The short answer
Lending your own money on a mortgage is usually not a securities transaction. Raising money from other people to fund mortgages usually is. Once a lender pools investors, sells fractional interests or runs a fund, securities law in the investor's jurisdiction applies, and a cross-border raise must satisfy both countries' rules.
Canada: from mortgage regulation to securities regulation
Syndicated mortgages. A syndicated mortgage involves two or more lenders sharing one mortgage. In 2021, Canadian securities regulators amended National Instrument 45-106 Prospectus Exemptions to narrow the exemption that previously allowed syndicated mortgages to be distributed without a prospectus in most provinces. In Ontario, oversight of non-qualified syndicated mortgages moved from the mortgage regulator (FSRA) to the Ontario Securities Commission on 1 July 2021. Simpler "qualified" syndicated mortgages (generally residential, non-construction, limited loan-to-value and fixed terms) remain under the MBLAA regime.
Prospectus exemptions. Most private raises rely on NI 45-106, including the accredited investor exemption (s. 2.3) and the offering memorandum exemption (s. 2.9). The offering memorandum route has specific form, disclosure and, in some provinces, investment-limit requirements, with additional disclosure for syndicated mortgages such as appraisals.
Registration. A person in the business of trading securities needs registration under National Instrument 31-103, commonly as an exempt market dealer. Mortgage brokers who sell investments to the public should confirm whether they need securities registration as well as a mortgage license.
Mortgage investment corporations. A MIC under section 130.1 of the Income Tax Act is a flow-through vehicle: dividends paid are deductible to the corporation. To qualify, a MIC must, among other things, be a Canadian corporation with at least 20 shareholders, have no shareholder holding more than 25% of any class of shares, and hold at least 50% of its property in residential mortgages, insured deposits and cash. MIC shares are securities and are distributed under prospectus exemptions. Non-resident investors should get tax advice on how MIC distributions are taxed in their hands (Article 6).
United States: the tests
Notes. Under Reves v. Ernst & Young, 494 U.S. 56 (1990), a note is presumed to be a security unless it resembles a recognized non-security category. That "family resemblance" list includes notes secured by a mortgage on a home and commercial loans made by lenders for their own account. A private lender's own loan is usually not a security.
Investment contracts. Under SEC v. W.J. Howey Co., 328 U.S. 293 (1946), an investment of money in a common enterprise with an expectation of profits from others' efforts is a security. Fractional interests in a pool of loans, or in one loan managed by a sponsor, commonly meet this test. Fund interests almost always do.
Exemptions. Private offerings typically rely on section 4(a)(2) of the Securities Act of 1933 and Regulation D. Rule 506(b) prohibits general solicitation but allows up to 35 sophisticated non-accredited investors. Rule 506(c) permits general solicitation, including websites and social media, but every purchaser must be accredited and the issuer must take reasonable steps to verify that status. Issuers file Form D within 15 days of the first sale, and most states require notice filings.
The fund itself. A pooled vehicle must avoid registration under the Investment Company Act of 1940. Mortgage funds often rely on section 3(c)(5)(C), which covers entities primarily engaged in purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. Other funds rely on section 3(c)(1) (100 beneficial owners or fewer) or 3(c)(7) (qualified purchasers). The sponsor may also face investment adviser rules at federal or state level.
California multi-lender loans. California permits licensed real estate brokers to arrange and sell fractional interests in trust deed loans to multiple lenders under Business and Professions Code § 10238, subject to investor-suitability, disclosure and other conditions. Outside that framework, fractional sales can trigger state securities law.
Cross-border raises: both sets of rules apply
| Situation | Canadian rules | US rules |
|---|---|---|
| Canadian sponsor raising from US investors | Home-province rules on distributions outside the province (for example, OSC Rule 72-503 for Ontario issuers) | Regulation D exemption and state notice filings for US purchasers |
| US sponsor raising from Canadian investors | NI 45-106 exemption and report of exempt distribution; possible dealer registration or an international dealer exemption | Regulation S may apply to offshore offers; Regulation D if US investors also participate |
| Marketing a deal on a public website or social media | May be restricted advertising depending on the exemption used | General solicitation: only Rule 506(c) is available |
A word on marketing. Posting a specific investment opportunity on a public website, LinkedIn or at an open event can be general solicitation. Industry education, including CBPLA articles like this one, is not the problem; a specific offer of an investment is.
Pre-raise checklist
- Is anyone other than the lender putting money in? If yes, assume securities law applies
- Identify each investor's jurisdiction and the exemption for each
- Confirm dealer or broker-dealer registration for anyone selling
- Choose Rule 506(b) or 506(c) before any marketing
- Diarize Form D, state notice filings and Canadian exempt distribution reports
- Confirm Investment Company Act and adviser status for any fund
Frequently asked questions
Frequently asked questions
Is a syndicated mortgage a security in Canada?
Many are. Since 2021, most syndicated mortgages are distributed under securities law exemptions, and in Ontario non-qualified syndicated mortgages are overseen by the Ontario Securities Commission.
Is a private mortgage note a security in the US?
A lender's own commercial or home-secured loan usually is not under Reves. Fractional interests sold to investors usually are, under Howey.
What is a mortgage investment corporation?
A Canadian flow-through corporation under section 130.1 of the Income Tax Act that invests mainly in residential mortgages and must meet shareholder and asset tests.
Can I advertise a private lending fund online?
In the US, only if you use Rule 506(c) and verify that every investor is accredited. Canadian advertising rules depend on the exemption.
This content is general information for industry professionals and is not legal, tax or financial advice. Laws change and apply differently to each transaction; obtain advice from qualified counsel in each relevant jurisdiction. Legal counsel to the Cross-Border Private Lenders Association: Jasmine Daya & Co. Questions: info@cbpla.com