We previously wrote about the certification of a class action brought on behalf of Canadian investors against an asset trading platform operated by Binance Holdings Limited and its Canadian subsidiaries, Binance Canada Capital Markets Inc. and Binance Canada Holdings Ltd. (collectively, “Binance”).  Binance appealed the certification, and the Court of Appeal recently released its decision dismissing that appeal.

This blog delves into this decision, in which Canadian investors allege Binance operated illegally by trading securities without proper registration and failing to provide necessary prospectuses. Understanding this case is crucial for anyone involved in or following the evolving landscape of cryptocurrency regulation in Canada.

Case Concerns Alleged Violations of the Securities Act and Related Laws

To recap, the plaintiffs applied to the Superior Court of Justice seeking to represent investors who bought cryptocurrency derivative products through the Binance trading platform beginning in September 2019.  As the Court of Appeal explained, investors registered and opened an account on the Binance platform, put funds or other assets into a “digital wallet,” and then clicked on the type of derivatives they wanted to buy.  The derivatives in question consisted of options contracts, futures contracts, and leveraged tokens.  The contracts derived their value “based on the price movement of cryptocurrencies.”

The plaintiffs alleged, among other things, that Binance violated the Securities Act in Ontario and other Canadian laws when it traded in securities without registering with the applicable securities commission and distributed securities without complying with certain prospectus requirements. The Superior Court of Justice certified the proceeding as a class action, finding that the claim met the requirements of section 5(1) of the Class Proceedings Act, 1992.

What Requirements Must Be Met To Obtain Certification For A Class Proceeding?

A court is generally required to certify a class proceeding if the requirements of section 5(1) are met.  Briefly, the requirements are:

• The pleadings must disclose a cause of action;
• There must be an “identifiable class” of more than one person;
• The claims or defences of the class members must “raise common issues;”
• It should be preferable to resolve those issues using a class proceeding and
• An appropriate representative plaintiff or defendant must meet certain criteria.

On appeal, Binance primarily argued that the motion judge erred in determining that the pleadings contained a “reasonable cause of action” and that the pleadings raised “common issues.”

Binance Argued That Prior Case Law Meant That Section 133 of the Securities Act Was Not Available to the Plaintiffs

The plaintiffs claimed a remedy under section 133 of the Securities Act, which states that a “purchaser of a security to whom a prospectus was required to be sent or delivered” has a right of action for “rescission or damages” where that prospectus was not sent or delivered as required by section 71(1).  In turn, section 71(1) provides that a dealer shall send or deliver to a purchaser “the latest prospectus” that it has filed.  

While Binance acknowledged that no prospectus was filed or delivered to class members who purchased derivatives using the Binance platform, it argued that it was “plain and obvious” that such class members could not rely on section 133 of the Securities Act to support their claim.  Specifically, Binance argued that section 133 was only available where a prospectus had been filed but not delivered to a buyer.  This was because the delivery obligation set out in section 71(1) only applied where a prospectus had been filed.

In support of its argument, Binance referenced the case of Jones v. F.H. Deacon Hodgson Inc.  That case involved an investment dealer who did not file a prospectus as required by the legislation.  The plaintiff bought shares from the dealer and subsequently sought to have the sale declared void.  One of the issues before the court was whether the remedies in what is now section 133 applied.  The High Court of Justice found that a remedy was not available under that section since it was only available where a prospectus had been filed (by virtue of a legislative provision that is equivalent to the current section 71(1) of the Securities Act).

While the Court of Appeal acknowledged that the use of the word “filed” in section 71(1) might lead at trial to the conclusion sought by Binance, the issue before it was not whether “the claim will ultimately succeed but, rather, whether it is ‘certain to fail.’” It noted that the Jones case was not binding upon it, and there were “certainly good reasons” to question its correctness.  It also noted that the interpretation put forward by Binance appeared to be inconsistent with the long-established remedial approach given to the Securities Act.

Of particular note is the Court of Appeal’s comment that the argument put forward by Binance “appears to reward prior non-compliance and may well create an incentive for issuers not to file a prospectus, thereby reducing the disclosure available to investors.”

For these reasons, the Court of Appeal concluded that it could not be said that the plaintiffs’ claim under section 133 of the Securities Act was certain to fail.

Court of Appeal Finds There Was Some Basis in Fact For the Proposed Common Issues

Before the motion judge, Binance had argued that the remedy of rescission sought by the plaintiffs could not serve as a “common issue” for the purpose of certification.  It argued this was because trading on the Binance platform did not take place between buyers and Binance but instead between buyers and sellers themselves using the platform.  Binance submitted that rescission would result in “an unwieldy unwinding of user-to-user contracts” and a conflict of interest between class members.  On appeal, Binance took issue with the motion judge’s statement that there was “no evidence” to support this argument.

The Court of Appeal acknowledged that the motion judge had gone further than necessary in making this comment.  However, it concluded that the judge had been correct in finding that there was “some basis in fact” for the position that Binance was a “counterparty” to the transactions undertaken through its platform.  As such, it was irrelevant whether there was evidence to the contrary since conflicts in evidence would be resolved at trial.

The appeal was thus dismissed.

Experienced Toronto Litigation Lawyers Representing Class Actions and Investment Loss Matters

The legal landscape surrounding cryptocurrency platforms in Canada is complex and evolving, as highlighted by this significant ruling in the Binance class action appeal. If you have concerns about your investments in digital assets or are involved in potential securities litigation or class action, the experienced legal team at Milosevic & Associates in Toronto is available to provide strategic and effective advice. Don’t hesitate to understand your options—contact us online or by phone at (416) 916-1387 for a confidential consultation.