Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

When an issuer plans to raise capital via the exempt market in Canada (particularly Ontario) and engages an exempt market dealer (“EMD”) to assist with distribution, the EMD agreement is a key governance, compliance and risk-allocation document. That agreement must clearly delineate roles, responsibilities, fees, filing obligations, compliance frameworks (including those under NI 31103 ‘Registration Requirements, Exemptions and Ongoing Registrant Obligations’ and NI 45106 ‘Prospectus Exemptions’), investor onboarding standards, indemnities and termination events. A poorly drafted EMD agreement may leave both parties exposed to regulatory scrutiny, investor complaints or ambiguity in liability between parties. This article guides how to draft an EMD agreement for fund distribution, what key provisions to include, where grey areas arise, and how to structure the document to align with regulatory and commercial risks.

Regulatory Framework & Sources of Law

The starting point is the registration regime under NI 31-103, which defines the dealer categories including the EMD category. An EMD is generally limited to distributions under prospectus exemptions, subject to limited circumstances and specific relief. The fund distribution will ordinarily rely on an exemption under NI 45-106, which sets thresholds, investor categories and filing obligations (e.g., Form 45-106F1). The agreement must therefore reflect the interplay between the issuer/fund, the EMD, and investor protection frameworks including KYC/AML obligations, suitability determinations, subscription logistics, marketing oversight, distribution filings and regulatory disclosure. Regulatory notices such as the companion policy to NI 31-103 and OSC and CSA guidance on EMDs provide interpretive guidance on what the regulator expects in dealer-issuance arrangements.

Definitions & Thresholds

The agreement should define, in clear terms, key parties and roles. For example: “Issuer”, “Fund Vehicle”, “Dealer” or “EMD”, “Investor”, “Offering”, “Subscription Document”, “Distribution” (being the sale of securities under the applicable exemption). It must reference the relevant registration category under NI 31-103. It should also clarify the exemption relied upon (for example the accredited investor exemption under s. 2.3 of NI 45-106) and note that the EMD is acting only in relation to distributions under that exemption. The agreement should reference thresholds such as minimum investment amounts, jurisdictions of distribution, investor categories, and specify that the EMD will verify investor eligibility and suitability in accordance with applicable rules, keeping in mind that the issuer remains ultimately responsible. It may also specify the filing obligations (e.g., Form 45-106F1 generally within 10 calendar days in Ontario) so that parties understand timing and jurisdictional scope.

Application in Practice

In drafting an EMD agreement for a fund distribution, the parties should proceed with these practical steps:

Step 1: Begin with the scope of services. The agreement should lay out what the EMD will do, such as: investor solicitation (if any), investor onboarding, KYC/AML verification, suitability assessments, subscription processing, fund-closing logistics, handling of funds, segregation of investor monies pre-closing, filing of required distribution reports, secondary trading (if applicable). The issuer should also define what the EMD will not do (for example, underwriting, acting in a retail distribution capacity, or distribution in jurisdictions where not registered). This clarity avoids regulatory risk if the EMD goes beyond its category.

Step 2: Define roles and responsibilities of the issuer, e.g., responsibility for preparing the offering memorandum or term sheet, investor due diligence on underlying assets, sponsorship of capital deployment, disclosures, valuations, ongoing investor reporting, and indemnities. The agreement should allocate liability or risk between the issuer and the EMD so each understands their exposure.

Step 3: Fees, compensation and expenses. The agreement must clearly set out how the EMD will be remunerated (e.g., success fee, trail commission, flat fee, reimbursement of out-of-pocket costs). Given the regulatory scrutiny of fees in exempt-market distributions, transparency on compensation is critical. The agreement may include claw-back provisions if subscriptions are reversed, early redemptions occur, or regulatory deficiencies emerge. The agreement should also address how compensation arrangements are reviewed and managed in accordance with conflict-of-interest obligations under NI 31-103, including disclosure and mitigation where fee structures could influence suitability assessments.

Step 4: Compliance obligations. The agreement must obligate the EMD to comply with NI 31-103 requirements, including maintaining books and records, suitability assessments, supervision of dealing representatives, KYC/AML procedures, conflicts-of-interest policies, training, and ensuring investor eligibility under the exemption used. The issuer may require the EMD to provide reports or audits of its compliance system given the issuer’s own regulatory risk. The agreement should also require the EMD to maintain compliant complaint handling procedures and to promptly notify the issuer of any investor complaints relating to the distribution.

Step 5: Filings, jurisdictional issues and investor territories. The agreement must specify which jurisdictions the distribution covers, who will file the required reports (e.g., Form 45-106F1) and within what timelines. The agreement should confirm if the EMD will assist with these filings or handle them if delegated. Where filing responsibility is delegated to the EMD, the issuer should remain expressly responsible for the accuracy and completeness of the information filed, and the agreement should require the EMD to provide copies of filings and confirmations of submissions. It should also specify coordination where multiple provinces are involved and who bears the cost of filings/fees.

Step 6: Confidentiality, data protection and records. The EMD will collect sensitive investor data (e.g., residence, tax status, accredited investor verification). The agreement should address confidentiality undertakings, investor data protection (in accordance with provincial/federal privacy laws such as PIPEDA), access to records for audit or regulatory inspection and retention of books and records for the required retention period (typically seven years under NI 31-103).

Step 7: Indemnities, liability, termination and remediation. The agreement should provide for indemnities by the issuer to the EMD (and vice versa) for misrepresentations in offering materials, regulatory breaches, investor claims arising from failures by one party. Termination events should be defined (e.g., regulatory suspension of EMD registration, material breach of distribution obligations, changes in law affecting the distribution). The agreement should also include remediation protocols. If regulatory issues arise regarding distribution, who is responsible, how investor complaints are handled, how subscription reversals are processed.

Step 8: Governing law, dispute resolution, amendment. Given that the distribution may span provinces, the agreement should stipulate the governing law (typically Ontario), specify dispute-resolution mechanisms (mediation/arbitration), and provide for amendments (written form, consent of both parties).

Grey Areas & Regulator Focus

Various grey-area issues emerge in EMD agreements for fund distributions. One such area is scope creep. If the EMD adopts a distribution model that resembles that of a full-service dealer, for example through public-facing marketing or general solicitation, outreach beyond a defined investor channel, or operating a continuous distribution program through repeated closings, regulators may question whether its activities remain consistent with its registration category, particularly where investor onboarding, suitability, and exemption verification controls do not keep pace with that model. Issuers should ensure the EMD agreement clearly delineates the EMD’s role and imposes appropriate controls over solicitation, onboarding, and compliance processes considering this risk.

A further grey area is conflicts of interest and related-party transactions. Regulators expect the EMD to disclose its relationship with the issuer (or underlying fund manager) and for the issuer to ensure the EMD is independent or that conflicts are managed. For example, if the EMD is affiliated to the issuer, disclosure is required. Such issues are addressed in CSA Staff Notices regarding conflicts in exempt market dealings. The agreement should include a conflicts-of-interest clause and a requirement for disclosure of related issuer matters.

Finally, multi-jurisdiction fundraising increases complexity. The EMD agreement must address variations in provincial enactments, cross-border investor eligibility, multiple filing regimes, and differing timelines. If the agreement lumps all jurisdictions together without clarity, the issuer and EMD may mis-coordinate filings, leading to regulatory deficiencies.

Interactions with Adjacent Regimes

The EMD agreement interfaces with fund-raising (securities law), fund-structuring (LPs/corporations), tax, and real estate/privacy/AML regimes. From a securities perspective, the distribution of interests in a fund vehicle must rely on the correct exemption under NI 45-106 or a provincial alternative. The EMD agreement should make clear that the issuer is responsible for structuring the vehicle and verifying the fund structure meets that exemption. 

From a tax and structuring perspective, investor onboarding handled by the EMD must gather tax-residence information. If international investors are involved, additional tax withholding or disclosure may apply, and the EMD agreement should reference these responsibilities. 

Privacy/data protection laws require that investor data handled by the EMD be managed under secure protocols. Real-estate issuers must ensure that the investor onboarding and distribution process managed by the EMD aligns with the asset-holding structure and related side-letters, because the EMD agreement may hold the EMD partly accountable for investor eligibility, subscription flows and disclosures. In short, the EMD agreement must inter-lock with offering materials, fund governance documents, subscription documentation and compliance frameworks.

Illustrative Scenarios

Scenario 1: A real-estate issuer engages an Ontario and Alberta registered EMD to distribute units of a limited partnership to accredited investors across Ontario and Alberta. The EMD agreement defines that the EMD will verify investor accreditation, process subscriptions, file Form 45-106F1 in each jurisdiction, and receive a 2% placement fee. The agreement includes indemnities providing that the issuer will indemnify the EMD for any misstatements in the offering memorandum. The issuer retains responsibility for asset management and investor reporting. When the EMD collects funds, the agreement requires the EMD to hold monies in a segregated account until closing. Compensation claw back is triggered if subscriptions are cancelled within 30 days. This clarity helps mitigate risk.

Scenario 2: An issuer uses an affiliated dealer entity as the EMD. The EMD agreement includes a conflicts-of-interest disclosure clause, limitations on investor solicitation, and a requirement that revised disclosure materials be reviewed by independent counsel. However, the EMD conducts public-facing investor webinars using untargeted marketing channels without pre-screening or adequate gating controls. Regulators later question whether the EMD’s distribution practices are consistent with its registration category, given the combination of broad, public-facing solicitation and an ongoing distribution model, particularly where onboarding, suitability and exemption verification controls do not keep pace with that model. Because the agreement did not sufficiently constrain solicitation practices or impose appropriate compliance controls, the issuer and EMD face remediation obligations and increased regulatory scrutiny.

Scenario 3: A fund raises capital in multiple provinces. The EMD agreement enumerates all jurisdictions, specifies filing responsibilities, and sets out cost-sharing for provincial filing fees. Mid-offer, the EMD fails to file in one province and does not notify the issuer. Upon regulatory inquiry, it is established that the EMD failed to fulfil its responsibilities. The issuer and EMD rely on the agreement’s termination clause (where “material breach of filing obligations” is a termination event) to unwind the relationship and switch to another dealer. But investor delays and reputational impact ensue. This scenario underscores the importance of accurate drafting of termination/exit provisions.

Compliance Checklist

• Document the distribution model: target jurisdictions, applicable NI 45-106 exemption(s), investor eligibility, fund structure and marketing approach
• Align the agreement with that model and define the EMD’s scope of services, express exclusions and allocation of responsibilities between issuer and EMD
• Set out compensation with precision: fees, trails, expenses and claw backs, aligned with regulatory constraints
• Include detailed investor onboarding obligations: KYC/AML, residency, eligibility verification, accredited investor checks, recordkeeping, confidentiality and data protection
• Specify jurisdictions and filings: Form 45-106F1 and related requirements, timelines, cost allocation and responsibility for filings
• Address handling of investor funds: segregation, custody and pre-closing controls
• Allocate liability through indemnities: issuer for offering disclosure; EMD for distribution, onboarding and compliance failures
• Define termination triggers: loss of registration, regulatory action, material breach, insolvency, with post-termination obligations and transition mechanics
• Include standard contractual provisions: governing law (Ontario), dispute resolution, amendments, assignment and notice provisions
• Append schedules: jurisdictions, onboarding procedures, subscription flow, compensation structure, fee sharing and claw-back matrix
• Conduct legal and compliance review: ensure consistency with offering documents and alignment with the EMD’s operational compliance framework

What’s Changing

The role of EMDs, and the regulatory expectations applicable to their engagement, continue to develop. Regulators are also applying increased scrutiny to conflicts of interest, compensation arrangements, suitability determinations and cross-jurisdictional filing practices. As a result, EMD agreements should be drafted to accommodate more rigorous and demonstrable compliance obligations.

In parallel, the expansion of cross-border capital raising, the use of digital onboarding processes and evolving AML and KYC requirements are shaping the expected scope of dealer responsibilities and, correspondingly, the contractual framework. Issuers and EMDs should monitor proposed amendments to NI 31-103, anticipated developments in the exempt market distribution regime and the continued regulatory focus on exempt market dealer practices.

Conclusion & Next Steps

The EMD agreement for a fund distribution is much more than a standard service contract. It is a foundational compliance document reflecting the allocation of regulatory, operational and investor-risk responsibilities between the issuer and the dealer. To proceed, you should draft a term-sheet of key deal points, align them with the fund’s offering materials and distribution strategy, engage qualified legal counsel to draft the full agreement incorporating all key clauses outlined above, and coordinate between the issuer and EMD to ensure the operational steps, roles, documentation and fees are aligned. Early alignment and clear contract terms reduce risk, support fundraising efficiency and strengthen your regulatory defence.

Book a Consultation

If you are forming, or operating a private investment fund, Exempt Market Dealer, Investment Fund Manager or Portfolio Manager in Canada, contact us to schedule an initial consultation with Nick Wright.