Can an Investment Fund Sell Its Own Securities Without an Exempt Market Dealer?

This article is provided for general informational purposes only and does not constitute legal advice. Whether an investment fund may distribute its own securities without an exempt market dealer depends on the specific facts, the activities being conducted and the applicable securities legislation.

One of the first questions many investment fund managers ask is whether they can raise capital without engaging an exempt market dealer (“EMD”).

The answer depends on more than whether the fund qualifies for a prospectus exemption.

While many investment funds distribute securities under exemptions found in National Instrument 45-106 Prospectus Exemptions, a separate question must also be considered: do the fund’s fundraising activities require dealer registration?

This distinction is frequently misunderstood. A prospectus exemption determines whether securities may be distributed without filing a prospectus. Dealer registration determines whether the persons carrying out those distributions must be registered or rely on an available registration exemption.

For investment fund managers, particularly those operating evergreen investment funds or conducting continuous exempt offerings, this distinction is critical. Whether a fund may effectively distribute its own securities depends on the nature of the fundraising activities, who is communicating with prospective investors, and whether those activities amount to carrying on the business of trading securities.

This article explains how Ontario’s dealer registration framework applies to self-distribution by investment funds and identifies the factors fund managers should consider before commencing capital raising activities.

What Is Self-Distribution?

Self-distribution generally refers to a situation where an investment fund or persons associated with the fund conduct fundraising activities without engaging an external registered dealer.

Rather than appointing an exempt market dealer to oversee the distribution process, directors, officers, employees, general partners or other representatives of the fund may communicate directly with prospective investors, respond to investment inquiries and coordinate subscriptions.

Fund managers may consider this approach for several reasons. Some are launching a new investment fund with a limited number of anticipated investors. Others believe their fundraising activities will be sufficiently limited that dealer registration will not arise. In other cases, managers assume that because the fund is relying on a prospectus exemption, an exempt market dealer is unnecessary.

These assumptions should be approached with caution. Ontario securities law does not simply ask whether securities are being distributed. It also asks whether the persons carrying out those activities are engaged in the business of trading securities. Accordingly, the question is rarely whether self-distribution is permitted in the abstract. The more important question is whether the proposed fundraising activities require dealer registration.

Dealer Registration Is a Separate Analysis

One of the most common compliance issues encountered in the exempt market is the tendency to treat prospectus exemptions and dealer registration as though they are the same legal requirement. They are not. A prospectus exemption answers whether securities be distributed without filing a prospectus. Dealer registration answers who may lawfully conduct that distribution. These should always be analyzed separately.

For example, an investment fund may distribute units exclusively to accredited investors under National Instrument 45-106 without preparing a prospectus. That does not automatically mean the fund’s directors, officers or employees may conduct the fundraising activities without dealer registration. The registration analysis depends upon the nature of the activities being carried on rather than the prospectus exemption being relied upon.

This distinction becomes particularly important for investment funds that continuously raise capital over an extended period. Ongoing marketing, repeated investor meetings and regular subscription activity may raise dealer registration considerations even where every purchaser qualifies under an available prospectus exemption.

Fund managers should therefore consider dealer registration at the earliest stages of planning an exempt offering rather than treating it as an administrative issue after fundraising has already begun.

When Does Self-Distribution Raise Dealer Registration Issues?

Dealer registration is generally required where a person or company is carrying on the business of trading securities unless a registration exemption is available. Determining whether that threshold has been met is often referred to as the “business trigger.”

Importantly, there is no single factor that determines whether a person is carrying on the business of trading securities. Instead, regulators examine the overall nature of the fundraising activities. For investment fund managers considering self-distribution, several factors commonly arise.

Continuous Fundraising

A private investment fund that admits a limited number of investors during formation presents a different regulatory profile from an evergreen investment fund accepting subscriptions every month. Where fundraising becomes an ongoing part of the business rather than a single capital raising event, dealer registration considerations become increasingly important.

Continuous fundraising often involves recurring marketing, repeated investor communications, regular subscription processing and ongoing capital raising activities. These characteristics may support the conclusion that fundraising has become part of an organized securities business.

Soliciting Prospective Investors

How investors are identified and approached is another important consideration. Fundraising may include:

* contacting prospective investors directly;
* arranging investment meetings;
* conducting webinars;
* attending conferences;
* responding to investor inquiries;
* distributing offering materials; or
* maintaining marketing campaigns.

Although no single activity determines whether registration is required, active and ongoing solicitation frequently forms part of the overall analysis. The focus is not simply on how investors are contacted but on the overall nature and frequency of the fundraising activities.

Investor Relations Activities

Many investment funds employ individuals responsible for investor relations, business development or capital raising. Titles alone do not determine whether dealer registration is required. Instead, regulators consider the activities being performed.

An employee who regularly identifies prospective investors, explains investment opportunities, coordinates meetings and facilitates subscriptions may contribute to the overall business trigger analysis, regardless of the title appearing on their business card. Accordingly, investment fund managers should carefully consider the responsibilities assigned to employees involved in fundraising before launching an exempt offering.

Compensation and Commercial Purpose

Another important consideration is whether the fundraising activities are conducted for a commercial purpose. Compensation is one of the factors regulators may consider when determining whether a person is carrying on the business of trading securities. Compensation may take many forms, including salaries, bonuses, commissions, referral fees or other economic benefits connected to fundraising activities.

For example, an employee whose responsibilities include identifying prospective investors, arranging meetings and coordinating subscriptions may still contribute to the overall registration analysis even if they receive only a salary rather than transaction-based commissions. Similarly, consultants or third parties who receive compensation for introducing prospective investors may raise additional dealer registration considerations depending on the surrounding circumstances.

Compensation alone does not determine whether registration is required. Rather, it is one of several factors considered when evaluating the overall fundraising model.

Holding Yourself Out

Regulators also consider whether a person or company holds itself out as being in the business of trading securities. Holding out extends beyond describing yourself as a dealer. It includes conduct that communicates an ongoing willingness to raise capital or facilitate investments. Examples may include:

* maintaining a website inviting investment inquiries;
* publishing marketing materials promoting investment opportunities;
* advertising through digital media or social platforms;
* conducting regular investor webinars;
* attending conferences to identify prospective investors; or
* encouraging prospective investors to contact the fund regarding investment opportunities.

None of these activities automatically requires dealer registration. However, when viewed together with continuous fundraising, investor solicitation and commercial purpose, they may form part of the overall business trigger analysis. Fund managers should therefore evaluate their public-facing marketing activities as part of their overall compliance framework rather than considering them in isolation.

Who Can Raise Capital for the Fund?

One of the most common practical questions is who may communicate with prospective investors on behalf of an investment fund. There is no simple rule based solely on a person’s title or relationship to the issuer. For example, a director, officer, employee, trustee or general partner is not automatically exempt from dealer registration because of their position within the fund structure. Similarly, calling someone an investor relations representative or business development manager does not determine whether registration is required.

The analysis instead focuses on what that individual actually does. Questions that may become relevant include:

* Are they regularly identifying prospective investors?
* Do they explain the investment opportunity?
* Do they answer questions regarding the offering?
* Do they arrange meetings with prospective investors?
* Do they facilitate subscriptions?
* Are these activities ongoing rather than isolated?

The more organized and continuous these activities become, the more carefully dealer registration should be considered. Accordingly, investment fund managers should define fundraising responsibilities before approaching investors rather than after capital raising has already begun.

Practical Examples

The following examples illustrate how the dealer registration analysis may differ depending on the overall fundraising model. They are simplified for illustration only and should not be interpreted as definitive legal conclusions.

Example 1: One-Time Capital Raise

A newly formed private equity fund admits a small number of founding investors during its initial closing. No additional investors are expected after formation. Although securities have been distributed, the fundraising activities are limited in duration and scope. This presents a materially different regulatory profile from an evergreen investment fund conducting ongoing exempt distributions.

Example 2: Evergreen Mortgage Fund

A mortgage investment fund accepts subscriptions throughout the year, regularly updates its website, conducts educational webinars and employs dedicated investor relations personnel. Fundraising forms part of the fund’s ordinary business. Dealer registration considerations should be carefully evaluated before this distribution model is implemented.

Example 3: Internal Investor Relations Team

A fund manager employs two investor relations professionals responsible for responding to inquiries, meeting with prospective investors and coordinating subscription documents. Although neither employee receives commissions, the activities they perform remain relevant when assessing whether dealer registration should be considered.

Example 4: External Capital Raising Consultant

A consultant introduces accredited investors to an investment fund in exchange for compensation based on successful investments. Depending on the surrounding facts, this arrangement may raise dealer registration issues for both the consultant and the overall distribution model.

When Does an Outsourced Exempt Market Dealer Become Appropriate?

Where fundraising activities become sufficiently organized, continuous or business-like, many investment fund managers choose to engage an outsourced exempt market dealer rather than conducting distributions internally.

An outsourced EMD provides an established compliance framework for exempt distributions while allowing the investment fund manager to remain focused on operating the fund.

Depending on the distribution model, the dealer may oversee investor onboarding, Know Your Client (KYC) procedures, Know Your Product (KYP) reviews, suitability assessments where applicable, subscription processing, recordkeeping and ongoing regulatory supervision.

For many evergreen investment funds, engaging an external dealer provides a practical solution that supports ongoing fundraising without requiring the manager to establish its own registered dealer. Whether this approach is appropriate depends on the specific structure and fundraising activities of the fund.

Common Misconceptions

Several misconceptions frequently arise when investment fund managers consider self-distribution.

“We only sell to accredited investors.”

The availability of a prospectus exemption does not determine whether dealer registration is required. These are separate legal analyses.

“Our employees are not registered, so they are only providing information.”

Registration depends on activities rather than titles. Explaining an investment opportunity, communicating with prospective investors and facilitating subscriptions may all become relevant depending on the circumstances.

“We don’t pay commissions.”

Compensation is only one factor considered when assessing whether fundraising activities constitute carrying on the business of trading securities.

“We’ve always raised capital this way.”

Past practice does not determine whether a fundraising model complies with Ontario securities law. As fundraising activities evolve, dealer registration should be reassessed periodically.

Practical Planning Checklist

Before conducting an exempt offering without an external dealer, investment fund managers should consider:

* Who will communicate with prospective investors?
* How frequently will fundraising occur?
* Will marketing activities continue after launch?
* Are employees responsible for investor relations?
* Will anyone receive compensation connected to fundraising?
* Has the dealer registration analysis been completed separately from the prospectus exemption analysis?
* Is the proposed distribution model appropriate for the anticipated fundraising activities?

Addressing these questions before approaching investors often reduces regulatory risk and allows greater flexibility when designing the fund’s distribution strategy.

Frequently Asked Questions

Can an investment fund sell its own securities?

Possibly. The answer depends on the nature of the fundraising activities and whether dealer registration is required under Ontario securities law.

Does every investment fund require an exempt market dealer?

No. Whether an external dealer is required depends on the particular facts, including the proposed distribution model and the activities being conducted.

Can employees communicate with prospective investors?

They may, depending on the circumstances. However, the activities they perform should be considered when assessing dealer registration requirements.

Can a general partner raise capital for a limited partnership?

Whether a general partner may conduct fundraising activities without dealer registration depends on the specific facts and the overall fundraising model.

Does relying on the accredited investor exemption eliminate dealer registration?

No. Prospectus exemptions and dealer registration address separate legal requirements.

Conclusion

Investment funds are not automatically prohibited from distributing their own securities. However, self-distribution raises important dealer registration considerations that should be evaluated before fundraising begins.

The central question is not simply whether the fund qualifies for a prospectus exemption, but whether the fundraising activities amount to carrying on the business of trading securities. Continuous fundraising, investor solicitation, organized marketing activities and ongoing capital raising may all become relevant when making that assessment.

For many evergreen investment funds, engaging an outsourced exempt market dealer provides an established compliance framework that supports ongoing exempt distributions while allowing the investment fund manager to focus on operating the fund.

Contact Us

Startly Inc. provides outsourced exempt market dealer services to investment funds and other issuers conducting exempt offerings. If you are evaluating whether your fund’s fundraising activities require an exempt market dealer or reviewing your distribution model under National Instrument 31-103, contact us to discuss how our EMD platform can support your compliance and capital raising objectives.

This article is current as of the date of publication, is provided for informational purposes only and does not constitute legal or regulatory advice. Independent professional advice should be obtained before relying on the information discussed above.