A recent decision by the Ontario Court of Justice provides lessons about the scope of the Ontario Securities Commission (OSC)'s powers to regulate acts "in furtherance of a trade". The OSC's case was against two individuals who helped create a website for a new company. The website included an investors relations page which stated that the company would be listing its common shares and provided an email address for all investor or shareholder correspondence.
Staff of the OSC (Staff) charged Mark Lowman and Dave Jarett with trading in securities without the required registration, issuing securities without having filed a prospectus, and representing that securities would be listed on an exchange with the intention of affecting a trade, contrary to s. 25(1), s. 53(1), s. 38(3), and s. 122(1)(c) of the Ontario Securities Act (OSA).
In his Reasons for Judgment, Justice West dismissed all charges.
The story begins with Duncan Cleworth and his aspirations to expand his waste-to-energy business. He was a part-owner of a company involved in such a project in Madagascar and was looking to expand into Asia. Cleworth told the manager of a local restaurant, Mansoor Igbal, of his plans. Iqbal then introduced Cleworth to the Defendant, Mark Lowman, who owned a company called Saxon Securities.
Lowman agreed to help get Cleworth with his enterprise. The two entered into a joint venture agreement to incorporate and develop a company and to obtain a public listing of its shares. The second Defendant, Dave Jarett, was an employee of Saxon Securities.
The four men then set out to design a website for the company and all four appeared to have contributed to its content. The website advised the company was seeking a listing and provided an email address for all investor or shareholder correspondence. The company was eventually incorporated in the British Virgin Islands approximately six weeks after the website first went live.
Shortly after the company was incorporated, cold-calls were made to investors in Europe and South Africa by sales representatives situated outside of Canada seeking to sell the company's soon to be listed shares. Five of the investors were directed to the company's website by the sales representatives. Five eventually purchased shares after they were listed on the GXG Exchange. None of the sales representatives were identified at trial and there was no direct evidence establishing a connection between the Defendants and the sales representatives.
The Defendants were never registered with the OSC to trade in securities. No prospectus was ever filed with the OSC by the company or by anyone in respect of the securities of the company during the relevant time period.
Staff of the OSC argued that:
- The Defendants were involved in the actual trades of shares made by the sales representatives;
- the company's website was designed and created for the purpose of "exciting the reader" and this alone amounted to an act in furtherance of trading thereby inducing investors to purchase shares contrary to s. 25(1) and 53(1); and
- the website stated the company's common shares would be listed for trading on an exchange and specified a specific time frame for the listing in a manner that indicated an intent to effect trades in the company's common shares contrary to s. 38(3).
Justice West dismissed all of the charges against both Defendants. He found that the evidence was simply insufficient to draw the necessary inferences to give rise to conduct contrary to the OSA.
Staff argued that the Defendants had committed an offence under s. 53(1) of the OSA, which provides that:
No person or company shall trade in a security on his, her or its own account or on behalf of any other person or company if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed and receipts have been issued for them by the Director.
The OSA, s. 1(1) defines "trade" or "trading" to include:
- any sale or disposition of a security
for valuable consideration, whether the terms of payment be on
margin, instalment or otherwise, but does not include a purchase of
a security or, except as provided in clause (d), a transfer, pledge
or encumbrance of securities for the purpose of giving collateral
for a debt made in good faith,
. . .
- any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing;
Justice West first reviewed two prior OSC decisions where involvement in the creation of a website was found to be an act in furtherance of a trade:
- In First Federal Capital (Canada) Corp (Re), the OSC held an act in furtherance of trading does not require an actual or completed trade, "anticipated" trades that arise where there is a direct proximate connection between the offering and any trade that was anticipated as a result of those solicitations may be caught by the OSA. However, in that case the website at issue actually offered a "trading program" and the principal of the company engaged in direct solicitation and negotiations with investors which continued over an extended period of time.
- In Xi Biofuels Inc (Re), the OSC found a website was created to "excite the reader" and solicit potential investors by numerous misleading statements. However, the OSC in that case also pointed to multiple other acts in furtherance of trades apart from the creation of a website that were found to be created for the purpose of "exciting the reader", including signing treasury directions, signing share certificates, picking up share certificates, opening bank accounts, and depositing investor funds into them.
Staff conceded that the company's website did not directly offer to sell shares to the public and there was no direct evidence of any direct or indirect contact or connection between the Defendants and the foreign investors, but argued an inference could be drawn that the Defendants were aware of and involved in the ongoing marketing of the shares of the company.
Justice West disagreed. He found that there were alternative explanations which cut against the inferences proposed by Staff. For example, the Defendants' testified that the purpose of creating a website was to have governments review the website as potential clients. Of some relevance is that none of the investors ever contacted the email address listed on the website's investors page.
There was also no evidence that any of the promotional materials sent by sales representatives to investors were found in the possession of the Defendants. A reasonable inference could be drawn that the sales representatives "saw an opportunity and created a scenario" which allowed the sales representatives to make cold-calls and representations which were designed to induce investors to purchase the company's shares without any knowledge or involvement of the Defendants.
Justice West's reasons are best encapsulated at paragraph 125 of his decision, which reads:
"All that existed, on the evidence presented, was that Jarrett was developing a website for a company that ultimately it was hoped would be listed on an exchange, a website where the content was in a state of revision and where the company's name was changed at least four (4) times in the space of two months. No shares existed at the time the purported sales representatives solicited the foreign investors. I find there was not a sufficient proximate connection to an anticipated trade to constitute an act in furtherance of a trade."
Due to the lack of direct or compelling circumstantial evidence of involvement by the Defendants in acts of trading in securities or any other acts in furtherance of trading in securities Staff were unable to make out the charges under s. 53(1), s. 25(1), and s. 38(3).
The definition of a "trade" under the OSA is extremely broad. Justice West's decision in R v Lowman is a rare example where a court has refused to recognize that conduct fell within the scope of that definition. The critical aspects of his decision are as follows:
- Merely "exciting the reader" with a website is not enough for an act in furtherance of a trade. The OSC must meet the standard established in cases like Xi Biofuels Inc. and First Federal Capital (Canada) Corp (Re), where websites directly solicited investors to purchase shares and provided instructions on where and how those shares could be purchased and the individuals charged were directly soliciting and pointing investors to their company's website.
- Justice West's reasons also suggest that there must be a causal connection between the act supposedly in furtherance of a trade, and the trade itself. It is not enough that the Defendants created a website informing investors of a potential opportunity to purchase securities which coincided with certain investors purchasing securities. The evidence showed that the investors decision to purchase securities was primarily or exclusively due to third party sales representatives rather than the Defendants' website.
- Finally, Justice West's reasons demonstrate the importance of direct evidence in establishing the strict liability offences under the OSA. Circumstantial evidence that Saxon Securities received a wire transfer around the time that one investor provided funds to a sales representative to purchase securities was not sufficient to draw an inference of wrongdoing. The Defendants were able to provide equally plausible alternative explanations.
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