r v. STEVEN, 2021 QCCQ 8738

Autorité des marchés financiers c. Martel 2021 QCCQ 8738 COURT OF QUEBEC CANADA PROVINCE OF QUÉBEC DISTRICT OF MONTRÉAL MUNICIPALITY OF MONTRÉAL « Criminal and Penal Division » No : 500-61-463213-174 DATE : September 16 th , 2021 ______________________________________________________________________ PRESIDING JUSTICE OF THE PEACE JULIE LALIBERTÉ ______________________________________________________________________ AUTORITÉ DES MARCHÉS FINANCIERS Prosecutor v. STEVEN « STEVE »

MARTEL Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] Mr. Steven "Steve" Martel is a seasoned real estate broker practising in Ontario. His career has led him to develop skills and a passion for the American real estate market.

Wishing to share his experience and knowledge, he has developed an introductory seminar on the United States (“U.S.”) real estate investing that he delivers across Canada to potential Canadian investors. [ 2 ] As part of this seminar, he promotes his real estate investment coaching program which offers participants, advanced education as well as personalized support for real estate investment in the U.S. market.

People who subscribe to the program can opt for different levels of support that can be spread out over a period from one to two years. [ 3 ] In 2012, Mathieu Gauthier, Roberto De Palma and Pooya Rafiee, three Quebec investors who attended one of these introductory seminars, have all enrolled in Mr. Martel's coaching program. [ 4 ] Mr. Martel's services include notably access to online documentation, the assistance of a virtual coach and group calls with him, the extent of the coaching depending on the program level.

Approximately every three months, participants also have the opportunity to attend optional seminars in the U.S. during which they are able to explore real estate investment opportunities on site with Mr. Martel to put their learning into practice. [ 5 ] During the educational conferences he gives to his program’s members in the spring of 2013, Mr. Martel informs the participants that he has a business opportunity to present to all those who are interested in investing with him. [ 6 ] Being among those who expressed their interest, Mr. Gauthier, Mr. De Palma and Mr.

Rafiee are presented with the opportunity to acquire three real estate complexes located in Phoenix, Arizona through an interest in the Canadian Phoenix Project Limited Partnership. Therefore, to be part of this project, they need to invest by purchasing Class B units of this limited partnership to be created, at a price of US$50,000 per unit. [ 7 ] On the basis of the information that provides Mr. Martel, the three Quebecers decides to invest, in turn, a total of US$ 200,000. [ 8 ] The Autorité des marchés financiers (“AMF”) alleges that Mr.

Martel thus proceeded with the distribution of a form of investment subject to the application of the Securities Act [1] (the Act ), i.e. shares of Canadian Phoenix Project limited Partnership (“Canadian Phoenix”) to these three Quebec investors. Since this issuing company did not have a prospectus approved by the AMF, it argues that Mr. Martel acted in contravention of

section 11 of the Act , committing the offence set out in its

section 202 . [ 9 ] Mr. Martel first argues that this Tribunal does not have jurisdiction to rule on the alleged offence because, apart from the place of residence of the investors concerned, there is no connection between the events in question and the province of Quebec. He therefore maintains that his conduct cannot be subject to the provisions of the Securities Act and the jurisdiction of the Autorité des marchés financiers du Québec. [ 10 ] In the alternative, he admits that he proceeded with the distribution of the securities of Canadian Phoenix Project Limited Partnership without a prospectus.

However, he argues that this company was a private issuer and that Mr. Gauthier, Mr. De Palma and Mr. Rafiee, with whom his securities were distributed, were not “persons of the public”. Thus, in accordance with Regulation 45-106 respecting prospectus exemptions [2] (Regulation 45-106), Canadian Phoenix was exempted from having such a prospectus. Accordingly,

he denies having committed the offence with which he is charged. [ 11 ] Finally, if the Tribunal nevertheless finds that the offence was committed, he alleges that he took all precautions reasonably expected of a person in the same situation to try to prevent it. ISSUES IN DISPUTE [ 12 ] The Court must therefore decide the following questions: 1. Is there a sufficient connecting factor between the circumstances of the alleged infraction and the Province of Quebec allowing the application of the Securities Act ? 2.

If so, was the Canadian Phoenix Project Limited Partnership a private issuer within the meaning of Regulation 45-106 and in this regard were Mr. Gauthier, Mr. De Palma and Mr. Rafiee “persons that are not of the public”? 3. If not, did Mr. Martel exercise due diligence in respect to the offence? ANALYSIS 1.

Is there a sufficient connecting factor between the circumstances of the alleged infraction and the Province of Quebec allowing the application of the Securities Act ? [ 13 ] Considering that he is not a resident of Quebec and does not carry on any form of investment activities in that province, the defendant essentially argues that the AMF could not regulate the activities at issue in this case, since they are not subject to compliance with the provisions of the Securities Act or the regulations of the Province of Quebec. [ 14 ] He adds that the investors involved have contractually agreed to be governed by the legislation of the Province of Ontario. [ 15 ] In this regard, Mr.

Martel refers to a clause included in all investment contracts signed by Messrs. Gauthier, De Palma and Rafiee, namely the document entitled Canadian Phoenix Project Limited Partnership -Subscription agreement for class B units [3] (“Subscription Agreement”), which reads as follows: “ 7.6 Governing Law .

This subscription agreement will be governed by and construed and interpreted with the laws of the Province of Ontario and the federal laws of Canada applicable therein “. [ 16 ] This wording is similar to an election of domicile [4] permitted in a contractual framework, whereby the parties elect domicile for the purposes of the execution of the contract or the exercise of the rights arising from it.

Thus, such a clause allows the parties to determine in advance the place, in this case the province, which will have jurisdiction and, by the same token, the legislation by which they wish to be governed in the event of any dispute in connection with this contract and the contractual relationship that results from it. [ 17 ] Although the evidence shows that the investors in question have all suffered substantial financial losses as a result of their investment with Mr.

Martel, the present case does not constitute a dispute between the parties to the contract, in which case this Court, according to the will of the parties would indeed, at first glance, not have jurisdiction to rule on it. Nor is it a class action by the investors challenging the civil liability of Mr. Martel.

Thus, the Civil Code of Québec , of which the defendant invokes certain provisions, is not applicable, nor are the various decisions [5] that he has submitted to the Court in an attempt to justify the lack of jurisdiction of this Court. [ 18 ] The offence with which the defendant is charged is of a regulatory nature. However, the contractual election of domicile does not exempt the parties to this contract from complying with the regulatory legislation of a province other than Ontario in the event that they act in such another province.

In other words, regardless of the law of which province the parties have chosen to subject their contractual relationship to, they cannot contractually limit their liability to the regulatory regime [6] . If their activities or conduct in another province in regards of this contract contravene its penal regulations, the provincial agency responsible for enforcing those regulations has the power to intervene and such a contravention will be governed by the penal regulatory legislation of the province where it occurred. [ 19 ] The prosecutor submits that Mr.

Martel conducted distribution of securities in Montreal and that this activity is therefore subject to the Securities Act and the authority of the AMF, which is responsible for enforcing it. [ 20 ] The purpose of the Act is both to protect the public and to regulate the securities market.

This is a very broad objective, the overriding purpose of which is to ensure that the people engaged in the business of dealing in securities or acting as investment advisers are honest, reputable and meet proficiency standards so as to protect the investing public and the securities market from unfair, fraudulent and abusive practices [7] . [ 21 ] The AMF is responsible for its enforcement and therefore has the corollary mission not only to promote the proper functioning of the Quebec securities market but also to ensure the protection of investors. [ 22 ] Since the Securities Act is a provincial regulatory statute, the AMF's jurisdiction is limited to Quebec.

« Elle vise donc tant les investisseurs que les intervenants du secteur qui y font affaires. Elle n’a donc pas compétence sur des sociétés hors du Québec qui font affaire ensemble hors du Québec ou qui transigent hors du Québec avec des consommateurs des valeurs mobilières qui sont hors du Québec.

Mais elle peut, dans certains cas, avoir une compétence dite extraterritoriale.» [8] [ 23 ] As early as 1961, the Supreme Court of Canada [9] recognized that the Securities Commission had jurisdiction over the activities of a company that had its head office in Montreal and solicited investment in Quebec mines from Montreal, but that only addressed investors outside of Quebec. The purpose of the legislation to ensure that people dealing in securities within Quebec are

honest, justified, in the Court's view, an expanded jurisdiction to protect the public in Quebec and elsewhere from unlawful activity emanating from Quebec. [ 24 ] This principle has been applied repeatedly by courts across the country. The Manitoba Court of Appeal in W.

Mckenzie Securities Ltd [10] . held, on the other hand, that the activities of an Ontario broker who solicited potential investors’ residing in Manitoba by mail and telephone were subject to Manitoba securities regulation because the purpose of the Act was to protect the public. [ 25 ] The British Columbia Court of Appeal [11] has accepted jurisdiction, even concurrently with Ontario, over securities traded by residents of that province, but for securities listed on a market outside British Columbia, even though the defendants were sued in Ontario for the same matters.

The Court concluded that this is a risk faced by those whose activities fall or may fall within the jurisdiction of multiple provinces. [ 26 ] In Szaszkiewicz [12] , the Quebec Securities Commission accused the defendant of having carried out a stock exchange transaction while in possession of privileged information.

The Quebec Court, relying on both the teachings of the Supreme Court and the Manitoba Court of Appeal, concluded that, in view of the nature of the alleged offence, the location of the trade was the one that mattered, regardless of the physical location of the defendant. [ 27 ] In Libman [13] , the defendant operated a telephone solicitation business based in Toronto. The salespeople contacted residents of the United States and attempted to sell them shares in Central American mining companies. They were instructed to misrepresent who they were, what they were doing, and the value of the shares they were selling.

The money invested passed through Central America and ended up in Toronto. The defendant argued that Canada did not have jurisdiction to hold a trial on charges of fraud and conspiracy. The Supreme Court, under the pen of Justice LaForest, concluded: In considering whether a criminal transaction falls outside territorial jurisdiction, account must be taken of all the relevant facts that took place in Canada giving this country an interest in prosecuting the offence and of whether or not anything in those facts offended against international comity.

All that is necessary to make an offence subject to the jurisdiction of our courts is that a significant portion of the activities constituting that offence took place in Canada. It is sufficient that there be a "real and substantial link" between an offence and Canada. [Our Underlines] [ 28 ] Although established in the context of international law, the Libman principle is a general one that has been adopted and applied to determine the jurisdiction of both federal and provincial courts over an offence.

Moreover, Canadian courts in the various provinces have repeatedly confirmed their jurisdiction over statutory offences on the basis of the existence of a "real and substantial link" with the province [14] . [ 29 ] In Quebec, the Superior Court in Doyon c. Autorité des Marchés financiers [15] emphasized : [74] Il est bien établi que toute personne qui se trouve au Québec ou qui pose des actes au Québec est soumise à la législation en vigueur dans la province. Une loi québécoise s’appliquera à une

partie qui n’y réside pas si le lien entre le Québec et cette

partie est suffisant pour justifier l’application du régime règlementaire québécois à cette personne. [ 30 ] What is the situation in this case? [ 31 ] The evidence shows that Mr. Martel is a resident of Ontario where he also has his place of business. He has never been registered as an investment dealer or adviser with the AMF. Mr.

Martel begins soliciting members of his coaching program in the context of the real estate investment training seminars reserved for such members, which were also held outside of Quebec. [ 32 ] However, the nature of the solicitation that occurs outside the province is limited to informing his members that he has a business opportunity to present to them, inviting all those interested in investing with him to leave their name and contact information as well as the amount of money they are considering investing. [ 33 ] Mr. Gauthier, Mr. De Palma and Mr.

Rafiee, all three residents of Montreal, manifest their interest, having each been made aware of such an offer at separate seminars. It is only afterwards that they receive, by e-mail, detailed information regarding the nature of this investment. [ 34 ] This mailing includes a video in which Mr. Martel presents the ins and outs of his proposal which can be summarized as follows. [ 35 ] Mr. Martel's objective is to find limited partners to acquire 75 Class B units of a limited partnership yet to be created, namely Canadian Phoenix Project Limited Partnership, at a price of US$50,000 per unit.

The "project" of the partnership, once set up, is to refinance two residential real estate complexes located in Phoenix, Arizona, already owned by Mr. Martel and to purchase a third one. All of which are to be rented on a monthly basis. [ 36 ] On the basis of the information that provides Mr. Martel, the three Quebec investors decide to proceed. Therefore, on April 9, 2013, they each enter into an agreement with Martel Group of Companies Inc. of which Mr. Martel is the sole manager.

The terms of this agreement are set out in writing in a document entitled " Memorandum of Understanding " (MOU) [16] signed both by Mr. Martel on behalf of Martel Group of Companies Inc. and all three investors after receiving it by e-mail in Montreal. [ 37 ] Pursuant to this agreement, on April 10, 2013, Messrs. Gauthier, De Palma and Rafiee transfer their U.S. funds to a bank account located in Ottawa, with Mr. Martel's lawyers as beneficiaries, for amounts of $50,000, $100,000 and $50,000 respectively. [ 38 ] Canadian Phoenix Limited Partnership is officially incorporated on July 22, 2013.

The company 8446946 Canada Inc. of which Mr. Martel is also the only shareholder and manager is the principal and decision-making partner. Each of the other investors, 33 in all,

are qualified as "limited partners" with a passive role that is limited to their financial participation. [ 39 ] Following the creation of the limited partnership, the Subscription Agreement formalizes the initial agreement provided for in the MOU and, incidentally, the subscription of the investors to the securities of the Canadian Phoenix partnership. This document is signed by Mr. Martel, this time on behalf of 8446946 Canada Inc.

Once again, it is sent to the investors by e-mail and all three of them sign it at their respective residence in Montreal, whose addresses appear at the bottom of their signatures. [ 40 ] It is not disputed that Mr. Martel resides in Ontario and that, for the purposes of the activities before us, he has never set foot in Quebec. Nor is it refuted that the limited partnership in question is managed by a company whose head office is in Ontario, with Mr. Martel as its sole director, and that its purpose is to only invest in the American real estate market.

The fact remains, however, that this limited partnership involves partners who reside in Quebec, from which location they invest. [ 41 ] The facts of the present case are very similar to those that led to the Court of Appeal's decision in McKenzie .

In this sense, the Court finds the words of Freedman J. to be eloquent and highly relevant to this dispute: « It seems clear that the true nature of the provincial statutes above considered, no less than the Securities Act of our own Province, is to provide protection to the public through a system of regulating and supervising the conduct of persons who engage in trading activities in securities within the Province. […] For a person to become subject to its restraint he must trade in securities in Manitoba. This is not to say that a nonresident of Manitoba can never become subject to the controls of the statute.

If the activities of such a non-resident can fairly and properly be construed as constituting trading within the Province, then they fall within the purview of the Act . […] The issue as to whether the activities of the accused constituted a violation of the Securities Act of Manitoba falls to be decided solely on what occurred within this Province . […] The sole point to be determined is whether the accused Dubros and the accused West, both of whom were unlicenced here, traded in securities in Manitoba That they did not physically enter the borders of the Province is not conclusive of the matter.

A person may, from outside the borders of a Province, do certain acts within the Province so as to make himself liable to the provisions of this statute. Williamson, op. cit., at p. 204 says: There seems to be no reason why a person cannot become subject to a licensing statute of a province without ever entering the province, constitutional questions aside. Although offences are local, the nature of some offences is such that they can properly be described as occurring in more than one place.

This is peculiarly the case where a transaction is carried on by mail from one territorial jurisdiction to another, or indeed by telephone from one such jurisdiction to another. […] It is appropriate to note that one of the acts which is included in the definition of "trade" or "trading" in s. 2 (

k) of the Securities Act is "the solicitation or obtaining of a subscription to the capital stock of any organization, whether incorporated or not". Solicitation of subscriptions to the capital stock of various corporations is precisely what the accused were engaged in doing in the present case. Can it effectively be denied that such solicitation took place, at least in part, in Manitoba? I think not. It was to Mr. McCaffrey in Manitoba that the accused sent their letters and other literature in which subscriptions for the purchase of capital stock were solicited. It was to Mr.

McCaffrey in Manitoba that telephone calls for the same purpose were made by the accused. I think it completely unrealistic to suggest that when the accused sent their letters by mail from Toronto, Ontario, to Shilo, Manitoba, the act of solicitation there represented took place only in Toronto or at most within the borders of Ontario. Such an approach ignores completely the nature and character both of a letter and of the postal service. The invitation put forward by the accused in their letters was a continuing one .

It started when written in Toronto; it continued when deposited in the post box there; it did not cease to exist during the period when it was being transported through the postal service (the agency selected for that purpose by the accused); and it retained its vitality and spoke with special effectiveness to McCaffrey at the time when he opened and read the letter in Shilo in Manitoba. It was in this Province that McCaffrey was solicited by the accused to purchase the shares in question, and it was in this Province that McCaffrey responded favorably to such solicitation .

I would agree with the learned Magistrate and the learned County Court Judge that what took place in the present case constituted

an act of trading in securities within the definition of the Securities Act of Manitoba”. [Our underlines] [ 42 ] It should be remembered that the offence with which Mr. Martel is charged is that of having proceeded with the distribution of a form of investment subject to the Securities Act while Canadian Phoenix Project Limited did not have a prospectus approved by the Autorité des marchés financiers as required by

section 11 of the Act . [ 43 ] Firstly, the evidence as a whole demonstrates beyond a doubt that the securities of Canadian Phoenix acquired by Gauthier, De Palma and Rafiee are a form of investment covered by the Act . • A form of investment subject to the Securities Act [ 44 ]

Section 1 of the Act provided as follows at the time of the events: SCOPE 1 . This Act applies to the following forms of investment:

(1) Any security recognized as such in the trade, more particularly, a share, bond, capital stock of an entity constituted as a legal person, or a subscription right or warrant;

(2) An instrument, other than a bond, evidencing a loan of money; (3) a deposit of money, whether or not evidenced by a certificate except a deposit received by the Government du Québec, the Government of Canada, or one of their departments or agencies; (4) […] […]

(6) A share in an investment club;

(7) An investment contract ; […] (8.1) an option or other non-traded derivative whose value is derived from, referenced to or based on the value or market price of a security, granted as compensation or as payment for a good or service;

(9) Any other form of investment determined by regulation of the Government . An investment contract is a contract whereby a person, having been led to expect profits, undertakes to participate in the risk of a venture by a contribution of capital or loan, without having the required knowledge to carry on the venture or without obtaining the right to participate directly in decisions concerning the carrying on of the venture. [ 45 ] The Securities Regulation [17] provides in

section 1.7 that a limited partnership unit is a form of investment to which the Securities Act applies in the same manner as the other forms of investment listed in

section 1 of the Act . Since the Limited partnership agreement [18] unequivocally demonstrates that the structure of Canadian Phoenix is one that corresponds to that of a limited partnership, the units acquired by Messrs. Gauthier, De Palma and Rafiee are therefore investments subject to the provisions of the Securities Act . [ 46 ] Moreover, the Court considers that the "partnership" described by the three investors and which, for the essential, has not been contradicted by Mr. Martel also corresponds to an "investment contract" within the meaning of

section 1 of the Act . [ 47 ] Indeed, the parties committed themselves not only by their financial investment, but also by signing the MOU and the Subscription agreement, which established the rights and obligations of each of the parties. The objective of the investors was to acquire experience in real estate investment in the American market.

More particularly to participate in the acquisition of real estate complexes in a favourable American economic context, to renovate them and then to benefit from the income of the rental of their units, all with the ultimate goal of eventually reselling the buildings with the hope of making a profit on their initial investment. [ 48 ] Without being able to specify the exact rate of profit they were predicted, they all agree that the expected return on investment as presented by Mr.

Martel was very interesting though not guaranteed [19] . [ 49 ] Moreover, their interest in the partnership was unquestionably limited to a financial participation, as evidenced by the Limited Partnership agreement as well as the investors and the defendant’s testimonies. They were all silent partners. Mr. Martel, under the aegis of his company 8446946 Canada Inc., had complete control and autonomy, being the one who had the sole authority to make decisions.

Furthermore, the fact that all three investors still do not understand where their money went and what caused their financial losses, each obviously coming up with their own

interpretation of what may have happened, indicate without a doubt that they had no say in the matter and that they were in no way involved in the decision-making process. In fact, Mr. Martel further admits that Mr. Gauthier asked him to have a more active role within Canadian Phoenix following his investment, which he refused. • Proceeded with the distribution [ 50 ] Secondly,

section 5 of the Act defines the concept of distribution: “distribution” means

(1) The endeavour to obtain, or the obtaining, by an issuer, of subscribers or acquirers of his securities;

(2) The endeavour to obtain, or the obtaining, by a firm underwriter, of purchasers for securities he has underwritten;

(3) The endeavour to obtain, or the obtaining, by a subscriber or purchaser of securities which he acquired under an exemption, of purchasers for such securities without the benefit of a final exemption from a prospectus;

(4) The endeavour to obtain, or the obtaining, by a subscriber or purchaser of securities which he acquired through a transaction for which no prospectus was prepared as required by law and no exemption was granted, of purchasers for such securities;

(4.1) The endeavour to obtain or the obtaining of purchasers for securities acquired from a company whose constituting documents provide for restrictions on the free transfer of shares, prohibit the distribution of securities to the public and limit the number of shareholders to 50, exclusive of present or former employees of the company or a subsidiary, by a subscriber or purchaser of such securities;

(5) The endeavour to obtain, or the obtaining, by a subscriber or purchaser of securities which he acquired outside Québec, of purchasers for such securities in Québec, except on a stock exchange or on the over-the-counter market;

(6) The endeavour to obtain or the obtaining of purchasers for securities, not previously the subject of a prospectus, of a company whose constituting documents provided for restrictions on the free transfer of shares, prohibited the distribution of securities to the public and

limited the number of shareholders to 50, exclusive of present or former employees of the company or a subsidiary;

(7) The endeavour to obtain, or the obtaining, by an agent, of subscribers or purchasers of securities being distributed in accordance with subparagraphs 1 to 6;

(8) The giving in guarantee by an issuer of securities issued by him for that purpose;

(9) The disposal, by a control person of an issuer or a person holding more than a determined portion of an issuer’s securities, of the securities held by that control person or that person or a determined portion of them according to the portion and in the manner prescribed by regulation. [ 51 ] The mere attempt to find subscribers of securities therefore constitutes distribution. In this regard, by seeking potential investors through the members of his coaching program, Mr. Martel acted as an intermediary or underwriter for an issuer, Canadian Phoenix Project Limited.

Although he argues that this solicitation always occurred during his seminars outside Quebec, the evidence reveals that his attempt to obtain subscribers went far beyond the scope of these educational seminars. [ 52 ] In fact, the three Quebec investors confirmed that once they expressed their interest, they received the information about the investment proposal after the seminars, by e-mail as they all were back in Montreal. It is on the basis of this information, conveyed notably by a video that they acquired knowledge of the nature and circumstances of this investment and decided to invest.

They also confirm that communications with Mr. Martel and exchanges of documents in this regard always took place either by e-mail or by telephone as they were themselves in Montreal. [ 53 ] Although technological means have evolved since the Mckenzie case, this solicitation at hand is unquestionably similar to the letters and telephone calls sent by Mr. McKenzie. Thus, although Mr. Martel was able to transmit his information without having to be physically in Quebec, it was received by residents of Quebec, in Montreal.

It was also in that province that they accepted the offer, receiving and signing all the contractual documentation that followed their decision to invest. [ 54 ] Furthermore, the e-mails sent by Mr. Martel to Mr. DePalma and visibly to other members on April 9 and 10, 2013 [20] , reminding them of the opportunity to invest and urging them to transmit the funds before the end of the day, demonstrate and support the conclusion that Mr.

Martel's actions in seeking and finding purchasers of securities were not limited to the seminars held outside Quebec. [ 55 ] It must therefore be concluded that not only the solicitation of potential subscribers took place in Montreal, but this is where he also effectively found purchasers because a contract was concluded in Montreal with each of the three Quebec investors. [ 56 ] Citing with approval the Manitoba Court of Appeal, the Ontario Superior Court [21] noted that: [47] When it comes to the solicitation of investment in securities (which is contained within the definition of trading in the Act ), the offence does occur where the communication originated and where the communication was received. [ 57 ] Similarly, the British Columbia Court of Appeal [22] notes: [37] The analysis of whether a real and substantial connection exists must reflect the realities of modern securities regulation.

For instance, conduct involving securities will often be transnational in nature, crossing provincial and state borders. [ 58 ] In this modern age of multimedia, it is important to consider that Internet and e-mails are now means of communication in the same way as the regular mail and telephone.

In the Tribunal's view, in order to succeed in reaching the objective of protecting the public that the Act seeks to achieve, the principles established by the courts with respect to jurisdiction in matters of distribution of securities, as set out above, must therefore be applied. [ 59 ] It should be noted that, in light of the Supreme Court's decision in Gregory , which established that the AMF has authority to protect foreign investors with respect to individuals or corporations that trade in securities from Quebec, it would be incongruous, to say the least, if Quebec investors were not entitled to such protection when in their turn they are solicited to invest abroad. [ 60 ] For all the reasons set out above, the Court is of the view that the connection between the facts of this case and Quebec is sufficiently "real and substantial" to justify the application of the Quebec regulatory regime.

Above all, it concludes that through his actions, Mr. Martel not only sought but found purchasers of securities in Quebec, thereby making a "distribution" within the meaning of the Act . These "distribution activities" were therefore subject to compliance with Quebec's statutory legislation, including the Securities Act . Accordingly, the AMF had the authority to intervene. • The investment of Mr. De Palma via 8364532 Canada Inc. [ 61 ] Still, the Court needs to address briefly the particular situation of Mr. De Palma who chose to invest through 8364532 Canada Inc. [ 62 ] Mr.

De Palma registered in the platinum level of Mr. Martel's coaching program, and thus benefited from the creation of a company to serve him for the purpose of his investments. As a first-time investor in the United States, and with the goal of building portfolio credibility, he decided to invest in Canadian Phoenix through this company. [ 63 ] Mr. Martel cleverly argues that since the investor is the company and not Mr.

De Palma and that its registration address is in Ontario, there is consequently no substantial link between the infraction pertaining to this subscriber and the province of Quebec. [ 64 ] Despite the initial registration address of the company, which is that of the accounting firm that helped create it, all of the company's activities take place in Montreal where its bank accounts are also located. In addition to being duly registered with the

government with an address in Quebec, its four administrators are all residents of this same province. Moreover, Mr. De Palma is the principal shareholder and manager of 8364532 Canada Inc., which he does from his residence in Montreal. [ 65 ] It is also important to keep in mind, as previously mentioned that a majority of the significant actions consisting in the distribution of securities take place in Montreal.

It is in Montreal that all information pertaining to the subscription of Canadian Phoenix securities are received and documents signed, and from there that the sum of $100,000 is transferred through Firma. [ 66 ] In addition, Mr. Martel’s solicitation to invest, always aimed directly at Mr. De Palma himself and not his company which only became the accessory or the tool with which he eventually chose to invest. [ 67 ] Lastly, it must be noted that the company’s address appearing on its Subscription agreement is in Montreal. Yet, the

section 2.1 (iii) of this document stipulates that the Subscriber is resident in the province set out in his address on the face page of this Subscription Agreement. [ 68 ] Consequently, the mere fact that the company was initially registered in Ontario does not alter the court's conclusion that a real and substantial link also exists between the commission of the offence involving the company 8364532 Canada Inc. and the province of Quebec. 2. Was the Canadian Phoenix Project Limited Partnership a private issuer within the meaning of Regulation 45-106 and in this regard were Mr. Gauthier, Mr. De Palma and Mr. Rafiee « persons that are not of the public »? [ 69 ]

Section 11 of the Securities Act provides that every person who intends to distribute a security is required to prepare a prospectus that must be approved by the AMF. [ 70 ] This is a fundamental obligation with respect to the protection of investors in that it ensures that they are fully informed, prior to their investment, of all facts relevant to a security issued or distributed. [ 71 ] National Instrument Regulation 45-106 respecting prospectus exemptions [23] , adopted by several provinces in Canada, including Quebec, nevertheless provides that an issuer may be exempted from such an obligation in certain circumstances. [ 72 ] As previously mentioned, Mr.

Martel knew that Canadian Phoenix did not have any prospectus. This omission was voluntary. Indeed, Mr.

Martel, as it appears from the documents attesting to the subscription of the securities, rely on Regulation 45-106 to submit that, as a "private issuer," Canadian Phoenix was exempt from having a prospectus for its securities. [ 73 ] It is thus, his responsibility to demonstrate on a balance of probabilities that he could benefit from this exemption [24] . [ 74 ] In this assessment, it is important to bear in mind, as our Court of Appeal [25] points out that in light of the objectives pursued by the Securities Act , which militate in favour of a broad and liberal application of the obligation set out in its

section 11 , our courts have recognized that conversely the applicability of a prospectus exemption requires a restrictive

interpretation [26] . [ 75 ] Having previously concluded that Mr. Martel proceeded with the distribution of securities of Canadian Phoenix, it is now important to determine whether he was in fact exempt from such an obligation. [ 76 ] Mr. Martel relies on

Part 2 of Regulation 45-106 , which address prospectus exemptions and refers more particularly to

Section 2.4 thereof which deals with private issuers. [ 77 ] The wording of paragraph 2 of that

section read at the time of the events:

(2) The prospectus requirement does not apply to a distribution of a security of a private issuer to a person who purchases the security as principal and is (

a) A director, officer, employee, founder or control person of the issuer, (

b) A director, officer or employee of an affiliate of the issuer, Regulation 45-106 July 1, 2021, PAGE 26 (

c) A spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive officer, founder or control person of the issuer, (

d) A parent, grandparent, brother, sister, child or grandchild of the spouse of a director, executive officer, founder or control person of the issuer, (

e) A close personal friend of a director, executive officer, founder or control person of the issuer, (

f) A close business associate of a director, executive officer, founder or control person of the issuer, (

g) A spouse, parent, grandparent, brother, sister, child or grandchild of the selling security holder or of the selling security holder’s spouse, (

h) A security holder of the issuer, (

I) an accredited investor, (

j) A person of which a majority of the voting securities are beneficially owned by, or a majority of the directors are, persons described in

paragraphs (

a) to (I), (

k) A trust or estate of which all of the beneficiaries or a majority of the trustees or executors are persons described in paragraphs (

a) to (I), or (

l) A person that is not the public. [ 78 ] A private issuer may therefore distribute its securities without a prospectus approved by the AMF if it does so exclusively to the categories of persons listed above. [ 79 ] What is meant by a “private issuer” is set out in paragraph 1:

(1) In this section, “private issuer” means an issuer: (

A) That is not a reporting issuer or an investment fund, (

b) The securities of which, other than non-convertible debt securities, (

i) Are subject to restrictions on transfer that are contained in the issuer’s constituting documents or security holders’ agreements, and (ii) are beneficially owned by not more than 50 persons, not including employees and former employees of the issuer or its affiliates, provided that each person is counted as one beneficial owner unless the person is created or used solely to purchase or hold securities of the issuer in which case each beneficial owner or each beneficiary of the person, as the case may be, must be counted as a separate beneficial owner, and (

c) That (

I) has distributed its securities only to persons described in subsection (2), or (ii) Has completed a transaction and immediately following the completion of the transaction, its securities were beneficially owned only by persons described in subsection (2) And since the completion of the transaction has distributed its securities only to persons described in subsection (2). [ 80 ] On the one hand, Mr. Martel is not a registered broker and therefore not a reporting issuer. Moreover, the contents of the Limited partnership agreemen t [27] that stands as the constituting document of Canadian Phoenix, show that it was a private issuer [28] . Indeed,

section 2.7 entitled "Private Issuer Restriction" provides that the company limits the number of its partners to 50, that it prohibits public offerings for the purpose of subscribing to its securities and that it provides for restrictions on the free transfer of its shares, which must be done only in accordance with the Agreement’s provisions . [ 81 ] The AMF argues that Mr.

Martel did not comply with the constitutive documents of Canadian Phoenix when he solicited the three investors to purchase its securities in that they did not correspond to any of the categories of purchasers of securities of a private issuer. In other words, it argues that Mr. Martel proceeded with a public offering of Canadian Phoenix's securities, thereby causing it to lose its status as a private issuer and thus the benefit of the prospectus exemption required by the Securities Act . [ 82 ] The MOU’s signed by the investors include a

schedule A [29] listing the various categories of persons who, under the Regulation 45-106 , may be purchasers of securities of a private issuer. It indicates to the subscriber: " Please mark your initials beside the category to which you belong ." Following the instructions of Mr. Martel or one of his assistants, Mr. Gauthier and Mr. De Palma both checked off the category of "close business associate" while Mr.

Rafiee checked off the category of "close personal friend ". [ 83 ] When questioned more specifically about the content of this schedule, the three investors are clearly unable to provide a minimal explanation as to the nature of the document and its legal purpose, other than they understood from Mr. Martel's parsimonious instructions that they had no choice but to check one of the boxes if they wished to legally participate in his project. Mr. Rafiee notes that he did not consider himself to fit into any of these categories and contacted Mr.

Martel's assistant and was, without any questions asked, instructed to check the "close personal friend" box. [ 84 ] Strangely enough, despite the boxes that were actually checked, Mr. Martel now invites the Court to conclude that these investors were more likely “not persons of the public". [ 85 ] At the outset, the obligation to properly categorize investors falls on the issuer of the securities that intends to rely on such an exemption and not on the investors themselves.

Indeed, the issuer has the responsibility to limit the scope of its solicitation to ensure that it will only target investors who correspond to the categories of persons listed and who qualify as such to benefit from the exemption it is invoking. This implies taking all the necessary preliminary measures to achieve this [30] .

It also follows logically that the conditions giving rise to the exemption must exist at the time the investment is made and not arise after the fact [31] . [ 86 ] As noted in Archer Or Inc. [32] : [68] En d’autres mots, la dispense de l’émetteur fermé n’est pas une astuce que l’émetteur de titres et d’autres intimés peuvent soudainement invoquer après coup, en défense devant le tribunal ou une cour judiciaire, pour se dédouaner d’une situation inconfortable lorsqu’on les pointe du doigt pour placement sans prospectus et activités de courtier illégales. [ 87 ] This responsibility on the part of the issuer is again justified and consistent with the objective of investor protection.

Indeed, the possibility of exemption from providing a prospectus is based on the premise that the proximity or trust relationship between the issuer and the specifically enumerated categories of persons renders the need for a prospectus superfluous to ensure their protection. It is presumed that, because of these privileged relationships, these persons will be in immediate possession of, or will have ready access to

the information normally disclosed in a prospectus and that the issuer will not be tempted to act unfairly, abusively or fraudulently towards them. Hence the importance of properly characterizing the nature of the relationship between the parties at the time of the distribution. [ 88 ] The private issuer exemption provided for in the Regulation 45-106 was, prior to its coming into force in 2005, formerly known as the "closed company" exemption, which, in order to qualify as such, was not allowed to make a public offering of its securities.

In order to determine whether such an offering had taken place, the courts concluded that as soon as a person needed the protection of the law, he was considered “part of the public". Conversely, a person who, because of his or her knowledge or expertise of the issuer or close relationship with the issuer, did not need the information normally provided by a prospectus, was not. [ 89 ] Two tests have been developed by the courts to assess whether an investor needs the information in a prospectus and to be protected.

The "need to know" test that analyzes the knowledge of the issuer and the expertise of the person being offered securities and the "close personal friend or close business associate" test that analyzes the relationship between the issuer and the person being offered securities [33] . These tests remain the backbone of what constitutes a private issuer. [ 90 ] The evidence has established and Mr. Martel admitted from the outset that he was, as a general partner, the only one in control of the securities of Canadian Phoenix. Accordingly, it was his responsibility to target potential subscribers.

Without denying that he and his assistants instructed the three investors to check the boxes for " close business associate" or " close personal friend" , Mr. Martel admits, after waffling on the issue, that he did not really care which box they checked since he was convinced that none of them could be considered persons of the public requiring the protection of the law. [ 91 ] In addition to the blatant lack of diligence that such an admission shows, it also affects to some extent the reliability of the defendant's statements.

If indeed he truly believed that such was the case, why not reasonably ensure that the box corresponding to this residual category was the one duly checked? The defendant's testimony is silent on this point. [ 92 ] That being said, regardless of which boxes were actually selected, the Tribunal still needs to evaluate whether these investors in fact qualified as any of the classes of private issuer investors relied upon at the time of the distribution [34] . [ 93 ] For the reasons that follow, the Court is of the view that Messrs.

Gauthier, De Palma and Rafiee were neither "close personal friends" nor "close business associates" of Mr. Martel. • « Close personal friend » or « close business associate » [ 94 ] The Regulation 45-106 do not define what is meant by "close personal friend" or "close business associate". However, the Policy Statement to Regulation 45-106 respecting prospectus exemptions , prepared by the AMF and available to the public, defines these terms as follows: 2.7. Close personal friend For purposes of both the private issuer exemption in

section 2.4 of Regulation 45-106 and the family, friends and business associates exemption in

section 2.5 of Regulation 45-106, a “close personal friend” of a director, executive officer, founder or control person of an issuer is an individual who knows the director, executive officer, founder or control person well enough and has known them for a sufficient period of time to be in a position to assess their capabilities and trustworthiness and to obtain information from them with respect to the investment. The term “close personal friend” can include a family member who is not already specifically identified in the exemptions if the family member satisfies the criteria described above. 2.8. Close business associate For the purposes of both the private issuer exemption in

section 2.4 of Regulation 45-106 and the family, friends and business associates exemption in

section 2.5 of Regulation 45-106, a “close business associate” is an individual who has had sufficient prior business dealings with a director, executive officer, founder or control person of the issuer to be in a position to assess their capabilities and trustworthiness and to obtain information from them with respect to the investment. [ 95 ] While the contents of this policy are not binding on the Tribunal, they do assist in understanding how provincial or territorial securities regulatory authorities interpret or apply the provisions of the Regulation [35] . [ 96 ] Moreover, the courts that have considered these concepts have themselves determined that being narrow exemptions, such a relationship must be one that goes well beyond mere casual or passing acquaintance and that a sufficiently close real and mutual relationship must exist between the investor and the director, executive officer, founder or controlling person of an issuer to outweigh the need to obtain or transmit "prospectus-type" information or disclosure [36] . [ 97 ] In the present case, the Court is of the opinion that the evidence as a whole does not allow to conclude on a balance of probabilities that a relationship of this nature actually existed between the parties. [ 98 ] The evidence reveals that prior to attending the introductory seminar given by Mr.

Martel, the three investors had no connection whatsoever with him. They all testified that they heard about the defendant either through radio or internet advertisements or through a fellow investor. It is only in the summer of 2012 in Montreal for Messrs. Gauthier and Rafiee and in October 2012 in Ottawa for Mr. De Palma that they have their first contact with Mr. Martel. [ 99 ] Having all adhered to his personalized coaching program, the relationship they each develop with Mr.

Martel from that moment on is one that they describe either as professional or educational, which is objectively similar to that of a student with his teacher. [ 100 ] Indeed, prior to their investment, all contacts between the parties, either face-to-face or distance, take place solely within the framework and for the purposes of this program. As mentioned different levels of support are available. For example, the enhanced

program, known as “platinum”, in which Mr. De Palma is enrolled, includes additional services such as direct access to Mr. Martel via his personal telephone number, training seminars on American soil in his presence, assistance in creating his own company and website for investment purposes, etc., all of which allow for an even more personalized approach. Nevertheless, all of these services always remain in the context of an educational student/ teacher or professional client/service provider relationship. [ 101 ] Mr.

Martel insists that he has developed a very close relationship with all the members of his coaching program whom he refers to as "his students". He states: "Every single person that was in our community knew every single intricate detail about me, on a personal level, on a financial level, bankruptcy, divorce, my son's first field hockey game...".

In the context of the training he provides and the mentoring role he assumes with respect to his students, it is reasonable to believe that he would choose to share with them the details of his career path and his personal life, whether for educational, motivational or other purposes.

However, in the Tribunal's view, these confidences alone do not transform each member of his student audience into a "close personal friend" or a "close business associate". [ 102 ] Indeed, there is no basis allowing to conclude conversely that all of his students, and particularly our three investors, would have been comfortable doing the same with him. On the contrary. Their unanimous testimony indicates that this feeling wasn’t shared by Messrs. Gauthier, De Palma and Rafiee. They all stated that although in the light of his experience and teachings they gave Mr.

Martel a lot of credibility prior to their investment, they never considered him a friend. The reciprocity of the party’s feelings about the true nature of the relationship is the basis for characterizing the relationship as a friendship [37] . [ 103 ] Moreover, while there is no reason to doubt the sincerity of Mr. Martel's feelings, the evidence presented does not support objectively his belief. In other words, besides his own perception, there is no concrete evidence that would allow the Tribunal to reasonably conclude on a balance of probabilities that Messrs.

Gauthier, Rafiee and De Palma were his "close personal friends" or "close business associates". [ 104 ] At the outset, it should be noted that the legislator chose to add the qualifier "close personal" to the word "friend", which undoubtedly implies that he wished to limit the number of persons to whom this qualifier can be attributed. In this regard, the evidence is silent as to the total number of people who were enrolled in Mr. Martel's coaching program at the time of the events. However, he indicates that at least 150 people were attending each of his educational seminars.

It would be unlikely, to say the least, to think that the "close bond" he referred to, could reasonably and realistically have existed with respect to each of them, let alone that they could all have been “close personal friends.” [ 105 ] They had known each other for no more than nine months in the case of Messrs. Gauthier and Rafiee and six months in the case of Mr. De Palma. During this period, they were in the physical presence of Mr. Martel fewer than five times and only twice for Mr. Rafiee, and always in group meetings.

They never saw each other in a context other than the support program or on an individual basis. Furthermore, none of them had previously invested nor had business dealings with Mr. Martel before Project Phoenix. [ 106 ] Let us add, as the defendant has pointed out, that the mere fact of attending a cocktail party organized as part of one of these seminars and accessible to all members does not in itself further personalize their relationship. [ 107 ] It should be remembered that it is the situation that prevailed on April 9, 2013, when the placement was made that is pertinent.

The possibility that these relationships may have evolved subsequently, particularly in the context of the partnership between them, is not relevant. It is at the time of the distribution or the investment that the question arises as to whether the person being offered the securities is properly protected by virtue of his or her pre-existing relationship with the issuer. [ 108 ] Thus, the fact that Mr. Gauthier agreed in September 2013 to write an

article attesting to his positive experience in the coaching program and his successes in real estate investment in the “Martel Community” newspaper or that he went to Phoenix in November 2013 to meet with the defendant on a one-on-one basis to express his desire to participate more actively in the management of their common project and even that he sent him a Christmas card for 2013 are facts that are irrelevant in determining the nature of the relationship at the time of the investment. [ 109 ] Similarly, Mr. Gauthier admitted that prior to his investment with Mr.

Martel, he had agreed to coordinate monthly meetings of members of the Martel community in Montreal. Again, without further information, this does not qualify him as a close business associate of Mr. Martel. • « A person that is not of the public » [ 110 ] It remains to be determined whether these investors were persons of the public. As mentioned, the case law has consistently recognized the application of two tests in this regard [38] . [ 111 ] The case of Autorité des marchés financiers v.

Archer Or Inc. [39] effectively summarizes what these two tests are. [56] La jurisprudence a établi deux tests pour déterminer si une personne fait

partie du public : la « besoin de savoir » (« need to know ») et « l’association » (« common bonds »). Le test de la connaissance présumée ou du besoin de savoir se fonde sur la prémisse selon laquelle les personnes peuvent se débrouiller par elles-mêmes pour trouver l’information ou ont déjà accès à l’information que divulguerait un prospectus et donc, n’ont pas besoin de la protection offerte par la législation en valeurs mobilières pour prendre une décision d’investissement éclairée. [57] Le second test réfère à l’association entre le vendeur et l’acheteur.

Cette association fait en sorte que le vendeur ne serait pas tenté d’utiliser des pratiques déloyales, abusives ou frauduleuses envers un acheteur ayant un tel lien et que l’acheteur serait dans une position plus favorable pour évaluer la probité et l’intégrité du vendeur ou des personnes associées à l’émetteur. [58] À ce sujet, la Commission des valeurs mobilières du Québec avait déjà eu l’occasion de se pencher sur ces distinctions qu’elle avait analysées comme suit : « A. L'appel public à l'épargne »

La Loi ne fournit pas de définition de l'appel public à l'épargne, mais la doctrine et la jurisprudence suppléent à cette carence. Au Québec, la chambre criminelle et pénale de la Cour du Québec s'est déjà prononcée sur ce point dans l'affaire de Claude Durocher. Dans sa décision sur une situation de vente des actions d'une société fermée, M. le juge Cyrille Morand a étudié la doctrine et la jurisprudence américaine et canadienne.

Il s'agissait du cas où des promoteurs proposèrent à des distributeurs de produits d'acheter des actions de dix sociétés; les sociétés étant fermées, ils se croyaient de ce fait dispensés de l'obligation de présenter un prospectus à la Commission des valeurs mobilières. L'affaire tournait autour du point suivant : Voilà la vraie question en litige: Est-ce que Claude et Paul Durocher ont fait un appel public à l'épargne ? En étudiant la doctrine canadienne et plus précisément l'œuvre de Victor P. Alboini, la cour s'est penchée sur les deux tests retenus par ce dernier pour déterminer le mot «public».

Le premier test est basé sur un arrêt canadien alors que le second trouve sa source dans un arrêt américain : Le test le plus largement accepté est celui prescrit dans l'arrêt R. vs. Piepgrass où la Cour a émis l'opinion que des personnes qui étaient amis (sic) ou associés (sic) ou qui avaient un «common bond of interest» ou une association avec le vendeur ne sont pas des membres du public. L'autre test fut adopté dans la décision de U.S.

Supreme Court – Ralston Purina Co. où l'on a décidé que les personnes qui peuvent se débrouiller par elles-mêmes ou qui n'ont pas besoin des renseignements contenus dans un prospectus parce qu'ils ont déjà accès à ces renseignements ne sont pas membres du public. Le public serait donc composé des membres d'une communauté qui ont besoin de la protection d'une législation sur les valeurs mobilières de manière à prendre une décision d'investissement éclairée.

Soit qu'un investisseur est inclus dans la définition du public s'il a besoin de connaître les renseignements sur un émetteur qui sont généralement contenus dans un prospectus, soit qu'il entretient avec l'émetteur une relation assez étroite pour éviter la nécessité d'un prospectus. [references omitted] [ 112 ] This

summary was quoted verbatim with approval by the Superior Court in Déry v. Autorité des marchés financiers [40] which concluded that both tests must be met. [ 113 ] The Tribunal considers that the investors in this case were persons of the public who needed protection under the law. [ 114 ] The evidence submitted reveals that the only factual information they had at the time they made their investment decision was in the MOU. Although the investors testified that they received a video by e-mail containing explanations from Mr. Martel, this video was not submitted as evidence. Mr.

Martel did not offer himself any more specific information about its content nor did he question the witnesses on this aspect to try to obtain more details from them. It appears from the testimonies heard, at the most, that it informed potential investors of the broad outlines of the investment project and thus served as a solicitation tool. [ 115 ] Moreover, the Court is convinced that all three investors did not have the expertise or the necessary knowledge of securities to manage on their own. Mr. Gauthier candidly admits that the clauses of the agreement were largely jargon that he did not understand.

He states that he trusted what Mr. Martel told him because he sounded and appeared credible. In his eyes he was supposed to be the best of the best. The difficulty of the witnesses in explaining the usefulness or meaning of the clauses in the contract indicates that this was the case for everyone. [ 116 ] Let us remember that they enrolled in Mr.

Martel's program precisely to acquire knowledge in a field in which they are either beginners or intermediate. [ 117 ] Although one would think that their "student" status would allow them to have easy access to more information, the three investors confirmed that the content of none of the documents they signed was explained to them. Mr. Gauthier also pointed out that Mr. Martel had repeatedly told them that they had to do their due diligence on their own. [ 118 ] Mr.

Martel relies on certain sections of the terms and conditions of the Subscription Agreement signed by the investors to argue that they are “not part of the public”: 2. REPRESENTATIONS AND WARRANTIES OF THE SUBSCRIBER 2.1 The subscriber hereby represents, warrants and declares that: […] (

x) The Subscriber knows the aims and objectives of the Limited Partnership and has been advised of the nature of the activity; (

x) The Subscriber has not received, read nor been otherwise exposed to any advertising in respect of the Units; (xii) The Subscriber is able to bear the substantial risk of an investment in the Limited Partnership; (xiii) The subscriber has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of the prospective investment to the Limited Partnership and has the net worth to undertake such risks; (xiv) the Subscriber believes that the investment in the Limited Partnership is suitable based on his or her investment objectives and financial needs and has adequate means of providing for current financial needs and personal contingencies and has no need for

liquidity of investment with respect to the Units; (xv) the Subscriber is aware of the characteristics of the Units and of their speculative nature and involve high degree of risk, including but not limited to, the risk of economic losses from the operations of the Limited partnership as well as of the fact they cannot be sold or otherwise disposed of except in accordance with the provisions stipulated in the Limited partnership Agreement and applicable securities legislation. […] [ 119 ] The mere fact that the investors signed the Subscription agreement in which these clauses were included does not render these statements factual.

This is especially true since as admitted by Mr. Martel, he did not review the content of the Subscription Agreement with the investors nor did he minimally verify and ensure that each of the investors actually met all of these conditions. He simply presumed they did.

In the same way that the boxes checked regarding the categories of investors did not represent reality, the Court concludes that the evidence does not show on a balance of probabilities that the investors met all of these conditions. [ 120 ] Moreover, although the defendant insisted on and substantially idealized the ties he shared with all the members of "the Martel Community", the fact remains that they are all clients. A teacher/student, mentor/mentee subordination bond inevitably forming the backdrop of this relationship, it therefore cannot be considered one of equals.

In April 2013, less than a year had passed since their first encounter. In view of the previous description of this relationship, there is no reason to believe that a bond of trust of the nature intended by the legislator existed between the parties. There is therefore no question of an association between them, nor of a common bond of interest. As Justice Morand concluded in Durocher : « La relation entre le prévenu et les gens sollicités étaient beaucoup plus une affaire de commerce et de motivation qu'un lien personnel très étroit […] ». [ 121 ] Mr.

Martel indicates that he was able to secure a total of 34 investors including himself. While the number of investors may not appear to be significant at first glance, it is one factor among others that must be considered but cannot be determinative on its own [41] . In the Cappellano [42] case, there were only two investors. This did not prevent the Tribunal from concluding that the issue of the securities constituted a public offering. [ 122 ] The evidence is silent as to whether they all qualified for one of the categories of private issuer investors.

Nevertheless, pointing out that his parents were among those who invested in the project, Mr. Martel asserts that he presented this investment offer only to members of his coaching program. He submits that he selected 50 students from among all those who were interested by sorting them out on the basis that they were advanced students whom he had met on several occasions and with whom he considered to have "some kind of relationship". [ 123 ] The Court does not accept this contention of the respondent. On the one hand, the evidence shows that Mr.

Martel made his investment offer during the educational seminars by reaching out to all the participants who were present, without setting out any prior condition for doing so other than being interested in investing with him. Considering that Gauthier, De Palma and Rafiee were made aware of such an offer while attending separate seminars and that according to Mr.

Martel, at least 150 people attended each of these seminars, it is reasonable to believe that several hundred people were solicited in this way. [ 124 ] If his initial intention was really to solicit only some of these students, based on the few characteristics he listed, then why broadcast this opportunity to all the members of his program? Why not sort through them beforehand and approach only the few candidates he deemed appropriate? Mr. Martel did not offer any explanation in this regard nor did he specify the number of applicants he had to turn down, saying only that he chose 50.

Nonetheless, the evidence as a whole rather convinces the Tribunal that he simply assumed that membership in his coaching program was a sufficient bond for his students to qualify as investors of a private issuer. In the Tribunal's view, Mr. Martel erred in the

interpretation and application of the Regulation 45-106 . [ 125 ] On the other hand, the criteria that Mr. Martel claims to have used to select his candidates are not reflected in all the choices he actually made. For instance, it appears that because of the level of the program he chose Mr. De Palma had, like all platinum members, not only direct and privileged access to Mr. Martel's personal contact information, but also to Mr. Martel's personal bank account information.

To assist his students in their personal real estate investments he provided them with this information so that they could use it as collateral for funds available through real estate brokers. This indeed denotes the necessity of a certain bond of trust between the parties as well as a certain closeness in the mentor-mentee relationship compared with other "regular" members. [ 126 ] In contrast, Mr. Rafiee only saw the defendant on two occasions, and that was in the context of group seminars. The evidence does not reveal what could be described as even a beginning of any relationship with Mr.

Martel beyond the teaching he provided. There is nothing to distinguish him from the rest of the members of the program in order to reasonably conclude that he had any privileged relationship or link of proximity with Mr. Martel. [ 127 ] This reality further convinces the Tribunal that the only real criterion that Mr. Martel imposed on himself in the context of his solicitation was the membership in his coaching program. [ 128 ] In R . v.

Buck River Resources Ltd . [43] , it was held that membership in a field hockey club organization was not sufficient to form an "association" or "common interest" between the seller and the purchasers of the securities sold: This argument was rejected by the court, which felt it unreasonable to suggest that the relationship of a «rather loose association» in the management of a non-profit hockey club could, thereby, provide a reasonable opportunity to a purchaser to assess the integrity and character of a fellow participant, as regards the worth of a speculative business venture that the participant was selling. [ 129 ] In Homerun International Inc. (Re) [44] the basis advanced by the Respondents as establishing a close business relationship was a prospective investor’s membership and participation in a Mentoring Program:

[122] We are not persuaded by any of the Respondents' contentions on this point. Enrolling in a program – or even prolonged or repeated interactions within that program – could not, without more, transform a client or customer (including a Mentoring Program enrollee) into a close business associate. Consistent with this, we also conclude that an investment in a Homerun Group offering – or even multiple such investments – did not suffice, without more, to transform an investor into a close business associate. [ 130 ] Likewise, in view of the objective pursued by the Act and the restrictive

interpretation that must underlie the application of the exemptions, the Tribunal is of the opinion that the fact of being a member of Mr. Martel's coaching program, which is similar to a mentoring program, is not sufficient to conclude that there was an association or a common bond of interest and does not, in itself, qualify an investor as a “person that is not of the public “. [ 131 ] Concluding that Mr.

Martel made a public offering in order to find purchasers for the securities of Canadian Phoenix, causing it to lose its status as a private issuer and thus the benefit of the prospectus exemption required by the Act . Considering that the evidence established that Canadian Phoenix did not have a prospectus approved by the AMF and that the defendant was aware of that situation. The Court concludes beyond any reasonable doubt that Mr. Martel committed the alleged offences. 3. Did Mr. Martel exercise due diligence in respect to the offences? [ 132 ] The offence set out in

section 11 of the Securities Act is one of strict liability [45] . It is therefore up to Mr. Martel to show, on a balance of probabilities, that he took all reasonable steps to prevent the commission of the offence or that he committed a reasonable error of fact in order to avoid liability [46] . [ 133 ] Due diligence refers to the particular care shown by the defendant to prevent the act complained of and not to his or her generally prudent conduct [47] . It must be assessed in the light of what a person engaged in the same activity would reasonably have done.

While not imposing perfection, the courts will be more demanding of defendants who are engaged in a specialized activity [48] . [ 134 ] As the Supreme Court [49] points out: “ it must be remembered that participants engage in this licensed activity of their own volition and ultimately for their own profit.

In return for permitting persons to obtain the fruits of participation in this industry, society requires that market participants also undertake certain corresponding obligations in order to safeguard the public welfare and trust. ” Therefore, due diligence implies the acceptance of a duty of responsibility to actively seek to learn about the obligations imposed. Thus, an attitude of passivity is incompatible with the concept of due diligence [50] . [ 135 ] The defendant candidly admits that he had no knowledge of securities matters.

He indicates that he therefore retained the services of a law firm specialized in this field to ensure that all of his documents and contracts were in order and to do things legally. [ 136 ] However, the problem does not lie in the content of the documents that were submitted to the investors, as they show that the conditions for Canadian Phoenix to be considered a private issuer were present in writing. It rather rests on the manner in which the defendant used those documents. [ 137 ] Mr. Martel made a mistake in the

interpretation and application of the Regulation 45-106. Ignorance of the law is not a defence. [ 138 ] Thus, the Supreme Court reminds us in AMF v. La Souveraine [51] that it is unnecessary for him to show that he made reasonable efforts to find out about the law or that, by ignoring it, he acted in good faith. Such evidence cannot relieve him of liability. [ 139 ] In the case Autorité des marchés financiers c. Dorion [52] the Court states in regards to a defence of due diligence: [51] Mme Dorion a fait état d’une dizaine de démarches effectuées.

Je n’ai aucune raison de mettre en doute le fait que la défenderesse a tenté de se rassurer sur la légalité des transactions.

Mais cela suffit-il? [52] Est-ce une défense de diligence raisonnable ou une erreur de droit? [53] Il ne s’agit pas d’une défense de diligence raisonnable puisque cette défense s’applique « par rapport à l’accomplissement d’une obligation imposée par la loi et non par rapport aux recherches sur l’existence d’une interdiction ou sur son interprétation ». [54] Toutes les démarches effectuées et qui avaient pour but de rassurer la défenderesse sur la légalité de tout le processus équivalent à invoquer l’erreur de droit. [55] Évaluer le sérieux d’un placement pour ses clients ne libère pas le conseiller de son obligation de respecter les prescriptions de la Loi. [56] En conséquence, la défenderesse n’a pas établi avoir agi avec diligence raisonnable.

Elle a plutôt plaidé l’erreur de droit qui n’est pas une défense. [References Omitted] [ 140 ] As the Honourable Justice Mascia pointed out in the Mechaka [53] case, citing with approval the preceding passage: [381] C'est en vertu d'une interprétation erronée de la Loi que l'accusé se croit en droit d'agir. Prenons quelques exemples. L'accusé croyait que les placements originaux dans Mount Real en 1995 et 1996 gardaient pour toujours leur qualité de « placements privés ».

Un investissement additionnel de la part de madame Di Filippo à son placement privé de 1995 n'affectait pas—selon la croyance de l'accusé—la qualité privée du placement. À la suite d'une discussion avec un administrateur de la fiducie Penson en 2001, l'accusé a appris que ce n'était pas le cas. L'erreur de l'accusé constitue une erreur de droit. [382] En ce qui concerne le référencement de clients, il s'est trompé sur la portée de l'Instruction Générale Q-9. Il s'agit d'une erreur de droit commise par l'accusé.

[383] Les informations qu'il a reçues des professionnels dans le domaine du placement financier étaient erronées. Encore une fois, une erreur de droit. [384] Pour l'accusé, le fait que les fiducies acceptaient les certificats Mount Real était suffisant pour leur accorder l'imprimatur de légitimité. Or, les fiduciaires dans cette affaire s'occupaient du « back office » et n'avaient aucune relation avec les clients. Dans ces circonstances, il incombait à l'accusé de vérifier la conformité des placements.

De toute façon, qu'il s'agisse ou non d'une erreur de droit, la délégation de ses responsabilités à un tiers ne peut pas constituer de la diligence raisonnable. [our underlines] [ 141 ] The error of law is admissible as a defence only if it is induced by a person in authority [54] . The only authority representing the State who could give an opinion on the legality of the defendant's actions was the AMF. In the present case, there is no indication that Mr.

Martel went to the AMF to inquire about the situation and the legality of his actions [55] . [ 142 ] In the event that the Tribunal was in error and that what Mr. Martel invokes is indeed in the nature of a due diligence defence, it is still the opinion of the Court that he has not discharged his burden. [ 143 ] As previously outlined, he chose to solicit all members of his community from the outset without first considering whether they all qualified as one of the categories of investors that could benefit from the private issuer exemption.

In doing so, the scope of his initial solicitation was therefore in violation of the partnership agreement’s provisions. [ 144 ] Mr. Martel did not further put in place the necessary measures to ensure the qualification of the investors at the time they actually subscribed to the securities.

In this regard, he does not provide any information as to the nature of the instructions he may have given to his assistants or lawyers regarding this matter or even if such instructions were actually given. [ 145 ] Although he admits that he relied on his lawyers to whom the documents were directly transmitted and who were responsible for reviewing them, that is not sufficient to constitute due diligence. Indeed, besides making sure that one of the boxes is checked, how can lawyers who do not know the investors personally can themselves confirm the nature of the relationship between them and the issuer?

To ask the question is to answer it. [ 146 ] Furthermore, the explanations provided by Mr. Martel to Messrs. Gauthier, De Palma and Rafiee with respect to the document that was to be used to categorize them as investors and the instruction to check "close personal friend" that Mr. Rafiee specifically received without any question being asked, which were not denied, indicate that Mr.

Martel did not really care whether this condition was actually met and that he considered it to be more of a clerical formality in order for his project to go ahead. [ 147 ] Likewise, the fact that the boxes actually checked do not correspond to the category now invoked by the defendant helps to further convince the Court that Mr.

Martel did not exercise sufficient diligence to try to avoid the commission of the offence of which he is accused. [ 148 ] Whereas the AMF has proven beyond a reasonable doubt the essential elements of the offences relating to the making of distributions of a form of investment subject to the Act without Canadian Phoenix having prepared a prospectus approved by the AMF. [ 149 ] Whereas the Court concludes that Mr. Martel has not raised any defences that can be retained.

FOR THESE REASONS, THE COURT: FINDS the defendant guilty of the offences with which he is charged; SETS the hearing for submissions on sentencing for Tuesday, October 5, 2021, in room

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