Mortgage brokerages, agents and brokers offering promissory notes to their clients must follow all applicable laws, including securities law requirements.
Before you deal in such instruments, you should seek legal advice to make sure you meet the relevant securities law requirements or the criteria of available exemptions from those requirements. Failing to do so may affect your suitability to retain your licence with FSRA.
What is a promissory note?
A promissory note is a legal instrument through which a borrower agrees to repay a specific amount of money, under agreed upon terms, loaned by a lender. Borrowers may include real estate investors sourcing funds to pursue investment opportunities.
- Secured promissory notes include collateral being pledged against the loaned amount.
- Unsecured promissory notes do not have collateral to secure the loan.
Promissory notes generally require a certain degree of trust between the borrowers and lenders, especially for unsecured notes.
The business activities of licensed mortgage brokers and agents are carved out of securities legislation provided such activities are conducted within the limits of their licensing with FSRA. Offerings of promissory notes may fall outside the scope of this carve out and be subject to securities legislation.
FSRA expects brokers and agents offering promissory notes to clients must disclose the risks involved. Such risks may include consumers and investors losing their investment if a borrower can’t meet their obligations and, in the case of secured promissory notes, the collateral is insufficient to repay the amount owing under the notes.
Jurisdiction
The definition of a “security” under the Securities Act (Ontario) includes “a bond, debenture, note or other evidence of indebtedness”. As a result, in Ontario, promissory notes are generally considered securities and fall under the oversight of the Ontario Securities Commission.