Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

An entity registered as an exempt market dealer (EMD) facilitates distributions of securities under prospectus exemptions within Canada’s dealer registration framework. A firm or individual that is “in the business of trading” securities in reliance on exemptions under NI 45-106 is generally required to register (or rely on a third-party registrant) in this category under NI 31-103. In a private placement, the EMD acts as the registered intermediary, conducting investor onboarding and suitability analysis, managing subscription execution, and supporting required exempt distribution filings. For issuers and fund sponsors, understanding when an EMD is required and the limits of its permitted activities is central to structuring a compliant capital raise.

Regulatory Framework & Sources of Law

The exempt market dealer category is established under National Instrument 31-103 ‘Registration Requirements, Exemptions and Ongoing Registrant Obligations’. Section 7.1(2)(d) defines the scope of activity that may be permitted by an EMD. An EMD may trade securities that are distributed in reliance on a prospectus exemption, trade certain non-listed securities where an exemption would be available if the trade were a distribution, and act as an underwriter in a distribution made under a prospectus exemption. The authority of the category is therefore limited to the exempt market.

Companion Policy 31-103CP and CSA Staff Notice 31-312 provide interpretive guidance on how these provisions are applied in practice. The underlying distribution framework is set out in National Instrument 45-106 ‘Prospectus Exemptions’, which establishes the available exemptions such as the accredited investor and offering memorandum exemptions.

In addition to defining permitted trading activity, the regulatory framework imposes ongoing obligations. The Canadian Securities Administrators (CSA) and provincial regulators, including the Ontario Securities Commission (OSC), issue guidance addressing proficiency and minimum capital requirements, custody of client assets, suitability, know-your-product, know-your-client and anti-money laundering procedures, conflicts of interest, and client relationship disclosure. The regulatory framework therefore is comprised of registration authority, exempt distribution pathways, and ongoing compliance obligations

Definitions & Thresholds

The defined terms frame the scope of the EMD category and determine when registration is required.

A “dealer” is defined in section 1(1) of the Securities Act (Ontario) as a person or company engaging in or holding himself, herself or itself out as engaging in the business of trading in securities as principal or agent. The concept is functional and turns on activity rather than title.

Under National Instrument 31-103, a person or firm that is in the business of trading in securities must be registered in an appropriate dealer category unless an exemption is available. For the EMD category, the registration obligation is triggered where the firm is in the business of trading securities distributed under a prospectus exemption.

The “business trigger” analysis is fact driven. Regulators assess whether the activity demonstrates repetition or regularity, direct or indirect solicitation of investors, compensation tied to trades, and an expectation of profit. No single factor is determinative. The inquiry focuses on whether the firm is carrying on a commercial trading activity that requires regulatory oversight.

Section 7.1(2)(d) of NI 31-103 delineates the scope of permitted activities for EMDs. The category is subject to structural requirements, including minimum working capital, insurance, audited annual financial statements, compliance systems, and prescribed proficiency standards for EMD dealing representatives and its chief compliance officer. In most jurisdictions, the minimum excess working capital requirement is $50,000, subject to the calculation methodology in Form 31-103F1 ‘Calculation of Excess Working Capital’.

Because the EMD’s authority is tied to exempt distributions, the underlying issuance must itself rely on a valid prospectus exemption. Where securities are distributed under a prospectus, an EMD cannot act as dealer or underwriter in that distribution without additional registration or specific relief.

These definitions and thresholds determine both when an issuer must engage a registered dealer and the scope of activity that an EMD can lawfully undertake in a financing.

Application in Practice

In practice, what does an EMD do for an issuer seeking to raise capital under an exemption? The process typically works as follows:

Distribution structuring: An issuer or fund sponsor engages an EMD to act as the distributing dealer for a private placement to eligible investors (e.g., accredited investors under NI 45-106, s. 2.3). The EMD conducts a know-your-product review of the issuer then assists by reviewing investor eligibility, verifying investor documentation, structuring the subscription process, managing the closing logistics and liaising with legal counsel.

Subscription services & investor onboarding: The EMD receives subscription agreements, investor questionnaires, KYC/AML documentation, accredited-investor verification (e.g., net-asset statements or income verification, when applicable). The EMD ensures that investor categorisation is correct, that the exemption being relied on is valid in the investor’s jurisdiction, and that relevant “know your client” and “suitability” standards are applied. It also carries out a suitability assessment of the investment for the specific investor and their circumstances.

Distribution logistics: The EMD may manage investor communications, coordinate funds receipt and hold client funds in escrow, ensure the issuer receives funds in compliance with securities law, and may file the required Report of Exempt Distribution (Form 45-106F1) on behalf of the issuer (or assist in doing so) for each provincial jurisdiction where investors reside.

Ongoing compliance support: The EMD maintains books and records of investor transactions, client account statements (in jurisdictions and circumstances where required under NI 31-103, e.g., quarterly statements), maintains internal policies and procedures (KYPP, KYC, AML, suitability, conflicts of interest), ensures the firm meets minimum capital/proficiency standards, and may audit its compliance frameworks at periodic intervals.

Secondary trading/resale support: For securities distributed under exemptions, the EMD may facilitate subsequent trades or resales (if permitted exemptions apply), and ensure the distribution remains compliant with resale conditions under the securities legislation.

Grey Areas & Regulator Focus

While the role of an exempt market dealer is prescribed in the regulatory framework, several areas continue to attract scrutiny. A recurring issue concerns the boundary between issuer activity and dealer activity.

Certain issuers characterize capital raising as a discrete, one-time transaction and conclude that dealer registration is unnecessary. In practice, regulators apply the “business trigger” analysis under National Instrument 31-103. Where an issuer or sponsor conducts repeated offerings, actively solicits investors, or otherwise engages in activities that resemble being in the business of trading securities, regulators often conclude that registration is required. In those circumstances, the entity must either register in an appropriate dealer category, typically as an EMD, or retain a registered dealer rather than relying on the issuer registration exemption.

Another grey area is the scope of the EMD’s underwriting. An EMD may act as an underwriter in a distribution made under a prospectus exemption but cannot underwrite a prospectus-qualified distribution unless separately registered. 

Non-resident investor distributions, cross-jurisdictional distributions, and multiple closings add complexity to EMD responsibilities because investor eligibility, merging of jurisdictions, filing fees, and regulatory reviews multiply. 

Regulators also focus on know your client (KYC), anti-money laundering (AML), suitability, and account-statement delivery, as weaker practices among EMDs raise red flags. 

Finally, custody and client asset protection for non-SRO firms (i.e., EMDs not part of IIROC/MDFA) are a common area of regulatory scrutiny.

Interactions with Adjacent Regimes

The exempt market dealer does not operate solely within the dealer registration framework. Its mandate intersects with several adjacent legal and regulatory regimes that shape how a private distribution is structured and administered.

First, anti-money laundering (AML) and anti-terrorist financing (ATF) legislation imposes independent client identification, verification, recordkeeping, and reporting obligations. Investor onboarding procedures must satisfy both securities law suitability requirements and federal AML standards. These obligations arise from separate statutory authority and carry their own enforcement consequences.

Second, cross-border and inter-jurisdictional regulatory requirements can materially affect a distribution. Multi-provincial offerings require coordinated exempt distribution filings, fee payments, and confirmation that no additional registration or licensing obligations are triggered in other jurisdictions. Where foreign investors are involved, local securities, marketing, or placement rules may apply.

Third, in the private fund context, fund governance and management structures intersect with the dealer function. The allocation of responsibilities between issuer, general partner, manager, and EMD must be clearly defined to preserve regulatory boundaries. The dealer’s gatekeeper role in investor eligibility and suitability must remain distinct from the sponsor’s capital-raising and fund management functions.

Fourth, tax and structuring considerations often influence investor qualification thresholds, minimum subscription amounts, and resale mechanics. While these matters are primarily legal and tax driven, they affect how investor eligibility is implemented in practice. An EMD must remain within the scope of its registration and avoid providing regulated legal or tax advice unless separately qualified to do so.

In practice, these adjacent regimes operate concurrently with the dealer function. Effective coordination across AML compliance, cross-jurisdictional filings, fund governance structures, and tax-driven investor mechanics is necessary to ensure that a private distribution remains compliant and defensible.

Illustrative Scenarios

Scenario 1: A first-time real-estate fund sponsor in Ontario decides to raise capital under the accredited-investor exemption. The sponsor engages an EMD to handle investor onboarding, verify eligibility, accept subscriptions, coordinate closing, and file Form 45-106F1 across Ontario and British Columbia. The EMD, among other things, ensures its dealing representatives have passed the required proficiency exams and that the firm maintains the required working capital and policies and procedures manual. Because the sponsor is not registered, the use of a third party EMD enables the fund to proceed under the NI 31-103, s. 8.5 exemption to registration.

Scenario 2: A private debt fund issues units under a $150,000 minimum amount exemption across multiple jurisdictions. The fund’s marketing campaign includes webinars and investor meetings across provinces. The EMD engaged by the fund maintains EMD registration in each jurisdiction, documents investor residence, ensures subscription agreements are property completed, and helps coordinate filings. Later, the EMD assists with secondary trades between accredited investors by applying the appropriate exemption for resale.

Scenario 3: An issuer directs its management company to perform dealer functions without registration. After reviewing repeated offerings, solicitation activity, and compensation structures, the regulator concludes the entity was “in the business of trading” under NI 31-103 and required registration. Because the firm neither registered nor engaged a properly registered EMD for earlier closings, the matter may advance beyond a standard compliance review. Potential outcomes include terms and conditions on future registration, a compelled retroactive registration process, retention of an independent compliance consultant at the firm’s expense, administrative penalties, and possible disgorgement of compensation earned through unregistered trading. There is also civil risk. Trading in breach of the registration requirement under the Securities Act (Ontario) exposes the issuer and its principals to civil claims, including statutory and common law causes of action that may support rescission, return of subscription proceeds with interest, and recovery of costs, depending on the surrounding disclosure and compliance record.

Compliance Checklist

• The issuer and EMD enter into a written distribution or agency agreement that defines the scope of the mandate, jurisdictions, compensation, representations, indemnities, and responsibility for regulatory filings.
• The EMD conducts know your product (KYP) due diligence on the issuer and the offering to support its ability to assess suitability and meet its gatekeeper obligations.
• The Issuer must structure the distribution to rely on available prospectus exemptions and the EMD must limit trading activity to those exemptions.
• The EMD Performs investor onboarding, including KYC, AML screening, and verification of exemption eligibility.
• The EMD conducts substantive suitability assessments for each investor, supported by an onboarding interview or call. It documents the analysis of objectives, risk tolerance, financial circumstances, and concentration.
• The EMD manages subscription execution and, in some cases, may coordinate fund flow logistics, including custodial or escrow arrangements.
• Either the Issuer or the EMD prepares and file Form 45-106F1 reports of exempt distribution in required jurisdictions.
• The EMD delivers required trade confirmations and account reporting, and maintain books and records supporting trades, suitability determinations, communications, and filings for the prescribed retention period.

What’s Changing

Regulators continue to refine the exempt market dealer regime. The CSA has signalled further modernisation of NI 31-103 to enhance investor protection and distribution-process transparency. Given the rising volume of private-capital raises in Canada (including real-estate funds, private debt, venture capital), regulators are focusing on investor eligibility verification, marketing practices across jurisdictions, and the role of EMDs in ensuring compliance. Issuers and EMDs should monitor regulatory updates, provincial registration-territory variations, and evolving expectations around suitability, conflicts of interest, fee-disclosure and KYC/AML.

Conclusion & Next Steps

The exempt market dealer functions as the registered intermediary within Canada’s prospectus-exempt distribution regime. Before proceeding with a private placement, an issuer should determine whether its activities trigger the dealer registration requirement under NI 31-103 and whether reliance on an independent registrant is required. 

If an EMD is engaged, the issuer should select a firm appropriately registered in the relevant jurisdictions and formally allocate responsibilities for investor eligibility verification, suitability, subscription processing, fee arrangements, custody or fund flow mechanics, and Form 45-106F1 filings. The distribution structure should be coordinated with counsel to ensure that the exemptions relied upon under NI 45-106 align with the EMD’s permitted activities. The issuer should also confirm that the EMD satisfies applicable proficiency, capital, insurance, custody, conflicts and compliance obligations, and should maintain reasonable oversight of the EMD’s conduct throughout the offering.

A disciplined approach to engaging and supervising an EMD supports defensible reliance on prospectus exemptions, clarifies accountability between issuer and dealer, and reduces exposure to regulatory scrutiny or remedial action.

Book a Consultation

If you are forming or operating an Exempt Market Dealer in Canada, contact us to schedule an initial consultation with Nick Wright.