Today we shall be talking about a Prospectus; Meaning, Civil and Criminal liabilities that may arise from making a misstatement in a Prospectus.
Meaning of Prospectus
The document by which public companies offer their shares for subscription to the public is called a Prospectus. A Prospectus is the formal document that a public company issues when it is desirous of raising capital from the public through an offer for subscription or an offer for sale of its shares. The Prospectus is designed to equalize information between a prospective investor and the company offering its securities to the public, thus it contains key information that a reasonably prudent investor would want to have to be able to make a well-informed decision with regards to participation in investment.
Section 315 of the Investments and Securities Act (ISA) 2007 defines a prospectus as any written or electronic information, notice, advertisement or other forms of invitation offering to the public for subscription or purchase, any shares, debentures or other approved and recognised securities of a company and other issues or scheme.
The ISA 2007 is the applicable law that prescribes contents for the Prospectus that should reduce if not eliminate informational asymmetry in securities dealings or transactions. The Act through its regulatory body the Securities and Exchange Commission (SEC) regulates public offers of securities. Section 67(1) of the ISA provides that a person shall make an invitation to the public to acquire or dispose off any securities of a body corporate for a fixed period or payable at call, whether bearing or not bearing interest, unless the body corporate concerned is a public company, whether quoted or unquoted, and the provisions of sections 73 to 87 of the Act are duly complied with.
Quoted companies are companies whose shares are listed in the Nigerian Stock Exchange. The shares of an unquoted public company are not so listed but shares of both quoted and unquoted public companies may be offered to the members of the public subject to the approval of the SEC.
A public company inviting the public to deposit money with it or offering its securities to the public for subscription must first obtain the approval of the Securities and Exchange Commission (SEC), which is the apex regulatory authority or body for the Nigerian Capital Market.
In the absence of a prospectus, a statement in lieu of a prospectus will suffice.
Misstatements In Prospectus
A prospectus is a document that contains information that the public can use to subscribe to or purchase a company’s securities, if it contains any inaccuracies, it will have major ramifications. Misstatement is also called misrepresentation and the provisions that regulate the accuracy and truthfulness (candor) of what statements made by issues in a prospectus are found not only in the ISA but also in the Securities and Exchange Commission Consolidated Rules and Regulations of 2013. Those rules and regulations were made by the SEC pursuant to its rule-making powers under the ISA.
It is worthy of note that from common law there have always been civil and criminal liabilities on issues pertaining to securities bothering on misstatements or misrepresentations in the prospectus. What is regarded as the ‘golden legacy’ in this area was left by Kindersley VC as far back as the 19th century in the case of New Brunswick and Canada Railway Co. vs. Muggeridge (1860D) R and SM363 (part 381) as follows:
- Those who issue prospectus, holding out to the public the great advantages which will accrue to the persons who will take shares in a proposed when they’re taking and inviting them to take shares on the fate of the representation daring contain, are bound to state everything with strict and scrupulous accuracy, and not only to abstain from stating as facts that which is not so, but to omit facts within their knowledge, the existence of which might in any degree affect the nature, extent or quality of the privileges and advantages which the prospectus holds out as inducements to take shares.
Liabilities for Misstatements in Prospectus
Liabilities for prospectus misstatements can be classified under the following headings:
- Civil Liability
- Criminal Liability
Civil Liability in Case of Misstatements in Prospectus
Section 83 ISA 2007 provides that, for the purpose of the provisions of this act, statements:
(a) Included in a prospectus shall be deemed to be untrue if it is misleading in the form and content in which it is included;
(b) shall be deemed to be included in a prospectus if it is contained in the prospectus or in any report or memorandum appearing in the face of it or by reference incorporated or issued with it.
Keep in mind that such reports as mentioned in paragraph (b) above include accountant and auditors report.
Precisely, the civil liability that could arise from misstatements in a prospectus is outlined in section 851 (a) ISA, and that section provides as follows:
“When a prospectus has invited the public to subscribe for shares in a company the following persons are liable to pay compensation to all persons who subscribe to shares or debentures relying on the prospectus for the loss or damage they may have sustained and by reasons of the untrue statement or misstatement in the prospectus:
a. any director of a company at the time of the issue of the prospectus;
b. any person who consented to be named and is named as a director or as having agreed to become a director either immediately or after an interval of the time in the company;
c. any employee of the company who participated in or facilitated the production of the prospectus; and
d. The issuing house and its principal officers”.
Exemption from Liability for Misstatements in Prospectus
Note that a person may avoid liability under the above provisions as provided for in section 85 (1) (2) ISA if:
- He withdrew his consent in writing after giving it before the prospectus was issued and he could prove that the prospectus was issued without his authority or consent.
- He could prove that the prospectus was issued without his knowledge consent and that on becoming aware of its issue, he immediately gave reasonable public notice that it was issued without his knowledge or consent.
- After the issue of the prospectus and before allotment, on becoming aware of any untrue statement or misstatement in the prospectus, he withdrew his consent in writing and gave reasonable public notice of the withdrawal and of the reason for the withdrawal.
- The person has reasonable grounds to believe and did believe that the statement was true up until the time of the allotment.
Criminal Liability in Case of Misstatements in Prospectus
According to Section 86 (1) ISA, where a prospectus includes any untrue statement or misstatement, any director or officer who authorised the issue of the prospectus commits an offence and is liable:
(a) on conviction to a fine of not less than N1,000,000,000 or to imprisonment for a term not exceeding three years, or to both such fine and imprisonment; or
(b) on summary conviction, to a fine of not less than N1,000,000,000 or to imprisonment for a term not exceeding three months or to both such fine and imprisonment, unless he proves either that the untrue statement or misstatement was immaterial or that he had reasonable ground to believe and did, up to the time of the issue of the prospectus, believe that the statement was true.
(2) A person shall not be deemed for the purposes of this section to have authorised the issue of a prospectus by reason only of his having given the consent required by section 77 of this Act to the inclusion in it of a statement purporting to be made by him as an expert.
Exemption of an Expert from Liability for Misstatements in Prospectus
An expert is ordinarily liable for misstatements in any opinion of his or hers that is included in a prospectus however he may avoid liability if he satisfies the court that;
a. Having given his consent to the issue of the prospectus he withdrew it in writing before delivering the prospectus to the Securities and Exchange Commission for registration;
b. After delivering a copy of the prospectus for registration but before allotment of the securities on becoming aware of the untrue statement he withdrew his consent in writing and gave reasonable public notice of the withdrawal as well as the reason for it; and
c. He was competent to make the statement and had reasonable grounds to believe and did believe the statement was true up until the time of the allotment of shares.
If any prospectus is issued in contravention of this section, the company and every person who is knowingly a party to the issue commits an offence and is liable on conviction to a fine of N100,000 or a term of imprisonment of not less than three years or to both such fine and imprisonment.
When creating a prospectus, extreme caution and discretion are required. Before it is released to the general public, the prospectus must be verified for any misstatements or anomalies. The ISA holds specific people liable and punishes them for any misstatements or misrepresentations revealed in a company’s prospectus this is because the general public relies on the prospectus to make investment decisions and its integrity must be preserved.
- Investment and Securities Act 2007
- Securities and Exchange Commission Consolidated Rules and Regulations of 2013
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