Divisional Court Upholds OSC Finding That Trading Software License Contracts Are Securities Within Meaning Of Securities Act

The Ontario Superior Court of Justice in Furtak v Ontario (Securities Commission), 2018 ONSC 6616, has upheld the Ontario Securities Commission's (OSC) merits and sanctions decisions with respect to the Strictrade Offering, which we previously reported on here.

Background

In 2015, OSC Staff brought enforcement proceedings against Edward Furtak, Axton 2010 Finance Corp., (Axton), Strict Trading Limited (STL), Strictrade Marketing Inc. (SMI), Trafalgar Associates Limited (TAL), Ronald Olsthoorn, and Lorne Allen (collectively the Strictrade Parties) arising out a scheme that involved the marketing and offering of a set of computerized trading software license contracts (the Strictrade Offering). Under the Strictrade Offering, third party participants signed a promissory note in favour of Axton, a company operated by Furtak, for the purchase of a license to use the Strictrade computerized trading software. The participants simultaneously contracted with STL, another company operated by Furtak, to host the Strictrade software and trade in financial instruments. Participants purchased licenses in $10,000 units and were required to pay upfront annual fees and interest to Axton and STL. In exchange, participants received annual trading report payments. The annual fees and interest paid by purchasers exceeded the trading report payments they received. The Strictrade Offering was marketed to investors as a tax-planning vehicle meant to provide participants with an opportunity to take advantage of business tax deductions.

In a merits decision released on November 24, 2016 (2016 ONSEC 35), the OSC found that the set of contracts being marketed in the Strictrade Offering were "investment contracts" and were therefore "securities" within the meaning of the Securities Act, RSO 1990, c S. 5 (the Act). As a result, the OSC found that:

Furtak, Axton, STL, SMI, and Allen engaged in, or held themselves out as engaging in, the business of trading in securities without registration, contrary to subsection 25(1) of the Securities Act, RSO 1990, c S. 5 (the Act); all of the Strictrade Parties distributed securities without filing and obtaining a receipt for a preliminary prospectus, in violation of subsection 53(1) of the Act; Furtak, Olsthoorn and Allen, as officers and directors of the corporate respondents authorized, permitted or acquiesced in the corporate respondents' non-compliance with Ontario securities law, in violation of section 129.2 of the Act; and...