On May 4, 2016, an Ontario Securities Commission panel (the Panel) issued its Reasons and Decision In the Matter of Future Solar Developments Inc., containing interpretive guidance on three central concepts in securities law:
- The meaning of "in the business of trading in securities" for purposes of the registration requirement;
- The extra-territorial regulatory application of Ontario securities law for distributions to investors outside Ontario; and
- The meaning of "a person that is not the public" for determining the availability of the private issuer prospectus exemption.
Key takeaways from the decision
- Fundraising is part of life for many start-up companies, but that does not mean those start-ups are automatically "in the business of trading in securities". Rather, fundraising may, depending on the particular factual circumstances, be viewed as an ancillary business activity for a company in its start-up phase.
- A distribution of securities to persons outside of Ontario may not require an Ontario prospectus even where there is a "sufficient connection" between the distribution and Ontario, in the absence of conduct that raises concerns about the objects of the Securities Act (Ontario) (OSA), the integrity of the capital markets in Ontario and the need to protect investors.
- Provided that it can be established that the purchasers in a distribution are part of a defined and limited category of investors with particular characteristics (such as, in this case, a desire to immigrate to Ontario), distributions of securities to those investors may qualify within the private issuer prospectus exemption as not being to the "public".
Background
This article sets out the facts that were of particular relevance to the issues that were under consideration by the Panel. For a detailed chronology of the events leading up to the hearing, reference should be made to the Reasons and Decision.
Future Solar Developments Inc. (Future Solar) was incorporated for the purpose of developing and managing solar energy products in Ontario. Future Solar submitted an application to Ontario's Ministry of Citizenship and Immigration for Future Solar's participation in Ontario's Provincial Nominee Program (OPNP). Through this program, each potential immigrant investor would be required to: (i) invest in preference shares of Future Solar, (ii) immigrate to Ontario, and (iii) perform a job in Future Solar at a senior managerial or officer level. Government approval would be required for the company's business plan and for each potential immigrant investor.
Future Solar's president engaged two immigration consulting firms to assist in the solicitation in China of potential investor participants in the program. In addition to identifying suitable candidates, the immigration consultants would be responsible for assisting potential investor immigrants with understanding the requirements of the nominee applications, completing the necessary forms, facilitating communication between the applicants and Future Solar and responding to questions about the business proposal and investment parameters. Future Solar's president and another employee also made trips to China to meet with potential investors under the OPNP, deliver the share certificates to the individuals who were accepted as investors, and carry on other business-related activities.
The staff of the Ontario Securities Commission (Staff) took the position that Future Solar, its president and other related companies had (i) traded in securities without being registered as dealers contrary to ss. 25(1) of the OSA; (ii) distributed securities without a prospectus contrary to ss. 53(1) of the OSA; and (iii) acted in a manner contrary to the public interest. The trades which were targeted were with respect to 11 of the Chinese investors.
Analysis and conclusions from the Panel
The Panel dismissed the allegations against all the respondents. In its analysis, the Panel provided a degree of clarification on three areas of Ontario securities law that have been the subjects of some uncertainty and inconsistency in their interpretation.
1. The meaning of being "in the business of trading in securities"
The Panel concluded that none of the respondents were in the business of trading in securities and therefore did not need to be registered as securities dealers.
Many of the activities referred to by Staff were ancillary business activities for a company in its start-up phase. The Panel did not share Staff's view that the immigration consultants retained by Future Solar were the equivalent of a Future Solar sales force tasked with selling shares of Future Solar. A single payment to the consulting firms did not constitute the equivalent of the payment of a securities brokerage commission.
The Panel also addressed certain statements on Future Solar's website directed to potential investors, including an invitation to contact the company, and an informational brochure for potential investor immigrants. The brochure contained information on the expected return from the investment and plans relating to going public and listing on the TSX Venture Exchange.
The Panel concluded that the website's references to investors, which were contained in one paragraph of a 160-page document (and with no evidence that the website was translated into a Chinese language or made available in China), did not constitute a securities solicitation to the public. The Panel also noted that Future Solar was a start-up business venture and it was natural, even necessary, to provide potential investors with information on the expected return and the ultimate exit path. The Panel regarded the company's trips to China and retention of the immigration consultants as normal activities of a business looking to acquire capital under the OPNP.
2. The extra-territorial application of Ontario securities law
The Panel acknowledged that there was a "sufficient connection" to Ontario to engage the Commission's jurisdiction, but absent conduct that harmed the integrity of Ontario capital markets or required investor protection, there was no need for Future Solar to have a prospectus receipted in Ontario. Previous jurisprudence cited by Staff had addressed situations where there were allegations of fraudulent misrepresentation, fraud or high pressure salesmanship, none of which were present here.
3. The meaning of "not the public"
In spite of its conclusion that the requirement to have a prospectus receipted in Ontario did not apply on the facts of the case, the Panel considered the question of whether prospectus exemptions were available. Some of the Chinese investors were clearly accredited investors, but the Panel concluded that all of the share issuances qualified under the private issuer exemption.
In its discussion of the private issuer exemption, the Panel provided some useful guidance on the "basket clause" concept of issuing shares to "a person that is not the public". The Panel stated that the inclusion of this category of persons "stands for the proposition that, as long as the distribution is not to total strangers but to a group of people who come within a defined category, a distribution to fewer than 50 persons is permitted." In this instance, the investors were "of significant wealth and with the desire to immigrate to Ontario". Accordingly, the Panel determined that they were not to be considered "the public" at large.
Comment
While the interpretive guidance provided by the Panel is helpful, it is important to recognize that the result of this case turned on its specific facts, and that even slightly different circumstances may have led to a different outcome. It should also not be assumed that securities regulators elsewhere in Canada, in applying equivalent laws, would necessarily share the interpretations of the Panel, particularly in regard to the issue of extra-territorial application of local securities law for distributions to investors outside of the jurisdiction. (See, for example, BC Interpretation Note 72-202 Distribution of Securities to Persons Outside British Columbia and the corresponding draft CMRA Policy 71-601 under the proposed Cooperative Capital Markets Regulatory System.)
This article was co-authored by Paige Donnelly, a student in Dentons' Toronto office.
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