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The 17th floor of 10 Queen St. West where the Ontario Securities Commission holds hearings into financial matters, is pictured March 2 2015. The OSC says peer-to-peer lenders may be subject to securities regulation.

Fred Lum/The Globe and Mail

The Ontario Securities Commission is warning companies moving into the nascent world of peer-to-peer lending that they may be subject to regulation and could even be required to register as investment dealers.

In a notice Friday, the OSC said it is aware that companies are starting to operate new peer-to-peer lending websites in Ontario, and said it has received several inquiries about whether they are subject to regulation by the OSC under the Ontario Securities Act.

The OSC said the emerging companies appear to have different structures and they may be subject to regulation, depending on how loans are provided and whether the loan products constitute a "security" under Ontario legislation.

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The OSC does not regulate ordinary loans, which are not considered securities under Ontario legislation. But it can regulate if investors are receiving loan-related securities, such as bonds, debentures or other "investment contracts."

"If you are approaching any Ontario investors to fund peer-to-peer loans or loan portfolios, then you should be talking to the OSC about securities law requirements, including whether you need to be registered or require a prospectus," said Debra Foubert, director of compliance and registrant regulation at the OSC.

Peer-to-peer lending is an emerging sector that uses websites to match up potential lenders with companies or individuals seeking loans.

The sector has grown rapidly in the United States in the shadow of the increasingly popular crowdfunding model. But the lending sector has not grown as quickly in Canada. That's because Canadian sites have operated on the understanding their products are securities subject to securities commission oversight, which means only accredited investors such as institutions and wealthy individuals can finance the loans.

The OSC notice also said peer-to-peer lending companies should consider whether the businesses need to be registered as investment dealers or advisers. Registration as a dealer would add oversight and compliance requirements that could significantly change the business model for some companies looking at running peer-to-peer lending sites.

An OSC spokesperson said the commission would "expect that the lending platform be registered as a dealer" when loans are deemed to be securities.

The OSC ruled in 2009 that CommunityLend Inc., which applied to launch a peer-to-peer lending site, was registered as an exempt-market dealer and could only allow accredited investors to provide loans deemed to be securities under the Securities Act. The company changed its business model and is no longer doing consumer lending.

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Vancouver-based Grouplend Inc. has been taking loan applications since January, providing loans in seven provinces. Grouplend CEO Kevin Sandhu said his firm has been talking with the OSC to ensure it is fully compliant and, although it is not currently registered with the OSC, he considers the firm to be subject to requirements under the Ontario Securities Act.

"Clients are entering into a loan agreement which effectively allows investors to invest in that loan," Mr. Sandhu said. "In our discussions, we see that this agreement definitely triggers a security consideration."

Grouplend currently works under the accredited investors exemption at the OSC, but as the firm expands its number of investors in Ontario, Mr. Sandhu said he would consider becoming a registered investment dealer.

Borrowell Inc. of Toronto launched its operations in April, allowing individuals to request loans for any purpose, such as personal debt consolidation, travel, weddings or for business financing. Borrowell describes itself as a "marketplace lender" rather than a peer-to-peer lender, and does not allow a broad range of individual lenders to finance the loans. Its loan funding is currently provided by institutional investors such as Equitable Bank and private investment firm Oakwest Corp.

Borrowell chief executive officer Andrew Graham said his firm consulted with the OSC early on, and has structured its business to ensure it complies with Securities Act standards.

"We think the OSC is taking the right approach by acknowledging that there are multiple business models used by peer-to-peer lending platforms and that the securities law requirements will vary, depending on the business model," he said.

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FundThrough Inc. CEO Steven Uster said his firm has advocated for "appropriate regulation" of the industry. "Our industry is growing rapidly, so guidance from securities regulators at this time is helpful," he said.

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