Canada: Bustle Without The Hustle Not An "Act In Furtherance Of A Trade" Under The Ontario Securities Act

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.

Background

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's Position

Staff of the OSC argued that:

  1. The Defendants were involved in the actual trades of shares made by the sales representatives;
  2. 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
  3. 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).

The decision

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:

  1. 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,

    . . .
  2. 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).

Commentary

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.

About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.

Law around the world
nortonrosefulbright.com

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 Mondaq.com.

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

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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