it. Ultimately, the broker did not pay the
promissory notes.
Did the Broker Breach Securities
Legislation by Distributing
Securities
2
?
A person is not to distribute a security unless a
prospectus is filed with the securities regulator
or an exemption applies.
An unsecured, high-interest-bearing
promissory note is very strongly presumed to
be a security. e presumption stands in this
case; other than that, there is considerable doubt
that an interest-free note (essentially a non-
investment) could be a security.
Issuing or renewing a promissory note
for valuable consideration is considered to be
distributing, and thus is classified as trading
in a security. Each of the renewals in this case
and the writing of replacement notes was a
distribution of a security, even though no new
funds were given to the broker. It is relevant in
determining that the presumption stands that:
n
e notes were unsecured.
n
e monies were given to the broker with an
investment intent.
n
All of the investors were looking to make money
on short term promissory notes where the interest
rate spread between what they would pay to
borrow the funds and what the respondents would
pay on the notes would offer a substantial return.
n
ere is no alternative regulator; regulators
of mortgage brokering regulate mortgages and
not promissory notes. (Note that a mortgage
broker regulator may nevertheless have a lot to
say about a broker who borrows money from
clients on the basis of promissory notes; issues
of conflicts of interest, suitability for registration
and conduct prejudicial to the public interest
potentially arise.)
In this case, a prospectus had not been filed
with the securities regulator.
No exemption to the requirement for a
prospectus was proved. Some provinces have an
exemption to the requirement that a prospectus
be filed, if the person making the loan is a
close friend or close business associate. e
borrower (that is, the mortgage broker) has
the onus to prove that any exemption applies.
Other than the bare claim of the broker, there
was no evidence in this case of any of the clients
being close friends or close business associates
of the broker. e clients categorically denied
being close personal friends or close business
associates of the broker.
Consequences
Having determined that the mortgage breached
the securities legislation, the BC Securities
Commission postponed deciding the con-
sequences until further submissions were made.
Takeaways
A mortgage broker should consult securities
requirements of the province before negotiating
loans from investors and issuing promissory
notes. is rather simple transaction may breach
securities legislation requirements.
2 Specifics of securities legislation differ between the provinces.
This article is focused on general principles and language.
The applicable legislation should be reviewed to determine
responsibilities in a specific instance.
CmB magazine cmba-achc.ca spring 2017 | 51
