2. Lecture Outcomes
To understand role of prospectus
To describe different types of prospectus
To Cognize the liabilities associated with fraudulent misstatements in
prospectus
5. Poll from Previous Lecture
Memorandum of Association contains __________.
(a) the exact address of the registered office
(b) the name of the state in which the company will have its registered
office
(c) the name of the country in which the company will have its registered
office
6. What is a Prospectus?
A prospectus is a legal disclosure document that provides information about
an investment offering to the public, and that is required to be filed with
the Securities and Exchange Commission (SEC) or local regulator.
The prospectus contains information about the company, its management
team, recent financial performance, and other related information that
investors would like to know.
Investors use the legal document to determine the growth and profitability
prospects of the selling company to decide whether they will take part in
the offering or not.
7. Components of a Prospectus
Overview and history of the company
Services/products offered by the company
Management profile
Desired deal structure
Use of proceeds
Security offering details
Financial information
Risks involved
9. Red Herring Prospectus
Red herring prospectus is the prospectus which lacks the complete
particulars about the quantum of the price of the securities. A company
may issue a red herring prospectus prior to the issue of prospectus when it
is proposing to make an offer of securities.
This type of prospectus needs to be filed with the registrar at least three
days prior to the opening of the subscription list or the offer. The obligations
carried by a red herring prospectus are same as a prospectus. If there is any
variation between a red herring prospectus and a prospectus then it should
be highlighted in the prospectus as variations.
10. Shelf Prospectus
Shelf prospectus can be defined as a prospectus that has been issued by
any public financial institution, company or bank for one or more issues
of securities or class of securities as mentioned in the prospectus.
When a shelf prospectus is issued then the issuer does not need to
issue a separate prospectus for each offering he can offer or sell
securities without issuing any further prospectus.
11. Abridged Prospectus
The abridged prospectus is a summary of a prospectus filed before the
registrar. It contains all the features of a prospectus. An abridged
prospectus contains all the information of the prospectus in brief so
that it should be convenient and quick for an investor to know all the
useful information in short.
Section33(1) of the Companies Act, 2013 also states that when any form
for the purchase of securities of a company is issued, it must be
accompanied by an abridged prospectus.
12. Deemed Prospectus
When any company to offer securities for sale to the public, allots or
agrees to allot securities, the document will be considered as a deemed
prospectus through which the offer is made to the public for sale. The
document is deemed to be a prospectus of a company for all purposes
and all the provision of content and liabilities of a prospectus will be
applied upon it.
13. Criminal Liabilities For Misstatement in
Prospectus
Where a prospectus, issued, circulated or distributed under this Chapter,
includes any statement which is untrue or misleading in form or context in which it is
included or where any inclusion or omission of any matter is likely to mislead, every
person who authorizes the issue of such prospectus shall be liable under section 447.
Provided that nothing in this section shall apply to a person if he proves that
such statement or omission was immaterial or that he had reasonable grounds to
believe, and did up to the time of issue of the prospectus believe, that the statement
was true or the inclusion or omission was necessary.
14. Section 447 is stringent in its way. The section provides for the punishment for fraud.
This hereby implies that any misstatement in prospectus will lead to fraud and will
attract section 447.
Section 447 states that without giving effect to any liability under any other law for
the time being in force any person who is guilty of fraud shall be punishable with
imprisonment for a term not less than six months but which may extend to 10 years
and shall be liable to fine not less than the amount involved in fraud but may extend
to 3 times the fraud amount.
15. Civil Liabilities For Misstatement in
Prospectus
Notwithstanding anything contained in this section, where it is proved
that a prospectus has been issued with intent to defraud the applicants
for the securities of a company or any other person or for any
fraudulent purpose, every person referred to in subsection (1) shall be
personally responsible, without any limitation of liability, for all or any
of the losses or damages that may have been incurred by any person
who subscribed to the securities on the basis of such prospectus”
16. In accordance with the above section the civil liabilities will be imposed
on director of the company, issuer of prospectus, promoter of the
company, person who has authorized issue of prospectus, expert
referred to in section 26.
Such above person shall personally liable without any limitation or
extent and shall be liable to make good the damage or loss caused to
the persons who has subscribed such securities on the basis of such
prospectus.
17. MCQs
_______are the prospectus issued instead of full prospectus
a) Abridged
b) Statement in lieu
c) Shelf
d) Red herring
18. _______ are the prospectus issued by the issuing house
a) Deemed prospectus
b) Shelf prospectus issued by the issuing house
c) Red herring
d) None of the above
19. _________ prospectus were issued in case securities were issued in
stages
a) Deemed
b) Shelf
c) Red herring
d) None of the abov
20. In the process of conversion of a private company into a public company
which prospectus must be issued
a) Deemed prospectus
b) Shelf prospectus
c) Statement in lieu of prospectus
d) None of the above
23. Prospectus is not required to be issued when sweat equity shares are
issued to directors and employees
a) Yes
b) No
24. Which of the following are not required to issue prospectus?
a) Private company
b) Incase of right issue
c) Sweat equity issue
d) All the above
25. Which one of the following has a right to claim compensation for any
loss due to misstatement in prospectus
a) Purchasing shares in Primary Market
b) Secondary Market
c) Subscribers to memo.
d) All the above
26. _______ are the prospectus issued by the issuing house
a) Deemed prospectus
b) Shelf prospectus issued by the issuing house
c) Red herring
d) None of the above
27. _________ prospectus were issued in case securities were issued in
stages
a) Deemed
b) Shelf
c) Red herring
d) None of the above
28. Case Study R V Kylsant (1932)
The director of the Royal Mail Steam Packet Company, Lord Kylsant, had
falsified a trading prospectus with the aid of the company accountant to
make it look as if the company was profitable and to entice potential
investors.
Following an independent audit instigated by HM Treasury, Kylsant and John
Moreland, the company auditor, were arrested and charged with falsifying
both the trading prospectus and company records and accounts.
Although they were acquitted of falsifying records and accounts, Kylsant
was found guilty of falsifying the trading prospectus and sentenced to
twelve months in prison. The company was then liquidated, and
reconstituted as The Royal Mail Lines Ltd with the backing of the British
government.
29. Case Study Nash v. Lynde (1929)
Nash applied for certain shares in a company on the basis of a
document sent to him by Lynde, the managing director of the company.
The document was marked “strictly private and confidential.” The
document did not contain all the material facts required by the Act to
be disclosed. Nash filed a suit for compensation for loss suffered by him
by reason of the omissions.
30. The suit was dismissed. The court observed, “The public is of course a
general word. No particular numbers are prescribed. Anything from two
to infinity may serve. The point is that the offer as such is to be open to
anyone who brings his money and applies in due form, whether the
prospectus was addressed to him on behalf of the company or not. A
private communications is not thus open and does not construe to be a
prospectus”.
