On April 19, 2024, Justice Morgan released his decision in Lochan v. Binance Holdings Limited, 2024 ONSC 2302, certifying a national class in the first Canadian class action against a cryptocurrency platform for the illegal trading and distribution of securities.
Sections 5(1)(a) and (c) of the Class Proceedings Act, 1992, S.O. 1992, c. 6 (“CPA”) were the two most contentious sections of the certification analysis and the Defendants largely focused their argument on the unavailability and unworkability of the remedy of rescission on a class-wide basis. Justice Morgan declined to determine the availability of rescission, leaving this to the common issues judge. He did find that if rescission is available, it could be determined on a class-wide basis.
Justice Morgan noted that the cryptocurrency market had a large number of retail investors which raised access to justice concerns supporting the preferability of a class action under s. 5(1)(d) of the CPA.
The requirements under sections 5(1)(b) and (e) of the CPA were not seriously contested and were easily satisfied.
Background
Binance marketed and sold cryptocurrency derivative contracts to Canadian retail investors. Binance sold three types of derivative contracts: futures contracts, option contracts, and leveraged tokens, all of which had cryptocurrency as the underlying asset. Cryptocurrency derivative products have been found to be investment contracts and their marketing and sale have been found to constitute distributions under s. 1(1) of the Ontario Securities Act, R.S.O. 1990, c. S.5 (“OSA”).[1]
To lawfully distribute securities under Ontario and equivalent provincial securities legislation, a company is required to register with the provincial securities commission and file a prospectus or obtain an exemption to these requirements. Section 71(1) of the OSA and equivalent provisions require that any dealer or agent who receives an order or subscription for a security offered in a distribution deliver a prospectus to the purchaser. Binance acted in the capacity of a principal in their sale of the cryptocurrency derivative contracts to class members. This placed them within the definition of a securities dealer under s. 1(1.2) of the OSA. Binance did not register with the Ontario Securities Commission (“OSC”) or file a prospectus, nor did it obtain an exemption for these requirements, which placed them in contravention of ss. 53(1) and 71(1) of the OSA.
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