Securities Law is an extremely complex and dynamic area of law. In Canada, securities law is a provincial responsibility. As a result, each province has established their own statutory framework to address the regulation and prosecution of securities related matters.
What Types of Conduct Are Prosecuted under the Ontario Securities Act and How Serious Are the Penalties?
Section 122 of the Securities Act makes it an offence to contravene “Ontario Securities Law.” This can include a wide range of conduct. In addition, the potential penalties under the Act can be quite severe. The maximum potential penalty for contravening Ontario securities law is a fine of $5 Million and up to five years in prison or both.
While there is a wide range of conduct that is prohibited, some of the most common securities prosecutions are for:
- Unregistered Trading
- Primary Distribution Without a Prospectus
- Fraud and Market Manipulation
- Making Material Misleading or Untrue Statements to the Commission or in a Prospectus
- Insider Trading and Tipping
What is Unregistered Trading? What is a Primary Distribution Without a Prospectus?
Under securities law, there are two fundamental commandments. First, thou shall not trade in securities without being registered. Second, thou shall not distribute securities without a prospectus.
The definition section of the Securities Act generally defines a trade as follows:
“trade” or “trading” includes,
(a) any sale or disposition of a security for valuable consideration, whether the terms of payment be on margin, installment 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,
(b) any participation as a trader in any transaction in a security through the facilities of any exchange or quotation and trade reporting system,
(b.1) entering into a derivative or making a material amendment to, terminating, assigning, selling or otherwise acquiring or disposing of a derivative, or
(b.2) a novation of a derivative, other than a novation with a clearing agency,
(c) any receipt by a registrant of an order to buy or sell a security,
(d) any transfer, pledge or encumbrancing of securities of an issuer from the holdings of any person or company or combination of persons or companies described in clause (c) of the definition of “distribution” for the purpose of giving collateral for a debt made in good faith, and
(e) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing; (“opération”)
The Act also defines a distribution as follows:
“distribution”, where used in relation to trading in securities, means,
(a) a trade in securities of an issuer that have not been previously issued,
(b) a trade by or on behalf of an issuer in previously issued securities of that issuer that have been redeemed or purchased by or donated to that issuer,
(c) a trade in previously issued securities of an issuer from the holdings of any control person,
(d) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as underwriter, prior to the 15th day of September, 1979 if those securities continued on that date to be owned by or for that underwriter, so acting,
(e) a trade by or on behalf of an underwriter in securities which were acquired by that underwriter, acting as underwriter, within eighteen months after the 15th day of September, 1979, if the trade took place during that eighteen months, and
(f) any trade that is a distribution under the regulations,
and on and after the 15th day of March, 1981, includes a distribution as referred to in subsections 72 (4), (5), (6) and (7), and also includes any transaction or series of transactions involving a purchase and sale or a repurchase and resale in the course of or incidental to a distribution and “distribute”, “distributed” and “distributing” have a corresponding meaning; (“placement”, “placer”, “placé”)
Under section 25 of the Act, unless an exemption applies, individuals or businesses are prohibited from trading in securities without being registered as a dealer, or as a dealer’s representative.
Under section 53(1), individuals and businesses are further prohibited from trading in a security, if the trade would be a distribution, without the filing of a prospectus. Essentially, whenever securities have not previously been issued, one is prohibited from trading in them without first distributing a prospectus to the potential investor.
Are there Exemptions to the Registration and Prospectus Requirements?
As explained above, the two general commandments in Ontario securities law are: 1) thou shall not trade in securities without being registered; 2) thou shall not engage in a primary distribution without a prospectus. However, the Securities Act, its regulations, and a host of National Instruments (NI’s), set out various exemptions to these general requirements.
It is vitally important to determine the exact date that the alleged “unregistered trade” or “prohibited distribution” occurred because only the exemptions in force at the time of the alleged offence are applicable.
It is also important to recognize that Ontario securities law requires the pre-registration/application for various exemptions one can take advantage of them.
National Instrument 45-106 sets out the general exemptions to the prospectus-filing requirement. These provisions are highly technical. For example, a distribution may be exempt for the prospectus requirement where:
- The trade or distribution is made to an accredited investor;
- The trade or distribution is made to family, friends and business associates of the issuer;
- The trade or distribution is made to a founder, control person of the issuer;
- A minimum amount is invested.
Moreover, National Instrument 31-103 sets out the exemptions to the registration requirements under Ontario securities law.
What is Insider Trading and Tipping?
Section 76 of the Ontario Securities Act prohibits both insider trading and tipping. The section provides:
76. (1) No person or company in a special relationship with a reporting issuer shall purchase or sell securities of the reporting issuer with the knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed.
(2) No reporting issuer and no person or company in a special relationship with a reporting issuer shall inform, other than in the necessary course of business, another person or company of a material fact or material change with respect to the reporting issuer before the material fact or material change has been generally disclosed.
Under the insider tradition provisions, individuals or companies that are in a special relationship with the reporting issuer (frequently their own publically traded company), are prohibited from purchasing and selling shares when they have knowledge of material information that has not been generally disclosed to the public. Of course, these individuals may trade in these shares or securities where they have complied with the insider reporting requirements under the Act and relevant regulations and instruments. “Insiders” that wish to trade in securities must file a report using the System for Electronic Disclosure by Insiders (SEDI: https://www.sedi.ca/)
Section 76 further prohibits “tipping.” Tipping occurs when an “insider” passes material information to a third party that has not been previously disclosed to the public.
What are the Penalties for Insider Trading and Tipping?
Under the Securities Act, the penalties for a conviction under s. 76 are quite steep. In addition to potential jail time, the maximum fine allowable is the greater of $5 Million, or triple the profits made or the losses avoided by virtue of the insider trading or tipping.