Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

In Canada’s private capital markets, particularly in Ontario, fund issuers, exempt market dealers (EMDs) and advisers often work together, but their legal roles, obligations, and regulatory exposures are distinct. Issuers remain primarily responsible for the structure of the offering, disclosures, investor rights and ongoing fund management; EMDs must handle distribution of exempt securities, investor onboarding, KYC/AML, filings and compliance under NI 31103; and advisers (typically registered as portfolio managers) may provide investment advice to investors or manage portfolios for issuers, subject to adviser registration requirements or applicable exemptions. This article clarifies who legally does what, how the roles interact, and what issuers and sponsors must coordinate to avoid regulatory or liability pitfalls.

Regulatory Framework & Sources of Law

The distribution of securities under prospectus exemptions is governed by NI 45106 ‘Prospectus Exemptions’, which permits issuers to raise capital without a prospectus provided certain conditions are met. The dealer registration and ongoing conduct regime is principally governed by NI 31-103 ‘Registration Requirements, Exemptions and Ongoing Registrant Obligations’. Adviser registration requirements, including the portfolio manager category, are set out in NI 31-103 and its companion policy. The instrument also addresses circumstances in which a firm may be engaged in both advising and dealing activities, potentially requiring registration in both adviser and dealer categories. The relationships among issuer, EMD and adviser are further shaped CSA Staff Notices (for example on exempt markets, KYC and suitability obligations) and provincial regulatory practice. Failure to correctly delineate roles can raise issues under the Securities Act and related rules (for example misrepresentation, unregistered dealing or advising).

Definitions & Thresholds

An Issuer in this context is the company, fund vehicle or partnership issuing securities under an exemption (e.g., units of a private fund). 

An exempt market dealer (EMD) is a registered dealer category under NI 31-103 (s. 7.1(2)(d)) that may act as dealer in respect of securities distributed under a prospectus exemption. 

An “Adviser” refers to a person or company engaging in the business of advising others in respect of investing in, buying or selling securities, within the meaning of the Securities Act (Ontario), s. 25. Under NI 31-103, this activity generally requires registration in the “portfolio manager” category. In practice, most firms providing investment advice on a discretionary or non-discretionary basis are registered as portfolio managers. A portfolio manager may provide advice directly to investors (client-facing advisory services) or manage the investment portfolio of an issuer or fund (fund-level portfolio management). Both constitute adviser activity for registration purposes.

The distinction between advising and dealing is determined using the “business trigger” analysis under NI 31-103 and related CSA and OSC guidance. Regulators assess factors such as repetition, expectation of compensation, solicitation, investor contact, and the degree of involvement in the trade.

Compensation structure is an important indicator but not determinative. Transaction-based compensation tied to capital raising or trades is commonly associated with dealer activity, while ongoing advisory fees are more consistent with adviser activity. Regulators assess compensation together with other business trigger factors, including solicitation, repetition, investor contact, and involvement in the trade.

Application in Practice

The issuer’s primary obligations include preparing offering materials (term sheet, offering memorandum), structuring the fund, and ensuring the conditions of the relied-upon prospectus exemption are available. The issuer is responsible for the accuracy of disclosure, the terms of the securities, and the overall design of the offering.

Where an EMD is engaged, investor onboarding, including KYC, KYP, suitability, and verification of investor eligibility (for example, accredited investor status under NI 45-106, s. 2.3), is performed by the dealer as part of its registrant obligations. The issuer supports this process by providing necessary information and documentation.

The issuer remains responsible for required filings, including Form 45-106F1 (typically coordinated with the EMD), as well as fund governance, asset management, and ensuring operations align with the disclosed strategy.

EMD

An EMD engaged by an issuer will manage distribution logistics including onboarding investors, verifying eligibility and residency, conducting KYC/AML processes, suitability (where required), investor questionnaires, and in some cases custody of subscription funds until closing. The EMD ensures investor-relations communications comply with NI 31-103 and provincial rules, manages dealing representatives, maintains books and records and monitors ongoing compliance. The EMD must ensure it is not trading securities beyond its category or handling a prospectus offering unless relief applies.  

An EMD must not provide registrable investment advice unless it is also registered in the adviser category. EMDs assess suitability in connection with each trade as part of their core registrant obligations under NI 31-103. This suitability analysis is conducted within a dealing relationship and does not extend to broader portfolio-level investment advice or discretionary management, which require adviser registration.

Adviser / Portfolio Manager

A firm engaging in the business of advising in securities must generally be registered as a portfolio manager under NI 31-103, unless an exemption is available. Adviser activity includes both providing investment recommendations to clients and managing investment portfolios on a discretionary basis.

Adviser activity may arise in two principal contexts:

1. Investor-facing advice: assessing suitability, making recommendations, or exercising discretionary authority over client portfolios. This is core portfolio manager activity and is subject to know-your-client, suitability, and Client Focused Reforms obligations.
2. Fund-level portfolio management: managing the assets of an issuer or investment fund in accordance with its investment mandate. This is also adviser activity and typically carried out by a registered portfolio manager, which may be affiliated with the investment fund manager.

A portfolio manager must not engage in registerable dealer activity unless separately registered or exempt. In particular, active solicitation of investors, participation in trade execution or subscription processing, or receipt of transaction-based compensation tied to capital raising may constitute dealing activity.

Where a firm performs both advisory and distribution functions, dual registration as a portfolio manager and exempt market dealer is commonly required, together with appropriate conflict of interest management and disclosure.

Grey Areas & Regulator Focus

A recurring issue arises where issuers or firms acting in an “advisory” capacity engage in activities that constitute dealer distribution, including solicitation, repeated closings, broad marketing campaigns, or the use of referral arrangements with transaction-based compensation. In these cases, the “business trigger” for dealer registration under NI 31-103 is often met.

Overlap between advising and dealing functions is a key area of regulatory focus. For example, a portfolio manager recommending specific exempt-market securities to clients while receiving transaction-based compensation may also be engaging in dealer activity. Conversely, an EMD providing broader portfolio-level advice may be engaging in adviser activity. NI 31-103 and its companion policy contemplate that a firm may carry on both activities, but only where it is appropriately registered in each category and has implemented controls to manage conflicts of interest, compensation structures, and disclosure obligations.

Regulators place particular emphasis on compensation structures. Referral fees and trailing commissions must comply with NI 31-103 referral arrangements, and compensation tied to capital raising will be closely scrutinized as an indicator of dealer activity.

A portfolio manager that purchases or recommends exempt market securities must satisfy its know-your-product obligations under NI 31-103, and incorporate that analysis into its suitability determination.

Interactions with Adjacent Regimes

These relationships also interface with fund-structuring law, tax, and securities-filing regimes. From a fund-structuring perspective, the issuer must organise partnership agreements, LP interests, subscription documentation and distribution structure so the EMD’s role is operationally clear. Tax considerations (for example investor residence, withholding, eligibility for flow-through structures) must be included in the structuring and disclosed to investors, often via the adviser or issuer. Also, the adviser’s suitability and KYC process overlaps with issuer/EMD investor-onboarding. 

On the securities side, if the adviser becomes involved in investor solicitation, marketing, or capital raising alongside the issuer or EMD, the parties must assess whether dealer registration is triggered and ensure that responsibilities are allocated accordingly. Engagement agreements between issuer and EMD, and between issuer and adviser, should clarify each party’s responsibilities and liabilities.

Illustrative Scenarios    

Scenario 1: A real estate fund issuer engages an Ontario-registered EMD to raise capital from accredited investors. The EMD handles onboarding, investor verification and subscription funds. A portfolio manager registered under NI 31-103 recommends the fund to its high-net-worth clients and receives trailing compensation through a referral arrangement with the EMD that complies with NI 31-103 requirements. The issuer remains responsible for asset management and investor reporting. Roles are distinct and aligned with registration categories. The portfolio manager does not participate in trade execution, subscription processing, or exempt distribution filings. The EMD does not provide portfolio-level investment advice or discretionary management. The issuer relies on the EMD for primary distribution and does not engage in active investor solicitation, to avoid triggering dealer registration.

Scenario 2: An issuer tries to raise capital directly, engages third parties described as “advisers” to solicit investor leads, pays them success fees, and closes multiple rounds with broad marketing. Regulators determine the issuer is “in the business” of trading and should have registered as a dealer or engaged an EMD. This results in regulatory review and remediation. The confusion between adviser lead-generation and dealer distribution was not addressed and the roles were indistinct.

Scenario 3: A fund manager acts both as portfolio manager (adviser) of the fund’s assets and as distributor, without engaging an EMD. Investors claim mistreatment when redemption delays occur and regulatory review flags that the fund manager may have been engaging in dealer activity without appropriate registration, where dual registration as both portfolio manager and dealer would typically be required. The lack of clarity between issuer, adviser and distributor roles triggered enforcement and required restructuring.

Compliance Checklist

• Define roles in written agreements, including an issuer-EMD distribution agreement covering onboarding, filings, KYC/AML, and subscription processing, and a separate adviser agreement addressing services, compensation (including any referral fees), scope of advice, limits on dealer activity, registration status, compliance obligations, and conflicts of interest disclosure.
• Assess whether any party is performing both advising and dealing functions and determine whether dual registration (portfolio manager and EMD) is required
• Verify compliance boundaries including that the EMD is properly registered and in good standing and that the adviser is not engaging in distribution unless registered
• Align disclosure across materials including ensuring that marketing and subscription documents reflect roles and include related/connected issuer disclosure (NI 31-103 s. 13.6)
• Maintain audit trails for onboarding, funds flow, Form 45-106F1 filings, eligibility, KYC/AML, suitability, disclosures
• Conduct periodic compliance reviews considering role drift, compensation-driven registration risk, exemption alignment
• Address multi-jurisdiction requirements including filings and registration across provinces
• Ensure governance in agreements, operations, and disclosure are aligned to reduce regulatory risk

What’s Changing

Regulators continue to scrutinize role allocation in exempt market distributions. Under NI 31-103 and its companion policy, the “business trigger” for both dealer and adviser registration remains a central test, particularly where firms combine advisory and distribution functions, including whether activities are conducted with repetition, expectation of compensation, and investor solicitation. The Client Focused Reforms further sharpen the distinction between transactional and ongoing client relationships, with direct implications for EMD and adviser obligations.

Enforcement activity has focused on situations where issuers or advisers are effectively engaging in registerable dealer activity, including through referral arrangements, broad marketing, repeated closings, or compensation tied to capital raising. Cross-jurisdiction offerings and multi-channel distribution models increase this risk, particularly where role boundaries and disclosures are not clearly documented.

Sponsors should ensure that role allocation, compensation structures, and marketing practices are consistent with registration categories, and that related and connected issuer disclosures are properly addressed under NI 31-103.

Conclusion & Next Steps

Clarifying the legal relationship between issuer, EMD and adviser is a critical component of structuring a compliant capital raise in Canada’s exempt market. Issuers, fund managers and their advisers must map out, document and monitor who does what, including who offers the security, who distributes it, who advises investors, and who maintains ongoing compliance. With clear role allocation, aligned documentation and ongoing compliance monitoring, fund sponsors can avoid regulatory missteps and build a scalable distribution model.

Book a Consultation

If you are forming or operating a private investment fund, exempt market dealer, or investment fund manager, or are registering as a portfolio manager in Canada, contact us to schedule an initial consultation with Nick Wright.