The Ontario Securities Commission has issued a notice explaining its interpretation of the section of the Securities Act regarding liability for misrepresentation in an offering memorandum.

The section, which was introduced in 1999, created a statutory right of action for damages or rescission against “a selling security holder on whose behalf the distribution is made”.

It the notice, the OSC aid, “We understand that some securities practitioners are taking the view that the [section] could be read to include an underwriter where it purchases securities for resale on a private placement basis. Under this interpretation, the underwriter in an underwritten private placement would be liable to purchasers for a misrepresentation in the offering memorandum and, incidentally, would not have a due diligence defence.”

OSC staff have been asked for their views on this question. and decided to issue the notice to explain its views.

In the notice, the OSC said “Had the legislation intended to include underwriters in the defendant class, it would have done so expressly.”

It added “Had the intention been to create underwriter liability, the legislation would have included a due diligence defence for underwriters as there would be no policy basis for subjecting underwriters to a higher standard of liability in the private placement context than in the public offering context.”