Many small businesses regularly use promissory notes, such as when they are borrowing money or when they are paying suppliers. Most small business owners never think about whether their promissory notes are securities. However, the issue is far from clear-cut and can have significant consequences.

Under the Ontario Securities Act (Act), a “security” is defined very broadly and includes any note or other evidence of indebtedness. This would seem broad enough to cover almost any promissory note. The consequences of a small business issuing a promissory note that is a security can be very serious. It would make Act applicable to the note. This means that the business would either have to comply with the Act, by issuing a prospectus, and if applicable, registering as a dealer, or more likely, the business would need to be able to rely on one of the exemptions from the prospectus requirements in the Act.

Ontario Securities Commission v. Tiffin et al.

This issue was recently considered by the Ontario courts in Ontario Securities Commission v. Tiffin et al. Mr. Tiffin was a financial advisor licensed to sell insurance. Previously he had been licensed to sell other investments and he had gotten into trouble with the OSC. In particular, the OSC had issued some orders against him preventing him from trading in securities and requiring him to pay over $500,000. This caused problems for his insurance business, Tiffin Financial Corporation (TFC). TFC borrowed about $700,000 from its clients and issued 14 promissory notes. The OSC learned of this and charged Mr. Tiffin with various breaches of the Act. The only issue at trial was whether the notes were securities.

After reviewing all of the evidence the court decided that the notes were not securities. The court stated that the literal interpretation of the word “note” in the definition of a “security” conflicted with the purposes of the Act, which are to protect investors from unfair, improper and fraudulent practices and foster fair and efficient capital markets.

The OSC had argued that all notes were securities unless there was a specific exemption under the Act or the regulations. The court disagreed and held that you need to look at the substance of the transaction and not just the definition in the Act and the specific exemptions available under the regulations.

In this case the court held that the notes were not securities for all of the following reasons.

  • The notes were exempt because they were a type of note that the courts in the US and Canada have previously decided is not a security. They were notes to a small business that were secured by a lien on some of the assets of the business. The fact that the notes were secured was important because it provides protection to the lenders. In this case they were secured by a lien over a toy soldier collection owned by TFC. The court held that the protection of the Act was not necessary because the lenders could enforce the notes under contract law and they could also register their lien and enforce their security. If there is no collateral for a loan, then it is much more likely that a note will be deemed to be a security.
  • Previous cases have held that were notes are issued to deal with a small business’ cash flow difficulties, they are less likely to be deemed securities.
  • While TFC was seeking the loans for general business purposes and the lenders were expecting a profit in the form of interest, there was no sense that the notes were an investment in the traditional sense or that they represented any interest in the business of TFC.
  • The notes were issued to TFC’s existing customers most of whom were friends of Mr. Tiffin. There was no general public solicitation of lenders or investors.
  • The lenders all viewed the transaction as a loan and not an investment.
  • Although the loans were made to TFC, the parties described them as personal loans. Some of the money was used by Mr. Tiffin to pay for his personal expenses. In addition, Mr. Tiffin was the sole shareholder and director of TFC. He appeared to run his personal finances through TFC and did not have his own bank account.


This decision provides some comfort to small business owners that if they issue secured promissory notes to specific lenders or suppliers, the money is used for business purposes, such as to help with cash flow, and the notes don’t provide the lenders with any other interest in the business, then they will usually not be securities. This is a practical decision that recognizes how small businesses operate.


The Ontario government has adopted a new Forfeited Corporate Property Act, 2015 (“FCPA”) and made related changes to the Ontario Business Corporations Act. The FCPA is scheduled to come into force on December 10, 2016.

New 3 Year Deadline for Forfeited Corporate Property

As the title of the statute implies, the FCPA specifies what happens to any remaining corporate property once a corporation is dissolved. So, if a corporation is dissolved and some or all of its property was not transferred, sold or distributed, then starting 3 years after the dissolution, the Government of Ontario can use the forfeited property for Crown purposes, sell it and remove or amend any encumbrances or security interests registered against the forfeited corporate property. The FCPA applies to both real property and personal property that was owned by a dissolved corporation. In particular, that FCPA also applies to any personal property left in, on or under forfeited real property, regardless of whether this personal property was owned by the corporation or someone else.

The 3-year deadline for the government to take or sell forfeited corporate property represents a major change. Under the current rules in the Ontario Business Corporations Act (“OBCA”) and the Corporations Act (“OCA”), the owners of a dissolved corporation have up to 20 years to apply to revive the corporation and recover its assets. After the FCPA comes into force, the corporate owners will still have 20 years to apply to revive the corporation. However, as a general rule which is subject to some exceptions, they will not be able to recover its assets if the revival occurs more than 3 years after the dissolution.

Corporations Will Be Required to Keep Register of Real Property

As part of these changes, the government has also approved amendments to the OBCA and the OCA. These two corporate statutes have been amended to require a corporation to keep an updated register of the corporation’s ownership interests in real property. This register must be kept with the corporation’s books at its registered office or at another location approved by the corporation’s directors. The register must show each ownership interest that the corporation has in land, the date it was acquired and the date it was sold (if applicable). The corporation must also keep with its real property register the deeds, transfers and other documents that contain the municipal address of the property, the registry or land titles division, the property identifier number (PIN), the legal description and the assessment roll number. Presumably, the purpose of keeping all of these records with the corporation’s books is to simplify the government’s task in using or selling any forfeited corporate property. For corporations that own real estate, this will become an additional burden. They will either need to maintain these records if they keep their own minute books, or provide all of the necessary information and documents to the law firm or other service provider who keeps their minute books.

The requirement to keep a register of real property owned by the corporation and the related documents will not come into effect until December 10, 2018. So corporations will have a 2-year period to get ready to implement this change.


Equity crowdfunding has been in place in most provinces in Canada since the end of January 2016. We thought it would be interesting to see how it is working in practice. As of June 20, 2016, the National Crowdfunding Association of Canada’s Canadian Crowdfunding Directory listed 16 equity portals operating in Canada. Not all of these portals appear to be fully up and running.

We went to several of the portals to see how the crowdfunding offerings were being structured. Our review was not systematic nor is it necessarily representative of the typical equity crowdfunding offering. Instead, we concentrated on offerings for which documents were available and could be reviewed.

We examined 4 offerings that are ongoing. We did not examine real estate offerings, because they generally appear to use their own limited partnership structure.

Of the corporate offerings that we reviewed, 2 were offering standard common shares with voting rights, one was for non-voting common shares and the other was for non-voting preferred shares.

Voting Rights

While this is a small sample, it is surprising to see some companies offering voting common shares. At a minimum, this means that these companies will need to send a notice of any shareholders’ meetings to all of the crowdfunding investors. Depending on the jurisdiction in which the company is incorporated, it may also need to send a management proxy circular to all of the shareholders. As an example, the Canada Business Corporations Act only exempts a company from the management proxy circular requirement if it has 50 or less shareholders entitled to vote at the meeting. In contrast, the Ontario Business Corporations Act only requires a management information circular for an offering corporation, generally a company whose shares are listed on a stock exchange or which has filed a prospectus. So, the jurisdiction of incorporation is an important consideration.

Shareholders’ Agreement

The two offerings of non-voting shares did not require the crowdfunding investors to sign a shareholders’ agreement. While this may seem normal for non-voting shares, it may cause difficulties later on. Although the shares are non-voting in general, under the corporate statute they will be entitled to vote on certain fundamental changes, such as certain amendments to the company’s articles or on an amalgamation. In some cases, they may be entitled to vote separately as a class. It was generally anticipated that the crowdfunding investors would be required to sign a shareholders’ agreement or voting trust agreement, giving management the power to vote their shares.

One of the common share offerings did require the crowdfunding investors to sign a minority shareholder agreement. This agreement contains share transfer restrictions, a pre-emptive right in favour of the crowdfunding investors, a drag-along clause, a clause appointing the founder as the investors’ attorney for the purpose of the drag-along clause and a clause requiring the crowdfunding investors to vote in favour of a sale of all or substantially all of the assets of the company if the offer is accepted by the founder and would result in gross proceeds per share at least equal to the subscription price paid by the crowdfunding investors.

Application of Take-Over Bid Rules

The inclusion of the drag along clause is interesting. This would apply in the case of a share purchase transaction. Based on the maximum offering and the minimum subscription for each investor, it appears that the company would have more the 50 shareholders. If this is the case, it would be difficult to see how a share purchase transaction could be structured without having to comply with the take-over bid requirements of Canadian securities laws. Generally, Canadian securities laws contain an exemption from the take-over bid requirements if the company is not a reporting issuer, there is no published market for the shares and it does not have more than 50 shareholders, not counting employees and former employees. If this exemption is not available, the purchaser would need to prepare a formal take-over bid circular, which would be too expensive and time consuming.

As mentioned above, the minority shareholder agreement contains a provision requiring the crowdfunding investors to vote in favour of certain asset sales. While this may help management or the founders to sell the company’s assets, it is probably not the ideal structure for the sale of the business. Usually, it is more advantageous from a tax and other legal perspectives for the shareholders of the company to sell their shares. An asset sale would also require the company to then distribute the net proceeds to the shareholders, which may have its own tax issues.

A more likely structure would probably be to sell the company by way of an amalgamation with the purchaser. This has many of the same advantages as a share purchase, but does not trigger the take-over bid rules. It is surprising that the minority shareholder agreement does not contain a clause requiring the crowdfunding investors to vote in favour of an amalgamation that is approved by the founder and which meets a certain minimum price.

We can expect that the deal structure and documents used in crowdfunding will evolve over time as stakeholders gain experience and see what has worked in previous deals and which issues have been problematic.


Ontario is the last province in Canada that still has bulk sales legislation. For many years, lawyers and the business community have been advocating to have the Bulk Sales Act repealed. It appears that the Ontario government is finally prepared to repeal the Bulk Sales Act. The government has introduced Bill 218, the Burden Reduction Act, 2016 and it passed first reading on June 8, 2016. If enacted, Bill 218 will amend or repeal more than 50 statutes, including the Bulk Sales Act, with the goal of reducing the legal burdens placed on Ontario businesses.

What is the Bulk Sales Act?

The Bulk Sales Act was adopted in 1917. Its purpose is to protect a business’ secured and unsecured creditors from a business owner selling the business’ assets and leaving the creditors unpaid. The Bulk Sales Act only applies to the sale of assets “in bulk”. It does not apply to the sale of shares. The Bulk Sales Act protects a business’ creditors by imposing certain duties and requirements on the purchaser of the business’ assets. If the purchaser fails to comply, the sale of the assets is voidable and the purchaser is liable to the creditors for the value of the purchased assets. The Bulk Sales Act has a very broad application, so it applies to most asset sales that occur outside the ordinary course of business.

Why is the Bulk Sales Act Being Repealed?

The Bulk Sales Act is generally viewed as antiquated and a nuisance. It generally adds time, complexity and cost to the sale of the assets of a business. Its goal of protecting a business’ creditors is now achieved by other more modern means. Creditors now have better credit investigation tools, they can easily register their security interest across Canada under the various personal property security legislation, by registering a purchase money security interest or other security interest, and they have other tools under the federal Bankruptcy and Insolvency Act.

The repeal of the Bulk Sales Act will be good news for Ontario’s business community. Hopefully, Bill 218 will soon receive all of the necessary legislative approvals and the Bulk Sales Act will finally be repealed.


Like most people, you probably assume that if your company is not a public company, then it does not need a SEDAR profile and you don’t have to file any documents on SEDAR. This was true, but it has recently changed for some companies.

What is SEDAR?

As you may know, SEDAR is the public website run by the Canadian Securities Administrators, the umbrella group for the provincial securities commissions in Canada. Under provincial securities laws, public companies in Canada have to file their disclosure documents on SEDAR and they are available to the public.

Until recently, only reporting issuers were required to file documents on SEDAR. Generally, a reporting issuer is a company whose shares are listed on a stock exchange in Canada or which has filed a prospectus with a securities commission in Canada. This changed on May 24, 2016. Now some companies that are not reporting issuers need to create a SEDAR profile and file some documents on SEDAR.

Who Needs to File and What Needs to be Filed?

The new requirements apply to the filings that some companies need to make when they raise money from investors. As a general rule, when a company raises money from investors, it must file a prospectus with the securities commissions in Canada. Since this is an expensive and time consuming process, there are several exemptions available that allow companies to raise money without filing a prospectus. For some exemptions, a company is required to file an exempt distribution report with the securities commissions. This report contains the details of the offering, such as the securities sold, the amount raised and information about the investors. Until recently, this form could be filed in paper format with most securities commissions.

The new rule will affect companies that are currently not public companies but that are also no longer private companies. A private company is a company that:

  • has restrictions on the transfer of its shares;
  • has less than 50 shareholders (excluding employees and former employees); and
  • has only ever issued its shares to permitted persons, such as directors, officers, employees, founders, certain family members, close personal friends, close business associates and accredited investors.

If your company is a private company, you don’t have to worry about or comply with the new rule.

If your company is no longer a private company because it has done several rounds of financing and now has more than 50 shareholders (excluding employees and former employees) or it does not qualify as a private company for some other reason, then the next time that you do a private placement, you may need to create a SEDAR profile and file an exempt distribution report on SEDAR.

The requirement to file an exempt distribution report applies to the most commonly used prospectus exemptions, such as the accredited investor, family friends and business associates, offering memorandum and minimum investment ($150,000) exemptions.

Whether your company needs to file an exempt distribution report on SEDAR will depend on where your company is incorporated and where the investors are resident. The new rule does not apply in Ontario and British Columbia, because the securities commissions in those provinces have set up their own electronic filing portals. The exempt distribution report must be filed in the province where your company is incorporated and in each province where the investors are resident. So if your company is incorporated in Ontario and the private placement investors are resident in Ontario, Quebec and Alberta, then your company will need to file the exempt distribution report on SEDAR in Quebec and Alberta.

We can assist you with creating your SEDAR profile and filing your exempt distribution reports on SEDAR.

B Corporations – The Business World’s Version of ‘Certified Organic’

B Corporations – The Business World’s Version of ‘Certified Organic’

Fair trade labelling, organic certification, and LEED (Leadership in Energy and Environmental Design) designation are some of the labelling and rating systems that we are commonly exposed to today. A similar kind of certification is now available for corporations – entities that primarily, and often solely, have profit-making motives. Corporations that are conscious of their social and environmental impact can now get the business version of organic certification by becoming a Certified B Corporation, or “B Corp”. B Corps are for-profit companies, certified by B Lab (a third-party, not-for-profit organization), that have met “rigorous standards of social and environmental performance, accountability, and transparency.”[1]

Today, there are approximately 1,728 Certified B Corps in 50 countries across 130 different industries. Well-known companies like Ben & Jerry’s Ice Cream, Patagonia, and Etsy are Certified B Corps. Canadian B Corps include Beau’s All Natural Brewing Company Ltd., Bullfrog Power, and the Business Development Bank of Canada.

How can my company become a Certified B Corp?

In Ontario there is currently no benefit corporation legislation that would enable a company to directly incorporate as a “public benefit corporation”. Therefore, the B Corp certification process through B Lab is the step that your business should take if it wants to be recognized as an accountable company with a positive social and environmental impact. Note that even if in the future Ontario enacts “public benefit corporation” legislation, B Corp certification through B Lab will remain a separate and independent rating system that any business – whether or not governed by benefit corporation legislation – can apply for.

If you have an existing business in Ontario or are about to incorporate a new one, there are two main steps you will have to take to become a Certified B Corp. The company must meet: 1) performance requirements; and 2) legal requirements.

The first aspect of the performance requirement is that the company will have to take a B Impact Assessment, which assesses the company’s impact on stakeholders such as its workers, suppliers, the community and the environment, and also looks at best practices regarding the company’s mission and governance. Following this, an assessment review with B Lab staff will be completed and supporting documentation will be requested. A score of 80 out of 200 points is required to gain B Corp certification. After the review, additional documentation may be requested, a confidential disclosure questionnaire must be completed, and background checks will be conducted.

In Ontario, the legal requirement of B Corp certification has two components. First, a company’s Articles of Incorporation (“Articles”) must include language that makes directors legally obligated to consider all stakeholder interests, other than solely shareholder interests. Stakeholders can include, but are not limited to, employees, suppliers, consumers, creditors, government, the local community, and the environment. Second, shareholders must be able to hold directors and executives accountable to this higher standard of conduct. B Lab provides specific language that a company can use to amend its Articles, although legal advice should be sought when doing so. It is important to be aware that whether or not your business is provincially or federally incorporated, both the Ontario Business Corporations Act (OBCA) and the Canada Business Corporations Act (CBCA) consider an amendment to a company’s Articles to be a “fundamental change” which will require authorization by special resolution.

Once B Corp certification is granted a company will sign the B Corp Declaration of Interdependence and Term Sheet and pay an annual fee based on the company’s annual sales. To maintain its B Corp status, a company will have to update its B Impact Assessment every two years and score the required 80 out of 200 points.

Why should my company become a Certified B Corp?

After reading this you might be thinking, why bother getting B Corp certified since there are fees to be paid and various steps that a company must take to gain this status? First, with B Corp Certification, your business will be able to attract a new and growing class of investors, known as impact investors. Impact Investing – investments in companies that will offer a financial return while generating a positive social and environmental impact – has gained significant popularity in the past years. Additionally, becoming B Corp certified provides companies with access to a GIIRS Rating, a ratings system that gives investors comprehensive ratings on a company’s social and environmental impact, thus enabling a B Corp to gain greater exposure to impact investments and increased credibility. Finally, now more than ever, consumers are aligning their purchases with their values and are demanding increased corporate accountability and transparency. Having B Corp status will enable you to differentiate your company from the rest, attract these consumers, and as a bonus, belong to an international community of businesses who are using the market to positively impact our planet and those living within it.

[1] What are B Corps?, online: B Lab <;

Proposed Amendments to Franchise Legislation

The Government of Ontario is proposing to amend the rules for delivery of franchising disclosure documents. Under the current rules, a franchisor must deliver its franchise disclosure document personally or by registered mail. The proposed amendments would allow a franchisor to deliver a disclosure document by courier or electronically.

For electronic delivery to be valid, the franchisee must be able to view, store, retrieve and print the electronic disclosure document. As an example, an electronic disclosure document in PDF or Microsoft Word would typically satisfy these requirements. In addition, the electronic disclosure document must not contain any links to external documents or content. If the electronic disclosure document consists of separate files, then it must contain an index listing the name of each file, and if the file name is not sufficiently descriptive, it must also contain a description of the file. Finally, electronic delivery will only be complete when the franchisor receives an electronic acknowledgement of receipt from the potential franchisee.

The proposed amendments would also allow a franchisee to deliver a notice of rescission to terminate the franchise agreement by pre-paid courier. Currently, the franchisee must deliver the notice of rescission personally, by registered mail or by fax.

The Alberta Government is considering removing the exemption from financial statement disclosure for large franchisors. As a general rule under the Alberta Franchises Act, a franchisor must include financial statements with its disclosure document. The Franchises Act Exemption Regulation grants an exemption from this rule to large franchisors. A large franchisor is one that has a consolidated net worth of at least $5,000,000, or has a consolidated net worth of at least $1,000,000 and is controlled by a corporation with a consolidated net worth of at least $5,000,000. In addition, to rely on the exemption, the franchisor has had at least 25 franchises conducting business in Canada at all times during the last 5 years, and it has been conducting the franchised business for at least 5 years.

The Alberta Franchises Act Exemption Regulation is scheduled to expire on November 30, 2016, and the Alberta government is considering not renewing it. If the exemption is not renewed, then Alberta will become the only province with franchise legislation that does not contain a financial statement exemption for large franchisors. This would be a significant risk and burden for large franchisors. They would either need to prepare separate disclosure documents for Alberta or provide the financial statements to all of their potential franchisees.