Supreme Court Judgments

Supreme Court of Canada

Pacific Coast Coin Exchange v. Ontario Securities Commission, [1978] 2 S.C.R. 112

Date: 1977-11-16

In the Matter of the Securities Act, R.S.O. 1970, Chapter 426 and Amendments Thereto:

And in the Matter of Pacific Coast Coin Exchange of Canada Limited (Plaintiff) Appellant;

And in the Matter of Monex International Ltd., Carrying on Business Under the Firm Name of Pacific Coast Coin Exchange (Plaintiff) Appellant;

and

Ontario Securities Commission (Defandant) Respondent.

1977: February 15, 16; 1977: November 16.

Present: Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon, Dickson, Beetz and de Grandpré JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.

Securities legislation—Scope of legislation—Offering for sale of silver coins “on margin”—Commodity account agreement—“Investment agreement”—Tests of commonality of enterprise, dependence on others for profitability—Risk capital approach—Duty of Courts to give effect to legislative policy—The Securities Act, R.S.O. 1970, c. 426, ss. 1, 35.

Appellant operated a scheme designed to enable members of the public to speculate in silver coins. It commenced business in Ontario in 1973 and its activities in that province consisted primarily of offering for sale, selling and delivering bags of silver coins in specie and offering for sale and selling bags of silver coins on margin. The appeal before the Supreme Court concerned only the latter activity, margin purchases under appellants’ standard commodity account agreements. The scheme involved the solicitation of customers primarily through newspaper advertising inviting the public to request information by mail. The literature pack which then was sent to potential customers emphasized silver coins as an “investment” and presented them as “reliable” and “almost perfect” protection against inflation. The price performance of silver was compared favourably with other forms of investment such as common stock. While appellant presented two ways to invest in the coins, cash and margin purchases, margin purchases were promoted over outright purchases and in fact over 90 per cent of purchases were on margin. The appellants’ commodity account agreements were termi-

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nable agreements and under them purchasers on margin were required to pay by way of deposit 35 per cent of the purchase price. The result of investment of money under the agreements was to give appellants a pool of money which became appellants’ money and tied the customers to the appellants for the consummation of the transactions either by taking delivery of bags of coins or by closing their accounts and selling at market price through the appellants. Appellants were not however obliged to repurchase from such customers, their only obligation was to deliver the number of bags of silver concerned if and when the customer paid the outstanding balance and no specific bags of coins were allocated to a customer until then. The Ontario Securities Commission after a hearing under s. 144(1) of the Act issued a prohibitory order requiring appellants to cease trading pending the filing of a prospectus on the basis that appellants’ activities came under s. 1(1) of the Act in that they were investment contracts within s. 1(1)22xiii or in the alternative constituted “evidence of title to or interest in the capital, assets, property, profits, earnings or royalties” within s. 1(1)22ii.

The Divisional Court in dismissing appellants’ appeal agree with respondents’ conclusion on the basis only that the transactions were investment contracts but felt that the agreements did not constitute evidence of title within the meaning of s. 1(1)22ii. The Court of Appeal affirmed, holding that the transactions did constitute investment contracts but found it unnecessary to determine whether they were also securities within the meaning of s. 1(1)22ii. The principal issue on further appeal was to determine whether the agreement between appellant and its customers was an investment contract.

Held (Laskin C.J. dissenting): The appeal should be dismissed.

Per Martland, Judson, Ritchie, Spence, Pigeon, Dickson, Beetz and de Grandpré JJ.: Section 35 of the Act prohibits anyone trading in a security in the absence of a prospectus and section 1(1) (22)xiii defines security as including “any investment contract, other than an investment contract within the meaning of The Investment Contracts Act”. [The contract in question was not one covered by The Investment Contracts Act]. While the term investment contract is not defined, the policy of the legislation is clearly the protection of the public through full, true and plain disclosure of all material facts relating to securities being issued. The fourteen

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subdivisions of the definition encompass practically all types of transactions and indeed the definition had to be narrowed down by the long list of exceptions in s. 19. The categories in the definition are not mutually exclusive and are in the nature of ‘catchalls’. Such remedial legislation should be construed broadly. Substance, not form, is the governing factor. The legislation is not aimed solely at schemes that are actually fraudulent but rather relates to arrangements that do not permit the customers to know exactly the kind of investment they are making.

The Supreme Court of the United States in SEC v. W.J. Howey Co., 328 U.S. 293 (1946), with the foregoing in mind laid down the test “Does the scheme involve ‘an investment of money in a common enterprise, with profits to come solely from the efforts of others’?” In the case at bar all aspects of this test can be answered in the affirmative. Clearly an investment of money was involved; as to the common enterprise aspect the only commonality necessary for an investment contract is that between the invester and promoter; and as to the dependence of the customer for the success of the enterprise the end result of the investment by each customer was dependent upon the quality of the expertise brought to the administration of the funds obtained by appellant from its customers. The test to determine the economic realities of a securities transaction based on “the risk capital approach” adopted by the Supreme Court of Hawaii in State of Hawaii v. Hawaii Marker Center, Inc., 485 P. 2d 105, results in the same conclusion that the agreement in question is an investment contract.

The facts were examined in the sole light of the Howey and Hawaii tests at the invitation of the parties. A broader approach could however have been taken. The clear legislative policy was to replace the harshness of caveat emptor in security related transactions and the courts should seek to attain that goal even if tests formulated in prior cases prove ineffective and have to be broadened in scope.

Per Laskin C.J. dissenting: The term “investment contract” applies to one of the many kinds of security included within The Securities Act. It was conceded that the term could not be given a literal meaning as to do so would bring innumerable transactions which have no public aspect within the scope of the Act; and it was common ground that commodity futures contracts were not per se under the Act. It is easy when faced with a widely approved statute for the protection of the investing public to give broad undefined terms a broad mean-

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ing so as to bring doubtful schemes under the authority of the statute. However where the Legislature has deliberately chosen not to define such a term which embraces various transactions, of which some are innocent, there is no reason for Courts to be oversolicitous in resolving doubt in the enlargement of the scope of statutory control.

Only three factors could be said to enter into the consideration of whether the agreement was an “investment contract” as included in the definition of “security” under the Act, the fixing of the base price at which customers made their purchases, the gathering of the pool of money from the deposits under the agreements and the question of the solvency of the appellants. These same factors under a similar scheme were present in Jenson v. Continental Financial Corporation (1975), 404 F. Supp. 792. The Court in that case like the Courts in this case faced the question of whether a gamble on the behaviour of the silver market is anything more than a commodity futures transaction and hence not subject to regulatory securities legislation. The Court in Jenson laid emphasis on the pooling of investors’ money in a common enterprise in which the risk depended substantially on the promoters’ ability to gauge the market and assure its own solvency to meet its obligations to its customers. Such view of the matter involves nothing more than solvency, because the market would determine whether and when the customer would have a profit; a customer left free to close out his account or to ask for delivery in specie at his instance. There was no question of the notion of managerial effort as arose in Howey as a controlling factor. Neither the test in Howey nor the broader risk capital approach in Hawaii should be generalized to decide the present case. Both cases were readily distinguishable.

[Re Regina Great Way Merchandising Ltd. (1971), 20 D.L.R. (3d) 67; Re Bestline Products of Canada Ltd. (1972), 29 D.L.R. (3d) 505; Re Ontario Securities Commission and Brigadoon Scotch Distributors (Canada) Limited, [1970] 3 O.R. 714; Tcherepnin v. Knight, 389 U.S. 332 (1967); SEC v. W.J. Howey Co., 328 U.S. 293 (1946); Koscot Interplanetary, Inc., 497 F. 2d 473 (1974); SEC v. Glen W. Turner Enterprises Inc., 474 F. 2d 476 (1973); State of Hawaii v. Hawaii Market Center, Inc., 485 P. 2d 105 (1971); Jenson v.

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Continental Financial Corporation (1975), 404 F. Supp. 792, referred to.]

APPEAL from a judgment of the Court of Appeal for Ontario[1] dismissing an appeal from a judgment of the Divisional Court[2] dismissing an appeal from a “cease trading” order of the Ontario Securities Commission. Appeal dismissed, Laskin C.J. dissenting.

Douglas Laidlaw, Q.C., for the appellants.

B.P. Bellmore and M.W. Bader, for the respondent.

THE CHIEF JUSTICE (dissenting)—The facts of this case have been sufficiently highlighted in the reasons proposed by my brother de Grandpré which I have had the advantage of reading before preparing my own. We are concerned here with giving meaning and application to the term “investment contract”, which is one of the many kinds of “security” included within The Securities Act, R.S.O. 1970, c. 426, as amended and hence brought within its regulatory authority. The term, it is conceded, cannot be given a literal meaning because to do so would bring within the scope of The Securities Act innumerable transactions which have no public aspect. Even with respect to that, it is common ground that commodity futures contracts are not per se within the regulatory regime of the Act.

My brother de Grandpré has noted in his reasons that securities legislation in the United States has similarly left the term “investment contract” undefined, so that it fell to the Courts in various proceedings to isolate or extract a meaning consistent with the purpose of securities legislation, namely, to ensure that investors in public offerings are supplied with full information to enable them to appreciate (if they are minded to examine it) the risks involved in making an investment. The more extensive judicial experience in the United States has been regarded as useful for Canadian courts called upon to wrestle with similar problems of interpretation and application, and so it is that in the present case the so-called Howey test (laid

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down in Securities and Exchange Commission v. Howey[3]) and the Hawaii test (laid down in Hawaii Commissioner of Securities v. Hawaii Market Centre Inc.[4]) were considered and utilized by the Courts below in determining that the appellants were dealing in securities through their commodity account agreements with their customers.

It is easy, in a case like the present one, when faced with a widely-approved regulatory statute embodying a policy of protection of the investing public against fraudulent or beguilingly misleading investment schemes, attractively packaged, to give broad undefined terms a broad meaning so as to bring doubtful schemes within the regulatory authority. Yet if the Legislature, in an area as managed and controlled as security trading has deliberately chosen not to define a term which, admittedly, embraces different kinds of transactions, of which some are innocent, and prefers to rest on generality, I see no reason of policy why Courts should be oversolicitous in resolving doubt in enlargement of the scope of the statutory control.

Although there was evidence of spot purchases of silver coins, that is purchases for cash, the issue before this Court concerns margin purchases under the terms of the appellants’ standard commodity account agreements. Spot purchases are clearly outside of The Securities Act. The commodity account agreement is a terminable agreement under which purchasers on margin contract for some desired number of bags of silver coins and pay by way of deposit thirty five per cent of the purchase price. Delivery in specie may be had on 48 hours’ notice after paying up the balance of the purchase price plus commission, and interest and storage charges as applicable. The appellants, to honour the contracts, must either have bags of silver coins on hand or go into the market to buy futures, and they would do so to cover outstanding obligations to their customers rather than trade in

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silver on their own account.

The result of investment of money under the commodity account agreements was to give the appellants a pool of money—which became its money—and tied the customers to the appellants in the consummation of their purchases, either by taking delivery of bags of coins (which was rarely done) or by closing out their accounts by selling at the market price through the appellants, paying a commission on selling as well as on buying. The commodity account agreements were not assignable by the customers without the appellants’ consent but, of course, the appellants could use them as bank collateral.

The appellants controlled the so-called base price; that is, the price at which investors bought bags of silver coins for future delivery was fixed by the appellants in relation to the then market price. The appellants did not, however, control the market price but were themselves subject to it; nor did they control the cost of money which would enter into a customer’s calculation, along with the market price, on whether to close out his account. It was in respect of these features of the transactions with their customers that counsel for the appellants took objection to the emphasis placed by the Courts below on hedging, calling it a non-issue.

Counsel contended that it was immaterial to the customers whether the appellants hedged or not on their future obligations to them. If they did not hedge, they simply took the risk of a larger loss or a larger profit when called upon by a customer to deliver the bags of coins which he purchased or when the customer closed out his account by instructions to sell. If they did hedge, it was still for the customer to decide, irrespective of the hedging, whether to call for delivery or whether to sell out if the market price of silver made it advantageous to do so. Hedging concerned only the financial position of the appellants and, indeed, it seems to me that it was only their solvency

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which created any risk to the customer. Yet it was the view of the Ontario Court of Appeal, speaking through Dubin J.A., that the solvency issue was not enough to bring the commodity account agreements within the scope of The Securities Act. I can understand the reluctance to find that solvency or insolvency is a determining factor in this case. It is equally a factor in the realization of future benefits under any commercial contracts providing for them, but there has been no suggestion that, even if there be a network of such contracts, they should be recognized by the Courts as investment contracts for security regulation purposes.

I see no more than three factors which can be said to enter into consideration of the question whether the commodity account agreement is an “investment contract” as that term is included in the definition of “security” under the Ontario Securities Act. There is the fixing of the base price at which customers make their purchases; there is the consequent gathering up of a pool of money by the appellants representing the required deposits under the commodity account agreements; and there is the question of the solvency of the appellants. The same factors under a similar scheme were present in Jenson v. Continental Financial Corporation[5], a judgment of the United States District Court, District of Minnesota, upon which counsel for the respondents in this case placed heavy reliance. The Court in the Jenson case faced the same question that the Courts in this case faced, namely, whether a gamble on the behaviour of the silver market is anything more than a commodity futures transaction and hence not a security subject to regulatory legislation.

In coming to a conclusion on the Howey test that the commodity account agreement was within the regulatory statute, the Court laid emphasis on the pooling of investors’ money in a common enter-

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prise in which the risk of profit or loss depended solely (or perhaps substantially) on the promoters’ ability to gauge the market and hence to asure its own solvency to meet its obligations to its customers. I do not see in this view of the matter anything more than solvency, because it woud be the market that would determine whether and when the customer woud have a profit, and he was free to close out his account or to ask for delivery in specie at his instance and not when the promoter chose to permit him to do so. Certainly, I do not see any controlling factor in managerial effort, to which the Court in Jenson alluded, when it is the market that determines profitability and not the promoter. The notion of managerial effort obviously came from the Howey case where, on the facts, the citrus grove enterprise promoted by the respondents there was managed and serviced by them. Here there is no parallel, any more than there is a parallel with a manufacturing company whose shares are purchasable in the open market.

I am not persuaded that a test stemming from a particular set of facts such as those in Howey, or the broader risk capital approach based on another set of facts as in Hawaii, can or should be generalized to fix the conclusion in yet the different set of facts present here. In Howey and in Hawaii, the Courts were concerned with schemes relating to land management and to merchandise selling respectively, under which managerial control rested in the promoters. There was no such substantial reliance on the market, outside of the promoter’s control, as existed in the present case. I think it apt to refer to the dissent of Frankfurter J. in the Howey case, at p. 302, where he objected to bringing every innocent transaction within the scope of securities legislation simply because a perversion of them is covered by it.

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I would allow the appeal, set aside the judgments below and quash the prohibitory order of the Ontario Securities Commission, with costs to the appellants throughout.

The judgment of Martland, Judson, Ritchie, Spence, Pigeon, Dickson, Beetz and de Grandpré JJ. was delivered by

DE GRANDPRÉ J.—By notice given pursuant to the provisions of sub. 1 of s. 144 of The Securities Act, R.S.O. 1970, c. 426, respondent informed appellant that a hearing would be held on the 24th of July 1974 “to determine whether the Commission should act in the public interest to order that all trading in the securities of Pacific Coast Coin Exchange of Canada Limited should cease forthwith pending the filing and acceptance of a prospectus and compliance with the registration provisions of The Securities Act”. Appellant was also informed that it would be urged that such order should issue because the plan or manner of business of appellant “involves the offer and sale…of securities to the public” in that

1) it constitutes “an investment contract” within the meaning of s. 1(1)22xiii of the Act;

2) in the alternative, it constitutes “evidence of title to or interest in the capital, assets, property, profits, earnings or royalties” of the appellant within the meaning of s. 1(1)22ii of the Act.

On October 11, 1974, following the hearing, respondent did issue a prohibitory order; its reasons indicate that it relied principally on s. 1(1)22ii of the Act although it added that s. 1(1)22xiii is also applicable. The Divisional Court agreed with the conclusion reached by respondent although it did so only on the basis that the transactions entered into between appellant and its clients are investment contracts; the Divisional Court felt that these agreements did not constitute evidence of title within the meaning of s. 1(1)22ii of the Act. (1975) 7 O.R. (2d) 395; also (1975) 55

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D.L.R. (3d) 331. An appeal to the Court of Appeal was dismissed, that Court also being of the view that the transactions constitute investment contracts; it found it unnecessary to determine whether they are also securities within the meaning of s. 1(1)22ii of the Act. (1975) 8 O.R. (2d) 257; also (1975) 57 D.L.R. (3d) 641.

The principal issue in this appeal is to determine whether the agreement between appellant and its customers is an investment contract. Should a negative answer be given to that question, it will be necessary to examine whether or not the agreement constitutes a security under s. 1(1)22ii.

THE FACTS

Although the facts have been carefully canvassed by Houlden J., speaking for the Divisional Court, and although this canvass has been accepted by the Court of Appeal and by the parties before us, I believe it important to review once again the most relevant ones.

Appellant Pacific is a Canadian corporation carrying on business in the Province of Ontario and other Canadian provinces; its shares are owned by Mr. Louis Carabini and Dr. Neil Chamberlain. Appellant Monex, a California corporation also controlled by Messrs. Carabini and Chamberlain, was incorporated in 1971 to replace a previous entity that had started business in 1967; it is active in several of the United States of America. Both appellants will be referred to as “Pacific”. It might be noted that, at the time of the hearing, Pacific had some 12,000 customers in the United States and 226 in Canada.

Pacific commenced to carry on business in Ontario in the Spring of 1973. Its activities in that province consist primarily of offering for sale, selling and delivering bags of silver coins in specie and offering for sale and selling bags of silver coins on margin. It is solely this latter activity that is the subject matter of the appeal.

Pacific solicits its customers primarily through newspaper advertising in which the public is invited to request information by returning a mail slip to the Company. A “literature pack” is sent to

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potential customers. This pack emphasizes silver coins as an “investment” and presents them as a “reliable” and “almost perfect” protection of the customer’s savings and assets against inflation. The price performance of silver is compared favourably with other forms of investments, such as common stocks. The literature predicts continued rampant growth of inflation and suggests a possible return to a depression. Emphasis is placed on an inevitable increase in the price of silver notwithstanding inflation, devaluation of money and depressed stock markets.

Appellant presents two ways to invest in silver coins: the outright purchase of bags of silver coins in specie which are delivered to the investor and the purchase of bags of silver coins on margin. Margin purchases are promoted over outright purchases by means of a comparison which illustrates that a person with $10,000 to invest can purchase seven bags of silver on margin while he can only purchase two bags in specie.

Over 90 per cent of purchases are by the margin contract mode. Whichever method is used, Pacific requires the customer to enter into a “Commodity Account Agreement”. As this is the only document evidencing the contract between Pacific and its customers, it must now be examined insofar as it governs the rights and obligations of the margin purchasers:

a) the commodity consists of one or more bags of silver coins;

b) the customer pays a commission of 2 per cent on the purchase price and when he sells, he is also asked to pay a second commission of 2 per cent;

c) the customer puts down a deposit (it was 35 per cent of the purchase price at the time of the hearing) and is required to maintain adequate margin in his account in such amounts as are from time to time required by Pacific;

d) Pacific is under no obligation to make delivery until the customer has paid in full therefor, which means the balance of the purchase price plus all interest (approximately 12 per cent at

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the time of the hearing), commission and storage charges; the customer agrees to purchase all the commodities ordered by it and pay for them in full before delivery;

e) the Agreement is terminable at the will of either party but in any event will terminate five years from the date of the last purchase under the Agreement;

f) the price at which Pacific sells to its customers is fixed by Pacific several times during the day and published by it and, in total, consists of a base price being the market value quoted by Pacific plus commissions and other charges;

g) the customer may obtain the release of any or all of the commodities credited to his account within forty-eight hours after payment in full for such commodities;

h) Pacific retains no power of attorney nor authority to direct the customer trading and maintains no control over the customer’s account subject to certain security provisions to secure outstanding indebtedness by the customer to Pacific;

i) the customer obtains no specific interest in any particular bag of silver under the contract until he makes payment in full therefor and accepts delivery of the bags purchased under the contract;

j) certain events of default are provided for and remedies retained by Pacific in that event to liquidate the customer’s account or realize on any commodities purchased by the customer and credited to his account to off-set any indebtedness in the event of default by the customer to Pacific;

k) the provisions of the Agreement are assignable by Pacific but not by the customer without Pacific’s consent.

More than 85 per cent of all margin account purchasers close-out their account without taking delivery. When a margin account buyer closes out his account, he receives or pays the difference between the per unit price at which his position is closed-out and the amount he owes on margin, plus applicable interest, commissions and storage charges.

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Although the Agreement spells out that Pacific “may, but need not at all times, make a market in commodities”, Pacific in its literature points out that it has never failed to make a market for its customers in the past. Pacific will not repurchase margin contracts acquired from another coin exchange nor will other coin exchanges repurchase Pacific margin contracts.

Pacific’s only obligation to margin customers is to deliver the bags of silver covered by the contract if and when the customer pays the outstanding balance. In practice, Pacific covers or hedges its obligation to margin customers:

a) by purchasing futures contracts for silver; approximately 85 per cent of Pacific’s obligations to margin account customers is covered by futures contracts;

b) by maintaining a small inventory of silver coins in specie.

Pacific has a policy of covering not less than 95 per cent of its margin obligations.

Pacific obtains title to the funds paid by the margin account investors as a deposit. The pooled monies are distributed in Pacific’s general funds. Some of this money is used to secure its own futures contracts and some of it is used for its own investment purposes.

In conducting its hedging operations, Pacific trades for its own account and in its own name; all purchases and sales of futures contracts are made by Pacific as principal and not as agent for a customer. As the silver futures contract comes close to delivery date, the Operations’ Department, some 55 persons strong, must decide whether to pay the balance owing on the contract and take delivery of the silver, or roll the contract over by selling it and replacing it with a contract for a more distant month.

In its literature, Pacific cautions against individuals speculating in futures contracts. Such investments are not for the uninitiated or unwary:

They are primarily for speculators who welcome extremely high-leveraged, short term situations, and for

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hedgers who use futures to balance their existing long or short commitments with an equal and opposite commitment. If you plan to buy silver futures, you should be prepared to spend a great deal of time studying the silver situation, staying on top of it every day.

INVESTMENT CONTRACT

Section 35 of the Act spells out the prohibition for any one to “trade in a security” in the absence of a prospectus. “Security” is defined in s. 1 as including fourteen categories, the thirteenth one being “any investment contract, other than an investment contract within the meaning of The Investment Contracts Act.” It is common ground that in the case at bar, the contract is not one covered by this last mentioned statute.

The expression “investment contract” is not defined in the Act. In their search for its meaning, the Courts below have been guided by the leading U.S. authorities and counsel have invited us to follow the same path. I agree. While the statute under consideration here does not read word for word like its U.S. counterpart, the expression “investment contract” is found in both. In addition, the policy behind the legislation in the two countries is exactly the same, so that considering the dearth of Canadian authorities, it is a wise course to look at the decisions reached by the U.S. Courts. This approach has also been adopted by the Court of Appeal of Alberta in Re Regina Great Way Merchandising Ltd.[6], as well as by Nemetz, J.A., in the Court of Appeal of British Columbia in Re Bestline Products of Canada Ltd.[7]

I have alluded to the policy of the legislation. It is clearly the protection of the public as was said by Hartt J. in Re Ontario Securities Commission and Brigadoon Scotch Distributors (Canada) Limited[8], at p. 717:

…the basic aim or purpose of the Securities Act, 1966,

…is the protection of the investing public through full, true and plain disclosure of all material facts relating to securities being issued.

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If any doubt could be entertained as to the intention of the Legislature in the present instance, that doubt should be dispelled by the very wide terms employed in defining the word “security”. The fourteen subdivisions of the definition encompass practically all types of transactions to such an extent that this definition had to be narrowed down by a long list of exceptions to be found in s. 19.

At this point, reference should be made to a work by Professor Louis Loss who was called by appellant as an expert witness before the Commission. In the second edition of his Securities Regulation ((1961) vol. I at pp. 483, 488-489) and in the 1969 supplement thereto (vol. IV at p. 2501), Prof. Loss recognizes that “the various categories in the definition are not mutually exclusive and are meant to be ‘catchalls’.” This view of the definition in the United States statute is valid in our case as well.

Such remedial legislation must be construed broadly, and it must be read in the context of the economic realities to which it is addressed. Substance, not form, is the governing factor. As noted in Tcherepnin v. Knight[9], at p. 336:

…in searching for the meaning and scope of the word ‘security’ in the Act, form should be disregarded for substance and the emphasis should be on economic reality.

In the search for the true meaning of the expression “investment contract”, another guideline must also be present in the forefront of our thinking. In the words of the Supreme Court of the United States in SEC v. W.J. Howey Co.[10], any definition must permit (at p. 299):

…the fulfillment of the statutory purpose of compelling full and fair disclosure relative to the issuance of ‘the many types of instruments that in our commercial world fall within the ordinary concept of a security.’…It embodies 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.

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Which does not mean that the legislation is aimed solely at schemes that are actually fraudulent; rather, it relates to arrangements that do not permit the customers to know exactly the value of the investment they are making.

It is with all the foregoing in mind that the Supreme Court of the United States in Howey (supra, at pp. 298, 299, 301) laid down the following test:

Does the scheme involve “an investment of money in a common enterprise, with profits to come solely from the efforts of others.”?

This test was said by the Court to be just another expression of a meaning “crystallized” by prior judicial interpretation. The following passage (at p. 298) is worth quoting:

The term ‘investment contract’ is undefined by the Securities Act or by relevant legislative reports. But the term was common in many state ‘blue sky’ laws in existence prior to the adoption of the federal statute and, although the term was also undefined by the state laws, it had been broadly construed by state courts so as to afford the investing public a full measure of protection. Form was disregarded for substance and emphasis was placed upon economic reality. An investment contract thus came to mean a contract or scheme for ‘the placing of capital or laying out of money in a way intended to secure income or profit from its employment.’ State v. Gopher Tire & Rubber Co., 146 Minn. 52, 56, 177 N.W. 937, 938. This definition was uniformly applied by state courts to a variety of situations where individuals were led to invest money in a common enterprise with the expectation that they would earn a profit solely through the efforts of the promoter or of some one other than themselves.

By including an investment contract within the scope of s. 2(1) of the Securities Act, Congress was using a term the meaning of which had been crystallized by this prior judicial interpretation. It is therefore reasonable to attach that meaning to the term as used by Congress, especially since such a definition is consistent with the statutory aims.

In the case at bar, it is obvious that an investment of money has been made with an intention of profit. The questions before us are the following: Is there a common enterprise? Are the profits to come solely from the efforts of others? These two

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questions are so interwoven that I will be endeavouring to answer them together.

The word ‘solely’ in that test has been criticized and toned down by many jurisdictions in the United States. It is sufficient to refer to SEC v. Koscot Interplanetary, Inc.[11] and to SEC v. Glen W. Turner Enterprises, Inc.[12] As mentioned in the Turner case, to give a strict interpretation to the word “solely” (at p. 482) “would not serve the purpose of the legislation. Rather we adopt a more realistic test, whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise”. In the same case of Turner, the expression “common enterprise” has been defined to mean (p. 482) “one in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties”. These refinements of the test, I accept.

Like the Courts below, I hold the view that both these questions must be answered in the affirmative. Their analysis of the situation being exhaustive, it would serve no useful purpose to restate it in my own words and to repeat the facts summarized earlier in these reasons. I will simply underline the common enterprise aspect and attempt to highlight two facets of the dependence of the customer upon Pacific, namely for the success of the venture and for the existence of a true market.

In my view, the test of common enterprise is met in the case at bar. I accept respondent’s submission that such an enterprise exists when it is undertaken for the benefit of the supplier of capital (the investor) and of those who solicit the capital (the promoter). In this relationship, the investor’s role is limited to the advancement of money, the managerial control over the success of the enterprise being that of the promoter; therein lies the community. In other words the “commonality” necessary for an investment contract is that between the investor and the promoter. There is no

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need for the enterprise to be common to the investors between themselves.

As to the dependence of the customer for the success of the enterprise, it should be recalled that appellant in its literature underlines the danger for the ordinary investor to deal in futures; the text of the warning has been quoted earlier in these reasons. This is echoed by Professor Loss in his testimony: “The ordinary fellow isn’t equipped to trade in commodity futures”. Appellant now attempts to recant from that position and submits that there is nothing mysterious about dealing in commodity futures contracts. The Courts below have refused to accept that submission and have held quite rightly that the end result of the investment made by each customer is dependent upon the quality of the expertise brought to the administration of the funds obtained by appellant from its customers. If Pacific does not properly invest the pooled deposit, the purchaser will obtain no return on his investment regardless of the prevailing value of silver; there is nothing that the customer can do to avoid that result.

This dependence of the investors upon the appellant is also apparent when it is noted that the margin purchaser may only look to Pacific for the performance of his contract. Until the investor has paid the full purchase price, he has no title to any physical property but only a claim against Pacific. Should the price of silver go down, there is no possibility for the investor to finance his balance (except through his own resources) and from that moment, he is at the mercy of Pacific. This is not to say that we are looking at a pure question of solvency. As pointed out by the Court of Appeal (p. 259), the conclusion of the Divisional Court does not rest “on such a narrow basis”.

The key to the success of the venture is the efforts of the promoter alone, for a benefit that will accrue to both the investor and the promoter. Thus, the nature of the relationship between Pacific and its margin customers establishes that it satisfies the Howey test. It matters not that the relationship was built around an object that is a commodity and which in another context could be

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the subject matter of transactions in the futures market that would not attract the restrictions of The Securities Act.

Another test to determine the economic realities of a security transaction is to be found in the decision of the Supreme Court of Hawaii in State of Hawaii v. Hawaii Market Center, Inc.[13], a decision of 1971. This test is possibly still more favourable to respondent in the present instance and the Divisional Court has examined the facts in that light also and has concluded that the risk capital approach would bring about the same conclusion. I agree.

At the risk of repetition, I will underscore that the question raised by this appeal is not whether or not commodity futures contracts are investment contracts. The parties agree that they are not. What is at issue is the relationship between Pacific and its margin customers examined particularly in the light of the Howey and the Hawaii tests. Such a relationship was studied recently in Jenson v. Continental Financial Corporation[14], a decision of the U.S. District Court of Minnesota rendered on November 19, 1975, and to be found in CCH Federal Securities Law Reporters, para. 95-436, where the facts were nearly identical to our own. There, the question was expressed in these words (at pp. 99, 202):

…the plaintiffs do not argue that the sale of the coins standing alone constitutes an investment contract. It is their position that the defendants method of operation transforms what is made to appear as the sale of a commodities futures contract into an investment contract.

And the Court answered (at pp. 99, 205):

It is thus clear that the defendants operation entailed more than just the sale of a standard commodity futures contract. By virtue of their pooling of investor payments and then investing such funds in their own name, the defendants transferred the risk of their operation to the plaintiff investors who thereby became partners in a common enterprise with the defendants.

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Substantially to the same effect is State of Idaho ex rel. Park v. International Silver (Silver) Mint Corporation[15], a decision of July 20, 1972, by the District Court of the Fourth Judicial District of the State of Idaho.

A last word. At the invitation of the parties, I have examined the facts in the sole light of the Howey and Hawaii tests. Like the Divisional Court, however, I would be inclined to take a broader approach. It is clearly legislative policy to replace the harshness of caveat emptor in security related transactions and courts should seek to attain that goal even if tests carefully formulated in prior cases prove ineffective and must continually be broadened in scope. It is the policy and not the subsequently formulated judicial test that is decisive.

* * *

Having reached the conclusion that the commodity account agreement entered into between appellant and its margin customers is an investment contract, there is no need for me to determine whether that agreement also falls within the definition of security under s. 1(1)22ii of the Act.

I would dismiss the appeal with costs.

Appeal dismissed with costs, LASKIN C.J. dissenting.

Solicitors for the appellants: McCarthy & McCarthy, Toronto.

Solicitor for the respondent: M.W. Bader, Toronto.