Canada: Family Resemblance: When Is A Promissory Note Not A "Security"?

Last Updated: April 25 2017
Article by James J. Shanks

Most Read Contributor in Canada, October 2018

For financing lawyers, the precise dividing line between the simple fluidity of financing law and the highly meticulous application of securities laws has always been an uncertain one. A good example of this uncertainty involves the issue of whether and when a promissory note issued in the course of a commercial financing will be treated as a "security." Specifically, when can a promissory note or other debt instrument be issued free of securities law concerns and when will it cross the line sufficiently to require strict adherence with such laws? The recent Ontario Court of Justice decision in Ontario Securities Commission v Tiffin1 introduces a common sense approach to this question.

Factual Background

In Tiffin, a private company sought to raise funds from a handful of existing clients. All told, six clients extended $700,000 of debt financing on the strength of fourteen promissory notes, all of which were secured by a claim against certain assets. The notes bore varying rates of interest and were issued with a one-year maturity. Seemingly routine as far as small financings go, the transaction soon attracted the attention of the Ontario Securities Commission ("OSC"), not least because both the company and its chief executive were bound by existing orders prohibiting them from trading in securities. In due course, both were charged with breaching the existing order on the basis that the new company notes were "securities" under the Securities Act (Ontario) (the "Act").

The OSC argued that the Act covered virtually all promissory notes and other forms of debt instrument and suggested that the only way the company's new notes could avoid strict compliance with the Act was to find a suitable statutory exemption. Described as a "catch and exclude" system, the position effectively asserted initial jurisdiction over all commercial debt transactions in the province.

Context and Purpose are Key

Based on a literal interpretation, there was no doubt that the notes fell into the definition of "securities" as set forth in Section 1(1) of the Act. The Act plainly provides that a "security" includes any "note or other evidence of indebtedness". However, as in most cases, a strict literal approach to statutory interpretation is not appropriate. Since all legislation is enacted to deal with a specific concern, courts must first discern the purpose of the statutory provision in question and then interpret the words used so as to effectuate that purpose.

The Court in Tiffin noted that the twin objectives of the Act were to protect investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets. While stated broadly, the Court nevertheless found that the legislature's intent had not been to regulate all commercial debt transactions in the province. Specifically, securities laws were not meant to displace all other legal regimes. Echoing a caution expressed in the Supreme Court of Canada decision in Pacific Coast Coin Exchange Ltd. v Ontario (Securities Commission)2, Justice Kenkel reiterated that courts should avoid overly broad interpretations of securities laws, lest such interpretations "bring within the scope of the Securities Act innumerable transactions which have no public aspect".

As a practical reality, promissory notes and other debt instruments are used in a whole range of financing situations. Examples include promissory notes issued in consumer financing, debentures issued in connection with a mortgage of real estate, notes or debentures secured by a lien on a business or specific assets of a business, personal notes issued to a financial institution, short term notes secured by a receivables assignment, and open account notes incurred in the ordinary course of business.

The point is that unlike shares of capital stock, which are sometimes said to be the "quintessence of a security", and thus justifiably require strict adherence with securities laws, certain promissory notes may possess a markedly different character.3 Recognizing this distinction, the Court held that a purpose-based approach demanded a narrower reading of the statutory definition of "securities".

When Do Securities Laws Not Apply?

So when will promissory notes not constitute "securities" under a purpose-based approach? The Court adopted the "family resemblance test" put forward by the United States Supreme Court in Reves v Ernst & Young.4 Under this test, every promissory note is initially presumed to be a "security" unless it bears a strong resemblance to one of a judicially-crafted family of instruments that are not typically considered to be securities. The essence of the "family resemblance test" is one of context and purpose: were the notes in question issued in a purely commercial context or were they issued for investment purposes?

Four questions (or factors) are useful in making a suitable determination:

  1. Is the purpose of the debt transaction to raise money for the general use of a business enterprise or to finance substantial investments and is the purchaser motivated primarily by the profit the notes are expected to generate for the business?
  2. Does the issuer's plan of distribution seek to establish some form of common trading in the notes, either for speculative or investment purposes?
  3. Is there a reasonable public expectation that the instruments should be treated as "securities"?
  4. Is there some mitigating factor such as the existence of another regulatory scheme that sufficiently protects investors, thereby rendering strict application of securities laws unnecessary?

Affirmative answers to the first three questions or a negative answer to the last all tend to favour characterization of the promissory note as a "security". For example, the issuance of convertible debentures to a group of arm's length investors seeking both yield and possible future upside on conversion would likely be an example falling into the first category, while a corporate bond issuance made to investors looking for liquidity of investment in an anticipated secondary market might be an example falling into the second category. On the other hand, the issuance of debentures secured by one or more parcels of real estate in favour of a handful of lenders and without regard for a secondary market might not warrant treatment under securities laws.5

The End Result

In the end, the Court found that the company's notes were not "securities'' under the Act because (i) the promissory notes were issued largely without regard to any future upside of the company, (ii) the promissory notes were secured against the company's assets, and thus more closely resembled a typical secured financing, with appropriate remedies on loan default which sufficiently protected the lenders, (iii) there was no expectation of a secondary market in the notes, and finally because (iv) the investors were existing clients of the company, already intimate with its affairs, and not members of the public, suggesting that the transaction lacked a sufficiently public aspect for securities law application.

In summation, the "securities" determination in any given situation may be less than straight-forward. In many cases, specific securities law advice will be warranted. Nevertheless, the Tiffin case reminds counsel that a purpose-based approach is generally the appropriate one in most circumstances. Indeed, it may be just a question of family resemblance.


1 Ontario Securities Commission v Tiffin, (2016) 133 O.R.(3d) 341 (O.C.J.)

2 Pacific Coast Coin Exchange Ltd. v Ontario (Securities Commission), [1978] 2 S.C.R. 112.

3 Referring favourably to the judgment of the United States Supreme Court in Reves v Ernst & Young, 494 US 56 (1990).

4 Reves v Ernst & Young, 494 US 56 (1990).

5 See also the decision of the British Columbia Court of Appeal in British Columbia (Securities Commission) v Gill, 2003 BCCA 169, where the Court applied the Reves family resemblance test and found that loans there called "personal loans" did meet the definition of "security" for securities law purposes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions