Earlier this year, the Ontario Capital Markets Tribunal (the Tribunal), accepted a joint settlement agreement[1] submitted by Staff of the Ontario Securities Commission (Staff) and defendant Raymond Pomroy (Pomroy), who had been accused of making false or misleading statements while holding the position of Chief Executive Officer (CEO) of SoLVBL Solutions Inc. (SoLVBL)[2], in breach of s. 126.2(1) of the Ontario Securities Act (the Act). SoLVBL is a reporting issuer in Ontario that provides high-speed data authentication that can be used to produce non-fungible tokens (NFTs).

Staff initially alleged that SoLVBL had published false and misleading information in press releases and various other submissions, most of them regarding a deal to license NFT production software to New Foundation Technologies Corp (New Foundation). These statements had generated positive interest and allowed SoLVBL to raise $4 million from investors through two private placements. Staff sought orders from the Tribunal to prohibit him from being a director or an officer of a reporting issuer for five years and to impose an administrative penalty on Pomroy.   

Background

SoLVBL began trading on the Canadian Securities Exchange as a publicly listed company on February 24th, 2021. Its share price significantly declined in the following months, leading SoLVBL to enter into a private placement financing proposal with broker Research Capital Corporation (Research Capital) on April 23, 2021. The agreement provided that the price would be reconfirmed prior to the launch of the private placement. According to Staff, this provision constituted incentive for SoLVBL to keep the price of its shares as high as possible in advance of the private placements.

On April 27, 2021, four days after the agreement with Research Capital was signed, Ahmed Akbar, a consultant for SoLVBL and one of the firm’s original cofounders/shareholders, incorporated New Foundation in Ontario. Akbar was registered as its sole officer and director. SoLVBL and New Foundation entered into an Intellectual Property Licensing Agreement (the Licensing Agreement) effective April 29th, 2021, which provided New Foundation with an exclusive, worldwide license to use SoLVBL’s intellectual property for the creation of NFTs.

Under the Licensing Agreement, New Foundation was to pay a one-time $120,000 licensing fee to SoLVBL. On May 5 and May 14, 2021, New Foundation made two payments to SoLVBL for a total of $75,000 from a bank account created by Akbar. On May 28, 2021, Akbar’s spouse and two other SoLVBL shareholders paid the balance of $45,000 to SoLVBL. Aside from this transaction, New Foundation never conducted any other business activities.

In May and June, 2021, SoLVBL issued several press releases, most of which provided information about the expected transaction with New Foundation. SoLVBL claimed that the Licensing Agreement was its first large transaction. Press releases and filings presented New Foundation as a Los Angeles-based company with several offices across the world when it actually shared a single office with SoLVBL. The news releases created the impression that SoLVBL was entering into a deal with an international company with multiple offices, established business activities and an existing customer base. They additionally suggested that SoLVBL won the contract after participating in a bidding process. In short, SoLVBL failed to include material information in its press releases, misstated certain facts and made false representations that, according to the OSC, were meant to keep its share price high.

Staff’s allegations and Findings of the Tribunal

Staff accused Pomroy of violating section 126.2(1) of the Act, which provides that:

1) A person or company shall not make a statement that the person or company knows or reasonably ought to know:

a) in a material respect and at the time and in the light of the circumstances under which it is made, is misleading or untrue or does not state a fact that is required to be stated or that is necessary to make the statement not misleading; and

b) would reasonably be expected to have a significant effect on the market price or value of a security, derivative or underlying interest of a derivative.

Staff claimed that officers and directors of public companies have important roles in ensuring the accuracy of the information delivered to the public. Pomeroy, as such, had the responsibility of making sure that SoLVBL’s statements were true and not misleading. The false and misleading statements made in the corporate press releases and regulatory filings could reasonably be expected to affect the market price or the value of SoLVBL’s securities. As emphasized by Staff, such conduct caused harm or risked harming investors.

The Tribunal found that the statements made by SoLVBL were indeed misleading as they failed to mention: (i) that no work had been carried out following the signature of the License Agreement; (ii) the relationship between SoLVBL and New Foundation[3] and in particular the fact that all of New Foundation’s investors were shareholders of SoLVBL, were funding SoLVBL’s operations through loans and had an interest in SoLVBL successfully raising capital in the upcoming private placements.

Pomroy admitted and acknowledged that he (i) made/was involved in SoLVBL making statements that he knew or reasonably ought to have known were misleading and (ii) failed to provide the information required to correct the inaccuracies of previous statements.

Sanctions

Pursuant to subsections 127(1), 127(1.1) and 127.1 of the Act, the Tribunal approved the settlement agreement between Pomroy and Staff pursuant to which Pomroy was to resign from any position he held as a director or officer of a reporting issuer, was prohibited from acting as a director or officer of a reporting issuer for 5 years, was imposed an administrative penalty of $75,000 and had to pay costs of $15,000 for Staff’s investigation.

Moreover, Pomroy undertook to complete an education course before becoming a director or an officer of a reporting issuer in the future and to cooperate with Staff’s investigation and testify as a witness in any proceeding commenced or continued by Staff regarding the settlement agreement.

Takeaways

In line with its mandate to protect investors and maintain general trust in capital markets, Staff has kept a close eye on activities involving NFTs and crypto assets trading in the past years, which are subject to securities regulations[4]. Consequently, reporting issuers conducting such business activities, as well as their directors and officers, should ensure they comply with the Act to avoid being sanctioned.

The author wishes to thank Roxanda Mirzac and Lambert Girardin, students-at-law, for their assistance in authoring this publication.

[1] Pomroy (Re), 2024 ONCMT 10; See also Settlement Agreement: In the Matter of Raymond Pomroy, February 26, 2024.

[2] RSO 1990, c S.5

[3] Namely that Akbar, who was engaged as a consultant by SoLVBL and was one of its significant shareholders and founders, incorporated New Foundation and acted as its sole director.

[4] See for example Autorité des marchés financiers c. XT.com Exchange (XT Exchange et XT.com), 2023 QCTMF 62 [see our post at www.securitieslitigation.blog/2024/08/acceleration-of-regulatory-scrutiny-towards-crypto-assets-trading-platforms/], Nova Tech Ltd (Re), 2024 ONCMT 18 and Hogg (Re), 2024 ONCMT 15.