Fundamental Securities Law Concepts
| Author | Christopher C. Nicholls |
| Profession | Faculty of Law, Western University |
| Pages | 47-108 |
47
CHA PTER 3
FUNDAMENTAL
SECURITIES LAW
CONCEPTS
A. INTRODUC TION
This chapter provides an overv iew of some essential securities law ter ms
and concepts. These include three of the most foundational definitions
in Canadian s ecurities law: secur ity, trade, and distribution.
B. W HAT IS A “SECURIT Y”?
1) Introduction
Thus far, we have referred to securities in an i mprecise, non-technical
way, as we reviewed some of the basic characterist ics of some of the
most common examples of securities, such as shares or debentures
issued by a corporation. Now, we turn to a more detailed examination
of the legal meaning of the term “secur ity.” As we will see, the mean-
ing of “security,” for purposes of Can adian securitie s legislation and
regulation, is exceedingly broad and extends to far more instr uments,
investments, and devices t han are conventionally associ ated with
the “securities” industr y. The question of what constitutes a “secur-
ity” is pivotal because the application of securities legislation ty pically
depends on a finding that a pa rticular transaction involves a security
(although, as we shall see below, the securities regulators sometimes
have regulatory authority over matter s even when there is no security
SECU RITIE S LAW48
involved1). Many requirements of secur ities legislation are tr iggered
when “securities” are involved, including the following:
1) The requirement that an issuer (such as a corporation) prepare and
distribute a prospectu s depends on whether there is a distribution
of “securities.”2
2) The requirement that an issuer publicly disclose materi al changes
in the business, capita l, or operations of that issuer (i.e., comply
with continuous disclosure obligations) depends on whether it has
issued securit ies in certain circumsta nces or filed a prospectus such
that the company qualifie s as a “reporting issuer.”3
3) The quasi-crim inal and civil prohibitions against in sider trading are
trig gered only when someon e with mater ial non-public infor mation
purchases or sells (or “tips” or recommends others to purchase or
sell) securities.4
4) The application of the take-over bid rules depends on whether there
is a take-over bid to acquire the outstanding voting or equity secur-
ities of an issuer.5
5) The registration (essentially, professional licensing) requ irements of
the legislation come into play only when there is activ ity involving
securities.6
What then is a security? Consider the following transactions:
• You buy shares or bonds of Microsoft through a broker.
• You buy shares or bonds in a small, private software company d irectly
from the company.
• You buy a unit in a real estate limited partner ship.
• You buy units in a mutual fund.
• You lend money to your aunt for the purpose of opening a commercial
design stud io.
1 See the dis cussion of derivatives in Se ction B(12), below in this chapter.
2 See, for example, O ntario Securitie s Act, RSO 1990, c S.5 [OSA], ss 1(1) (definition
of “distribution”) and 53.
3 Ibid, s 1(1) (definition of “reporti ng issuer”).
4 Ibid, ss 76 and 134. The definition of “secu rity” in s76 does include, among
other thing s a “related derivative.” Ibid, s 76 (6)(c).
5 National Instr ument (NI) 62-104, s 1.1 (definition of “take-over bid”).
6 OSA, ss 1(1) (definitions of “underwr iter” and “adviser”) and 25 (when regis-
tration requi red). Although the defi nition of “‘trade or ‘trading ’” does include
activitie s in relation to the tradin g of derivatives (see clauses ( b.1) and (b.2)),
the OSA’s s 25 regist ration requirement itsel f refers to “trading in securitie s.” A
proposed amend ment to s 25, not yet in force at the date of writing, would add
to s 25 a new s1.1, which anticipates t he possibility of a regist ration category
based on tra ding in derivatives, SO 2010, c 26, Sched 18, s 19.
Fundamenta l Securities Law Concept s 49
• You buy an interest in a number of chinchillas, in retur n for a prom-
ise that you will share in any profits generated by the sale of the
chinchillas.
• You open a bank account.
• You buy a life insurance policy.
• You buy an interest in a time-share condominium unit.
Which of these tran sactions involves a security? Most people would
recognize that shares of a public company are securities. Most people
would likely recognize th at bonds, or debentures,7 or other similar debt
instruments issued by a public company are also securities. It is likely
that most people would similarly expect t hat shares or bonds in a pri-
vate company are also securit ies. However, many would fail to recognize
that every other transaction on this list m ay conceivably be character-
ized as a transaction involving a security, or could be so characteri zed,
but for specific exclusions from the definition of securit y found in the
securities legi slation. This shows just how broadly the legal definition
of security is dr afted.
2) The Securities Act Definition
How is it possible that so many things can be clas sified as securities?
The first place to look for an answer is the definitions section of secur-
ities legislation. In Ontar io, for example, “security” is defined a s follows:
“security” i ncludes,
(a) any document, i nstrument or wr iting commonly known a s a
se cu ri ty,
(b) any document constituti ng evidence of title to or interest i n the
capital, asset s, property, profits, earni ngs or royalties of any per-
son or company,
(c) any document constitut ing evidence of an interest i n an associ-
ation of legatee s or heirs,
(d) any document constituti ng evidence of an option, subscription or
other interest in or to a sec urity,
7 At one time, “bond” was a term u sed to refer to secured debt, whi le the term
debenture refer red to unsecured debt — a distinction, as m entioned in Chapter1,
that is sti ll found in some finance texts. Today, however, the ter ms “bond” and
“debenture” are often us ed interchangeably, although it would be unusu al to use
the term “debentur e” to describe a debt instr ument secured solely by a charge on
a particul ar fixed asset.
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