Right of Rescission

Under federal securities laws and the laws of several states, investors have the right to rescind their investments and receive a full refund of the purchase price paid for any securities if the seller violated securities law when the securities were offered or sold. The right of rescission can become a major concern for companies that receive significant investment and fail to achieve milestones communicated to its investors. Securities laws are difficult to comply with and some laws incorporate common law fraud elements that can make it virtually impossible to ensure full compliance. A motivated investor looking to recoup money may review offering and sale documents with the goal of finding noncompliant elements it can use to exercise its right of rescission. Further, state regulatory agencies may require companies selling securities to cease and desist sales if the agency finds the company is not complying with state securities laws. Most agencies will require the company to make a rescission offer to the investors it has already sold to, whereby the company offers to pay the investors back their investment plus interest. The rescission offer itself must independently comply with state securities laws and may not preclude other enforcement actions by a state agency.