When Does an Ontario Investment Fund Need an Exempt Market Dealer?

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.

One of the most common questions asked by investment fund managers is whether they need an exempt market dealer (“EMD”) to raise capital.

The answer is rarely as simple as yes or no.

Many fund managers correctly determine that they can rely on a prospectus exemption, such as the accredited investor exemption under National Instrument 45-106. They then assume they can distribute securities without engaging a registered dealer. In many cases, that assumption is incorrect.

Under Ontario securities law, the prospectus requirement and the dealer registration requirement are separate regulatory obligations. A fund may be entitled to distribute securities without filing a prospectus while the persons conducting those distributions may nevertheless require dealer registration.

For evergreen investment funds that continuously raise capital, understanding this distinction is critical. Registration obligations depend primarily on the activities being carried on, not simply on the legal structure of the fund or the exemptions being relied upon.

This article explains when dealer registration becomes relevant, how the registration requirement applies to investment funds, and the role an outsourced exempt market dealer can play in supporting compliant capital raising.

Understanding the Registration Requirement

Ontario’s dealer registration regime exists to ensure that persons engaged in the business of trading securities meet minimum standards of proficiency, integrity and financial responsibility. Registered dealers are also subject to ongoing regulatory obligations relating to supervision, compliance systems, investor protection and recordkeeping.

For investment fund managers, however, the more important question is not why registration exists. The practical question is at what point do our fundraising activities require a registered dealer? The answer depends on the nature of the activities being conducted.

Ontario securities law focuses on substance rather than labels. A person is not exempt from registration simply because they are a director, officer, general partner or employee of the issuer. Similarly, describing fundraising as “investor relations,” “business development” or “capital raising” does not determine whether dealer registration is required. Instead, regulators examine what the person is actually doing.

Among other things, they may consider whether the person:

* regularly raises capital;
* solicits prospective investors;
* markets investment opportunities;
* receives compensation connected to fundraising;
* holds themselves out as being available to raise capital; or
* conducts activities similar to those performed by registered dealers.

No single factor is determinative. The analysis considers the overall business being carried on.

For many evergreen investment funds, fundraising is not an isolated event. New investors are accepted on a continuous or periodic basis, marketing efforts continue throughout the life of the fund, and investor relationships are actively maintained. These characteristics often require careful consideration of the dealer registration requirement.

Dealer Registration and Prospectus Exemptions Are Different Requirements

Perhaps the most common misunderstanding in the exempt market is the assumption that a prospectus exemption also eliminates dealer registration. It does not. Although both concepts arise under securities legislation, they serve different regulatory purposes.

A prospectus exemption determines whether securities may be distributed without filing a prospectus. Dealer registration determines whether the persons carrying out the distribution must be registered. These questions should always be analyzed separately. Consider a common example:

A real estate investment fund distributes units exclusively to accredited investors. Because every purchaser qualifies under the accredited investor exemption, no prospectus is required. Many fund managers conclude that this also means no exempt market dealer is required but this is not necessarily the case. If the fundraising activities amount to carrying on the business of trading securities, dealer registration may still be required notwithstanding the availability of a prospectus exemption.

This distinction becomes particularly important for investment funds operating on an ongoing basis. Continuous fundraising, active marketing, ongoing investor solicitation and regular capital raising may all be relevant when assessing whether dealer registration requirements apply. Fund managers should ask two separate questions:

* Can the securities be distributed without a prospectus?
* Who is permitted to carry out that distribution?

Keeping these questions separate is fundamental to designing a compliant fundraising structure.

When Does an Investment Fund Need an Exempt Market Dealer?

There is no single rule stating that every investment fund must engage an exempt market dealer. Instead, the analysis focuses on whether the fundraising activities constitute carrying on the business of trading securities. This assessment is highly fact specific. For example, consider two different investment funds:

The first admits a small number of founders and strategic investors during formation and accepts no additional investors after closing.

The second continuously markets investment opportunities, conducts webinars for prospective investors, maintains a dedicated investor relations team, receives new subscriptions every month and expects to continue raising capital indefinitely.

Although both funds may rely on the same prospectus exemption, their fundraising activities are materially different. The second structure is significantly more likely to raise dealer registration considerations because capital raising forms an ongoing part of the business. Factors that frequently increase the likelihood that dealer registration will be required include:

* accepting subscriptions on a continuous basis;
* actively marketing investment opportunities;
* maintaining a pipeline of prospective investors;
* compensating individuals for fundraising activities;
* employing dedicated investor relations personnel;
* conducting repeated exempt distributions over an extended period; and
* building fundraising into the ordinary course of business.

No individual factor determines the outcome. Rather, regulators assess the overall nature of the activities being conducted. For established evergreen investment funds, this analysis should be undertaken before fundraising begins rather than after investors have already been approached. Early planning provides greater flexibility when designing the distribution model and reduces the likelihood that fundraising activities will need to be restructured after launch.

What Does an Exempt Market Dealer Actually Do?

Many investment fund managers first encounter an exempt market dealer when they are preparing to launch a new fund or expand an existing exempt offering. A common misconception is that the dealer’s role is limited to collecting subscription agreements and processing investments. In reality, an exempt market dealer performs a much broader compliance function.

Registered dealers are responsible for conducting distributions in accordance with Ontario securities law and National Instrument 31-103. Depending on the structure of the offering, this may include supervising dealing representatives, conducting Know Your Client (KYC) and Know Your Product (KYP) reviews, assessing suitability where required, maintaining regulatory records and establishing policies and procedures designed to support compliance with securities legislation.

For investment fund managers, an experienced outsourced EMD provides an independent compliance framework for the distribution process. While the investment fund manager remains responsible for operating the fund, the dealer oversees the regulatory obligations associated with distributing securities.

This allocation of responsibilities can be particularly valuable for evergreen investment funds that accept subscriptions on an ongoing basis, where fundraising activities form part of the fund’s ordinary business.

What Does an EMD Review Before Accepting a Fund?

Before agreeing to distribute securities, most exempt market dealers conduct their own due diligence regarding both the issuer and the investment product. The scope of this review varies depending on the complexity of the fund and its investment strategy, but it is typically much more comprehensive than many first-time fund managers expect.

Among other matters, a dealer will commonly review the fund’s legal structure to understand how responsibilities have been allocated between the issuer, investment fund manager, general partner, trustee, portfolio manager and other service providers.

The dealer will also review the principal offering documents, including the offering memorandum, subscription agreement, governing documents and investor disclosure, to ensure that the materials accurately describe the investment and support the dealer’s own regulatory obligations.

The investment strategy itself is another significant area of review. A dealer should understand what the fund invests in, how investments are selected, how assets are valued, what risks investors face and how liquidity is managed. These matters form an important part of the dealer’s Know Your Product obligations. The review commonly extends beyond legal documentation.

Many dealers also evaluate the fund’s governance framework, conflicts of interest, valuation policies, anti-money laundering procedures, service providers, complaint handling procedures and operational controls. The objective is not simply to understand the legal structure of the fund, but to determine whether the dealer can responsibly distribute the product to investors within its compliance framework.

A well-prepared onboarding package generally results in a faster and more efficient onboarding process.

Common Mistakes Fund Managers Make

Registration issues frequently arise because investment fund managers focus primarily on prospectus exemptions while giving less attention to dealer registration. Several recurring issues are encountered during dealer onboarding.

One common assumption is that selling exclusively to accredited investors eliminates dealer registration concerns. As discussed earlier, this is not necessarily the case. Prospectus exemptions and dealer registration address different regulatory requirements.

Another issue is engaging in marketing activities before the distribution structure has been finalized. Investor presentations, websites, webinars and promotional materials may all become relevant to the dealer’s review and should generally be consistent with the fund’s offering documents and compliance framework.

Some managers also underestimate the amount of product information a dealer requires before agreeing to distribute a fund. Incomplete documentation, inconsistent disclosure or unclear valuation methodologies often delay onboarding more than any legal issue.

Finally, governance is frequently overlooked. Dealers commonly review how conflicts are managed, how investment decisions are documented, how valuations are determined and how investor complaints will be handled. These operational matters are important components of an effective compliance program and should be considered well before fundraising begins.

Planning Your Distribution Strategy

Choosing an appropriate distribution model is one of the most important structural decisions made during fund formation. Some investment fund managers establish affiliated registered dealers. Others conduct distributions through independent exempt market dealers. The appropriate approach depends on the fund’s size, fundraising objectives, internal compliance resources and long-term business strategy.

For many established evergreen funds, outsourcing dealer functions provides access to an existing compliance infrastructure without the cost and regulatory burden associated with operating a registered dealer.

Whatever structure is selected, the distribution model should be considered alongside the preparation of the offering documents, marketing strategy and investor onboarding process. Aligning these elements from the outset generally produces a more efficient fundraising program and reduces the need for later restructuring.

Practical Registration Checklist

Before commencing an exempt offering, consider the following questions:

* Have we analyzed whether our fundraising activities raise dealer registration considerations?
* Have we distinguished the prospectus exemption analysis from the registration analysis?
* Is our proposed distribution model appropriate for our fundraising activities?
* Are our offering documents complete and internally consistent?
* Have marketing materials been reviewed for consistency with the offering documents?
* Is the investment strategy sufficiently documented to support dealer product review?
* Are governance policies, valuation procedures and conflicts management appropriately documented?
* Have anti-money laundering and investor onboarding procedures been established?
* Have we identified all parties responsible for the distribution process?

Addressing these issues before capital raising begins can significantly reduce delays during dealer onboarding and help establish a more efficient compliance framework.

Frequently Asked Questions

Does every investment fund need an exempt market dealer?

No. Whether dealer registration is required depends on the activities being conducted and whether a registration exemption is available. There is no rule requiring every investment fund to appoint an external exempt market dealer.

Does relying on the accredited investor exemption eliminate dealer registration?

No. The accredited investor exemption is a prospectus exemption. Dealer registration involves a separate legal analysis.

Can an investment fund distribute securities through an outsourced exempt market dealer?

Yes. Many investment fund managers engage an independent exempt market dealer to conduct distributions under an established compliance framework while the manager continues to operate the fund.

What information will an exempt market dealer request during onboarding?

Although requirements differ between dealers, the review commonly includes the fund’s governing documents, offering memorandum (if any), subscription documents, investment strategy, valuation methodology, governance framework, service providers and compliance policies.

When should an investment fund engage an exempt market dealer?

Dealer registration considerations should ideally be addressed before fundraising begins. Early engagement generally allows sufficient time to review the proposed structure, offering documents and distribution process before investors are approached.

Conclusion

For investment fund managers, dealer registration should be considered at the earliest stages of planning an exempt offering. Although prospectus exemptions determine whether securities may be distributed without a prospectus, they do not determine who may carry out those distributions.

Where fundraising activities constitute carrying on the business of trading securities, dealer registration may become a central component of the fund’s regulatory framework.

For many evergreen investment funds, engaging an experienced exempt market dealer provides more than access to a registered distribution platform. It establishes a compliance framework designed to support investor onboarding, regulatory oversight and ongoing exempt distributions as the fund grows.

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.