Private Placement Securities Litigation In Ontario

This has been the year of cannabis market sector scandals. Headlines have been thick and fast. Investor losses have been significant.

A large part of the financing that facilitated the massive growth of the cannabis sector has been through the prospectus exempt issuance of securities (more commonly referred to as a private placement). The trend in the cannabis sector is consistent with the growth in exempt market investments generally. Over the last decade, the amount of capital invested in Ontario's prospectus exempt market has roughly tripled. According to figures compiled by the Ontario Securities Commission, exempt market investments in Ontario increased from $30.7 billion in 2010 to $91.6 billion in 2017.1

The prospectus exempt market is where securities are issued to the public without a prospectus being filed with securities regulatory authorities. Exempt market investments can only be made when investors qualify for specific exemptions. Section 2.3 of National Instrument 45-106, Prospectus Exempt Distributions, provides one key exemption from the prospectus requirement—for trades in a security if the purchaser is an "accredited investor".2

The accredited investor exemption is the exemption most frequently utilized in Ontario. For an issuer selling securities, the exemption offers an inexpensive, fast and predictable alternative to undertaking, for example, an underwritten offering through a prospectus.

The regulatory justification for prospectus exemptions is typically that protections offered by prospectus disclosures and continuous disclosure are not always necessary or practical.3 The Ontario Securities Commission provides two rationales for the accredited investor exemption. First, accredited investors are assumed to be sophisticated. That is, capable of obtaining expert advice and analyzing information needed to assess an investment without a prospectus or continuous disclosure. Second, they are assumed to be able to withstand the loss of their entire investment.4

This does not change the reality that, in some cases, accredited investors who participate in an exempt offering will be provided with misleading information and will suffer a loss as a consequence.

The type of disclosure, if any, given to accredited investors as part of an offering under the accredited investor exemption is important because the absence of a prospectus or other continuous disclosures and the corresponding remedies provided in the Securities Act may...