Should Your Investment Fund Build Its Own Exempt Market Dealer or Outsource Distribution?
This article is provided for general informational purposes only and does not constitute legal advice. Whether an exempt market dealer is required depends on the specific facts, the activities being carried on, and the applicable securities legislation.
As an investment fund grows, its distribution strategy often evolves alongside its assets under management and fundraising objectives. A fund that initially relied on a third-party exempt market dealer (EMD) may begin to question whether maintaining that relationship remains the most effective approach. Others may be preparing to launch a new product and are considering whether to establish their own dealer rather than engaging an external EMD.
The decision extends beyond regulatory compliance. It is a strategic business decision that affects operating costs, governance, compliance infrastructure, fundraising, and scalability.
For some investment fund managers, operating an internal EMD provides greater control over the capital raising process and aligns with a long-term strategy of building an integrated distribution platform. For others, outsourcing distribution to an established EMD allows management to focus on portfolio management and investor relationships while relying on an experienced dealer to satisfy the regulatory obligations associated with securities distribution.
This article examines the factors investment fund managers should consider when deciding whether to establish their own exempt market dealer or outsource distribution through an existing dealer.
Why Investment Funds Consider Building Their Own Exempt Market Dealer
Many successful investment funds eventually ask whether they should become more vertically integrated by operating their own registered dealer.
The question commonly arises after a fund reaches a meaningful scale. Annual fundraising increases, additional funds or series are launched, internal investor relations teams expand, and management begins to evaluate whether dealer functions should also be brought in-house.
Several factors typically drive this discussion.
Greater Control Over Distribution
An internal EMD gives the investment fund manager direct oversight of the fundraising process. Rather than coordinating with an external dealer, management establishes its own supervisory structure, onboarding procedures, compliance policies, and investor documentation. For firms with experienced operational teams, this level of control may improve consistency across fundraising activities.
Supporting an Internal Sales Team
As distribution grows, many fund managers employ dedicated investor relations professionals or business development personnel. Operating an internal EMD allows these individuals to become registered dealing representatives under the firm’s own dealer, rather than through an external dealer, assuming all applicable registration requirements are satisfied. For organizations with a substantial distribution team, this may simplify reporting structures and internal supervision.
Expanding Product Offerings
Managers overseeing multiple investment funds often seek greater consistency across product launches. Whether introducing additional private equity funds, private credit strategies, real estate funds, or mortgage investment corporations, an internal dealer may provide a centralized distribution platform supporting multiple offerings.
Long-Term Business Strategy
Some investment fund managers view dealer registration as part of building a fully integrated investment management business. Rather than relying on third-party service providers for distribution, they prefer to internalize key operational functions alongside portfolio management, fund administration, and investor services. For larger organizations, this approach may align with broader strategic objectives.
Operating an Exempt Market Dealer Is More Than Obtaining Registration
A common misconception is that establishing an exempt market dealer primarily involves obtaining registration with the applicable securities regulators. In reality, registration represents only the beginning.
An EMD is expected to maintain an ongoing compliance framework designed to satisfy the obligations imposed under securities legislation, National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, and applicable guidance issued by the Canadian Securities Administrators and the Ontario Securities Commission. Operating a registered dealer requires significantly more than processing subscription agreements.
Compliance Governance
Every registered dealer must establish an appropriate governance structure. This includes appointing individuals to key regulatory roles, maintaining written policies and procedures, supervising registered individuals, managing conflicts of interest, and ensuring that compliance responsibilities are appropriately documented and implemented. These obligations continue throughout the life of the dealer.
Know Your Client, Know Your Product and Suitability
One of the most significant ongoing responsibilities involves meeting KYC, KYP and suitability obligations. Dealer obligations extend beyond collecting investor information. Registered firms must establish procedures to understand their clients, evaluate the products they distribute, determine whether recommendations are suitable, maintain supporting documentation, and supervise these activities on an ongoing basis. These responsibilities require dedicated compliance resources and consistent supervisory oversight.
Supervision of Registered Individuals
Where dealing representatives conduct registrable activities, the dealer remains responsible for supervision. This includes establishing supervisory procedures, maintaining appropriate records, reviewing transactions, addressing potential deficiencies, and ensuring that registered individuals comply with applicable regulatory requirements. As distribution teams expand, supervisory responsibilities become increasingly significant.
Books and Records
An exempt market dealer must maintain comprehensive books and records supporting its activities. This includes client documentation, product due diligence materials, suitability analyses, compliance reviews, supervisory records, complaint files, policies and procedures, training records, and other documentation required to demonstrate compliance with securities legislation. Maintaining these records requires disciplined operational processes and appropriate technology systems.
Regulatory Reviews
Registered dealers should also expect periodic compliance reviews conducted by securities regulators. These reviews assess whether the dealer is meeting its regulatory obligations and maintaining an effective compliance system. Preparing for and responding to regulatory examinations requires management time, organized documentation, and established compliance procedures. For many firms, the ongoing operational commitment associated with maintaining dealer registration is considerably greater than initially anticipated.
The Costs of Operating an Internal Exempt Market Dealer
Operating an exempt market dealer involves both initial and ongoing costs. While these costs vary depending on the size of the dealer, the number of registered individuals, and the complexity of the business, many investment fund managers underestimate the level of investment required to establish and maintain a compliant dealer.
Some costs are readily identifiable, including regulatory filings, insurance, legal advice, compliance consulting, and technology platforms. Others are less visible but equally significant, including management time, supervisory responsibilities, internal training, compliance monitoring, and preparing for regulatory reviews.
As a dealer grows, these costs generally increase alongside fundraising activity, product offerings, and the number of registered individuals requiring supervision. Fund managers should therefore consider the total cost of operating an internal dealer over several years rather than focusing solely on the initial registration process.
Beyond direct financial costs, fund managers should also consider the opportunity cost of operating an internal dealer. Senior management, compliance personnel, and legal advisors may spend considerable time on dealer governance, supervisory matters, regulatory reporting, and compliance oversight. Those resources may otherwise be directed toward portfolio management, product development, or fundraising initiatives.
Benefits of Operating an Internal Exempt Market Dealer
Despite the operational responsibilities, establishing an internal exempt market dealer may be the appropriate strategy for certain investment fund managers. An internal dealer provides direct control over the distribution process. Management determines its own supervisory structure, investor onboarding procedures, and compliance processes without relying on an external dealer’s operating model. For organizations with established compliance departments and experienced management teams, an internal dealer may also integrate more effectively with existing operations.
An internal dealer may be particularly appropriate where a manager:
* raises substantial amounts of capital on a continuous basis;
* employs a significant number of registered dealing representatives;
* distributes multiple investment products;
* intends to make dealer operations a permanent component of its business; or
* has sufficient internal resources to support ongoing regulatory obligations.
For these organizations, the additional control may justify the increased operational complexity.
Benefits of Outsourcing Distribution to an Exempt Market Dealer
For many investment fund managers, outsourcing distribution to an established exempt market dealer offers a different approach. Rather than building dealer infrastructure internally, the fund manager can access an existing compliance framework, supervisory systems, and operational processes while remaining focused on managing investments and growing assets under management.
An established EMD has already invested in the personnel, policies, procedures, and technology required to operate a registered dealer. Fund managers are therefore able to leverage this infrastructure without assuming responsibility for operating the dealer itself. Outsourcing may also reduce the time required to launch new offerings or expand fundraising activities, particularly where the dealer has experience working with similar investment products. For many managers, the ability to focus internal resources on portfolio management, investor relations, and business development represents a significant operational advantage.
Questions to Consider Before Building an Internal Dealer
There is no universal answer to whether an investment fund should establish its own exempt market dealer. The appropriate decision depends on the manager’s business objectives, fundraising strategy, and operational capabilities. Before proceeding, investment fund managers should consider questions such as:
* How much capital does the fund expect to raise each year?
* Will fundraising continue to increase over the next three to five years?
* Does the organization have experienced compliance personnel?
* Is management prepared to supervise registered individuals on an ongoing basis?
* Does the organization have the systems necessary to satisfy dealer obligations?
* Would management’s time be better spent managing investments and developing investor relationships?
Answering these questions often provides greater insight than comparing registration costs alone.
Internal Dealer or Outsourced EMD?
The decision ultimately involves balancing control against operational responsibility. Managers seeking complete control over distribution and possessing the resources necessary to operate a registered dealer may determine that establishing an internal EMD aligns with their long-term business strategy.
Other managers may conclude that outsourcing dealer functions provides access to experienced compliance infrastructure while allowing management to remain focused on investment performance and capital raising. The appropriate model depends on the manager’s fundraising objectives, available resources, and long-term operating strategy.
Conclusion
As investment funds grow, distribution becomes increasingly important to long-term success. Decisions regarding dealer registration should therefore be evaluated as part of the fund’s broader business strategy rather than as a standalone regulatory exercise.
Operating an exempt market dealer provides greater control over fundraising and distribution, although it also requires significant ongoing investment in compliance, supervision, governance, and operational infrastructure.
For many investment fund managers, partnering with an established exempt market dealer offers a practical alternative that provides access to experienced dealer infrastructure without the responsibility of operating a registered dealer.
Before deciding whether to establish an internal EMD or outsource distribution, fund managers should carefully evaluate both the regulatory obligations and the operational commitments associated with each approach. A thorough assessment of these considerations will help determine which model best supports the fund’s long-term growth objectives.
Frequently Asked Questions
Does every investment fund need its own exempt market dealer?
No. Many investment funds distribute securities through an independent exempt market dealer rather than operating their own registered dealer.
Is operating an exempt market dealer more than obtaining registration?
Yes. Registration is only one component of operating a dealer. Ongoing obligations include supervision, compliance, books and records, KYC, KYP, suitability, regulatory reporting, and governance.
Can an investment fund change exempt market dealers?
Yes. Investment fund managers may transition from one exempt market dealer to another, although the process typically requires coordination to ensure continuity of fundraising activities and investor onboarding.
Is outsourcing an exempt market dealer less compliant than operating one internally?
Not necessarily. Both models are subject to the same regulatory framework. The question is which organization is responsible for maintaining the dealer’s compliance infrastructure and supervisory systems.
When does building an internal exempt market dealer make sense?
It may be appropriate where a fund manager has achieved sufficient scale, maintains experienced compliance resources, employs a larger distribution team, and intends to operate dealer functions as a permanent part of its business.
Contact Us
Startly Inc. provides outsourced exempt market dealer services to investment funds and other issuers raising capital under prospectus exemptions. If you are launching a new fund, expanding an existing exempt offering, or evaluating your distribution model under National Instrument 31-103, contact us to discuss how our EMD platform can support your capital raising activities.
This article is current as of the time of publication, is for informational purposes and does not constitute professional advice. Independent legal advice should be sought prior to relying on any information herein.