Changing Your Mind: Part I – Two Day Cancellation Rights under the Offering Memorandum Exemption

By Alixe Cormick and Brian Koscak

Do you not hate shopping in stores that will not let you return items?  We have all purchased an item we were excited to acquire, but then changed our mind and returned it the following day. 

Return policies in retail stores vary from no returns allowed, to bring us your battered and bruised item, without receipt, anytime in the future, for a full refund or exchange, no questions asked. 

The securities law related to changing one’s mind to acquire securities from an issuer in a private placement offering varies widely as well. This first article, of a two part series, discusses under what circumstances purchasers can change their mind and cancel their subscription for securities offered under the offering memorandum exemption (the offering memorandum  exemption) in section 2.9 of  National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).

NI 45-106 Offering Memoranda

Issuers conducting a private placement offering under the offering memorandum exemption must prepare an offering memorandum in the required form (NI 45-106 OM).^[1]  Issuers are required under subsection 2.9(6) of NI 45-106 to include a two (2) day contractual right to cancel the purchase of securities in the NI 45-106 OM if the securities legislation where the purchaser resides does not provide a comparable right.  

Notice of two day cancellation right

Purchasers must deliver a notice to the issuer no later than midnight on the second (2^nd) business day after the purchaser signs the subscription agreement to purchase the securities offered under the offering memorandum exemption to exercise this statutory/contractual (depending on the jurisdiction)  right of cancellation.  Purchasers may cancel their subscriptionfor securities for any reason at all during this time.  This is also disclosed in the Risk Acknowledgement Form (Form 45-106F4) which must be delivered to, and signed by, investors in connection with the offering memorandum exemption.

Below is a chart illustrating which Canadian jurisdictions provide investors with a two (2) day statutory right to cancel their purchase of securities offered under the offering memorandum exemption (the statutory cancellation right) and which ones do not. The terms of each statutory cancellation right are identical to the contractual right to cancel under the offering memorandum exemption (see subsection 2.9(6) of NI 45-106).

 Holding funds in trust

Issuers under the offering memorandum exemption (subsection 2.9(16) of NI 45-106) are required to hold funds received from a purchaser in trust during this period of time that a purchaser has this statutory/contractual cancellation right.

Part II of this article discusses the cancellation rights involving the use of an offering memorandum voluntarily provided to an investor in connection with any available prospectus  exemption under applicable Canadian securities law, other than the offering memorandum exemption,  and additional special cancellation rights provided to investors of mutual fund securities.

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Disclaimer

 This blog is not intended to create, and does not create an attorney-client relationship. You should not act or rely on information on this blog post without first seeking the advice of a lawyer.  This material is intended for general information purposes only and does not constitute legal advice.  For legal issues that arise, the reader should consult legal counsel.

 Authors:

 Brian Koscak is a Partner at Cassels Brock & Blackwell LLP located in Toronto, Ontario and Chair of the Exempt Market Dealers Association of Canada. Brian is also a member of the Ontario Securities Commission’s Exempt Market Advisory Committee. Brian can be reached by phone at 416-860-2955, by e-mail at bkoscak@casselsbrock.com or on twitter @briankoscak. Brian also regularly writes about Canadian securities law matters on his personal blog at www.briankoscak.com.

Alixe Cormick is the founder of Venture Law Corporation  in Vancouver, British Columbia and a member of the Advisory Board of the National Crowdfunding Association of Canada. You can reach Alixe by phone at 604-659-9188, by e-mail at acormick@venturelawcorp.com, on twitter @AlixeCormick or on Google+.