Ontario Securities Commission v. Tiffin et al.

[Indexed as: Ontario Securities Commission v. Tiffin]

Ontario Reports

Ontario Superior Court of Justice,

Charney J.

May 15, 2018

142 O.R. (3d) 223 | 2018 ONSC 3047

Case Summary

Securities regulation — "Security" — Respondents soliciting interest-bearing loans from existing investment clients to keep business afloat and cover personal expenses while prohibited from trading in securities [page224] — Respondents issuing promissory notes secured against property of corporate respondent — Trial judge erring in finding that promissory notes did not fall within definition of "security" under s. 1 of Securities Act — Trial judge improperly importing American "family resemblance" test into Ontario securities law to determine whether promissory notes were excluded from statutory definition of "security" — Promissory notes falling under s. 1(1)(e) of Act as "note or other evidence of indebtedness" — Securities Act, R.S.O. 1990, c. S.5, s. 1.

The respondents were charged with trading in securities without registration, distributing securities without filing a prospectus, and trading in securities while prohibited from doing so by an order of the Ontario Securities Commission. While prohibited from trading in securities, they solicited interest-bearing loans from existing investment clients to keep the business afloat and cover personal expenses, and issued promissory notes secured against property of the corporate respondent. The trial judge found that the promissory notes did not fall within the definition of "security" in s. 1 of the Securities Act and dismissed the charges. The OSC appealed.

Held, the appeal should be allowed.

The trial judge erred in importing the American "family resemblance" test into Ontario securities law to determine whether the promissory notes were excluded from the statutory definition of "security". The trial judge stated that the definition of "security" in the Act casts too wide a net and is inconsistent with the purpose of the Act. However, where the legislature acts to protect vulnerable segments of society, it often casts its net widely to ensure that it captures all targeted activity. That breadth is deliberate, and consistent with the remedial purpose of the Act. In the absence of a constitutional challenge for overbreadth, that is not an invitation for the creation of judicially crafted criteria to scale back the scope of the law. The Act has its own built-in exemptions, and it is neither necessary nor appropriate to formulate additional exemptions by applying a judicially constructed test. The promissory notes in this case were "notes or other evidence of indebtedness" and were therefore securities under s. 1(1)(e) of the Act.

British Columbia (Securities Commission) v. Gill, [2003] B.C.J. No. 587, 2003 BCCA 169, 180 B.C.A.C. 221, 11 B.C.L.R. (4th) 102, 120 A.C.W.S. (3d) 1058, 57 W.C.B. (2d) 52; Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147, [1998] S.C.J. No. 13, 155 D.L.R. (4th) 257, 222 N.R. 81, J.E. 98-386, [1998] 2 C.T.C. 35, 98 D.T.C. 6100, 77 A.C.W.S. (3d) 446, 1998 CanLII 846; R. v. Stevenson, [2017] A.J. No. 1342, 2017 ABCA 420, 61 Alta. L.R. (6th) 273, 143 W.C.B. (2d) 605; Reves v. Ernst & Young, 494 U.S. 56, 110 S. Ct. 945 (1990); Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411, [1997] S.C.J. No. 25, 143 D.L.R. (4th) 385, 208 N.R. 161, [1997] 2 W.W.R. 457, J.E. 97-523, 46 Alta. L.R. (3d) 87, 193 A.R. 321, 44 C.B.R. (3d) 1, 8 C.P.C. (4th) 68, 97 D.T.C. 5089, 12 P.P.S.A.C. (2d) 68, 69 A.C.W.S. (3d) 295, 1997 CanLII 377, consd

Other cases referred to

Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601, [2005] S.C.J. No. 56, 2005 SCC 54, 259 D.L.R. (4th) 193, 340 N.R. 1, J.E. 2005-1901, [2005] 5 C.T.C. 215, 2005 D.T.C. 5523, 2005 D.T.C. 5547, 142 A.C.W.S. (3d) 1075, EYB 2005-96529; M. v. H., [1999] 2 S.C.R. 3, [1999] S.C.J. No. 23, 171 D.L.R. (4th) 577, 238 N.R. 179, J.E. 99-1064, 121 O.A.C. 1, 62 C.R.R. (2d) 1, 46 R.F.L. (4th) 32, 1999 CanLII 686, 88 A.C.W.S. (3d) 73; Ontario (Securities Commission) v. Tiffin (2016), 133 O.R. (3d) 341, [2016] O.J. No. 4597, 2016 ONCJ 543; Pacific Coast Coin Exchange of Canada Ltd. v. Ontario (Securities Commission), [1978] 2 S.C.R. 112, [1977] S.C.J. No. 117, 80 D.L.R. (3d) 529, 18 N.R. 52, 2 B.L.R. 212, [1977] 2 A.C.W.S. 1064, 1977 CanLII 37; [page225] R. v. Shepherd, [2009] 2 S.C.R. 527, [2009] S.C.J. No. 35, 2009 SCC 35, 309 D.L.R. (4th) 139, [2009] 8 W.W.R. 193, 245 C.C.C. (3d) 137, 194 C.R.R. (2d) 86, EYB 2009-161619, J.E. 2009-1373, 66 C.R. (6th) 149, 81 M.V.R. (5th) 111, 331 Sask. R. 306, 391 N.R. 132; Rooney v. ArcelorMittal S.A. (2016), 133 O.R. (3d) 287, [2016] O.J. No. 4347, 2016 ONCA 630, 352 O.A.C. 170, 402 D.L.R. (4th) 383, 61 B.L.R. (5th) 26, 270 A.C.W.S. (3d) 659; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, [1999] S.C.J. No. 30, 178 D.L.R. (4th) 26, 247 N.R. 19, [1999] 4 C.T.C. 313, 99 D.T.C. 5669, 99 D.T.C. 5682, 91 A.C.W.S. (3d) 876, 1999 CanLII 647; Wildlands League v. Lieutenant Governor in Council (2016), 134 O.R. (3d) 450, [2016] O.J. No. 5230, 2016 ONCA 741, 2 C.E.L.R. (4th) 217, 402 D.L.R. (4th) 738, 270 A.C.W.S. (3d) 774

Statutes referred to

Provincial Offences Act, R.S.O. 1990, c. P.33, s. 121(b)(ii)

Securities Act,R.S.A. 2000, c. S-4

Securities Act,R.S.O. 1990, c. S.5, ss. 1 [as am.], (1) [as am.], 1.1 [as am.], 25(1), 53(1) [as am.], 122(1)(c)

Securities Act of 1933, 15 U.S.C. 77a, s. 2(a)

Authorities referred to

Hogg, P.W., and J.E. Magee, Principles of Canadian Income Tax Law (2nd ed. 1997)

APPEAL from a decision dismissing charges under the Securities Act.

Jonathon T. Feasby, for appellant.

Glen Jennings and Alex Zavaglia, for respondents.

CHARNEY J.: —

Introduction

[1] The Ontario Securities Commission ("OSC") appeals from the decision of the Ontario Court of Justice, dated August 31, 2016 [(2016), 2016 ONCJ 543, 133 O.R. (3d) 341, [2016] O.J. No. 4597 (C.J.)], dismissing the charges against Daniel Tiffin and his company, Tiffin Financial Corporation ("TFC"), for three breaches of s. 122(1)(c) of the Securities Act, R.S.O. 1990, c. S.5 (the "Act"). The respondents were charged with

(1) trading in securities without registration as required by s. 25(1) of the Act;

(2) distributing securities without filing a prospectus as required by s. 53(1) of the Act;

(3) trading in securities while prohibited from doing so by an order of the Ontario Securities Commission. [page226]

[2] Section 122(1)(c) of the Act provides:

Every person or company that,

(c) contravenes Ontario securities law,

is guilty of an offence and on conviction is liable to a fine of not more than $5 million or to imprisonment for a term of not more than five years less a day, or to both.

[3] The only issue on this appeal is the proper interpretation of the term "security" under the Act, and in particular, whether the promissory notes issued by TFC in this case fell within the definition of a "security" under the Act.

[4] For the reasons that follow, I would allow the appeal and substitute a conviction.

Facts

[5] The trial judge summarized the relevant facts as follows [at paras. 4-13]:

Background

Mr. Tiffin is a financial advisor licensed to sell insurance and insurance-based investments through TFC. Tiffin is the sole officer, director and owner of TFC. He had been registered with the Ontario Securities Commission (OSC) to trade in securities from 1983 to 1999 but at the time these promissory notes were issued he was subject to a "Cease Trade Order" (CTO) issued by the Commission.

A temporary Cease Trade Order was issued on December 22, 2009 in relation to promissory notes issued in relation to the Rezwealth Financial Services Inc. (Rezwealth) investment scheme which purported to engage in foreign exchange (FX) trading. The promissory notes were traded by TFC and Tiffin.

On July 8, 2014 the OSC issued its final decision and order in the Rezwealth proceedings. The sanctions against Tiffin and TFC for issuing and trading in Rezwealth included five year prohibitions on trading in securities or relying on exemptions in Ontario securities law. In addition, the Rezwealth Final Order imposed an administrative penalty of $25,000 and disgorgement of $517,000 in proceeds. Funds are "disgorged" to the OSC by order of the Commission but are then typically redistributed to the investors. The final order prohibited Tiffin and TFC from trading in securities or relying upon any exemption in Ontario securities law.

Following those financial penalties Mr. Tiffin solicited funds from his insurance investment clients for personal use and to keep his business operating. He told them about the OSC investigation and order and the impact on his finances. Six clients agreed to loan funds to TFC on terms set out in promissory notes. The notes were signed by Tiffin on behalf of TFC.

All funds received for the promissory notes were deposited into TFC's corporate account. Funds from that account were disbursed "for general business purposes" and to cover Mr. Tiffin's personal expenses. [page227]

The TFC Promissory Notes

Six clients agreed to advance funds to TFC on terms set out in fourteen promissory notes. The notes were signed by Tiffin on behalf of TFC. The total value of funds obtained was $700,000.

Twelve of the fourteen notes require that TFC pay principal and a single interest payment on a given maturity date. The interest on the notes ranges from 10% to 25% on the one year term.

The notes state:

9. Lender and Borrower intend that the relationship created an [sic] evidenced by this note shall be solely that of debtor and creditor. Nothing in this Note shall be construed as creating a joint venture, partnership, tenancy in common, or joint tenancy between Lender and Borrower.

The notes all refer to the Securities Act: "This note shall utilize the accredited investor exemption available in Ontario has [sic] modified from time to time by the Ontario Securities Commission."

All funds received for the promissory notes were deposited into TFC's corporate account. Funds from that account were disbursed "for general business purposes" and to cover Mr. Tiffin's personal expenses.

[6] At trial, the parties filed an agreed statement of facts dated September 1, 2015. I reference the following additional facts from that agreed statement of facts.

[7] The TFC promissory notes represented loans from six families totalling $700,000 in principal. TFC owed a further $144,300 in interest at maturity. The term of the notes varied; three were less than 12 months and the remaining 11 were for over 12 months, with two having indefinite terms. Each of the notes provided for penalty interest at 2 per cent per month in the event of non-payment, plus interest on all amounts owing upon default "at the highest rate allowable by law".

[8] Each of the lenders was an existing TFC client who had purchased insurance or investment products from Tiffin or TFC previously.

[9] The notes were secured against a "toy soldier collection" owned by TFC, and alleged by Tiffin to be worth $540,000.

Trial Judgment

[10] Mr. Tiffin and TFC admitted that they were not registered to trade in securities, did not file a prospectus in relation to the transactions at issue, and at the material times were prohibited from trading in securities by order of the Ontario Securities Commission. Accordingly, the trial judge began by stating [at para. 3] that the sole issue at trial was "were these promissory notes simple private loan agreements not subject to the Securities Act or were they securities as defined by that statute?" [page228]

[11] This question was based on the premise that a "simple private loan agreement" is not subject to the Securities Act, even though there is no such exemption in the Ontario statute.

[12] The trial judge found that the promissory notes were not securities within the meaning of the Securities Act and dismissed the charges.

[13] The trial judge began by examining the "twin goals" of the Act as set out in s. 1.1 of the Act:

(a) to provide protection to investors from unfair, improper or fraudulent practices;

(b) to foster fair and efficient capital markets and confidence in capital markets.

[14] He also considered the "very broad definition" of a "security" in s. 1(1) of the Act. At trial, the OSC argued that the TFC notes, as promissory notes representing interest-bearing loans, were "notes or other evidence of indebtedness" and therefore fit branch (e) of the definition of "security" in the Act. The OSC also argued that promissory notes fell within branches (a) and (n) of the Act. The relevant provisions of the definition are as follows:

"security" includes,

(a) any document, instrument or writing commonly known as a security,

(e) a bond, debenture, note or other evidence of indebtedness or a share, stock, unit, unit certificate, participation certificate, certificate of share or interest, preorganization certificate or subscription other than,

(i) a contract of insurance issued by an insurance company licensed under the Insurance Act, and

(ii) evidence of a deposit issued by a bank listed in Schedule I, II or III to the Bank Act (Canada), by a credit union or league to which the Credit Unions and Caisses Populaires Act, 1994 applies, by a loan corporation or trust corporation registered under the Loan and Trust Corporations Act or by an association to which the Cooperative Credit Associations Act (Canada) applies,

(n) any investment contract,

whether any of the foregoing relate to an issuer or proposed issuer.

(Emphasis added)

[15] The trial judge also considered the Supreme Court of Canada's statement in Pacific Coast Coin Exchange of Canada Ltd. v. Ontario (Securities Commission), [1978] 2 S.C.R. 112, [1977] S.C.J. No. 117, 1977 CanLII 37, at p. 127 S.C.R., [page229] in which the court commented on the scope of the definition of the term "security":

If any doubt could be entertained about the intention of the legislature in the present instance, that doubt should be dispelled by the very wide terms employed in defining the word "security". The fourteen subdivisions of the definition encompass practically all types of transactions to such an extent that this definition had to be narrowed down by a long list of exceptions[.]

[16] Indeed, the trial judge acknowledged that, on its face, the promissory note at issue in this case was a security under the Act. He stated, at para. 26:

The defence concedes and I agree that promissory notes can be securities under one or more of the headings cited by the Commission. The reference to "note or other evidence of indebtedness" effectively includes all forms of debt instruments issued by any issuer.

[17] The trial judge accepted the defence submission that a broad definition of "security" that included the TFC promissory notes (at para. 28) "casts too wide a net and is inconsistent with the purpose of the Act".

[18] The trial judge accepted the OSC's characterization of the Act as "catch and exclude", meaning that the Act begins with a broad definition of "security" because (at para. 39) "the legislature cannot anticipate all of the potential transactions that may be crafted over time", and then corrects any overreach from the literal interpretation by listing a number of statutory exemptions so that the regime as a whole meets the goals of s. 1.1 of the Act.

[19] The trial judge concluded, however, that adopting a literal interpretation of the term "security" would be contrary to the approach that courts have taken in both Canada and the United States (at para. 41):

I agree with the OSC that the legislative scheme is fairly characterized as "catch and exclude" but I disagree that exclusions are found only in the statute or regulations. Courts have looked at the broad terms defining security and they've looked at the substance of the particular transaction at issue to determine whether applying the statutory term in that context is in keeping with the purposes of the Act.

[20] The trial judge adopted the "family resemblance" test, established by the United States Supreme Court in the case of Reves v. Ernst & Young, 494 U.S. 56, 110 S. Ct. 945 (1990), to determine whether a note was an investment that should come under the regulation of the U.S. Securities Act. The trial judge explained the Reves "family resemblance" test, at para. 30 of his decision:

Under that test, a note is presumed to be a security unless it bears a strong resemblance, determined by examining four specified factors, to one of a judicially crafted list of categories of instrument that are not securities. The court [page230] explained that the phrase, "any note" could not be given a literal interpretation considering the wide variety of notes used in the commercial context, but must be read against the backdrop of what Congress intended to accomplish in the Securities Acts. Included in the family of non-securities are notes secured against an asset of a small business.

[21] The "family resemblance" test evaluates the notes at issue as to whether they resemble securities or exempt notes based on a list of "judicially crafted" factors, summarized by the trial judge as (at para. 44):

1. Whether the borrower's motivation is to raise money for general business use and whether the lender's motivation is to make a profit.

2. Whether the borrower's plan of distribution of the note resembles "common trading for speculation or investment".

3. Whether the investing public reasonably expects that the note is a security.

4. Whether there is a regulatory scheme that protects the investor other than securities laws.

[22] In reviewing the TFC promissory notes against the factors in the Reves "family resemblance" test, the trial judge made the following findings, at paras. 45-49:

The TFC notes for that small business are secured by property of the business as collateral.

While the borrower TFC was seeking money for general business use and the lenders were expecting profit in the form of interest, there was no sense of investment or interest in the TFC business beyond the limited terms of the loan.

The loans were secured from existing customers, most of whom considered Mr. Tiffin a friend . . . there was no general public solicitation of funds or wider distribution.

The evidence of the lenders at trial showed that all of them viewed the transaction as a loan and not an investment. There's no allegation that Mr. Tiffin made any misrepresentations that induced the lenders to misunderstand the nature of the transactions. Some lenders even appeared to resent state interference in what they viewed as a personal matter.

Contract and tort law apply should TFC and Mr. Tiffin fail to repay the loans. The loan contracts are enforceable like any other commercial contact. The lenders have the added protection of collateral for the loan . . . Collateral is a "risk reducing factor" not typical of securities investments. The defence further submits that the security interest in property in the [page231] TFC notes could be registered under the PPSA. The fact of collateral as a risk reducing factor which also gives rise to effective enforcement of the loan agreements without resort to securities regulation also favours the defence position that the TFC notes are not securities.

[23] The trial judge concluded, at para. 52:

I find that the TFC notes are presumptively securities under the Securities Act, but the defence has shown that these notes do not meet the overall statutory definition of "security". An examination of the four Reves factors shows that the TFC notes are similar to notes secured by a lien on a small business or its assets, one of the "family" of recognized non-security notes in Reves. Neither the statutory goals in s. 1.1 of the Act nor the circumstances of the particular transactions require that these promissory note loan agreements be regulated as securities.

Standard of Review

[24] The sole issue before the court is whether the TFC promissory notes were "securities" as defined by the Securities Act. The facts on which the trial judge made his decision are not at issue in this appeal. The correct interpretation of the term "security" is a question of law, and the standard of review is correctness: R. v. Shepherd, [2009] 2 S.C.R. 527, [2009] S.C.J. No. 35, 2009 SCC 35, at para. 20.

Analysis

[25] In my view, the trial judge erred in law by importing the American "family resemblance" test into Ontario securities law to determine whether the promissory notes issued by TFC were excluded from the statutory definition of "security" in the Securities Act.

[26] The trial judge's decision to consider American case law in interpreting the Ontario Securities Act is not unprecedented. In Pacific Coast, the Supreme Court of Canada acknowledged the wisdom of considering the Securities Act decisions of U.S. courts where the phrase at issue was not defined in the Ontario statute (at p. 126 S.C.R.):

The expression "investment contract" is not defined in the Act. In their search for its meaning, the Courts below have been guided by the leading U.S. authorities and counsel have invited us to follow the same path. I agree. While the statute under consideration here does not read word for word like its U.S. counterpart, the expression "investment contract" is found in both. In addition, the policy behind the legislation in the two countries is exactly the same, so that considering the dearth of Canadian authorities, it is a wise course to look at the decisions reached by the U.S. Courts. [page232]

[27] That said, the word "security" is defined in the Ontario Act, and prior to this case, no court in Ontario or decision of the Ontario Securities Commission, had found that an instrument that meets the statutory definition of "security" in the Securities Act should be exempted from the Act by the application of extra-statutory judicially crafted criteria.

[28] The Ontario legislature has established a complex and comprehensive scheme for the regulation of securities in Ontario. The term "security" is defined in s. 1 of the Act. The definition is comprised of 16 subsections. Other sections of the Act provide specified exemptions from particular requirements. If the language of the legislation is clear and unambiguous, it is not for the court to impose refinements in order to improve, limit or modify the language of the statute to reach a result more in keeping with the court's view of the purposes of the legislation. In this regard, the Supreme Court of Canada's comments in Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147, [1998] S.C.J. No. 13, 1998 CanLII 846, at para. 41, are apt:

The law of income tax is sufficiently complicated without unhelpful judicial incursions into the realm of lawmaking. As a matter of policy, and out of respect for the proper role of the legislature, it is trite to say that the promulgation of new rules of tax law must be left to Parliament.

[29] See, also, Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411, [1997] S.C.J. No. 25, 1997 CanLII 377, at para. 112.

[30] While both Canderel and Sparrow Electric were dealing with the federal Income Tax Act, the Supreme Court's comments are equally applicable to any complex and comprehensive statutory scheme, such as the Securities Act.

[31] It is not uncommon for legislation to include a brief preamble or purposes section. These provisions are useful in the interpretation of an ambiguous provision within a statute, and in determining the vires of a regulation -- whether it is authorized by the statute under which it is made (see Wildlands League v. Lieutenant Governor in Council (2016), 134 O.R. (3d) 450, [2016] O.J. No. 5230, 2016 ONCA 741, at para. 39). There is, however, no requirement that every section of a statute be consistent with the brief statement of purpose(s) or preamble. Legislation is the product of multiple, often competing, purposes that lead to certain compromises, and complex statutory schemes frequently contain provisions that may appear to be inconsistent with the general purpose of the statute. These apparent inconsistencies can usually be explained by identifying the competing, often [page233] unstated, legislative objectives that resulted in the final statutory balance that comprises the legislative scheme.[^1]

[32] I also have some difficulty with the trial judge's statement, at para. 28, that the definition of "security" in the Act "casts too wide a net and is inconsistent with the purpose of the Act".

[33] There is, in my view, an important distinction between "casting too wide a net" and actual inconsistency with the purposes of an Act. Where the legislature acts to protect vulnerable segments of society it often casts its net widely to ensure that it captures all targeted activity. This breadth is deliberate, and consistent with the remedial purpose of the act. In the absence of a constitutional challenge for overbreadth, this is not an invitation for the creation of judicially crafted criteria to scale back the scope of the law.

[34] This analysis is, in my view, consistent with the modern approach to statutory interpretation, which requires the court to consider the words of the section in their entire context, with regard to the ordinary and grammatical meaning, and in harmony with the scheme of the Act, the object of the Act and the intention of the legislature: Rooney v. ArcelorMittal S.A. (2016), 133 O.R. (3d) 287, [2016] O.J. No. 4347, 2016 ONCA 630, at paras. 39 and 62.

[35] In Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, [1999] S.C.J. No. 30, 1999 CanLII 647, the Supreme Court of Canada stated, at para. 43:

The Act is a complex statute through which Parliament seeks to balance a myriad of principles. This Court has consistently held that courts must therefore be cautious before finding within the clear provisions of the Act an unexpressed legislative intention . . . Finding unexpressed legislative intentions under the guise of purposive interpretation runs the risk of upsetting the balance Parliament has attempted to strike in the Act.

(Citations omitted)

[36] This approach to statutory interpretation was reiterated by the Supreme Court of Canada in [page234] Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601, [2005] S.C.J. No. 56, 2005 SCC 54, at para. 12, adopting this quote from P.W. Hogg and J.E. Magee, Principles of Canadian Income Tax Law (2nd ed. 1997), at pp. 475-76:

It would introduce intolerable uncertainty into the Income Tax Act if clear language in a detailed provision of the Act were to be qualified by unexpressed exceptions derived from a court's view of the object and purpose of the provision.

[37] In reaching his conclusion the trial judge relied on the British Columbia Court of Appeal decision in British Columbia (Securities Commission) v. Gill, [2003] B.C.J. No. 587, 2003 BCCA 169, which he stated (at para. 31) "adopted and applied" the Reves "family resemblance" test.

[38] Gill was an appeal of a decision of the British Columbia Securities Commission (the "commission") that held that loan agreements relating to loans to a registrant from former clients were securities. The Court of Appeal identified the main issue in the Gill case as (at para. 2):

[W]hether it was reasonable for the Commission to have found that the receipts, financial summaries and loan agreements issued by the appellants were securities within the meaning of the term "evidence of indebtedness" contained in subsection (d) of the definition of "security" under section 1(1) of the [British Columbia Securities] Act.

[39] The Court of Appeal concluded, at para. 6: "the Commission's conclusion that the documents in question ought to be considered as securities was reasonable and ought not to be disturbed".

[40] With respect to the Reves case, the British Columbia Court of Appeal compared the definitions of security in Canada and the United States, and stated, at paras. 49-50:

Similarly, the United States Supreme Court, in Bob Reves v. Ernst & Young, 494 U.S. 56 (1990), [1990] SCT-QL 1056, held:

Â17 . . . it enacted a definition of "security" sufficiently broad to encompass virtually any instrument that might be sold as an investment.

Â18 . . . Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.

Thus, both Pacific Coast Coin Exchange and Reves suggest that the definition of "security" must be sufficiently broad so as to capture investments of an atypical nature, such as the transactions at issue in this case.

[41] The British Columbia Court of Appeal also considered (at para. 52) the "family resemblance" test adopted in Reves, and stated (at para. 53): [page235]

If the factors set out in Reves are applied to the facts found by the Commission in this case, the Gill-Brown transaction would fall within the definition of "security" in the Act.

[42] With respect, while the British Columbia Court of Appeal applied the "family resemblance" test, I do not read the decision as expressly adopting the test. Rather, the British Columbia Court of Appeal applied the test to support the reasonableness of the commission's decision that the loan agreement in issue qualified as a security. The British Columbia Court of Appeal did not consider, and certainly did not decide, whether the failure to meet any of the criteria in the "family resemblance" test would mean that the loan agreement was not a security under the Act.

[43] More recently, the application of the Reves "family resemblance" test was considered by the Alberta Court of Appeal in R. v. Stevenson, [2017] A.J. No. 1342, 2017 ABCA 420. In Stevenson, the appellant was charged with a number of offences under the Alberta Securities Act, R.S.A. 2000, c. S-4, arising out of the raising of money from the public through short-term (six months) loan agreements.

[44] The Alberta Court of Appeal made the following general comments about the purpose of the Securities Act, which are helpful for the analysis in this case (at paras. 9-12):

The Securities Act is very broadly worded legislation, designed to cover virtually every method by which money could be raised from the public. It is contradictory to argue that money "raised from the general public" is nevertheless merely a series of "private transactions"; that is exactly what the Securities Act is designed to regulate. That characterization could be placed on any method of raising money from the public. Every sale of shares by a corporation to a member of the public is, at one level, a "private transaction". The entire process of raising money from the general public is, however, regulated under the Act.

The Provincial Court Judge found that the lenders believed they were advancing personal loans, and also noted the provision in the Loan Agreements:

7. This investment is in the form of a loan, and is not subject to any securities law, regulation, rules or forms of conduct. This investment and the loan of moneys does not constitute the transaction of any form of securities, stocks, bonds, or other financial instrument subject to regulation by Government under securities law.

It is, however, impossible for those raising funds from the public to contract themselves out of the Securities Act, and this inclusion in the documentation is ineffective and irrelevant.

As noted, the fact that the loans might be described as "personal" is not decisive. Equally irrelevant is whether the lenders are happy with their investment, feel that they were fairly dealt with, or believe that full disclosure was made to them. An issuer must comply with the Act even if the investors make a fortune. As P. T. Barnum noted: "There's one born every minute"; the Securities Act is designed to protect them, along with all investors. The Act regulates all raising [page236] of money from the public, not just situations where the outcome of the investment is negative or the purchasers of the securities are unhappy.

Likewise, the definition of a "security" is a question of statutory interpretation, and the opinions of individual lenders and investors as to whether they were dealing in such an instrument is irrelevant. The interpretation of statutes is a question of law, and evidence on this subject is not admissible.

(Citations omitted; emphasis added)

[45] The Alberta Court of Appeal then considered the trial judge's decision in the present case, and his reliance on the Reves decision. The court rejected the Reves "family resemblance" test, stating, at paras. 14-16, 18-20:

The appellant relied on Ontario (Securities Commission) v Tiffin, 2016 ONCJ 543, 133 OR (3d) 341, which in turn relied on American case law such as Reves v Ernst & Young, 494 US 56 (1990). Counsel for the respondent advised the Court that Tiffin is under appeal. Tiffin relied on a finding in Reves that not all "notes" are securities.

Reves involved the interpretation of the term "any note" in the definition of "security" in the Securities Exchange Act of 1934. The American courts have restricted the term to notes that have an "investment" character to them, on the theory that Congress did not intend the statute to reach other "commercial" notes. All notes are presumed to be securities unless the opposite is shown. The presumption can be rebutted by considering several factors: a) if the motivation is an investment with a view to a profit, it is likely a security. If it is to finance an asset purchase or to meet short term funding needs, it may not be; b) if there is a "plan of distribution" and "common trading for speculation or investment" it is likely a security; c) if there is a public expectation that the notes are securities, they will be dealt with as such; and d) if some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, the application of the Securities Acts may be unnecessary.

Reves itself does not create any general exemption for "private transactions", and it deals only with the specific term "notes", not all types of securities in general. Further, the notes in Reves were found to be securities. Given the comprehensive and complex regulation of securities in Alberta, there is no apparent need for any judicially created exemptions to the securities regime. There are numerous conditions and exemptions built into the Alberta securities regulation system that are designed to deal with the issues raised in Reves.

Further, even if the Loan Agreements are not "notes", they would still fall within the other components of the definition of "securities": "evidence of indebtedness", "profit-sharing agreement" and "investment contract".

Tiffin was prepared to recognize a general exemption from the statute for transactions that were purely private in nature, and had no element of raising funds from the public, even though there is no such exemption in the Ontario statute. It appears the trades in Tiffin may have qualified as exempt trades with "close friends and business associates", which undermines the rationale in Reves justifying such a judge-made exemption. That approach has been found to be necessary in the United States, apparently because of the very wide wording of [page237] their statute. The Alberta regime has its own built-in exemptions for the issuing of securities to close friends and business associates, and no common-law exception is appropriate.

Tiffin turns on the fact that all of the funds were raised from close friends of Tiffin himself. It appears to suggest that a particular instrument would be a "security" if used to raise funds from the general public, but not a "security" if used to raise funds from friends. The Alberta statute does not recognize a distinction in the characterisation of an instrument as a "security" depending on the identity of the purchaser or investor. The test is functional: Is the issuer raising funds from the public for investment purposes? On the facts of this case funds were raised from members of the public on the expectation that they would participate in the gains to be made from the venture.

(Emphasis added)

[46] I find the analysis of the Alberta Court of Appeal to be persuasive on this appeal, and I adopt it for the purposes of this decision. The court should not be creating exemptions that are not found in the statute. The Ontario Securities Act, like its Alberta counterpart, has its own built-in exemptions, and it is neither necessary nor appropriate to formulate additional exemptions by applying a judicially constructed test. The trial judge recognized that a loan arrangement is a "note or other evidence of indebtedness" under s. 1 of the Act. The clear intent of the legislature is that loan arrangements are not to be excluded from the definition of "security" unless they fall within a specific statutory exemption. Altering the meaning of a definition that is fundamental to a complex and carefully balanced regulatory regime is not a judicial function.

[47] It is clear that the TFC notes, as promissory notes representing interest-bearing loans, were "notes or other evidence of indebtedness" and therefore fit branch (e) of the definition of "security" in s. 1 of the Ontario Securities Act.

[48] The trial judge concluded, at para. 20 of his decision, that:

The evidence at trial shows that the TFC promissory notes were understood by the parties to be loans to the accused through his business. They were secured against assets of the business and carried no expectation of gain or loss based on the fortune of the business. To apply securities law in this context is contrary to the purpose of the Act.

[49] There is nothing in the Ontario Securities Act to exempt promissory notes on the basis of what the parties "understood". As a general proposition, it is unlikely that most of the investing public has any understanding what kind of lending transactions fall within the ambit of the Act and which do not. The purpose of the Securities Act is "to provide protection to investors from unfair, improper or fraudulent practices" regardless of whether the investors understand the nature of the transactions protected or even want the protection of the Act. [page238]

[50] In addition to the basic principle that judicial innovation is inappropriate and undesirable in the face of clear and unambiguous statutory language, the OSC takes the position that the "family resemblance" test is particularly inappropriate in Ontario because of fundamental policy differences between the securities regulatory regimes in Ontario and United States.

[51] The distinction between instruments with commercial and investment purposes is a bright line in American securities regulation. Indeed, the United States Supreme Court in Reves recognized (at p. 494 U.S. 65) that "the aefamily resemblance' and aeinvestment versus commercial' tests -- are really two ways of formulating the same general approach". The court also stated (at pp. 494 U.S. 68-69): "We have consistently identified the fundamental essence of a aesecurity' to be its character as an aeinvestment'."

[52] This distinction is relevant, but not determinative in Ontario's securities law. Ontario's system of definitions and exemptions make it clear that the legislature intended the Securities Act to include commercial as well as investment instruments. Some commercial notes are exempt from certain provisions in the Ontario legislation, but subject to others.

[53] Another important distinction is that in the United States the definition of the term "security" is prefaced with the words "unless the context otherwise requires" indicating a legislative intention to provide the court with discretion to exempt instruments that might otherwise appear to be securities: Securities Act of 1933, 15 U.S.C. 77a, s. 2(a). No such discretion appears in the definitions in s. 1 of the Ontario legislation.

[54] Finally, the OSC argues that even if the Reves "family resemblance" test applied in Ontario, the trial judge misapplied it. Since I have concluded that the trial judge erred in finding that the Reves "family resemblance" test applied, I will not go through all of the OSC's arguments on this point, but two examples will suffice.

[55] The first factor in the "family resemblance" test was described by the U.S. Supreme Court (at p. 494 U.S. 66):

First, we examine the transaction to assess the motivations that would prompt a reasonable seller and buyer to enter into it. If the seller's purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a "security." If the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller's cash-flow difficulties, or to advance some other commercial or consumer purpose, on the other hand, the note is less sensibly described as a "security."

(Emphasis added) [page239]

[56] Even on the facts found by the trial judge, the purpose of the promissory notes was "to raise money for the general use of the business enterprise" -- all funds received for the promissory notes were deposited into TFC's corporate account and were disbursed "for general business purposes" as well as Mr. Tiffin's personal expenses (see para. 13 of the trial decision).

[57] With regard to the buyer's interest, the trial judge found (at para. 46): "the lenders were expecting profit in the form of interest, there was no sense of investment or interest in the TFC business beyond the limited terms of the loan". This finding downplayed the buyer's interest in the profit expected to be generated, and is not consistent with the U.S. Supreme Court decision in Reves, which made the following comment on this issue of profit, at p. 494 U.S. 68, footnote 4:

We emphasize that by "profit" in the context of notes, we mean "a valuable return on an investment," which undoubtedly includes interest.

[58] The U.S. Supreme Court made it clear that, in the context of the Securities Act, there was no requirement that the rate of interest be "keyed to the earning of the enterprise" (494 U.S. 68, footnote 4).

[59] In this case the "lenders" were to receive a relatively high rate of return, in the form of interest of 10 per cent to 25 per cent on their loans. The "economic reality" is that this was a good investment (if the interest were paid), and I do not see how it can be characterized in any way other than being an investment.

[60] The fourth factor in the "family resemblance" test was described by the U.S. Supreme Court as (at p. 494 U.S. 67): "whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument thereby rendering application of the Securities Act unnecessary".

[61] The trial judge dealt with this fourth factor by noting, at para. 49, that:

Contract and tort law apply should TFC and Mr. Tiffin fail to repay the loans. The loan contracts are enforceable like any other commercial contract. The lenders have the added protection of collateral for the loan.

[62] The right to recover a debt by way of a contract or tort claim in a civil proceeding is universal in debt obligations. Such civil proceedings cannot be considered a "regulatory scheme" that significantly reduces the risk of the instrument. If it were, it would be hard to imagine any "notes or other evidence of indebtedness" that would qualify as a "security" under the Act.

[63] Moreover, with respect to "the added protection of collateral", there was no evidence, such as an independent appraisal, presented at trial to prove the actual value of the "toy soldier [page240] collection". Nor did the trial judge make any finding with respect to the value of that collection. The trial judge recognized that, under the Reves "family resemblance" test, "notes" are presumptively securities, and the onus was on the defence to prove that the notes did not meet the overall statutory definition of "security" (see paras. 21 and 52). Without evidence of the actual value of the "collateral", the trial judge could not conclude that the collateral specified in the agreement "significantly" reduced the risk to the lenders. Even if the toy soldier collection was worth $540,000, the collateral equalled only approximately 60 per cent of the value of the loans and the interest owed.

Conclusion

[64] Given my conclusion that the trial judge erred in law and that the promissory notes in issue were "securities" and subject to the Securities Act, the appeal is allowed and a conviction is substituted pursuant to s. 121$(b)(ii)$ of the Provincial Offences Act, R.S.O. 1990, c. P.33. The parties may schedule a date to make submissions on the appropriate sentence.

Appeal allowed.

Notes

[^1]: See, for example, M. v. H., [1999] 2 S.C.R. 3, [1999] S.C.J. No. 23, 1999 CanLII 686, at para. 329, per Basterache J. concurring, discussing this principle in the context of social benefits legislation: Determining the legislative purpose behind the creation of a category that grants benefits to some, and withholds them from others, may sometimes be a difficult task. This is because social legislation often explains explicitly why the category is being created, not why it is being limited to certain persons and not others . . . The reasons for limitation do not always flow logically from the reasons for inclusion. For example, the scope of many acts granting financial benefits are circumscribed by a government's need to operate within fiscal constraints. Such a concern is usually totally separate and distinct from the reasons for granting a benefit in the first place.

End of Document