14 | summer 2016 cmba-achc.ca CMB MAGAZINE
• Residential 1st and 2nd Mortgages
• Lending in BC, ON, AB and MB
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promissorynote
e outward simplicity of a promissory note can be deceiving, in that it
belies some very complicated regulatory requirements – with potentially
devastating consequences for non-compliance.
A promissory note is a debt instrument that obligates the payor to
make payments at a rate and frequency – and on or prior to a specific
date – set out in the note. It is evidence of a debt, just like a loan
agreement. But what makes a promissory note different from a loan
agreement is that it does not contain a myriad of lengthy legal clauses
and is only signed by the debtor, not the lender. is makes them quite
simple and straightforward to read.
Many people don't realize that a promissory note is also a
security. e securities legislation in each province defines a security
to include a "note or other evidence of indebtedness." Dealing in
promissory notes, therefore, requires that a prospectus be filed under
the various securities requirements of each province or reliance on an
available prospectus exemption.
Tenured brokers and lenders may recall the notorious mortgage
scandal involving Eron Mortgage. In 1999, Eron principals Frank Biller
and Brian Slobogian were found to have bilked an estimated $170 million
from approximately 3,200 investors using syndicated mortgages; the
properties were purposely overvalued and many investor interests were
not secured properly. What many people don't know is that a significant
number of Eron investments were secured with promissory notes, and
the BC Securities Commission concluded that Biller and Slobogian
had traded in securities without complying with the prospectus and
exemption requirements of the province's Securities Act.
Recently, a former mortgage broker was served with a Notice of
Hearing by the BC Securities Commission for essentially the same
capital-raising activities as the Eron principals. He is alleged to have
raised funds that were secured by promissory notes without filing a
prospectus or relying on a prospectus exemption.
It should be duly noted: Industry members who are issuing
promissory notes in relation to investor or lender funds should exercise
caution, and ensure they understand any requirements of their provincial
securities legislation before embarking on such capital-raising activities.
Duly Noted
Mortgage brokers issuing promissory notes
may be in non-compliance with regulatory
requirements concerning securities
BY SAMANTHA GALE, CMBA EXECUTIVE DIRECTOR
