Failure to ensure an offering memorandum (“OM”) does not contain a misrepresentation has serious consequences.  Investors have rights of action, statutory and common law, against an issuer and others to sue for rescission or damages if an OM contains a misrepresentation.

This article focuses on the rights and remedies of investors who purchase security under a prospectus or an offering memorandum and discover a misrepresentation in those documents. 

An offering memorandum (“OM”) must contain all information material to the investment opportunity to enable an investor to make an informed investment decision.  What information is material depends on the specific business and investment opportunity of an issuer. 

Investors have a statutory right of action against the issuer and others if the issuer prepared the OM in reliance on the offering memorandum exemption under 2.9 of the National Instrument 45-106-Prospectus and Registration Exemptions (the “OM Exemption”).  Under Canadian securities law, this right of action arises if an issuer makes a misrepresentation in an OM at the time of sale.  A misrepresentation is either an untrue statement of material fact or an omission to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made.  

Traditionally, it has been difficult for Canadian investors to succeed in common law negligent misrepresentation claims because of the requirement that an investor prove that it actually relied to its detriment on the alleged misrepresentation.  However,  pursuant to s. 132.1(1) of the Securities Act, [RSBC 1996] Chapter 418, investors could succeed in actions for damages for misrepresentation in the OM by satisfying the following test:

132.1 (1) If a prescribed disclosure document contains a misrepresentation, a purchaser who purchases a security offered by the disclosure document
         (a) is deemed to have relied on the misrepresentation if it was a misrepresentation at the time of purchase, and
         (b) has a right of action for damages against
               (i)  the issuer,
               (ii) every director of the issuer at the date of the disclosure document, and
               (iii) every person who signed the disclosure document.

An investor is not required to prove that:

  1. the issuer was negligent or intentional in making the misrepresentation;
  2. the investor relied on the misrepresentation to its detriment; or
  3. that the investor’s reliance on the misrepresentation was reasonable;

which are all required under the common law.  

This statutory right of action also has the benefit of providing a cause of action for an omission.  An omission is not actionable as a misrepresentation under the common law, however, there are various defences available to the persons or companies that the investor has a right to sue.  In particular, they have a defence if the investor knew of the misrepresentation when the investor purchased the shares.  Additionally, if the investor elects to exercise a right of rescission against the Company, the investor will have no right of action for damages against the Company, every person who was a director at the date of the OM and every other person who signed the OM.  

Section 140 of the Securities Act sets the limitation period:

140 Unless otherwise provided in this Act or in the regulations, an action to enforce a civil remedy created by this Part or by the regulations must not be commenced
      (a) in the case of an action for rescission, more than 180 days after the date of the transaction that gave rise to the cause of action, or
      (b) in the case of an action other than for rescission, more than the earlier of
             (i) 180 days after the plaintiff first had knowledge of the facts giving rise to the cause of action, or
             (ii) 3 years after the date of the transaction that gave rise to the cause of action.

If you intend to rely on the rights described above, you must keep within strict time limitations. You must commence your action to rescind the agreement within 180 days after the date that you purchased the Shares. You must commence your action for damages within the earlier of 180 days after you first had knowledge of the facts giving rise to the cause of action and three years after the day you purchased the Shares.  

Canadian courts have held that, unlike the general limitation periods, discoverability does not apply to section 140 of the Securities Act in triggering the running of the limitation period.  In the Securities Act, the limitation period runs from the date the alleged misrepresentation was made in a document or oral statement.  Additionally, unlike general limitation periods, the Securities Act limitation period continues to run even after a claim is commenced.

In summary, plaintiffs alleging misrepresentations under section 140 of the Securities Act are best advised to review the OM if a loss has been suffered and to commence their claims as early as possible.

Previous Post