Exempt Market Dealers
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.
Exempt market dealers (EMDs) play an important role in Canada’s private capital markets by helping issuers distribute securities in compliance with applicable securities laws. Whether raising capital for an investment fund, mortgage investment corporation (MIC), real estate investment trust (REIT), private company or other exempt market issuer, working with a registered exempt market dealer can provide the regulatory oversight and investor onboarding necessary for a compliant exempt distribution.
EMDs are regulated under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and are subject to ongoing compliance, proficiency and conduct obligations. Their role extends well beyond processing subscription documents. An EMD is responsible for regulatory functions that help protect investors and support the integrity of Canada’s exempt market.
This article explains what exempt market dealers do, when they may be required, and how issuers and investment managers commonly work with an external EMD.
What Is an Exempt Market Dealer?
An exempt market dealer is a securities dealer registered to trade securities distributed under prospectus exemptions. Unlike investment dealers that facilitate trading on public markets, exempt market dealers focus on private capital raising and exempt distributions. EMDs work with a broad range of market participants, including:
* Private companies
* Investment funds
* Mortgage investment corporations (MICs)
* Real estate investment trusts (REITs)
* Private equity and venture capital funds
* Real estate development issuers
* High-net-worth and institutional investors
An exempt market dealer acts as an intermediary between issuers and investors, helping ensure securities are distributed in accordance with applicable securities legislation. Depending on the engagement, an EMD may oversee investor onboarding, conduct regulatory reviews, assess investor suitability and supervise the distribution process.
When Is an Exempt Market Dealer Required?
Canadian securities legislation generally requires any person or company that is in the business of trading securities to be registered unless an exemption is available. Whether registration is required depends on the specific facts and circumstances of the offering, including the nature, frequency and scope of the distribution activities being conducted. This analysis is commonly referred to as the “business trigger.”
Rather than becoming registered themselves, many issuers choose to engage an external exempt market dealer to perform the dealer functions associated with an exempt distribution. This approach allows issuers to access experienced compliance professionals and established regulatory systems while remaining focused on managing their business or investment strategy.
Exempt Market Dealer Services
The services provided by an exempt market dealer will vary depending on the issuer, the offering and the terms of the engagement. In general, EMD services are designed to support compliant exempt market distributions while providing appropriate regulatory oversight.
Investor Onboarding
An EMD guides prospective investors through the subscription process and reviews subscription documentation before an investment is accepted. This process helps ensure that required documentation has been completed and that investors are participating under the appropriate prospectus exemption.
Know Your Client (KYC)
Registered dealers are required to understand their clients before facilitating an investment. This includes collecting information regarding an investor’s financial circumstances, investment objectives, investment knowledge, risk tolerance and other information required under applicable securities laws. A thorough KYC process helps establish whether a proposed investment is appropriate for a particular investor.
Suitability Assessments
Suitability is one of the core regulatory responsibilities of an exempt market dealer. Where required, an EMD evaluates whether a proposed investment is suitable for a client based on the client’s circumstances and the characteristics of the investment. This assessment forms an important part of Canada’s investor protection framework and is conducted by registered dealing representatives operating under the dealer’s compliance program.
Anti-Money Laundering Compliance
EMDs are also responsible for satisfying applicable anti-money laundering and anti-terrorist financing obligations. This typically includes verifying client identity, maintaining required records and complying with reporting obligations under Canada’s anti-money laundering regime. These requirements help maintain the integrity of the financial system while reducing the risk of financial crime.
Subscription Processing
An exempt market dealer reviews subscription packages, coordinates closing documentation and works with issuers to facilitate the completion of exempt market transactions. Depending on the structure of the offering, the dealer may also assist in coordinating investor communications, subscription acceptance and closing procedures.
Regulatory Oversight
Perhaps the most significant role of an exempt market dealer is providing regulatory oversight throughout the distribution process. EMDs maintain written compliance policies and procedures, supervise registered dealing representatives, maintain required records and operate within a regulatory framework established by Canadian securities regulators. This oversight helps issuers conduct exempt offerings in a manner that is consistent with applicable regulatory requirements while providing investors with confidence that the offering is being conducted through a registered dealer.
Working with an External Exempt Market Dealer
Many issuers engage an external exempt market dealer instead of establishing and maintaining their own dealer registration. This approach can be particularly appropriate for investment funds, MICs, REITs and private issuers conducting exempt offerings on a periodic or ongoing basis. Although the issuer remains responsible for operating its business, preparing offering documents and managing its investment strategy, the EMD performs the regulatory functions associated with the distribution of securities.
Successful offerings typically involve close coordination between the issuer and the exempt market dealer. Engaging an EMD early in the planning process allows the parties to establish appropriate distribution procedures, review offering materials and identify potential regulatory issues before marketing begins.
Frequently Asked Questions
What is an exempt market dealer?
An exempt market dealer is a registered securities dealer that facilitates the distribution of securities offered under prospectus exemptions in accordance with applicable Canadian securities laws.
Does every private issuer need an exempt market dealer?
No. Whether an issuer requires dealer registration or should engage an exempt market dealer depends on the facts and circumstances of the offering, including the nature of the issuer’s capital raising activities and the applicable securities law requirements.
What is the difference between an exempt market dealer and an investment dealer?
Investment dealers primarily facilitate trading in publicly listed securities and generally provide access to public capital markets. Exempt market dealers focus on private placements and securities distributed under prospectus exemptions.
Can an issuer engage a third-party exempt market dealer?
Yes. Many issuers retain an independent exempt market dealer to provide dealer services for exempt offerings rather than maintaining dealer registration themselves. The appropriate structure depends on the specific circumstances of the offering.
When should an issuer engage an exempt market dealer?
Issuers should consider engaging an exempt market dealer during the planning stage of an exempt distribution. Early engagement allows the dealer to review the proposed offering structure, establish onboarding procedures and identify regulatory considerations before securities are marketed to investors.
Conclusion
Exempt market dealers play a central role in Canada’s private capital markets by providing the regulatory oversight, investor onboarding and compliance infrastructure required for many exempt market distributions. Whether acting for an investment fund, private issuer, MIC, REIT or other exempt market participant, an experienced EMD helps facilitate compliant capital raising while supporting investor protection and regulatory compliance.
Contact Us
Startly Capital provides exempt market dealer services to investment funds and other issuers raising capital under prospectus exemptions. Whether you are launching a new offering or expanding an existing distribution, contact us to learn how our EMD services 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.