In Solar Income Fund Inc. (Re), 2022 ONSEC 2 (the Solar Decision)[1] an OSC Hearing Panel considered, among other things, section 44(2) of Ontario’s Securities Act (the Act),[2] which prohibits false or misleading representations that a reasonable investor would consider relevant in deciding whether to enter into or maintain a trading or advising relationship with the person or company making the representation.
The OSC has previously applied section 44(2) to non-registrants carrying on the business of trading or advising who should have been registered. The Solar Decision is the first reported decision in which OSC Staff (Staff) attempted to have the OSC recognize the application of section 44(2) to a non-registrant who was not carrying on the business of trading or advising.
Staff alleged that the respondent Solar Income Fund Inc. (SIF Inc.) and individual respondents and members of SIF Inc.’s senior management committee (together, with SIF Inc., the Respondents) used funds raised through a SIF Inc. growth fund (SIF #1) in ways that were inconsistent with what was disclosed to potential and existing investors, thereby breaching two provisions of the Act: section 44(2) and section 125.1(1)(b).[3]
A breach of section 44(2) required Staff to prove: (1) that the respondent made a statement; (2) that the statement was untrue or misleading in the circumstances in which it was made; and (3) that a reasonable investor would consider the subject of the statement to be relevant in deciding whether to enter into or maintain “a trading or advising relationship” with the respondent who made the statement.[4]
The focus was on the third factor – whether any of the Respondents were in a “trading or advising relationship” with investors. Staff relied on the following factors to argue for the existence of a “trading relationship”:[5]
- investors purchased SIF #1 units directly from SIF Inc.;
- investors entered into a subscription agreement that was explicitly directed to SIF #1, and to SIF Inc. as the “Manager”, and that was signed by SIF Inc. “as agent for” SIF #1;
- SIF Inc. would determine the investor’s eligibility to purchase the units;
- SIF Inc. wrote to each purchaser to confirm details and to invite questions;
- Raintree, the lead exempt market dealer retained to sell units, identified itself as an independent dealer and advised investors that the investors would “also be creating a relationship with [the] issuer for the ongoing care and control of [the] investment.”;
- the SIF #1 management agreement said that SIF Inc.’s role would include reporting to and liaising with investors about SIF #1;
- SIF Inc. sent regular newsletters to unitholders;
- units were redeemable at the unitholder’s option, with the redemption price being tied to the units’ market value, which was determined by SIF Inc.; and
- SIF Inc. could cancel units at its discretion.
The Hearing Panel nevertheless concluded that a trading or advising relationship within the meaning of section 44(1) did not exist on the facts. It found that “a trading or advising relationship” must “mean something considerably more than the incidental and administrative relationship between unitholder and manager of the issuer in this case”, and further noted that there was no evidence “that any investor had any trading‑related connection with SIF Inc. that was anything more than, once, buying units of SIF #1.”[6]
The Hearing Panel rejected Staff’s argument that the factors (listed above) created a “trading relationship”, holding:[7]
- SIF Inc.’s administrative steps at the time of purchase were typical of those of an issuer of exempt securities, and its after-purchase steps were typical of investor relations activities conducted by many issuers;
b even if the exempt market dealer was correct when it told investors that they would “also be creating a relationship with [the] issuer for the ongoing care and control of [the] investment”, that relationship was of an administrative nature, and there would not necessarily be any trading once the initial purchase was complete; and
- any rights of redemption or cancellation did not create a “trading” relationship.
The Hearing Panel also considered section 44(1) in its assessment of the purpose of section 44(2), noting that the section governs registrants and others who make representations about being a registrant. This reinforced their conclusion that the “trading or advising relationship” envisaged by section 44(2) is of a nature typically provided by registrants.[8]
Ultimately, the Hearing Panel did not agree with Staff’s warning that if the Respondents were not held to have contravened section 44(2) that “an issuer could never be held liable under section 44(2) for making misrepresentations to investors so long as the issuer retained an Exempt Market Dealer to sell on its behalf.”. While the Panel agreed that if there is no trading or advising relationship between an issuer and a security holder that an issuer cannot be held liable under section 44(2), it emphasized that this is because the trading or advising relationship is an essential element of section 44(2). Indeed, the Panel noted that if section 44(2) were to apply in these circumstances, every issuer might be said to be in a trading relationship with every holder of an issuer’s securities.[9]
Key takeaway
The Solar Decision offers interesting insight into the limits of section 44(2) and the definition of a “trading or advising relationship”. Although the OSC Hearing Panel noted the possibility of liability under other provisions of the Act, it recognized that section 44(2) should not apply to non-registrants who have done nothing more than engage in a “trade, and associated administrative and information-conveying steps”.
The author would like to thank Breanne Matheson for her contributions to this article.
[1] Solar Income Fund Inc. (Re), 2022 ONSEC 2 [Solar].
[2] Securities Act, RSO 1990, c S.5, s.1(a) [Securities Act].
[3] Solar at para 7. This post focuses on the OSC’s reasoning as it relates to the first of these provisions.
[4] Ibid at para 32.
[5] Ibid at para 42.
[6] Ibid at para 61.
[7] Ibid at para 62.
[8] Ibid at para 50.
[9] Ibid at para 66.
