Court) decision in Pacific Coast Coin Exchange v. Ontario
(Securities Commission) (Pacific Coast) is the leading Canadian
authority on the definition of an investment contract. In Pacific
Coast, the Supreme Court applied a four part test in determining
whether a business arrangement constituted an investment
contract, specifically whether the arrangement involved:
a. an investment of money,
b. an intention or an expectation of profit,
c. a common enterprise, and
d. dependent upon the efforts and success of those seeking the
investment (referred to as promoters) or of third parties.
In connection with the third and fourth parts of the test, the
Supreme Court held that a common enterprise is satisfied when
it is undertaken for the benefit of the supplier of capital (i.e., the
investor) and of those who solicit capital (i.e., the promoter). The
investor’s role is to invest money and the promoter’s role is to
manage and direct the success of the enterprise. In Pacific Coin,
the Supreme Court also held that in evaluating whether a business
arrangement constitutes a security, form should be disregarded
for substance and that the emphasis should be placed on the
‘economic realities’ of the transaction that securities legislation is
designed to protect.
Additionally, in another case, the Alberta Court of Appeal held
that it did not matter that an agreement contained provisions for
investment which are intermixed and intermingled with provisions
relating to non-investment matters. It would not exempt the
agreement from the provisions of securities legislation.
With a broad interpretation given to what constitutes a security
under the Act, individuals and entities need to be careful of how
they structure a transaction if they seek to avoid the application
of securities law. The examples below illustrate how a business
arrangement can easily constitute a securities transaction when
such arrangement is an investment contract as a matter of law.
Let’s start off with real estate.
Real Estate Transactions as Investment Contracts
One major area of business
that has attracted unexpected
securities regulation is the real
estate development business.
While real estate purchase
and sale agreements are not
traditionally thought of as
involving the sale of a security,
certain real estate transactions
have been held to be an
investment contract with the
result that securities laws apply
notwithstanding real estate
laws. Below are three examples:
1. Energy Syndications Inc.
In a recent 2013 OSC decision, agreements regarding the sale
of real estate and solar panels were held to constitute investment
contracts and hence securities under the Act. In its decision, the
OSC held that three companies (i.e., Energy Syndications Inc.,
Green Syndications Inc. and Syndications Canada Inc.) and
three individuals affiliated with these companies, had illegally
distributed securities to investors.
In this case, the defendants sold investments through
newspaper advertisements, brochures and meetings at their
corporate office. One set of advertisements indicated that investors
could earn a return of 25% in one year. Other advertisements
marketed a return of 9% for a six month investment. In both
cases, no mention was made that the investments would be
used to purchase parcels of land in the United Kingdom or solar
panels until such time as investors contacted the company and
made additional inquiries. The defendants argued that the land
agreements provided for the purchase and sale of a plot of land.
The defendants stated that upon payment of the purchase price,
the investors received title to a parcel of land which they were
entitled to retain or to sell. The option to put the lands back to the
company in one year’s time is just that, an option to repurchase,
not unusual in land transactions. Accordingly, the defendants
argued that the transaction did not constitute the sale of securities.
However, the OSC considered the definition of “investment
contract” and the test enunciated by the Supreme Court in Pacific
Coast. The OSC was satisfied that the first two elements of the
test were satisfied, namely that there was an investment of money
by the investors with an intention or expectation of profit being
received one year later. The OSC found that investors entered into
the solar panel agreements with the primary intention of realizing a
profit of 9% over a six month time period and that the defendants
knew investors had no intention of accepting delivery of or leasing
the solar panels to a third-party, as was also provided for under
The OSC was also satisfied that the third and fourth elements
of the Pacific Coast test were proven. The land agreements
represented a common enterprise in which the expectations of
the investor in receiving back his/her money together with his/
her profit are entirely dependent upon one of the defendants
(being a third party) which owned the plots and was selling the
plots. The OSC noted the manner in which the contracts had
been marketed, and ultimately found that it was unreasonable to
assume that the land agreements were entered into by investors
in order to purchase the land itself, as the ‘economic realities’ of
the transaction suggested the opposite.
The defendants were subsequently found to have breached
the registration and distribution requirements of the Act and acted
contrary to the public interest.
2. Sapphire Tower Development Corp.
Another example of a real estate transaction that was subject