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Securities - Investment Contracts. Hogg v. Chief Executive Officer
In Hogg v. Chief Executive Officer (Ont Div Ct, 2025) the Ontario Divisional Court dismissed an appeal, here brought against a decision of a "panel of the Capital Markets Tribunal (the “Panel”) [that] found that the appellants committed two frauds contrary to the Securities Act, R.S.O. 1990, c S. 5. Additionally, the Panel found that the sale of tokens, without a prospectus and registration amounted to further breaches of the Securities Act.[1] Among the remedies ordered, Mr. Hogg was held jointly and severally liable for a portion of the disgorgement of the lost funds".
The CMT [at paras 29] and the court [at paras 76-91] consider the meaning of 'securities' under the Securities Act, here in it's 'investment contract' form [SA 1(1) "security" (n)]:[29] Applying the common enterprise approach set out in Pacific Coast Coin Exchange v. Ontario Securities Commission, 1977 CanLII 37 (SCC), [1978] 2 S.C.R. 112, at p. 128, the Panel found that the Commission established the elements of an investment contract:. Investment of Money: The Panel held that prospective purchasers made an investment of money when they paid for the Tokens with Bitcoin, which is readily convertible into fiat currency. The proceeds collected from the sale of Tokens were available to be used by the enterprise offering the Tokens.
. View to a profit: The Panel found that investors reasonably expected that they would share in the profits of Cryptobontix because the appellants made representations that the Tokens were “backed” by gold and the earnings from the cryptocurrency mining program, and that Token holders would be able to sell the Tokens on other trading platforms. The Panel held that the Commission only needed to establish, in the circumstances that investors would have reasonably had that expectation. The Commission did not need to establish that each individual purchaser had that expectation.
. Common enterprise and efforts of others: The Panel held that given the representations made to investors, they would have reasonably expected that the profitability of their investment in the Tokens depended upon the efforts of others. Namely, their investment would increase in profitability if the funds from the sale of Tokens were used to acquire and operate crypto mining equipment, and that the profits from crypto mining would be used to acquire gold to “back” the Tokens, to acquire and operate more cryptocurrency mining equipment to generate additional returns, and to buy back and “burn” Tokens. ....
2. The determination that the cryptocurrency was a security
[76] The appellants submit that the Panel erred in finding that the sale of the Tokens together with the representations made to purchasers, were “investment contracts” and therefore securities under the Securities Act. They further argued that the Panel expressly took the approach undertaken in an American authority, SEC v. Ripple Labs, Inc., 2023 US Dist LEXIS 120486 (SDNY July 13, 2023) at p. 22-24, but then declined to follow it, in finding that there was an investment contract. The appellants’ position is that to satisfy a necessary part of the legal test for an investment contract, the purchasers would have to know that they were purchasing the Tokens from Cryptobontix. There was almost no evidence that the purchasers knew who they were buying the Tokens from.
[77] I do not accept this submission for the following reasons.
[78] To begin the analysis of this issue, this ground of appeal raises a question of mixed fact and law. Whether something is a security is a purposive, fact-driven inquiry: VRK Forex & Investments Inc. v. Ontario Securities Commission, 2023 ONSC 3895 (Div. Ct.), at para. 7. No extricable error of law arises in the circumstances of this case.
[79] Second, the Panel got the test right. They cited the leading authority of Pacific Coast Coin Exchange and analyzed the four elements of the common enterprise approach to the definition of an investment contract:(a). An investment of money;
(b). With a view to profit;
(c). In a common enterprise where the success or failure of the enterprise is interwoven with, and dependent on, the efforts of persons other than the investors; and
(d). The efforts made by those others significantly affect the success or failure of the enterprise. Moreover, they carefully applied the evidence to each element and determined they were met.
[80] Third, while it is true the Panel said at one point in their reasons that they preferred the approach and analysis of Ripple Labs, the context of that portion of their reasons must be carefully scrutinized. The reference to Ripple Labs is found in the section headed “What is the “investment contract” in this case?”. In that section, the Panel rejects the respondent’s argument that the Tokens themselves were the investment contract, as opposed to the overall transaction or scheme for the offer and sale of the Tokens, including the representations made to investors, considered together.
[81] They rejected the respondent’s argument that a concurrent level Capital Markets Tribunal decision warranted the conclusion that cryptocurrency was always a security. Rather, the Panel held that such a determination depended on the facts of each individual case. The Panel found that the Tokens, considered alone, did not incorporate or reflect what the purchasers of the Tokens might reasonably expect from their investments. Thus, the purchasers’ reasonable expectations, based upon the representations that were made to them in promotional materials, were an essential element of an investment contract. Moreover, the Panel found that the Tokens were not an investment instrument like a share certificate. After reasoning in this fashion, the Panel then stated the following passage relied upon by the appellants:On this question of what is the “investment contract”, we prefer the approach and analysis taken in the US decision in SEC v. Ripple Labs, Inc., namely that the subject of a “contract, transaction or scheme” can be a variety of tangible or intangible assets. The subject itself is not necessarily a security by virtue of being an investment contract. Although the Tokens are the subject of the transaction or scheme in this case, we find that the Tokens (like the bags of silver coins in Pacific Coast Coin and the citrus groves in Howey, involving contracts in which investors bought citrus groves and essentially leased them back to a service provider to harvest, pool and market the produce), in and of themselves, do not embody the elements of an investment contract. [82] In my opinion, in this passage, the Panel was not applying the law as set out in Ripple Labs as the appellants contend. They clearly applied the test in Pacific Coast Coin Exchange. Nor were they finding Ripple Labs judge’s application of the American test to the facts in that case persuasive in their assessment of the evidence in the case at bar. The only principle the Panel adopted was a narrow one. That is, an investment contract can be about tangible assets or intangible assets, and that a cryptocurrency is not per se always an investment contract. Additionally, the Panel never goes beyond such a limited reference to Ripple Labs when one reads the entire reasons.
[83] Fourth, given this context, the appellants’ submission that the Panel somehow erred by failing to properly apply Ripple Labs is misplaced. In Ripple Labs, the sale of some of the crypto tokens to certain buyers did not qualify as an investment contract because the company and the purchasers of the tokens did not know each other and the purchasers did not know that they were purchasing from the company. Therefore, the purchasers did not have a reasonable expectation of profit derived from the efforts of the company. Further, the court found that there was no evidence that the buyers who purchased the tokens on digital exchanges, could “parse through multiple documents and statements…which include statements (sometimes inconsistent) across many social media platforms.”
[84] In my view, any precedent set by Ripple Labs is very much confined to the facts before it. The Panel had different evidence to consider. It did not err in failing to reach a similar conclusion about the proof of a security in the case at bar as it was done in Ripple Labs.
[85] Fifth, regardless of the application of Ripple Labs, the appellants still argue that to establish the third and perhaps fourth element of the test in the common enterprise approach, the respondent would need to provide evidence that demonstrates that the purchasers knew they were buying the tokens from the company. The appellants submit that the Panel did not undertake this required analysis and that there was almost no evidence presented at the merits hearing to satisfy this requirement.
[86] I am not persuaded the Panel erred in this way.
[87] I agree with the respondent that the definition of an investment contract must be determined purposively and broadly. Accordingly, the meaning of investment contract must embody “a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits”: Pacific Coast Coin Exchange, at p. 127.
[88] The analysis conducted by the Panel was in keeping with this approach.
[89] While the appellants point to various deficiencies or weaknesses in the evidence, these arguments are essentially directed at the weight of the evidence. Absent a palpable and overriding error, these findings are afforded deference: Hydro-Quebec v. Matta, 2020 SCC 37, [2020] 3 S.C.R. 595, at para. 33.
[90] I do not see any palpable and overriding error.
[91] Although the appellants argue to the contrary, the Panel made findings in relation to when and how the tokens were sold, outlined generally how the tokens were sold, the approximate number sold during the material time, and conducted a chronological review of the promotional materials to determine the reasonable expectations of the purchasers.[4] Moreover, the Panel was cognizant of the nature of the scheme when they correctly observed “the reality [is] that the sale of crypto assets, by its very nature, can make it difficult to identify individual purchasers”.[5] . VRK Forex & Investments Inc. v Ontario Securities Commission
In VRK Forex & Investments Inc. v Ontario Securities Commission (Div Court, 2023) the Divisional Court considered an appeal from the Capital Markets Tribunal where the issue was whether 'contracts for difference' (CFDs) qualified as "securities" (specifically, 'investment contracts') for the purpose of Securities Act regulation.
In these quotes the court considers the definition of 'investment contracts', and whether CFDs met it. Interestingly, the appellants argued that their 'products' were more in the nature of betting or gaming:[11] The Appellants argue that in this case, the Tribunal erred when it found there were investment contracts because the third component of the four-part test has not been established. The test is found in the leading case of Pacific Coast Coin Exchange v. Ontario Securities Commission, 1977 CanLII 37 (SCC), [1978] 2 SCR 112.
[12] An investment contract will be found where there is:(a) an investment of money;
(b) with a view to a profit;
(c) in a common enterprise where the success or failure of the enterprise is interwoven with, and dependent on, the efforts of persons other than the investors; and
(d) the efforts made by those others significantly affect the success or failure of the enterprise. [13] A “common enterprise” will arise where “the success or failure of the enterprise is interwoven with, and dependent on, the efforts of persons other than the investors;” The Appellants argue that because the CFD providers are counterparties and do not share in the profits or losses, that the “common enterprise” component of the investment contract test is not met.
[14] Before the Tribunal, the Appellants submitted that this arrangement was not an investment contract, but was more like a form of betting, such as that offered on gaming websites.
[15] The Tribunal rejected this argument. It appropriately adopted a flexible approach to whether the investment opportunity was an investment contract, in the context of the investor protection purpose of the Act. The Tribunal rejected a formulaic or rigid approach. It found that there were multiple elements which created a common enterprise with the CFD provider on the facts including the following elements:1. Investor reliance on the CFD provider:a. for access to CFDs with underlying exposure to assets such as equities, commodities, or currencies;
b. for the performance of the CFDs as there was no market for the CFDs and the CFDs were not transferable (i.e., once a CFD position was opened, the investor was restricted to closing the position with the CFD provider);
c. to provide access to, and operate, the online proprietary trading platform; and
d. to hedge risk, including credit risk, performance risk and misappropriation risk appropriately so that the CFD provider could satisfy its payment and performance obligations. 2. The existence of the key attributes of the common enterprise to buy or sell CFDs, including by providing investors:a. CFDs, and exposure to markets and instruments that may not otherwise be directly available, or available in a cost-effective manner, and acting as counterparty;
b. access to leverage their investment using margin; and
c. an online platform for the execution of purchases and sales of CFDs. [16] Thus, the Tribunal found that the investors were dependent on the CFD providers to provide the opportunities to trade in these over-the-counter, often highly-leveraged, investments. The Tribunal’s conclusion was well-supported on the facts.
[17] In doing so, the Tribunal properly bore in mind that the Act is remedial legislation, with one of its primary purposes the protection of investors: Pacific Coast Coin at para. 127. The Act defines “security” via a non-exhaustive list of 16 clauses which are expressed in general terms, thus “evidencing an intention for breadth.” The Court of Appeal has described the scheme of the Act and this breadth of scope in this way:... the Act defines key terms very broadly, and thereby captures a great many instruments and activities in its wide regulatory scope, and then provides for many exemptions from the Act’s requirements … to tailor this regulatory scope to its purposes.
Ontario Securities Commission v. Tiffin, 2020 ONCA 217 (CanLII) at para. 28. [18] The Appellants rely on a 1985 decision of the British Columbia Court of Appeal in support of a narrower interpretation of the attributes of what constitutes an investment contract: British Columbia (Superintendent of Brokers) v. Lazerman Invt. Metals Int. Inc., 1985 CanLII 444 (BCCA). In that decision, the court upheld a finding by the Corporate and Financial Services Commission that arrangements through which customers could acquire the right to delivery of precious metals, including on margin, did not give rise to a common enterprise.
[19] Lazerman involved hedged liability on the part of investors who sold the right to purchase precious metals on margin. As noted in R. v. Sisto Finance NV, [1994] OJ No. 1184 at paras. 212-213, the facts in Lazerman were similar enough to the elements in Pacific Coast Coin which amounted to an investment contract that amounted to a “distinction without a difference.” The legal analysis in Lazerman amounted to a more rigid application of the test, which was not the approach taken by the Supreme Court of Canada in Pacific Coast Coin. For that reason, it has not been followed in Ontario, either in Sisto Finance by the Ontario Court of Justice, or by the Tribunal in Universal Settlements International Inc., 2006 ONSC 18 at paras. 8, 10, 117-121.
[20] The Appellants did not raise the Lazerman decision with the Tribunal.
[21] The facts in Lazerman are not those in the case at bar. In that case, the investors were entitled, upon payment, to delivery of precious metals. The investors could sell the metals to others including via established international markets. Here, the investors who purchased CFDs had no right to delivery of any goods – all they had was an agreement with the CFD provider, which they could not assign or sell elsewhere. These investors were only entitled to payment in prescribed circumstances.
[22] Second, in Lazerman, the investors’ funds were segregated, and the hedging contracts purchased with their funds were held in trust. The evidence tendered before the Tribunal here showed that CFD providers did not segregate investor funds nor hold in trust any assets purchased with those funds.
[23] For these reasons, I would decline to find that Lazerman represents the correct approach to the question of assessing investment contracts. It is also distinguishable on its facts from the facts here. I conclude that the Tribunal did not err in law nor in applying the law to the facts by failing to adopt the approach used by the BCCA in Lazerman.
[24] In concluding that the third branch of the Pacific Coast Coin test is met when the scheme exists “for the benefit of the supplier of capital (the investor) and of those who solicit the capital (the promoter)” the Tribunal did not fall into palpable and overriding error.
[25] The facts as found by the Tribunal amply support an investment contract relationship among the investors, the Appellants, and the trading platforms. The focus is on the relationship, and a common enterprise will be found to exist where “the investor’s role is limited to the advancement of money, managerial control over the success of the enterprise is that of the promoter; therein lies the community”: See Pacific Coast Coin at para. 129. . VRK Forex & Investments Inc. v Ontario Securities Commission
In VRK Forex & Investments Inc. v Ontario Securities Commission (Div Court, 2023) the Divisional Court considered an appeal from the Capital Markets Tribunal where the issue was whether 'contracts for difference' (CFDs) qualified as "securities" (specifically, 'investment contracts') for the purpose of Securities Act regulation.
In these quotes the court characterizes CFDs and illustrates how they work:[1] This is an appeal from a decision of the Capital Markets Tribunal, which found that the Appellants’ business trading in “Contracts for Difference” (“CFD”) amounted to trading and advising in unregistered securities, contrary to the Securities Act, R.S.O. 1990, c. S.5.
[2] A CFD is a financial instrument offered through online trading platforms, “over the counter” rather than on an exchange basis, in which investors purchase interests in assets without taking ownership or delivery of the underlying asset, which may be commodities, currency or equities.
[3] The investors here, on the Appellants’ recommendations, traded on two on-line platforms, Oanda (Canada) Corporation ULC (“Oanda”) and Vantage Global Prime Pty LLP (“Vantage”), who acted as principals and counterparties to the CFD trades. These trades were often highly leveraged, meaning that the potential for losses (or profits) was amplified relative to the amounts invested. Most of these transactions traded at 50:1 leverage. The Appellants had trading authority, monitored the accounts and received portions of the profits associated with the accounts on these platforms.
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[6] The sole issue on appeal is whether the Tribunal erred in finding that the CFDs were securities because they are “investment contracts.”
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Analysis
[8] The Appellants promoted CFD trading as an investment opportunity with potential for significant returns via various means, including a storefront sign, online, at investment conferences, and in one-on-one meetings. Some materials circulated by the Appellants discussed the potential for investors to earn daily returns of 1% to 5%. Mr. Namburi told investors he had expertise and experience in, among other things, CFD trading.
[9] Mr. Namburi had most investors sign an agreement in which they agreed to:(a) open and fund online accounts with the CFD Providers for investment in CFDs on margin;
(b) give the Appellants access to the investors’ accounts for the purposes of trading C FDs and monitoring CFD holdings in their accounts; and `
(c) pay the Appellants 50% of the monthly net realized profits for all CFD trading in their accounts. [10] The Appellants traded in CFDs on the investors’ accounts and provided advice to the investors on CFD trading. As a result of these trades, the Appellants earned approximately $400,000 in profits as part of the profit-sharing agreement. Collectively the investors lost approximately $1.9 M.
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