Personal jurisdiction in the age of blockchain

As commercial activity increasingly intertwines with applications of blockchain technology with participants around the world, courts have had to grapple with the personal jurisdiction implications of such arrangements. Will participants in these blockchain applications based outside the United States find themselves subject to U.S. jurisdiction when disputes arise, based on how they have conducted their activities? Two recent New York federal court decisions examined such questions under traditional personal jurisdiction principles and upheld exercising personal jurisdiction over nonresident defendants.

Read the full article.

Originally published:  November 27, 2018

Forum Selection Clauses in Delaware Corporate Charters Invalid as to Securities Claims

The Delaware Chancery Court recently faced a challenge to forum selection clauses in certificates of incorporation of three Delaware corporations that required shareholder claims under the Securities Act of 1933 be brought in U.S. federal court, thereby barring the state forum.  For securities cases, defendant corporations generally prefer the U.S. federal courts which are viewed as less plaintiff friendly than state courts, particularly at the motion to dismiss stage.  Recognizing that the 1933 Act established concurrent federal and state court jurisdiction for claims thereunder with no right of removal, the Delaware Court held that such clauses barring the state forum were “ineffective and invalid.”  Sciabacucchi, et al. v. Salzberg, et al., C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018).


The plaintiff in this action had purchased securities in the initial public offerings of three corporations.  As such, he had standing to bring claims under Section 11 of the 1933 Act for any material misrepresentations or omission in connection with those offerings.  The plaintiff brought an action for declaratory judgment seeking to invalidate those corporations’ federal forum selection clauses that barred 1933 Act claims from being brought in state court.

The Ruling

In a December 19, 2018 decision, the Chancery Court agreed.  While Sections 102(b)(1) and 109(b) of the Delaware General Corporate Law permit forum selection clauses in certificates of incorporation and bylaws to regulate claims involving the internal affairs of Delaware corporations, the Court found that claims under the Securities Act of 1933 do not relate to a corporation’s internal affairs.  The Court observed that such a claim arises from an investor’s purchase of shares at a time the purchaser is not yet a stockholder “and lacks any relationship with the corporation that is grounded in corporate law.”

The Court further held  that “Delaware’s authority as the creator of the corporation does not extend to its creation’s external relationships, particularly when the laws of other sovereigns govern those relationships.”  The Court’s ultimate holding extended well beyond claims under the 1933 Act: “Under existing Delaware authority, a Delaware corporation does not have the power to adopt in its charter or bylaws a forum-selection provision that governs external claims.”

Ontario Court of Appeal Grants Leave to Appeal Tiffin Decision: Will Determine Role of the “Family Resemblance” Test in Defining Securities under the Securities Act

It seems that the saga of the Ontario Securities Commission’s prosecution of Daniel Emerson Tiffin and Tiffin Financial Corporation is not over yet.  On November 28, 2018 (2018 ONCA 953), the Ontario Court of Appeal granted leave to appeal the May 15, 2018 merits decision of Charney, J which rejected the “family resemblance” test and found that certain promissory notes were “securities” within the meaning of the Securities Act (the Act).


As we’ve previously discussed, Mr. Tiffin and his company, Tiffin Financial Corporation (TFC), were charged with three offences under the Act related to TFC’s issuance of a number of promissory notes to investment clients while Mr. Tiffin and TFC were prohibited from trading in securities or relying upon any exemption under Ontario securities law.  Kenkel, J’s trial decision (2016 ONCJ 543) focused on whether the promissory notes could be considered “securities” within the meaning of the Act.

In dismissing the charges against Tiffin and TFC, Kenkel, J applied the “family resemblance” test articulated by the United States Supreme Court in Reves v Ernst & Young, 494 US 56 to determine that the promissory notes did not meet the statutory definition of a “security” under the Act.  The family resemblance test presumes that a note is a security unless it bears a strong resemblance to one of a number of categories of instruments that are not considered securities. In determining whether a strong resemblance exists, courts are required to examine the following four factors:

  • whether the borrower’s motivation is to raise money for general business use and whether the lender’s motivation is to make a profit;
  • whether the borrower’s plan or distribution of the note resembles “common trading for speculation or investment”;
  • whether the investing public reasonably expects that the note is a security; and
  • whether there is a regulatory scheme that protects the investor other than securities laws.

On appeal (2018 ONSC 3047), Charney, J rejected the family resemblance test, finding that because the term “security” is defined under the Act, and defined broadly enough to cast a wide net to protect investors, it was not necessary to import the family resemblance test.  Charney, J found that, while there were conflicting decisions from the British Columbia Court of Appeal and the Alberta Court of Appeal with respect to whether the family resemblance test applied in Canada, the Alberta Court of Appeal’s decision, which rejected the family resemblance test, ought to be followed.  Ultimately, Charney, J held that the promissory notes were “securities” within the meaning of the Act and allowed the appeal.  Read our previous analysis of Charney, J’s decision here.

In a decision released September 26, 2018, (2018 ONSC 5419) Charney, J sentenced Tiffin to six months in custody and 24 months of probation, finding that restitution and financial penalties alone were not sufficient to achieve general and specific deterrence.  Learn more about the aggravating and mitigating factors that informed Tiffin’s sentence by reading our previous post on the topic.

Leave to Appeal Granted

In its reasons for granting leave to appeal, the Ontario Court of Appeal noted that Tiffin’s conviction raises two main issues of public importance: (i) the interpretive principles to be applied in determining whether an instrument is a “security” within the meaning of the Act; and (ii) whether a loan agreement of the type issued by TFC is a “security” under the Act.  The Court noted that the determination of both issues requires a consideration of the role, if any, played by the “family resemblance” test.

Given that the British Columbia Court of Appeal and the Alberta Court of Appeal have taken different positions on the applicability of the family resemblance test in Canadian courts, the Ontario Court of Appeal’s decision on the topic is sure to be hotly anticipated.

Findings of Fraud Constitute “Other Good Reason” to Order Security for Costs

Hung v Ontario Securities Commission, 2018 ONSC 6729 (Div Ct)

The Divisional Court has released yet another chapter in the saga of one of the largest frauds in Canadian history.  In 2017, after a 188-day merits hearing, the Ontario Securities Commission (the Commission) released its decision concerning allegations of fraud against Sino-Forest Corporation (Sino-Forest) and its senior officers.  In that decision, the Appellants, as senior officers of Sino-Forest, were found to have authorized, permitted, or acquiesced in the company making misleading statements in its disclosure documents and to have misled Staff of the Commission during their investigation.  The hearing panel also found that the Appellant, Mr. Chan, committed fraud in the sale of his undisclosed interest in Greenheart Resources Holdings Limited to Sino-Forest.  Almost a year later, the Commission released its sanctions and costs decision.

The Appellants, Messrs. Hung, Ip, Ho, and Chan, appealed both the decision on the merits and the decision on sanctions and costs. The Commission subsequently sought an order for security for costs.  The Divisional Court released its decision on the motion for security for costs on November 26, 2018.

The Legal Framework

Rule 61.06(1) of the Rules of Civil Procedure, RRO 1990, Reg 194, states when security for costs may be ordered.  The Commission relied on rules 61.06(1)(a), (b), and (c):

61.06(1) In an appeal where it appears that,

(a) there is good reason to believe that the appeal is frivolous and vexatious and that the appellant has insufficient assets in Ontario to pay for the costs of the appeal;

(b) an order for security for costs could be made against the appellant under rule 56.01; or

(c) for other good reason, security for costs should be ordered,

a judge of the appellate court, on motion by the respondent, may make such order for security for costs of the proceeding and of the appeal as is just.

With respect to rule 61.06(1)(b), Horkins, J. noted that the Court of Appeal has determined that a respondent on an appeal may not rely on rule 61.06(1)(b) to obtain an order for security for costs of an appeal as against an appellant. The policy rationale is not to impose security for costs upon foreign or impecunious defendants who are forced by others to defend themselves in a legal proceeding.  Because the appellants were compelled to attend the hearing before the Commission to defend themselves, the Commission was only entitled to rely on rules 61.06(a) and (c).

The appeal did not appear to be vexatious

Under rule 61.06(1)(a), the Commission must show that it “appears” there is good reason to believe that the Appellants’ appeal is frivolous and vexatious, and that they lack sufficient assets in Ontario to pay the costs of the appeal. The lack of sufficient assets was not disputed.

Horkins, J. found that there was good reason to believe that the grounds of appeal were frivolous: The hearing lasted 188 days and the panel issued detailed reasons in support of its findings of wrongdoing. However, the Commission did not show that there was good reason to believe the appeal was vexatious given that the usual indicia of vexatiousness were not present.  The Appellants had expeditiously proceeded with their appeal, and there was no history of non-compliance with court and Commission orders.

There was some other good reason to order security for costs

Horkins, J. relied on the Ontario Court of Appeal’s decision in Mechanical Services Inc. v Flesch, 2010 ONCA 633 to determine what constitutes “other good reason” under rule 61.01(1)(c):

The court does not have a closed list of cases in which security for costs has been ordered under the residual category. […] However, the “other good reason” must be related to the purpose for ordering security: that a respondent is entitled to a measure of protection for costs incurred and to be incurred in the proceeding, which is now on appeal. And, the “other good reason” should be a fairly compelling reason…

The Commission submitted that the “other good reason” to order security for costs was the fact that the merits panel made “powerful findings of fraud” against the Appellants.

Horkins, J. agreed that strong findings of fraud constitute “other good reason” to order security, particularly where an appellant has taken steps to put assets out of the reach of creditors. There was evidence that the appellants received substantial monies as a result of the breach of Ontario securities law.  These monies were obtained by the Appellants outside Ontario and were beyond the reach of the Commission.  There was also evidence that Messrs. Ho and Ip transferred real property to their respective wives after the Commission’s Statement of Allegations was filed against them.

It was just to order security for costs

Once the Commission proved that rule 61.06(1)(c) was satisfied, part two of the test triggered an inquiry into the justness of the order sought.

Horkins, J. held that it was just to order security for costs. The Commission was not using the motion for security for costs as a litigation tactic to prevent the appeal from being heard.  The parties were working together to ensure that the appeal proceeded without delay.  Further, the Commission had good reason to be concerned about the costs of the appeal and being able to collect on a costs order that may be made if the appeal was dismissed.  The Appellants had, after all, orchestrated an elaborate premeditated and coordinated fraud to overstate the assets and revenue of Sino-Forest – one of the largest frauds in Canadian history, resulting in a loss of approximately US$6 billion in market capitalization.

Accordingly, Horkins, J. ordered that the Appellants post security for the costs of the hearing before the Commission and the appeal in the amount of $100,000.00.


The author would like to thank Elana Friedman, articling student, for her contribution to this article.

Stop the presses! Canadian securities regulators raise concerns about press releases and other promotional activities

The Canadian Securities Administrators (CSA) have issued a notice regarding misleading promotional activities by issuers.  The notice includes examples such as press releases, presentations, social media posts and other marketing materials that provide insufficient or unbalanced information or that include unsubstantiated claims about the issuer.

Problematic Promotional Practices

Examples of potentially misleading promotional activities identified by the CSA include:

  • describing early-stage plans with “unwarranted certainty”, or making unsupported predictions about growth of the market or future product demand;
  • issuing multiple press releases that do not disclose any new material facts;
  • compensating third parties for promotion through social media and investing blogs without disclosing the relationship between the issuer and third party;
  • announcing a change of business, particularly in a trendy industry such as cannabis, cryptocurrency or blockchain, without a supporting business plan or comprehensive risk disclosure; and
  • announcing a positive event such as a large acquisition but:
    • not filing the corresponding material contracts;
    • not disclosing the material conditions necessary to complete the transaction such as financing or due diligence; and/or
    • subsequently changing or cancelling the transaction with no announcement.

The CSA also provides industry-specific examples of potentially misleading promotional activities in the notice.

Top 10 Ways to Ensure You Comply

  1. Provide sufficient and balanced information so as not to be misleading or inconsistent.
  2. Announce material changes in a factual and balanced way.
  3. Disclose unfavourable news just as promptly and completely as favourable news.
  4. Avoid exaggerated third-party reports and potentially misleading promotional commentary, do not cherry-pick analyst reports and prominently disclose when you pay for reports and articles.
  5. Ensure that any person or company you engage in investor relations activities clearly and conspicuously discloses in all publications and oral statements that such information has been issued by or on your behalf.
  6. Disclose forward-looking information only if there is a reasonable basis for such information, identify it as being forward looking, state the factors or assumptions used to develop such information and provide appropriate cautions.
  7. Update any previously disclosed forward-looking information if something happens (or doesn’t happen) that will likely cause actual results to differ materially.
  8. Ensure that material company information is not released on social media before being generally disclosed in a press release or other disclosure document, and do not (as an issuer) participate in, host or link to chat rooms or bulletin boards.
  9. Limit the number of people authorized to speak on behalf of the issuer to analysts, the media and investors.
  10. Establish written corporate disclosure and social media governance policies and establish appropriate board and/or senior management oversight of disclosures.

Additional Information

The CSA notice is available here.

Refer also to our publication from March 2017: #needsimprovement: CSA releases report on social media disclosure practices by Canadian public companies here.

Crime Doesn’t Pay: OSC Permanently Bans Convicted Fraudster

On November 26, 2018, the Ontario Securities Commission (OSC) issued an order permanently prohibiting Daniel Reeve, a financial planner based in the Kitchener, Ontario area, from participation in Ontario’s capital markets, including trading in any securities and becoming or acting as a registrant.

The permanent ban came after Reeve was convicted in the Ontario Superior Court of Justice in 2017 for having defrauded at least 41 investors of nearly $10 million (see R v Reeve, 2018 ONSC 3744). Justice Skarcica found Reeve’s conduct to have “presented virtually every aggravating circumstances recognized by the Criminal Code and the case law”. Accordingly, Reeve was sentenced to 14 years in custody—the maximum sentence under the Criminal Code—and ordered to pay $10.9 million in restitution to his victims, which included “the disabled, the elderly, …close long-time friends and loyal clients”.

Mr. Reeve’s criminal conduct involved soliciting investors to make “low-to-no risk investments”, which he promised would return between 12 to 20 percent. He was later found to have diverted those investor funds for his personal use, such as making payments for his spousal support, his failing business as well as repayments to other investors. Investors lost more than $10 million.

Subsection 127(1) and 127(10) of the Ontario Securities Act work together to allow the OSC to make an order in the public interest with respect to a person who has been convicted of an offence arising from conduct related to securities. In particular, subsection 127(10) allows the OSC to impose regulatory sanctions under subsection 127(1) in respect of a person who has been convicted in any jurisdiction of an offence under a law respecting the buying or selling of securities.

The two issues the OSC panel was called upon to consider were:

  1. Did Mr. Reeve’s conviction involve transactions relating to the purchase or sale of “securities”; and
  2. If so, what sanctions should the Commission order against Mr. Reeve?

In answering the first question, the OSC applied the three-pronged test identified by the Supreme Court of Canada in Pacific Coast Coin Exchange v Ontario (Securities Commission), 1977 CanLII 37 (SCC) at para 128, and came to the conclusion that all three prongs have been satisfied. The transactions in question were investments with a view to profit, in a common enterprise between Mr. Reeve and the investors, where the profits were to be derived solely from the efforts of others.

Having found that the test under subsection 127(10) has been met, the Commission next deliberated on what sanctions, if any, should be ordered. The panel observed that orders made under subsection 127(1) are meant to be “protective and preventative”,  not punitive. It is essential that the imposed sanction serves to protect Ontario investors both by specifically deterring Mr. Reeve, and by acting as a general deterrent to other like-minded individuals.

By imposing a permanent ban against Mr. Reeve, the OSC panel agreed with Justice Skarcica’s characterization that this matter was “an overwhelming case of fraud”. Not only did the fraud scheme involve a large number of victims and a high dollar value of financial losses, the fraudster showed no remorse for taking full advantage of the high regard he had in the investment and general community in addition to breaching the personal trust and faith the victims had in him.

The OSC’s decision is a reminder of the severity of penalties available for securities fraud and that perpetrators may find themselves prosecuted and sanctioned under both the Criminal Code and provincial securities legislation.


Danny would like to thank Coco Chen, articling student, for her contribution to this article.

When Will Referral Arrangements Constitute Trading under the BC Securities Act?

In a recent decision of the BC Securities Commission (BCSC), the BCSC provides helpful guidance concerning when referral arrangements cross the line and become trading for which registration is required.

Chien-Hua Liu (Liu) and two affiliated corporations referred BC and Hong Kong investors to two issuers, leading to the purchase of over $6.5 million in securities, and earning nearly $450,000 in commissions.

In Re Liu, 2018 BCSECCOM 372, the BCSC scrutinized the details of the referral arrangements and determined that Liu and the corporate respondents had contravened section 34(a) of the BC Securities Act (the Act) by acting in furtherance of trades while not registered under the Act.


Liu is a registered insurance agent and former registrant under the Act for selling mutual fund securities.  This registration lapsed in March 2013.  During the material time, he was the sole shareholder and a director of NuWealth Financial Group (NuWealth), and the sole director and officer of CPFS Professional Financial Services Inc. (CPFS, together with NuWealth and Liu, the Respondents).   CPFS was an insurance company which sold segregated funds and employed approximately 20 insurance agents, including Liu.

The Respondents entered into formal referral agreements with two companies: W, a registered exempt market dealer which sold only proprietary products; and GB, an issuer whose principal business was an early stage real estate development project.

Pursuant to these referral agreements, during the period between April 2013 and January 2016, NuWealth referred investors to W and GB, resulting in 160 trades of securities totaling $4,826,504.52 and CPFS referred investors to W and GB, resulting in 54 trades of securities totalling $1,696.878. Liu was personally involved in referrals which resulted in 48 trades totaling $1,713,070.80.

In the absence of direct evidence to the contrary, the BCSC accepted Liu’s evidence about the referral arrangements:

  • he provided general promotional brochures about W and GB […] to investors, without any discussion of specific investments;
  • he referred the investors to representatives of W and GB and, on occasion, assisted in setting up those meetings;
  • he and other representatives of the corporate respondents attended seminars put on by W and GB. but none of the investors were ever at these sessions;
  • he, NuWealth and individual brokers of CPFS received commissions from W and GB, as the case may be, for these referrals; and
  • he believed that NuWealth, CPFS and their representatives also did what he testified that he had done himself.

The referral arrangements were terminated in late 2016.


The BCSC considered whether the Respondents were in breach of section 34(1), which provides that “A person must not…trade in a security… unless the person is registered in accordance with the regulations…”.  The BCSC observed that the definitions of “trade” and “acts in furtherance” of a trade are intentionally broad in order to support the Act’s purpose of investor protection.  These broad definitions include both direct and indirect conduct.

The BCSC rejected the notion that an introduction or referral was, in and of itself, an “act in furtherance” of a trade.  Referrals occur on a spectrum and vary from uncompensated introduction to full service registrants offering a range of securities, to highly compensated introductions to issuers who offer limited securities.  The context and circumstances will determine where a referral is on this spectrum and whether it is an act in furtherance of a trade within the meaning of the Act.

The BCSC set out a non-exhaustive list of factors that are material for determining where a referral falls on the spectrum:

  • was there material (relative to the amount invested in securities) compensation paid for the referral?
  • was that compensation tied to specific trades in securities? If so, this suggests that the referrer played a material role in causing the trade.
  • what is the range of securities offered by the person to whom the investor is referred? If there is only one product, this suggests that the referrer anticipated a trade in that product as the likely outcome of the referral.
  • was the investor receiving financial services from the referrer prior to the referral? An existing financial services relationship indicates a level of trust and that a referral would be more likely to be interpreted as a recommendation.

Each of these factors in this case supported a finding that the Respondents, in making referrals to W and GB, were engaged in acts in furtherance of trades and were therefore “trading” for the purposes of s. 34(a) of the Act.

The BCSC rejected the Respondents’ submission that since there was no evidence of investor harm there was no need to consider their referral activities to be “trades”.  Investor protection concerns are raised in the circumstances regardless of whether any harm is established: the investors here could not benefit from the Respondents satisfying “know your product” and “know your client” obligations required of registrants.

The BCSC also rejected the Respondents’ reliance on the guidance set out in the Companion Policy to NI 31-103 regarding permissible referrals by registrants.  Not only is the Companion Policy not binding on the BCSC, but also on a technical basis this only applies where registrants made referrals, which the Respondents were not.

The Respondents further submitted that they were entitled to an exemption as they were “not in the business of trading”.  The BCSC disagreed, finding that by finding and soliciting a large number of investors, and connecting them with issuers over many months and in exchange for significant compensation, the Respondents were “in the business of trading”.

The Respondents made a number of submissions urging the BCSC to find that sanctions are not necessary and not in the public interest.  The BCSC distinguished this case from others where such a finding was made at an early stage, and deferred these submissions to a later sanctions hearing.  Written submissions on sanctions are scheduled for January 2019.


Divisional Court Upholds OSC Finding that Trading Software License Contracts are Securities Within Meaning of Securities Act

The Ontario Superior Court of Justice in Furtak v Ontario (Securities Commission), 2018 ONSC 6616, has upheld the Ontario Securities Commission’s (OSC) merits and sanctions decisions with respect to the Strictrade Offering, which we previously reported on here.


In 2015, OSC Staff brought enforcement proceedings against Edward Furtak, Axton 2010 Finance Corp., (Axton), Strict Trading Limited (STL), Strictrade Marketing Inc. (SMI), Trafalgar Associates Limited (TAL), Ronald Olsthoorn, and Lorne Allen (collectively the Strictrade Parties) arising out a scheme that involved the marketing and offering of a set of computerized trading software license contracts (the Strictrade Offering).  Under the Strictrade Offering, third party participants signed a promissory note in favour of Axton, a company operated by Furtak, for the purchase of a license to use the Strictrade computerized trading software. The participants simultaneously contracted with STL, another company operated by Furtak, to host the Strictrade software and trade in financial instruments.  Participants purchased licenses in $10,000 units and were required to pay upfront annual fees and interest to Axton and STL.  In exchange, participants received annual trading report payments.  The annual fees and interest paid by purchasers exceeded the trading report payments they received.  The Strictrade Offering was marketed to investors as a tax-planning vehicle meant to provide participants with an opportunity to take advantage of business tax deductions.

In a merits decision released on November 24, 2016 (2016 ONSEC 35), the OSC found that the set of contracts being marketed in the Strictrade Offering were “investment contracts” and were therefore “securities” within the meaning of the Securities Act, RSO 1990, c S. 5 (the Act).  As a result, the OSC found that:

  • Furtak, Axton, STL, SMI, and Allen engaged in, or held themselves out as engaging in, the business of trading in securities without registration, contrary to subsection 25(1) of the Securities Act, RSO 1990, c S. 5 (the Act);
  • all of the Strictrade Parties distributed securities without filing and obtaining a receipt for a preliminary prospectus, in violation of subsection 53(1) of the Act;
  • Furtak, Olsthoorn and Allen, as officers and directors of the corporate respondents authorized, permitted or acquiesced in the corporate respondents’ non-compliance with Ontario securities law, in violation of section 129.2 of the Act; and
  • Oslthoorn failed to fulfill his Know Your Client obligations, failed to fulfill his obligations as Chief Compliance Officer and Ultimate Designated Person of TAL, and failed to take reasonable steps to determine whether the Strictrade Offering was suitable for investors, contrary to sections 3.4, 13.2 and 13.3 of National Instrument 31-103.

In a separate sanctions and costs decision released May 4, 2017 (2017 ONSEC 12), the OSC reprimanded the Strictrade Parties and imposed a number of hefty sanctions including cease trade orders, administrative monetary penalties, disgorgement of proceeds, and costs in the amount of $186,013.  In a minority opinion, Vice-Chair D. Grant Vingoe disagreed with the scope of the cease trade orders imposed by the majority, indicating that he would have allowed an exception to permit the remaining investors in the Strictrade Offering to continue their investments if they so wished.

Appeal to the Divisional Court

The Strictrade Parties appealed the OSC’s merits and sanctions decisions to the Ontario Superior Court of Justice, Divisional Court. The Strictrade Parties argued that the OSC (i) erred in finding that the set of contracts met the legal test for an “investment contract”, (ii) erred in making factual findings and drawing inferences unsupported by evidence, and (iii) imposed unreasonable sanctions.

Standard of Review

The Divisional Court determined that the reasonableness standard of review applied to all three grounds of appeal.  The Court rejected the Strictrade Parties’ argument that the presumption in favour of a reasonableness standard that applies where a tribunal is interpreting its home statute was rebutted in this instance because the issue on appeal was not related to the OSC’s threshold jurisdiction to sanction conduct and was not a matter of central importance to the legal system outside of the OSC’s specialized expertise.  The Court also rejected the Strictrade Parties’ submission that the standard of “palpable and overriding error” should apply to the Commission’s findings of fact, holding that that standard is not applicable in a judicial review of an adjudicative tribunal’s decision.  Rather, factual errors may only be a ground for overturning a tribunal’s decision if they go to a “core finding” that is fundamental to the reasonableness of the ultimate decision.

Investment Contracts

In determining that the set of contracts marketed under the Strictrade Offering were “investment contracts”, the OSC adopted the test from Pacific Coast Coin Exchange v Ontario Securities Commission, [1978] 2 SCR 112 and outlined the following four elements of an “investment contract”:

1.  an investment of money,

2.  with an intention or an expectation of profit,

3.  in a common enterprise in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties,

4.  whether the efforts made by those other than the investor are the undeniably significant ones – essential managerial efforts which affect the failure or success of the enterprise.

The Divisional Court found that, while the OSC broke down the test for an “investment contract” into four components in a manner not reflected in the Supreme Court of Canada’s decision in Pacific Coast Coin, the OSC recognized that the elements of the test are not “airtight compartments” and many of the same considerations may apply to more than one aspect of the test.  The OSC’s reformulation captured the “essence” of the test. The Divisional Court further held that the OSC’s application of the test to the Strictrade Offering and the finding that the set of contracts constituted “investment contracts” and were therefore “securities” under the Act was reasonable.

Factual Findings

The Strictrade Parties argued that the OSC made a number of factual errors and drew improper inferences not supported by the evidence.  In dismissing this ground of appeal, the Divisional Court noted that the Strictrade Parties had failed to demonstrate that any of the factual errors alleged would have impacted the OSC’s conclusion that the set of contracts were “investment contracts”.  In essence, the Strictrade Parties were asking the Divisional Court to improperly re-weigh the evidence that was before the OSC.  In any event, the Divisional Court found that the OSC referred to evidence that amply supported its conclusion and its findings were therefore reasonable.


The Strictrade parties argued that the sanctions imposed by the OSC were unreasonable, disproportionate to the nature of the misconduct, and failed to serve any identifiable public interest goals.  The Divisional Court disagreed, holding that the OSC properly considered all of the relevant factors, including the different circumstances, roles, and histories of the various Strictrade Parties and imposed sanctions that fell within its broad discretion.

The Divisional Court also considered Vice-Chair Vingoe’s minority opinion that would have allowed an exemption to the cease trade orders to permit the remaining participants to continue their investment in the Strictrade Offering.  The Divisional Court determined that both the majority and Vice-Chair Vingoe, in the minority, provided a reasonable basis for their respective positions on the cease trade orders and that each was defensible.  Faced with two reasonable interpretations, the Divisional Court concluded that it was obliged to defer to the findings of majority, and upheld the sanctions decision.


The Hard Way – SEC announces first penalties and compliance roadmap for unregistered ICOs

On November 16, 2018, the Securities and Exchange Commission (SEC) announced consent orders settling actions in respect of two unregistered initial coin offerings (ICOs), including the first fines levied against non-compliant ICO issuers made by the SEC to date.

The consent orders demonstrate the SEC’s willingness to follow through with enforcement proceedings against issuers of ICOs not in compliance with securities laws, and provide a roadmap for how existing ICOs can bring themselves into compliance going forward.

The parties – Airfox and Paragon

The issuers charged in the two SEC enforcement actions each raised substantial amounts of capital through an ICO for vastly different purposes:

  1. CarrierEQ Inc., doing business as Airfox, is a financial services company focused on emerging markets that raised $15 million in digital assets through an ICO to finance the creation of a token ecosystem by which users would earn and exchange tokens in connection with the acquisition of data and interaction with advertisements;  and
  2. Paragon is an online company that raised $12 million through an ICO with a view to implementing blockchain technology in the cannabis industry.

According to the SEC’s consent orders for Airfox and Paragon, neither company or its ICO was registered with the SEC.  In each case, the SEC charged that the company marketed its ICO on the representation that it expected its coin to appreciate in value with an opportunity for future profit.

Consent orders level heavy penalties and lay out a compliance framework

The penalties leveled against Airfox and Paragon are largely similar, and demonstrate the SEC’s intention to backstop its enforcement of regulation against ICO issuers along with its commitment to ensuring other would-be issuers understand the path to proper compliance.

Both Airfox and Paragon were ordered to pay a civil money penalty of $250,000.  While the Airfox penalty was ordered payable within 90 days, the Paragon penalty is payable in three instalments spread over 240 days.  Airfox and Paragon also undertook in their consent orders to issue press releases notifying the public of the order.

On the compliance side, among other requirements, Airfox and Paragon undertook to register their respective tokens as a class of securities, and to establish a claims process for purchasers of those tokens:  specifically, within 60 days after registering their tokens as securities, each company must notify all purchasers of their potential claims under section 12(a) of the Securities Exchange Act of 1934 including the right to sue to recover the consideration paid with interest for the security, less any income received from that purchase.  Each company is required to provide token purchasers with a claim form, and to pay the amount due pursuant to section 12(a) to each person submitting a proper claim form by the deadline specified in the order, with some opportunity for the company to seek documentation from the claimant to support their claim.  The companies will then have to report the results of this claims process to the SEC on a monthly basis.

SEC orders send clear compliance message

The Airfox and Paragon orders make clear that token issuers that fail to comply with securities laws will (a) be prohibited from profiting from their breaches, (b) face substantial penalties, and (c) end up required to comply with securities laws in any event.  The message is clear: “Comply now, or we will take action to force you to be compliant.”  Anyone considering a token offering with any doubt about the SEC’s willingness to sanction unlawful ICOs should take serious notice.

Alberta Securities Commission Introduces Whistleblower Program

On November 19, 2018, the Alberta Securities Commission (ASC) implemented its first whistleblower program (the Program) through the release of ASC Policy 15-602 Whistleblower Program (the Policy) and simultaneous amendments to the Alberta Securities Act (the Act).

The Program is effective as of November 19, 2018.  Its protections apply retroactively to securities misconduct but only in relation to tips communicated to the ASC on or after November 19, 2018.

According to the ASC, the highlights of the Program include the following:

  • the facilitation of simple reporting by providing a dedicated telephone “tip” line and access to forms for submission by email, mail or in-person
  • whistleblower access to trained, knowledgeable ASC staff
  • rigorous protection of the confidentiality of the identity of whistleblowers
  • prohibition of obstruction and reprisal
  • protection of whistleblowers from the application of contractual clauses that directly or indirectly attempt to prevent whistleblowing.

No Whistleblower Awards

Unlike certain whistleblower programs in other jurisdictions (such as Ontario), the Program does not provide for the payment of awards to whistleblowers.  It only goes so far as to provide for possible credit for cooperation in the case of whistleblowers who are themselves involved in securities misconduct.

Under the Ontario Securities Commission Whistleblower Program, for example, individuals who meet certain eligibility criteria and who voluntarily submit information regarding breaches of Ontario securities laws may be paid a whistleblower award if there is an “award eligible outcome” and the Commission, in its discretion, determines it appropriate to order an award.

Efficacy of Whistleblower Programs

It remains to be seen whether the Program will be an effective tool in connection with the ASC’s enforcement of Alberta’s securities laws, particularly in that whistleblowers will not be eligible to receive any financial awards.

According to an OSC press release issued in June 2018, the OSC Whistleblower Program has been very effective in “shining a light on information that previously would have remained in the shadows”.  To that date, the OSC Program had generated approximately 200 tips, of which 45 were under review, 19 had been referred for enforcement, and 68 were or are in the process of being shared with another OSC operating branch or another regulator for further action.

To date no awards have been announced by the OSC.

In its fiscal year ending September 30, 2018, the United States Securities and Exchange Commission (SEC) received over 5,000 tips, including over 200 FCPA-related complaints.  The tips originated from over 70 different countries, and awards of almost US $170 million were paid out to 13 individuals.

The authors would like to thank Sunny Mann, articling student, for his contribution to this article.