The Prospectus Requirement: Does the Securities Act Apply

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    1. The Prospectus Requirement: Does the Securities Act Apply?

Prospectus ONLY IF there is a TRADE in a SECURITY which constitutes a DISTRIBUTION.

Recall General Rule: ss. 25, 53 of the SA: No person shall engage in or hold themselves out as engaging in the business of trading in a security without being registered and if a trade is a distribution, without preparing a prospectus

Analysis for Whether You Need to Issue Prospectus:
  1. Does transaction involve a security? ^ If NO, SA does not apply. If so…
  2. Is it a trade in a security? ^ If NO, SA does not apply. If so.
  3. Does that trade in a security constitute a distribution? ^If NO, no Prospectus. But if yes. then you must prepare a prospectus [1]unless one of private placement exemptions are available
  • The definitions are key to this analysis!
  • Remember why you care: b/c fundamental question is… I want to do something, do I need to prep a prospectus to do that? (to engage in activity I’m proposing)
      1. What is a security?
        1. Statutory Definitions

LEGISLATION ACT 2006 – Interpretation

Section 64(1): an act shall be interpreted as being remedial and shall be given such large and liberal interpretation and best ensures the attainment of the object

  • POLICY: To understand a statute, have to understand what it’s trying to do because we’re going to give it a broad enough interpretation to have it achieve what we wanted it to do
  • The courts have gone to incredible lengths to make sure that happens.

ONTARIO SECURITIES ACT – Interpretation & Definitions

S.1(1): “security” includes (NOT EXHAUSTIVE= broad def): (a) any document, instrument or writing commonly known as a security, (b) any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company,(n) any investment contract

  • Very broad definition^ Covers common types of securities, as well as other less common items – thus, contains items capable on taking a broad meaning and is non-exclusive.

s.1(1): “security” includes (NOT EXHAUSTIVE)

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



  • A “security” includes “any bond, debenture, note or other evidence of indebtedness, share, stock, unit, unit certificate, participation certificate, certificate of share or interest, preorganization certificate or subscription (OSA s. 1(1) “security” (e)).
  • Also, “any document constituting evidence of an option, subscription, or other interest in or to a security”.
  • Also includes “any instrument or writing commonly known as a security”.

^ Both US and Canadian case law have made it clear that “commonly known” refers to known in the legal/financial community – a sophisticated legal expert (not common to lay person)

(b) any document constituting evidence of title to or interest in the capital, assets, LESS COMMON SECURITIES

• Definition sets out a number of specific items all of which would normally involve an initial payment that would be used to produce some future returns (e.g. investment contract)

property, profits, earnings or royalties of any person or company, ^ Too broad a definition (so a receipt for the purchase of a hockey stick could theoretically constitute a security, because it is evidence of an interest in property)

^ Courts have had to narrow this definition, so only instruments intended as investments are securities and not instruments bought and sold for other commercial purposes (ex: title to a car is property, not security) (test: is the individual investing in the piece of paper OR are they investing through the piece of paper in a product)

^ Look to see whether the person is expecting an increase in value – if yes, security

(n) any

investment CATCH ALL PROVISIONS (Pacific Coast)
  • Definition is case in open-ended terms

o Included items listed—thus non-exhaustive.

o Includes “a document evidencing title to or an interest in the capital, assets, property profits, earnings or royalties of a person”. o “a profit sharing agreement or certificate” and o “an investment contract”.

  • These are sufficiently broad/vague that interpretations have not gone outside the listed items.
^ Hotly litigated because it is ambiguous

^ We determine if a particular instrument is a security by asking whether or not the person invested on the premise that the other person’s expertise would create profit (in these situations, need full disclosure of relevant info) How Case Law Has Defined a Security

Main Points: Definitions in the OSA are not mutually exclusive, but are catchalls

  • Securities legislation is ‘remedial legislation; to be ‘construed broadly’ (SEC v CM Joiner Leasing & Pacific Coast Coin Exchange)
  • Substance not form governs the interpretation of what is a security -it is flexible, not static (Pacific Coast Coin Exchange)

-The policy of securities legislation is ‘full and fair disclosure’ with instruments regarded as securities

  • Something will be considered a security if:
  1. It falls clearly under one of the definitions of the OSA
  2. If can fit under one of the broad definitions and policy considerations demand coverage SEC v. Glen T. Turner Enterprises Inc. (US, 1973)

Ratio: s.1.1(a) definition that a security includes “any document, instrument or writing commonly known as a security” means if known as such by the legal/ financial community, not common person.

Implications: takes a broad def and makes it even broader!

Due to POLICY: most sec are technical in nature, not likely to be understood by anyone other than legal/ financial community

Reasons: interprets US law similar to OSA s.1(1)(a) that provides a security includes: (a) Any document, instrument or writing commonly known as a security.

o “The court doubts that Congress intended that in order to qualify under these general categories, a transaction must be commonly known to the man in the street as a security. Most securities are rather technical in nature and not likely to be understood except by the legal or financial

community. It is sufficient that an offering be considered as a legal matter to be a security, regardless of the popular perception of it”

• Supported by Can courts

Ontario (Securities Commission) v. Brigadoon Scotch Distributors (1970 Ont. H.C.)

Ratio: Provides insight into s.1(1)(b): Securities only includes instruments intended as investments and not instruments bought for other commercial purposes.

Test: Is the investor investing in the piece of paper (the security) in the hopes that it will appreciate in value? Or is the investor investing through the piece of paper in the product?

Policy: The reason you’re defining this is to figure out if you need to issue a prospectus, so had to narrow definition (otherwise, could be anything you’re selling)


  • Recall: s.1(1)(b) Any document constituting evidence of, title to, or interest in the capital, assets, property, profits, earnings or royalties of any person or company

o Case interprets section: def of security doesn’t include documents of title bought/ sold for purposes other than investment

o Basically if you’re buying something and you get a receipt for it, that receipt does not

constitute a security unless you’re planning on selling it in order to make an investment off of it

  • Test for whether or not a title document is a security:

o Is the investor investing in the piece of paper (the security) in the hopes that it will appreciate in value? Or is the investor investing through the piece of paper in the product?

■ E.g. go to store that ages scotch. Buy a bottle, age for 5 yrs, give you doc evidencing you own it. If my intention is to buy the bottle of scotch, that piece of paper is not a security. If my intention is to sell that piece of paper evidencing that I own that bottle at a higher price in the future, then that piece of paper is a security.

Policy: There’s no incentive of investor protection by covering something like the receipt for the shampoo I bought at the store as securities.

  1. If you enter into an investment contract, that’s a security

No one has any idea what an investment contract means, but some American cases, and then SCC case adopting American reasoning…

SEC v. CM Joiner Leasing Corp. (USA)

Ratio: Act will be construed broadly and in whatever way leads to it to promote the policy objective of investor protection (Purposive approach to interpreting the meaning of “security”). Specifically, interprets s.1(1)(n): an investment contract will be where people are investing in the potential for something to generate profit and are purchasing expertise of someone else.

Policy: Purposive approach to interpreting the meaning of “security” required to respond to new, novel, uncommon or irregular devices.

Facts: SEC sought injunction against CM with respect to assignment of leases. Anthony acquires leases in Texas, transferred a substantial portion to Joiner Corp., and engaged in sales campaign where they tried to assign leases in land in parcels of 5-20 acres with the promise the Joiner would drill a test well to test the oil producing potential of the land. Transaction was set up so that it was arguably only a sale in land.

Decision: the court found that it was not just a sale of an interest in property, but the sale of the prospect of gaining from the exploration exercise. The transaction “had all the evils inherent in the securities transactions which it was the aim of the Securities Act to end”


  • Although set-up to be a lease in land, the definition of a security uses very general terms and can encompass this transaction.

o Decision based on POLICY:

  • The Act must be able to respond to new, novel, uncommon or irregular devices.
  • Interpret the definition broadly to meet the purpose of the Act – it should not be subverted by new instruments designed to avoid the application of the Act or frustrate its purpose.

• Ultimately, investors likely needed more info on scheme administration etc. through a prospectus

  • If investors are investing in the potential for the item/ doc to generate profit, and are purchasing the EXPERTISE of someone else, tends to be read like an investment contract ^ means that looking at OSA objectives, the investors could have BENEFITED from OR NEEDED info that would be in a prospectus

o In this case, investors would have needed information on oil/gas potential of the land, structure of C.M. Joiner Corp., background on the individuals, their interests in the plan, how the plan would be administered, etc. For such small investments, a prospectus made sense.

**note: next two cases are only important b/c reasoning is later adopted by SCC in Pacific Coin Exchange

SEC v. W.J. Howey Co. (USSC, 1946) – reasoning used by SCC in Pacific Coin

Ratio: Common enterprise test for identification of an “investment contract” and therefore, security. Test


  1. A contract, transaction or scheme whereby a person invests;
  2. That the investment be in a common enterprise; and
  3. That the person is led to expect profits (or capital appreciation: see Forman) solely from the efforts of a promoter or third party (pol obj: since it is them who controls success/failure of enterprise)

Facts: Howey Co. and Howey-in-the-Hills Service Inc. were under common ownership. Howey Co. owned orange groves in Florida and a hotel. Groves were for sale and sold in plots of 1 acre each. Buyers advised that land needed to be serviced, recommended Howey-in-the-Hills Service Inc. Buyers would derive profit from orange groves manages by HHS Service Inc. Buyers told that 20% returns had occurred but that they could expect 10%.

Decision: Investment contract ^ this was more than just a sale of fee simple interests in land. The transfer of land was merely a convenient way of allocating the profits of the enterprise. Again, these investors would have benefitted from some information regarding their decision to buy and put the land under management.


• Common enterprise test: contract or transaction where a person invests in something that is a common enterprise that is expected to lead to a profit for the investor, and this profit will be derived solely from the efforts of a promoter or third party – key is that someone else controls success/failure of the enterprise and that’s why you would want that information

State of Hawaii v. Hawaii Market Center Inc.

Ratio: Risk Capital Test for identifying an investment contract (broader than Howey test to comply with policy objectives). Test requires:

  1. The offeree furnish initial value;
  2. A portion of the initial value is subjected to the risks of the enterprise;
  3. The furnishing of initial value is induced by promises or representations leading to a reasonable expectation or understanding that a benefit above initial value will accrue; and
  4. The offeree does not have the right to exercise practical and actual control over the managerial decision of the enterprise.

However, it is the policy and not the subsequently formed judicial test that is decisive. The primary objective is to protect the investing public. Are investors relying on expertise/management—courts have immense discretion.

Facts: A store where only members can shop. The capital for the store was raised by the sale of founding memberships. Costs was $320-$820. Earn returns by selling other memberships and by commissions. Securities Commission of Hawaii sought an injunction against the sale of these memberships on the basis that they constituted “investment contracts” and thus constituted securities. Hawaii Market Center argued that members had some control over their potential return, and did not rely “solely” on others as required by Howey.

Held: The court said the problem with the Howey test was its narrow focus on the mechanical test of “solely”.

This results in losing sight of the need to interpret investment contract broadly.

Reasons: The RISK CAPITAL TEST for identifying an investment contract should be used as it is broader than Howey test (thereby, meeting broad securities def) to comply with policy objectives

  • Here, the premium paid for sewing machine was initial value. Ability to recoup investment depended on the success of the store. Fixed fees and commissions were expected benefits. Investor did not have practical and actual control over the investment of the capital or the management of the store, and thus no way to his/her investment.

in the end, we don’t care so much about the judicial test, more about the policy of protecting the investing public who is relying on someone’s expertise/management (with both cases).

Pacific Coast Coin Exchange of Canada v OSC (SCC, 1978)

Ratio: Broad, purposive approach should be used in interpreting meaning of word “security” (even broader – s.1(1) is not exhaustive) ^it is legislative policy to replace the harshness of caveat emptor in security related transactions and courts should seek to attain that goal even if tests carefully formulated in prior cases prove ineffective and must continually be broadened in scope. It is the policy and not the subsequently formulated judicial test that is decisive.

*Accepts US definition for “investment contract” as a security

Facts: PCCE was in business of selling bags of silver coins. Two ways to buy from PC: (a) pay 100% $ in cash and receive bag of silver coins, or (b) you could buy bags of coins on margin through current account commodity agreement

  • Margin: you buy it, own it, but you don’t get it until you pay the rest of the balance you owe (e.g. if bag is $100 on Day 1, Give $35 on Day 1, and in 5 yrs, give $65, get back an investment contract on Day 1, and get the bag of silver when you pay off balance)
  • Almost everyone bought silver on margin. PC after receiving $35 did not keep silver in reserve for the person b/c they wouldn’t make $ doing that. Instead, hedged: have an obligation in 5 yrs to deliver 500 bags of silver ^ enter in futures contract w/ $35 payments, make $ b/c going to decide when the right time to buy bags in silver is 5 yrs from now ^ e.g. if worth $100 today, when it’s worth $90, buy 500 bags and make a profit on $10

• Crucial to solvency of PC was ability to properly hedge. They didn’t. All customers come forward with

$65 asking for their silver that’s increased dramatically, and they obviously don’t have it. Customers sue saying that they should have had a prospectus. D said they weren’t securities, they were selling silver.

Issue: whether the “current account commodity agreements” constituted an “investment contract” as defined in s.1(1)(n) of the Securities Act, i.e. whether they were a “security”

Held: SCC held 8-1 that the contracts were “investment contracts”, and since it was a trade that amounted to a distribution with no prospectus, the investors were entitled to their money back. Must fulfill the statutory purpose of compelling full and fair disclosure relative to the issuance of instruments that fall within the concept of a security

Analysis/ Implications: Majority examined tests from two US cases (Howey and Hawaii), concludes that a broader approach is required than even these tests, and goes on to adopt a more realistic test in light of underlying objectives of the Act.

It also determined the following:

  1. Appropriate for Canadian courts to consider US jurisprudence b/c i) def of security is similar, ii) both defs refer to an investment contract, ii) purpose of legislation was the same and iv) dearth of Can authority
  2. Expanded the concept behind the Howey test so that it would not be constrained by narrow interpretations of the words “common enterprise” or “solely”.
  • Under Howey test, the third part requires “that the person is led to expect profits…SOLEYfrom the from the efforts of apromoter/third-party: following this rationale would have caused case to fail. HOWEVER, SCC reasoned that the Q is whether the efforts of the third party are undeniably significant for the success/ failure of the enterprise
  • Under the 2nd requirement in Howey, require the investment to be a COMMON ENTERPRISE: Court found significant managerial efforts were made by D (promoter) and that the actions of this promoter lies in the commonality – between investor and promoter; there is no need for enterprise to be common to the investors between themselves
  1. Broad purposive approach should be used in interpreting the meaning of the word “security”: This case is a blank cheque to call anything a security as long as it satisfies the underlying policy of the Legislation.
  • Case indicates that courts will go to great lengths to ensure that the investor has the information he needs to make an informed investment.
  • Must appreciate economic realities,

o “Such remedial legislation must be construed broadly, read in context of economic realities to which it is addressed, substance not form is the focus. Any definition must permit fulfillment of statutory purpose of compelling full and fair disclosure. What will fall within the definition of a security is flexible rather than static… capable of adaptation to meet countless and variable schemes to those that seek use of $ of others on promise of profits”

Dissent: Laskin reasoned that the source of the buyers’ risk was not the quality of the management brought to the project by PCCE, but the market risk inherent in the price of silver. The only difference between buying silver from PCCE and buying on the open market was concern over the solvency of PCCE. As such, there is nodifference between this and commercial contracts where bankruptcy can lead to non-performance. This is extending the definition of security too far.

Policy Notes:

  • IF PURCHASING EXPERTISE, PURCHASING A SECURITY: Every time you invest in something where your expectation ofprofit is based on the expertise of someone else, the courts will go to whatever length they need to go to find that that’s a security

o Remember what you’re trying to do: if you’re investing in something to make a profit from it, and you’re relying on someone else’s expertise, you’re buying that expertise and therefore someone is required to give me a prospectus telling me everything that I need to know.

o The key difference between buying a product vs. buying something to profit from that someone else is managing is that in the latter cases the profit is not only risky, but the risk is largely determined by the management of others. Because of this reliance on expertise, to earn a profit there are 100 questions that need to be asked about the skill and risk before you give them the money.

o In order to protect the public and to foster confidence in capital markets these people need to have the protection of a prospectus

  • Here, PC was not selling bags of silver, were selling expertise in knowing how to hedge it for a profit. Buying MANAGEMENT EXPERTISE, which is a security.
  • This is the only way they can force prospectus/disclosure and to ensure that protection of investing public happens.
  • Policy: Basically, the court will find anything to be a security, so long as it fits into the definition – the reason for this relates back to the three objectives, but mainly investor protection

o Joiner, Howey, Hawaii, and Pacific Coast suggest courts will take a purposive approach if it is the type of transaction to which securities regulation was intended to be directed.

o We care about the investing public because we need confidence in capital markets and efficient capital markets (companies will not survive without the public’s $)

  1. “Commonly Known As” does not mean commonly known as security to ordinary people on the street. If commonly known as a security to most sophisticated security lawyer in the country, it’s commonly known as a security

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