Ontario Securities Commission sanctions TeknoScan Systems Inc. and three of its executives for misleading disclosure
Blog Risk Management and Crisis Response

On October 14, 2025, the Capital Markets Tribunal released the sanctions decision^[1] in TeknoScan Systems Inc. (Re), following the merits decision,^[2] released December 23, 2024. After hearing 19 days of evidence, the Tribunal found that the respondents had perpetrated securities fraud contrary to s. 126.1(1)(b) of the Ontario Securities Act (the Act), by sending shareholders a notice that failed to indicate uncertainty that funding for a transaction may not materialize. The Tribunal made such a finding in spite of the respondents subjectively believing that such funding would be available. In its sanctions decision, the Tribunal ordered that TeknoScan and two of its directors and officers be permanently banned from participating in the capital markets and that the third officer and director be banned for 20 years. The Tribunal also imposed officer and director bans on all three individuals, monetary penalties against the executives, and $400,000 in costs against the parties, to the benefit of the Commission.

The facts

In December 2016, TeknoScan sent the notice to shareholders touting a transformative sale whereby a “Canadian Strategic Investor” would buy up to approximately 50% of TeknoScan’s common shares at US$20 per share. Preferred shareholders were told they could participate only if they converted all their preferred shares to common shares by January 31, 2017. This communication resulted in a 92.3% conversion of preferred shares, and, as a result, dividend, redemption, and in some cases royalty rights of the preferred shareholders were extinguished.

However, the notice failed to indicate that the funding for the transaction was uncertain, that the transaction relied on unconventional, non-arm’s length funding arrangements, and that the transaction may not materialize. In the end, the transaction did not close.

The merits decision

At the merits hearing, the Tribunal found that TeknoScan and its three directing minds — Hyams (CEO), Kung (CFO), and Tam (Chair) — perpetrated fraud under s. 126.1(1)(b) of the Act and that TeknoScan made a materially misleading statement under s. 126.2(1), which the individual directors acquiesced to.

In its merits decision, the Tribunal dismissed the Commission’s allegation that the respondents knew and believed that the third-party funding for the transaction was implausible and nonsensical at the time of the notice. To the contrary, the Tribunal found that the respondents believed in the funding but knew that the transaction was uncertain and that the third-party funding might not materialize. The fraud, according to the decisions, consisted of sending shareholders the notice which failed to indicate that uncertainty and instead conveyed that the funding was not an issue.

The sanctions decision

In the sanctions decision, the Tribunal highlighted that fraud is “the most egregious violation of securities law” but noted that the fraud at issue in this case is not the most egregious kind and that the fraud would have been more severe if the transaction had been a complete sham. Nonetheless, the Tribunal stated that the fraud “remains serious and warrants meaningful sanctions to protect the integrity of the capital markets”.

In the end, TeknoScan, Kung, and Tam were permanently banned from participating in the capital markets, and Hyams was banned for 20 years. Administrative penalties were also set at $150,000 for TeknoScan, $450,000 for Kung, $350,000 for Tam, and $250,000 for Hyams. Costs totaled $400,000, with $100,000 payable by TeknoScan and $300,000 jointly and severally by the individual respondents.

Implications

TeknoScan underscores several key takeaways. First, the Tribunal found that fraud can arise from omissions and will carry significant consequences for market participants, even where such fraud is “not the most egregious kind”. Further, the Tribunal determined that the fact that the respondents held a subjective belief that the funding for the transaction would materialize when the notice was distributed was no defence to staff’s allegation of fraud, given the transaction’s underlying uncertainty. The merits and sanctions decisions in TeknoScan highlight the importance of ensuring that corporate communications to shareholders are made openly and transparently.