In 2012, Winnie came roaring out of the gates at Sauder and founded a start-up called "Fruitr"! She had a brilliant idea with perfect product-market fit: she came up with a new kind of cold-press juicing system that took all the mess and hassle out of juicing. It consisted of a small machine that came with pre-packaged pulverized fruit-filled bags. The bags could be placed in the machine (akin to "Keurig" coffee pods) and the machine would dispense fresh cold-pressed juice. Investors loved the concept and it soon attracted a lot of investors.

In late 2012, it was discovered by beta users that the bags did not need to be placed in the (pricey!) machine in order for juice to be dispensed. Users could instead just squeeze the bag with their hands and get the same quality and volume of dispensed juice. The users questioned why they would ever need to purchase the expensive machine when they could just squeeze the bags by hand.

Fruitr's whole business model was based on the sale of the machine with the juice bags. Without the sale of the machine, the business was not viable. Winnie desperately tried to raise more money before the flaw totally destroyed the company's prospects.

Unfortunately, fueled by her desperation, Winnie ended up lying about the product in her investor communications, and on Dec 31, 2013, Winnie's company was issued with a 6-month cease trade order (i.e. an order to stop selling any further shares) by the British Columbia Securities Commission.

Winnie was facing a difficult situation, she did not have enough money for payroll and she owed over $300,000 in interest payments on a loan.

On January 4, 2014, an unsuspecting family friend, Gwen, took a meeting with Winnie. Gwen was resident in BC and owned a well-known construction company and had substantial personal investments. It was a short meeting, where Winnie explained her product and her need for investment. Winnie did not mention the beta users' finding that no machine was necessary for juicing nor did she mention the cease trade order. Following the meeting, Gwen invested $100,000 CDN in the company in exchange for 500,000 shares valued at $0.01 CDN per share. The shares were issued to Gwen under an agreement dated January 4, 2014.

Following the meeting, Fruitr's share price fluctuated significantly. On Feb 4, 2014, it reached a high point of $0.50 per share. At this point, Gwen attempted to sell her shares. However, she saw that there was a cease trade order and could not.[1] So she held on to them, reluctantly, waiting patiently. However, when the cease trade order expired, the share price was at an all-time low and it never recovered. As of August 3, 2021, the share price of Fruitr was $0.0066 CDN per share.

At this point, Gwen had been resigned to the fact that she had lost her money: start-ups are risky! However, on August 31, 2021, Gwen learned from a mutual friend, that Winnie had been under a cease trade order when she first solicited Gwen's investment and sold her shares way back in 2014. Gwen is outraged. She calls up Winnie and has a short and difficult conversation. During the conversation, Gwen demands that she be paid out by the company the amount she would have gotten had she been able to sell when the shares were trading at their highest, at $0.50 per share, or at a minimum, be paid back the amount of her investment since Fruitr was under a cease trade order[2] when Gwen first invested and Fruitr should never have issued the shares in the first place.

For this assignment:

Pretend you are Winnie. Your board of directors has found out about the issue with Gwen. Compose an email to the board setting out the main issues, risks and response. It should answer the following questions at a minimum:

What, if anything, does Fruitr owe to Gwen and on what terms?

If Gwen were to sue, howlikely is Gwen to be successful?

How should Fruitr communicate its response to Gwen?

[1]To confirm, at this point, Gwen was unaware that the cease trade order had been in place when she bought her shares.

[2]You do not need to consider potential ramifications or consequences for a breach of securities laws to Winnie or Fruitr (i.e. the orders or findings of the British Columbia Securities Commission in respect of selling shares in breach of a cease trade order). That is outside the scope of this assignment.