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

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Co-Author: 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 (2nd) 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 subscription for 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).

Province

Statutory Cancellation Right under Applicable Canadian Securities Legislation

British Columbia,

Section 138.1, Securities Act, RSBC 1996, c 418.

Alberta

Section 209.1, Securities Act, RSA 2000, c S-4.

Saskatchewan

Section 80.1, Securities Act, 1988, The, SS 1988-89, c S-42.2.

Manitoba

Section 141.3, Securities Act, The, CCSM c S50.

Ontario

None. Contractual cancellation right required under offering memorandum exemption.[1]

Quebec

None. Contractual cancellation right required under offering memorandum exemption.

New Brunswick

None. Contractual cancellation right required under offering memorandum exemption.

Prince Edward Island

Section 113, Securities Act, RSPEI 1988, c S-3.1.

Nova Scotia

None. Contractual cancellation right required under offering memorandum exemption.

Newfoundland and Labrador

None. Contractual cancellation right required under offering memorandum exemption.

North West Territories

Section 113, Securities Act, SNWT 2008, c 10.

Nunavut

Section 113, Securities Act, SNu 2008,c 12.

Yukon

Section 113, Securities Act, SY 2007, c 16.

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.


Note:

  1. The offering memorandum exemption is currently unavailable in Ontario, however, the Ontario Securities Commission has recently announced in December 2013 that it is considering adopting a form of offering memorandum exemption in Ontario, along with other proposed new capital raising exemptions, such as equity crowdfunding.


Brian_Koscak1Brian Koscak

Brian Koscak is President and General Counsel at Pinnacle Wealth Brokers located in Calgary, Ontario and Vice-Chair of the Private Capital Markets 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 (403) 589-9609, by e-mail at brian.koscak@pinnaclewealth.ca 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 Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at acormick@venturelawcorp.com, on twitter at @AlixeCormick or on Google+ at +AlixeCormick.
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Changing Your Mind: Part I - Two Day Cancellation Rights under the Offering Memorandum Exemption
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Discusses under what circumstances investors can change their mind and cancel their subscription for securities offered under the offering memorandum exemption.
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Venture Law Corporation
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Disclaimer

The articles on this blog are not intended to create and do not create, an attorney-client relationship. You should not act or rely on information on this website without first seeking the advice of a lawyer. This material is intended for general information purposes only and does not constitute legal advice. You are advised to contact legal counsel prior to undertaking any securities transaction. Laws change and there are subtle nuances to the rules that may apply in your particular circumstance.