How to Draft an EMD Agreement for Fund Distribution

Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

When a private investment fund or other issuer engages an exempt market dealer (“EMD”) to distribute securities in Canada, the dealer agreement establishes the commercial terms of the engagement and allocates responsibility for important aspects of the distribution process. A properly drafted agreement should address the dealer’s mandate, investor onboarding, regulatory compliance, offering materials, compensation, exempt distribution filings, handling of subscription funds, confidentiality, indemnification and termination.

The agreement should also reflect the parties’ respective obligations under applicable securities legislation. Contractual allocation of a function to one party does not displace regulatory obligations imposed directly on the issuer, the EMD or its registered individuals.

For a private investment fund, the dealer agreement should be coordinated with the offering memorandum or other offering document, subscription agreement, fund governing documents and the EMD’s actual onboarding and compliance procedures.

Regulatory Framework

In Ontario, subsection 25(1) of the Securities Act (Ontario) establishes the principal dealer registration requirement. National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”) establishes the national registration framework and describes the activities permitted to firms registered in the EMD category.

Paragraph 7.1(2)(d) of NI 31-103 permits an EMD to act as a dealer in securities distributed under a prospectus exemption and in certain other securities specified by the instrument, subject to the restrictions applicable to the category.

A private fund distribution will commonly rely on one or more prospectus exemptions under National Instrument 45-106 Prospectus Exemptions (“NI 45-106”), such as the accredited investor exemption. Depending on the exemption and jurisdiction, the distribution may require prescribed investor representations or risk acknowledgements and the filing of a Form 45-106F1 Report of Exempt Distribution.

The dealer agreement therefore sits within a broader regulatory framework. It should reflect the distribution model actually being used and allocate contractual responsibilities without suggesting that either party has contracted out of obligations imposed on it by securities legislation.

1. Define the Dealer’s Mandate

The agreement should begin by defining precisely what the EMD has been retained to do.

Depending on the engagement, the mandate may include:

• identifying or soliciting prospective investors;
• communicating with prospective investors concerning the offering;
• conducting KYC and KYP processes;
• making suitability determinations where required;
• determining whether investors satisfy the conditions of the applicable prospectus exemption;
• obtaining subscription agreements, risk acknowledgements and supporting documentation;
• coordinating subscriptions with the issuer or fund administrator;
• participating in closing procedures;
• handling or transmitting subscription funds where applicable; and
• assisting with or making prescribed regulatory filings.

The mandate should correspond to the EMD’s registration status, jurisdictions of registration and actual operational role.

Express exclusions can be equally important. For example, the agreement may establish that the EMD has no authority to amend offering terms, bind the issuer, make representations beyond approved offering materials, provide investment management services, accept subscriptions on behalf of the issuer or distribute securities in a jurisdiction in which it is not appropriately registered or exempt.

The drafting should avoid treating the EMD as a generic placement agent. Its contractual functions should correspond to the regulatory functions it will actually perform.

2. Allocate Responsibilities Between the Issuer and the EMD

The agreement should distinguish the issuer’s responsibilities from the EMD’s dealer obligations.

The issuer will ordinarily retain responsibility for matters such as:

• establishing and operating the fund;
• preparing and approving the offering memorandum or other offering materials;
• determining the terms of the securities being offered;
• providing complete and accurate information concerning the fund and offering;
• maintaining the fund’s governing and organizational documents;
• accepting or rejecting subscriptions in accordance with the offering documents;
• deploying and managing invested capital;
• calculating or providing financial and valuation information; and
• providing ongoing investor reporting required from the issuer or fund.

The EMD’s responsibilities should focus on the distribution functions it has agreed to perform and the regulatory obligations applicable to it as a registrant.

The agreement should also establish practical interfaces between the parties. For example, it should specify how updated offering information is communicated to the EMD, who determines whether a subscription package is complete, who approves an investor for closing, and what happens when the EMD identifies information that may require correction or supplementation of the offering materials.

Clear allocation is particularly important where the issuer and EMD share responsibilities in the subscription process.

3. Address Offering Materials and Marketing

The agreement should establish which documents and communications the EMD may use in connection with the offering.

The issuer may covenant that information supplied to the EMD for use in the distribution is accurate and complete in all material respects and undertake to notify the EMD promptly of material changes or inaccuracies.

The EMD may correspondingly agree to use only authorized offering and marketing materials and to refrain from making representations concerning the issuer, fund, securities or underlying investments that are inconsistent with those materials.

The agreement should also address the approval process for presentations, pitch decks, websites, webinars, social media, email campaigns and other investor communications where these form part of the distribution strategy.

The objective is to ensure that the contractual framework corresponds to the actual marketing process rather than addressing only the formal offering memorandum or term sheet.

4. Address Investor Onboarding and Dealer Compliance

NI 31-103 imposes obligations directly on registered firms and individuals that cannot be transferred to the issuer merely by contract.

The agreement should nevertheless describe the EMD’s responsibilities for those components of the onboarding process that form part of its mandate. Depending on the circumstances, these may include KYC, KYP, suitability, conflicts of interest, relationship disclosure, investor documentation, books and records, complaint handling and supervision of dealing representatives.

The agreement should also address prospectus-exemption qualification. For example, where securities are distributed under the accredited investor exemption in section 2.3 of NI 45-106, the parties should establish who obtains the investor representations and supporting documents required by the subscription process and who reviews them before the subscription is accepted.

Care should be taken with provisions stating that one party “verifies” or is exclusively responsible for an investor’s qualification. The appropriate allocation depends on the applicable exemption, the parties’ respective regulatory obligations and the subscription process actually being used.

The agreement may also require the EMD to notify the issuer of material investor complaints, regulatory issues or deficiencies relating to the offering, subject to appropriate limitations concerning privilege, confidentiality and the EMD’s independent regulatory obligations.

5. Specify Jurisdictions of Distribution

The agreement should identify the provinces and territories in which the EMD is authorized to distribute the securities.

This is particularly important for a national or multi-jurisdictional offering because registration status, prospectus exemptions, required forms and filing requirements must be considered in each jurisdiction in which a distribution occurs.

The agreement can prohibit the EMD from soliciting or accepting investors in additional jurisdictions without the issuer’s prior approval and confirmation that the proposed distribution can lawfully proceed.

Where non-Canadian investors may participate, the agreement should separately address responsibility for determining compliance with applicable foreign securities laws. Canadian EMD registration does not itself authorize securities activities in a foreign jurisdiction.

6. Allocate Exempt Distribution Filings

The agreement should specify responsibility for preparing and filing Form 45-106F1 and any other required reports of exempt distribution.

In Ontario, Form 45-106F1 is generally required to be filed within 10 days after a distribution where the applicable filing requirement applies. The parties should account for differences arising from the nature of the issuer, exemption and jurisdictions involved.

Where the EMD prepares or submits a filing on behalf of the issuer, the agreement should establish a process for obtaining the information required from each party, reviewing the completed form, approving it before submission and providing evidence of filing.

The agreement should also allocate filing fees and responsibility for correcting deficient or inaccurate filings.

This area should be drafted carefully. Delegating the administrative preparation or submission of a filing does not necessarily transfer the statutory responsibility associated with the filing from the person on whom securities legislation imposes it.

7. Address Subscription Funds and Closing Mechanics

The agreement should describe the flow of subscription funds and closing documents.

Depending on the structure, this may include:

• the account into which investors remit subscription proceeds;
• whether funds are received by the EMD, issuer, trustee, administrator or other party;
• any applicable trust or segregation arrangements;
• conditions that must be satisfied before closing;
• responsibility for reconciling subscriptions and funds;
• procedures for rejected subscriptions;
• return of funds where a closing does not occur; and
• delivery of closing confirmations or evidence of issuance.

The drafting should reflect the actual banking, custody and administrative arrangements. The agreement should not impose a funds-handling structure on an EMD that is inconsistent with its regulatory obligations or operating model.

8. Define Compensation and Expenses

The agreement should state precisely how the EMD is compensated.

Compensation may include a percentage of gross subscriptions, a fixed fee, ongoing or trailing compensation, expense reimbursement or a combination of these arrangements.

The agreement should address:

• when a commission or fee is earned;
• when it becomes payable;
• whether compensation applies to subsequent investments by an introduced investor;
• the treatment of rejected or withdrawn subscriptions;
• responsibility for taxes;
• reimbursement of expenses;
• any minimum or retainer;
• post-termination commissions; and
• any applicable clawback arrangements.

Compensation provisions should also be considered in light of the EMD’s conflicts-of-interest obligations. Economic incentives created by the agreement should be identified and addressed consistently with applicable securities legislation and the EMD’s compliance policies.

9. Address Conflicts of Interest and Related Parties

Conflicts require particular attention where the EMD, issuer, fund manager, general partner, sponsor or their principals have ownership, financial or other relationships.

The agreement should require disclosure of relevant relationships and provide a mechanism for notifying the other party if a new material conflict arises during the engagement.

Where the issuer is a related or connected issuer of the EMD, the parties should separately consider the disclosure and other securities-law requirements arising from that relationship.

The agreement should complement the EMD’s own conflicts-management obligations rather than purporting to replace them.

10. Coordinate Confidentiality, Privacy and Records

The EMD may receive substantial personal and financial information from prospective investors. The agreement should address the collection, use, disclosure, protection and permitted sharing of that information in a manner consistent with applicable privacy legislation and the parties’ respective regulatory obligations.

The agreement should also establish appropriate rights to access distribution records.

An issuer may reasonably require copies of subscription documents and information required for its own securities-law, tax, governance and investor-record obligations. The EMD must separately maintain the books and records required of it under NI 31-103 and applicable securities legislation.

The drafting should distinguish between records belonging to the issuer, records the EMD is required to maintain independently and information that may be subject to confidentiality, privacy or privilege restrictions.

11. Draft the Indemnities to Follow the Allocation of Responsibility

Indemnification provisions are among the most important provisions in an EMD agreement and should reflect the actual division of responsibility between the parties.

An issuer indemnity may address claims or losses arising from misrepresentations or material inaccuracies in information supplied by the issuer, breaches of issuer representations or covenants, or other matters within the issuer’s responsibility.

An EMD indemnity may address losses arising from breaches of the agreement, unauthorized representations, failure to perform agreed distribution functions, or violations of securities legislation attributable to the EMD.

The appropriate formulation will depend on the transaction and bargaining position of the parties. The provisions should address matters such as causation, contributory fault, notice, control of proceedings, settlement rights, mitigation and exclusions for negligence, wilful misconduct or other specified conduct where appropriate.

Most importantly, an indemnity allocates contractual risk between the parties. It does not alter regulatory responsibility imposed directly by securities legislation.

12. Address Representations and Covenants

The agreement should contain representations and covenants appropriate to each party’s role.

Issuer representations may address matters such as organization and authority, authorization of the securities, accuracy of offering materials, compliance with governing documents and absence of undisclosed material changes.

EMD representations may address registration status, authority to enter into the agreement and its ability to perform the contemplated distribution activities in the specified jurisdictions.

Ongoing covenants can require each party to notify the other of matters that could materially affect the distribution, including changes in registration status, regulatory restrictions, material changes to the offering, significant complaints or regulatory proceedings relevant to the engagement.

13. Provide for Suspension and Termination

The agreement should identify circumstances in which distribution activities must or may be suspended.

These may include:

• a cease trade order or other regulatory restriction;
• suspension, surrender or material restriction of the EMD’s registration;
• a material change requiring updated disclosure;
• discovery of a material misrepresentation or deficiency in offering materials;
• a material breach of the agreement; or
• circumstances in which continuing the distribution could result in a breach of applicable law.

Termination provisions should address both termination for cause and termination on notice.

The agreement should also specify the consequences of termination, including treatment of pending subscriptions, investor communications, return or transfer of records, outstanding compensation, confidentiality, indemnities and other provisions intended to survive termination.

For a fund conducting a continuous or extended offering, transition mechanics can be particularly important if the issuer may need to appoint a replacement dealer.

14. Coordinate the Dealer Agreement with the Fund Documents

The EMD agreement should not be drafted in isolation.

Its terms should be reviewed against the fund’s:

• limited partnership agreement, declaration of trust or other governing document;
• offering memorandum or private placement memorandum;
• subscription agreement;
• investor eligibility representations and risk acknowledgements;
• management or investment management agreement;
• administration arrangements;
• banking and subscription-funds procedures; and
• applicable marketing materials.

For example, the dealer agreement should not authorize the EMD to make representations that are inconsistent with the offering memorandum, establish subscription procedures that conflict with the subscription agreement, or assign acceptance authority inconsistently with the fund’s governing documents.

The same review should be conducted for compensation disclosure. Dealer commissions, referral fees and other distribution expenses described in the offering materials should correspond to the contractual arrangements actually entered into by the fund or issuer.

Multi-Jurisdictional and Cross-Border Offerings

Additional drafting is required where the offering extends beyond a single province.

For Canadian multi-jurisdictional distributions, the agreement should identify permitted jurisdictions and establish responsibility for monitoring registration, exemption and filing requirements applicable to each distribution.

Cross-border offerings require a separate analysis. The fact that an EMD is registered in Canada does not determine whether it may solicit or transact with investors in the United States or another foreign jurisdiction. The parties should determine separately whether foreign dealer-registration, securities offering, tax, privacy or other requirements apply.

The agreement should allocate responsibility for obtaining necessary advice and restrict activities in jurisdictions that have not been approved for distribution.

Practical Drafting Checklist

Before finalizing an EMD agreement for a private fund distribution, the parties should confirm that the agreement:

• accurately describes the fund’s distribution model and applicable prospectus exemptions;
• identifies every jurisdiction in which the EMD may act;
• defines the EMD’s mandate and material exclusions;
• distinguishes issuer responsibilities from dealer responsibilities;
• addresses offering materials and approval of marketing communications;
• establishes the investor onboarding and subscription process;
• addresses KYC, KYP, suitability and exemption documentation consistently with applicable requirements;
• allocates responsibility for Form 45-106F1 and other regulatory filings;
• documents the flow and handling of subscription proceeds;
• specifies commissions, fees, expenses and any post-termination compensation;
• addresses conflicts of interest and related-party relationships;
• establishes confidentiality, privacy and records requirements;
• contains transaction-specific representations and covenants;
• allocates contractual risk through appropriately drafted indemnities;
• provides for suspension, termination and transition;
• addresses multi-jurisdictional and foreign distributions where applicable; and
• has been checked against the offering memorandum, subscription agreement and fund governing documents.

Conclusion

An EMD agreement for a private fund distribution should reflect the actual distribution arrangement rather than operate as a generic placement-agent agreement. Its principal functions are to define the dealer’s mandate, coordinate the issuer’s and dealer’s respective responsibilities, establish the commercial terms of the engagement and address contractual risk where their functions intersect.

The agreement should also remain consistent with the underlying regulatory framework. Contractual provisions can allocate responsibility for performing particular tasks and allocate economic risk between the parties, but they do not displace obligations imposed directly by securities legislation.

For private investment funds, careful coordination among the EMD agreement, offering materials, subscription documentation and fund governing documents is particularly important. Inconsistencies among those documents can create uncertainty precisely where the agreement is intended to establish responsibility.

Book a Consultation

If you are forming or operating a private investment fund, engaging an Exempt Market Dealer for a private placement, or require advice concerning an EMD distribution agreement, contact us to schedule an initial consultation with Nick Wright.