Submitted by nsscadmin on
As the name suggests, the Nova Scotia Securities Commission regulates all securities in the province of Nova Scotia. But what exactly is a security? If you look at the Nova Scotia Securities Act, which contains the laws governing securities in the province, it has a lengthy definition with 18 specific things that are considered to be a security. Since it’s a legal document, not all 18 things are easily and clearly decipherable by most people. That’s where we come in.
In this three-part blog series, we aim to clear up what is a security. We’ll go through all 18 things from the NS Securities Act and provide a more concise and clear example of what they mean. You’ll see that there is significant overlap among some of the definitions. For instance, a common share of a corporation may be caught as a security under more than one of these definitions.
You’ll also see that some of these definitions are very broad, and could be argued to include virtually any situation in which money changes hands. Regulators and courts considering specific situations will usually start by asking whether the holder of the interest should be entitled to the protection that securities law provides, usually because of factors like information asymmetry between the issuer and the holder, or the holder’s lack of control over things that determine their return on their investment. Where it’s not clear under the existing definitions, the greater the vulnerability of the holder, the more likely regulators and courts are to decide that a security is involved.
Let’s start with the first six:
(i) any document, instrument or writing commonly known as a security,
Some of the most commonly-known securities include equities, bonds, mutual funds, and exchange-traded funds.
(ii) any document constituting evidence of title to or interest in the capital, assets, property, profits, profit or loss or royalties of any person or company,
This could include equities or bonds, which may entitle the holder to company profits or interest paid when the bond matures.
(iii) any document constituting evidence of an interest in an association of legatees or heirs,
This is one of the more vague and uncommon examples of a security from the Act, but it has been suggested that this provision was adopted following the introduction of the game of "lost heir." Here a promoter would inform a large number of people of the existence of a sizeable estate (sometime fictitious), and their possible claim to it. The promoter would persuade them to contribute to a litigation fund. In a past U.S. decision a promoter sold undivided interest in the assets of an estate that could have been recovered following litigation. These interests were deemed to be investment contracts, and certificates of interest and participation, thus making them securities. It's highly unlikely you'll ever come across such a security, but at least you know what these section of the securities act means.
(iv) any contract or instrument where the contract or instrument is an interest in or to a security and a trade in the security pursuant to the contract or instrument would constitute a distribution,
This would include agreements under which a security described in the subsection is given as collateral for a loan, and the underlying security may change hands if there is a default under the loan.
(v) any bond, debenture, note or other evidence of indebtedness, share, stock, unit, unit certificate, participation certificate, certificate of share or interest, preorganization certificate or subscription other than a contract of insurance issued by an insurance company or an evidence of deposit issued by a bank, a loan company or a trust company,
As noted here, bonds, debentures, stocks, and other evidence of indebtedness are all securities. Also importantly noted here contracts of insurance issued by insurance companies, and evidence of deposit issued by banks, loan companies or trust companies are NOT securities, mainly because they are already regulated under other legislative schemes for such financial institutions.
Note that this also could mean, depending on the circumstances, that an “IOU” or promissory note given by one individual to another as evidence of a personal debt could be a security. However, in many cases an exemption will be available so that the main requirements of securities law do not apply.
(vi) any agreement under which the interest of the purchaser is valued for purposes of conversion or surrender by reference to the value of a proportionate interest in a specified portfolio of assets, except a contract issued by an insurance company which provides for payment at maturity of an amount not less than three quarters of the premiums paid by the purchaser for a benefit payable at maturity,
This definition would include investment funds, like mutual funds and exchange traded funds. Again, such contracts issued by insurance companies are NOT securities because they are regulated under a separate legislative scheme.
We'll be back next week with Part 2 which will look at the next five exampels of a securities froin the NS Securities Act.