11.5.2 Statutory Rights Of Investors
Introduction
The Canadian Securities Administrators (CSA) have mandated a series of investor protection rights to be included in all prospectuses as per National Instrument 41-101 General Prospectus Requirements. These rights encompass the right to withdraw, the right of rescission, and the right of action for damages, aiming to protect the interests of investors against potential misrepresentations or issues in securities transactions.
Right of Withdrawal
Investors are granted the right to withdraw from an agreement to purchase securities within two business days after receiving (or being deemed to have received) a prospectus or any amendment to it. The procedure includes the necessity for the purchaser to give notice to the vendor or its agent about their intent to withdraw.
Key Points
- Scope: Applicable across all provinces in Canada.
- Conditions: Withdrawal must occur within two business days of receiving the prospectus or its amendment.
- Notice: Notification must be provided to the vendor or agent.
- Special Cases: In Quebec, there is the possibility for a purchaser to apply for an adjustment to the purchase price.
Right of Rescission
If a prospectus contains a misrepresentation, purchasers have the right to rescind or cancel a completed contract for the purchase of securities. It is critical that enforcement actions are initiated within the legally specified time limits.
Key Points
- Misrepresentation: Triggered by any false or misleading statements in the prospectus.
- Time Limits: Actions must be initiated within the specified timeframe set by provincial law.
- Choice: The purchaser must choose between rescission or alternatively, seeking damages.
Right of Action for Damages
Investors also have the right to seek damages if the prospectus contains a misrepresentation. Liability under this provision can extend to the issuer, its directors, or any signatories of the prospectus.
Key Points
- Responsible Parties: Issuers, directors, and prospectus signatories can be held liable for damages.
- Inclusion of Experts: Experts such as auditors, lawyers, geologists, and appraisers who provide reports or opinions in the prospectus can also face liability.
- Defences Against Liability: Defenses are available, such as demonstrated due diligence by underwriters or directors and evidence of investor awareness of the misrepresentation.
- Limitation: There are caps on liability and time frames for bringing actions.
Glossary and Definitions
Prospectus: A legal document issued by companies that are offering securities for sale. It provides details about the investment offering to potential and existing investors.
Misrepresentation: Any untrue statement or omission of a necessary fact that causes the prospectus to be misleading.
Frequently Asked Questions (FAQs)
Q: What is the National Instrument 41-101?
National Instrument 41-101 is a regulation that sets the general prospectus requirements in Canada, ensuring transparency and protecting investors.
Q: What is the time frame to exercise the right to withdraw?
Investors have two business days after the receipt or deemed receipt of the prospectus to exercise the right to withdraw.
Q: Who can be held liable for misrepresentation in a prospectus?
Liability can extend to the issuer, its directors, signatories of the prospectus, as well as experts whose reports or opinions appear in the prospectus.
Key Takeaways
- Investors in Canada have extensive statutory rights under National Instrument 41-101 to protect against misrepresentations in securities transactions.
- Key rights include the ability to withdraw from agreements, rescind transactions, and seek damages.
- There are specific time limits and conditions attached to exercising these rights.
- Liability for misrepresentation can extend to directors, issuers, and any experts involved, but defenses are available.
Diagrams and Charts
Timeline for Investor Rights Enforcement Actions
sequenceDiagram
Investor->>Vendor/Agent: Receives Prospectus/Amendment
Investor-->>Vendor/Agent: Withdraws within 2 Business Days
Note over Investor,Vendor/Agent: Right of Withdrawal Period
Vendor/Agent-->>Investor: Notifies of Misrepresentation
Investor-->>Issuer/Directors: Chooses Rescission or Damages
Note over Investor,Issuer/Directors: Remedies for Misrepresentation
📚✨ Quiz Time! ✨📚
## What is the "Right of Withdrawal"?
- [ ] The right to sell securities immediately after purchase
- [ ] The right to sue the issuer
- [x] The right to withdraw from an agreement to purchase securities within two business days
- [ ] The right to cancel a purchase without any conditions
> **Explanation:** The right of withdrawal allows purchasers to cancel their agreement to purchase securities within two business days after receiving the prospectus, by giving notice to the vendor or its agent.
## What must a purchaser do to exercise the "Right of Withdrawal"?
- [x] Give notice to the vendor or its agent
- [ ] Contact the regulatory authorities
- [ ] Sell the securities on the open market
- [ ] File a lawsuit
> **Explanation:** To exercise the right of withdrawal, a purchaser must notify the vendor or its agent within two business days after receiving the prospectus.
## Under what condition can a purchaser in Quebec apply for an adjustment of the purchase price?
- [ ] When they miss the withdrawal deadline
- [x] When a distribution requiring a prospectus is effected without a prospectus
- [ ] When they want additional securities
- [ ] Under no conditions
> **Explanation:** In Quebec, if a distribution requires a prospectus but is conducted without one, the purchaser who still owns the security may apply for an adjustment of the purchase price within the applicable time limits.
## What does the "Right of Rescission" provide to purchasers?
- [ ] The ability to avoid paying taxes on securities
- [x] The ability to cancel a contract if the prospectus contains a misrepresentation
- [ ] The ability to sell securities immediately
- [ ] The ability to buy more securities from the issuer
> **Explanation:** The right of rescission allows purchasers to cancel a completed contract for purchasing securities if the prospectus contains a misrepresentation, provided the action is brought within applicable time limits.
## What must a purchaser alleging misrepresentation choose between in most provinces?
- [ ] Rescission and selling all securities
- [ ] Damages and ignoring the issue
- [x] Rescission and damages
- [ ] Adjusting the purchase price
> **Explanation:** A purchaser alleging misrepresentation must typically choose between rescission and seeking damages.
## Who may be liable for damages if a prospectus contains a misrepresentation?
- [ ] Only the investor
- [ ] Only the issuer
- [x] The issuer, its directors, and anyone who signs the prospectus
- [ ] Only the underwriter
> **Explanation:** The issuer, its directors, and anyone who signs the prospectus may be liable for damages if it contains a misrepresentation.
## What is required for an expert to be held liable for misrepresentation in a prospectus?
- [ ] The expert must sign the prospectus
- [ ] The expert must be employed by the issuer
- [x] The misrepresentation must pertain to the expert's report or opinion
- [ ] The misrepresentation must be trivial
> **Explanation:** Experts like auditors or geologists are only liable if the misrepresentation concerns their specific report or opinion included in the prospectus.
## What is one of the defenses available to directors or underwriters against liability for misrepresentation?
- [ ] Ignorance of the law
- [ ] Incomplete documentation
- [ ] Lack of control over the publication
- [x] Conducting a thorough investigation providing reasonable grounds to believe there is no misrepresentation
> **Explanation:** Directors or underwriters may defend against liability if they can prove they conducted a thorough investigation providing reasonable grounds to believe there was no misrepresentation.
## When can a person or company not be held liable for misrepresentation?
- [ ] When the purchaser has held the securities for over a year
- [ ] When the purchaser sells the securities at a loss
- [x] When the purchaser bought the securities with knowledge of the misrepresentation
- [ ] When the company declares bankruptcy
> **Explanation:** A person or company cannot be held liable if the purchaser bought the securities with knowledge of the misrepresentation.
## What kind of limits do securities legislation impose regarding actions for rescission or damages?
- [ ] Limits on the length of the prospectus
- [ ] Limits on the number of shares that can be sued upon
- [ ] Limits on the interest rate applied
- [x] Limits on maximum liability and time limits for bringing an action
> **Explanation:** Securities legislation imposes certain limits on maximum liability and the time period within which an action can be brought.