Recent case an important reminder for investors about what the Alberta Securities Commission considers a security
by Riley O'Brien and Katy Josephs (Student-at-Law)
The Alberta Securities Commission (the ASC) recently decided that a promissory note specifically described as being non-securities related is in fact a security under the Alberta Securities Act. So, what in fact is a present-day security? The answer is unclear.
The ASC issued a Notice of Hearing for breach of an Interim Cease Trade Order
On August 19, 2019, the Alberta Securities Commission (the ASC) staff issued Nicholas Felgate a Notice of Hearing due to an alleged breach of an interim cease trade order (the ICTO) that prohibited him from "trading in all securities" as the term is defined under the Alberta Securities Act (the Securities Act). In May of 2019, Felgate traded "Lender/Loan Personal Non Securities Related Agreement Promissory Notes" to at least two investors. ASC staff asserted that these promissory notes to be "securities" for the purposes of the Securities Act and therefore alleged that Felgate breached the ICTO.
So, what is a security under the Securities Act?
In general, a security is a debt or equity obligation issuers sell to investors to raise funds for business activities. In return, investors receive a bundle of rights from which they expect to profit financially. The definition of a "security" in the Securities Act is broad and encompasses everything from "common" types of securities such as shares, bonds, debentures, and options to "less common" types such as investment contracts, scholarships, trusts and profit sharing agreements, among many others. The promissory notes, in this case, likely fell under a "catch-all" portion of the definition of a security in the Securities Act, which includes "any bond, debenture, note or other evidence of indebtedness…"
This definition is extremely broad and is not particularly user-friendly for forms of investment that do not fit within the traditional mold of a security. Whether or not a particular instrument is a security will depend on the facts and legal obligations surrounding the relationship between the investor and the issuer and not only on the structure of an investment. It is therefore difficult to distinguish between a financial instrument that will be a security under the Securities Act and one that is merely an asset sale or agreement between two parties.
The assertion by ASC staff that these non-securities related promissory notes are in fact securities makes a statement that ASC staff are willing to take a broad approach when defining securities. It is still unclear in fringe cases which instruments will fall under the definition of a security and which will not.
Bottom line: investors should be cautious about what they are trading
Mr. Feltgate's case is a reminder that investors should be extra cautious regarding their business activities during no-trade periods. Although an instrument may not fit within the typical understanding of a security, ASC staff may still consider it a security due to its function or substance and the factual circumstances. If investors are unsure whether an instrument is a security, they should seek legal guidance to avoid any unexpected sanctions or consequences that could negatively impact their business.
Felgate will appear in front of the ASC panel on October 31, November 1, and November 4, 2019, at which time the panel will render its final decision.