In its recent decision in Lochan v. Binance Holdings Limited, the Ontario Court of Appeal upheld the certification of a class action brought on behalf of Canadian investors who purchased cryptocurrency products (Decision). It is alleged that certain cryptocurrency trading companies traded in securities without registering and distributed securities without complying with applicable prospectus requirements, in violation of the Ontario Securities Act and various other Canadian securities law (Claim).
A lower court found that the Claim satisfied the requirements of the Class Proceedings Act in Ontario and certified the proceeding as a class action. In upholding the certification, the Court of Appeal found that the Claim sufficiently pleaded common law and statutory causes of action. The Court of Appeal also confirmed that the Claim raises common issues, as required by the Class Proceedings Act.
The Decision provides guidance to investors and advisors and identifies some of the legal risks associated with the purchase and sale of crypto assets and related derivatives. The Decision is part of a long-running series of decisions involving the parties. An earlier Ontario Court of Appeal decision which set aside an arbitration agreement between the parties as void was previously discussed in our November 2024 Blakes Bulletin: Ontario Court of Appeal Confirms Crypto Company's Arbitration Agreement Void.
Background
Binance Holdings Limited, Binance Canada Capital Markets Inc. and Binance Canada Holdings Ltd. (collectively, Binance), a Cayman Islands corporation, operated a retail cryptocurrency exchange in Canada involving three types of cryptocurrency — futures contracts, options contracts and leveraged tokens. Binance did not register with the Ontario Securities Commission to engage in the business of trading in securities, nor did it file or deliver a prospectus to purchasers of cryptocurrency derivatives sold by Binance on its website.
The Claim pleads that prospectus requirements are fundamental to Canadian securities law since they ensure that investors are provided with full, true and plain disclosure of all material facts relating to the securities being offered. The Claim further alleges that Binance illegally sold securities to members of the class action. Specifically, the Claim asserts that the sale of cryptocurrency derivatives constituted distribution of securities to Canadian investors without a prospectus, contrary to Canadian securities law. The Claim also alleges that Binance actively, intentionally and fraudulently concealed the fact that it was illegally trading in securities in Canada. The Claim seeks a remedy of rescission or damages in respect of the alleged breaches.
The lower court certified the proceeding as a class action noting that, among other things, the legal test in respect of the "cause of action" requirement under the Class Proceedings Act is "identical" to the test for striking a statement of claim under the Ontario Rules of Civil Procedure (i.e., whether it is "plain and obvious" that the statement of claim fails to disclose a reasonable cause of action). The lower court found that the Claim had little difficulty in satisfying the cause of action requirement. The lower court found that, taking the pleaded facts to be true, it was not plain and obvious that the Claim fails to disclose a recognizable cause of action.
On appeal, Binance argued that the lower court erred in finding that the Claim pleaded a reasonable cause of action and that the Claim raised common issues under s. 5(1)(c) of the Class Proceedings Act.
The Decision
The Court of Appeal dismissed the appeal and confirmed the certification of the Claim as a class proceeding. The Court of Appeal found that the Claim sufficiently pleaded both statutory and common law causes of action.
Turning to the statutory cause of action, the Court of Appeal emphasized that the prospectus requirements in the Ontario Securities Act are fundamental to achieving the objects of the statute. In particular, the importance of the requirement to file a prospectus is aimed at protecting the general public. The Court of Appeal underscored the importance of prospectus requirements in relation to cryptocurrency products. As a result, the Court of Appeal found that the claimed breaches of statutory requirements for a prospectus were a properly pleaded cause of action.
The Court of Appeal also found that the claimed common law causes of action were proper. In particular, the Court found that the failure to file a prospectus may violate the common law right of purchasers to set aside a transaction for illegality.
Finally, the Court of Appeal held that Binance had not identified any palpable and overriding error in the lower court's conclusion that there was some basis in fact for the respondents' position that the class members contracted with Binance, rather than each other. Accordingly, the court found that remedial issues could be answered on a class-wide basis. As a result, the Claim raised common issues as required under the Class Proceedings Act.
Conclusion
Crypto assets are a burgeoning sector of the worldwide economy. Canadian courts are just beginning to grapple with the issues raised by crypto products. In this Decision, the Court of Appeal confirmed that the purchase of cryptocurrencies from an exchange may constitute a derivative (i.e., a financial instrument whose value is derived from or based on an underlying interest or asset). In addition, the Decision provides guidance on when investors can seek potential legal remedies relating to the purchase of crypto assets in circumstances where there is no prospectus.
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