While most people spent the last few months counting down the days until the wedding of Ms. Markle and His Royal Highness Prince Harry, at AUM Law we were eagerly awaiting the appeal court’s decision in Ontario Securities Commission v. Tiffin (Tiffin). The case turned on whether promissory notes issued by Tiffin Financial (TFC) to some of Daniel Tiffin’s investment clients were securities. In 2016, the trial judge ruled that the notes weren’t securities and acquitted Tiffin and TFC of charges under the Securities Act (Ontario) (the Act). Earlier this month, however, the Ontario Securities Commission (OSC) won its appeal to the Ontario Superior Court of Justice, and Tiffin and TFC were convicted of trading in securities without registration, distributing securities without filing a prospectus, and trading in securities while subject to a cease-trade order.

Seriously, there is nothing that securities lawyers love more than a discussion about what constitutes a “security”. It takes us back to law school, when we could sleep in, stay up late and debate each other for fun.

We wouldn’t waste your time telling you about this case, however, unless we thought it had practical significance for our clients. We often come across situations where someone has issued or is thinking of issuing promissory notes and does not believe that securities laws apply to the transaction. The confusion may arise because the definition of “security” in the Act is exceptionally broad. It includes, among other things, a “note or other evidence of indebtedness”, unless the instrument fits into a long list of exceptions, such as evidence of a deposit issued by a regulated bank, credit union, loan corporation or trust company. In other words, the Act takes a “catch and exclude” approach to the definition of “security” and securities regulation generally.

In this case, Daniel Tiffin was a financial advisor who, from 1983 to 1999, had been registered with the OSC to trade in securities. In 2009, the OSC issued a temporary cease-trade order against him and his firm TFC in relation to promissory notes that had been issued as part of an investment scheme that purported to engage in foreign exchange trading. Five years later, the OSC issued its final decision and imposed sanctions against Tiffin and TFC that included a five-year prohibition on trading in securities or relying on exemptions in Ontario securities law.

After those sanctions were issued, Tiffin solicited funds from his insurance investment clients for personal use and to keep his business running. Six clients agreed to lend funds totaling $700,000 to TFC on terms set out in promissory notes.

Not surprisingly, these transactions attracted the attention of OSC enforcement staff. This time, the OSC sought to have Tiffin and TFC convicted of offences under the Act. At trial, however, Justice Kenkel dismissed the charges, having accepted the defendants’ argument that the broad definition of “security” cast “too wide a net” and was “inconsistent with the purpose” of the Act. Instead, Justice Kenkel applied a test applied by U.S. courts that have considered whether notes are securities within the meaning of U.S. securities legislation. Kenkel J. concluded that the promissory notes issued by TFC were similar to one “family” of “non-security” notes in U.S. case law and that neither the statutory goals of the Ontario legislation nor the circumstances of the particular transactions required that the promissory notes in this case be regulated as securities.

The OSC successfully appealed this ruling. We believe that the appellate court judge’s comments about the scope of securities legislation are particularly instructive for those who are tempted to test the boundaries of the Act:

“Where a 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 [Securities] 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.”

The OSC (and other Canadian securities regulators) are aware that Canadian securities legislation can be very broad in scope, and they have demonstrated a willingness to craft exemptions (in the form of rules or ad hoc exemptive orders) when there is a good business reason and it is not contrary to the public interest to do so. The fact that regulators are willing to consider requests for exemptive relief in appropriate circumstances, however, does not mean that market participants can ignore the letter of the law and ask for forgiveness after the fact.