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Securities - Investment Contracts. 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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