Question

(A) What matters are given in a prospectus and how Approval, Issue and Registration of Prospectus is processed?

(B)       Describe the Civil and Criminal Liabilities of Mis-statement of Prospectus.

Answer 1

A ) A prospectus includes some of the following information:

• A brief summary of the company’s background and financial information
• The name of the company issuing the stock
• The number of shares
• Type of securities being offered
• Whether an offering is public or private
• Names of the company’s principals
• Names of the banks or financial companies performing the underwriting
• Approval of prospectus .
• Section 87A(1) of the Act provides for the approval of a prospectus by the FCA: [Note: Section 87C of the Act sets out time limits for the FCA to notify an applicant of its decision on an application for approval.]
• (1) The [FCA] may not approve a prospectus unless it is satisfied that: (a) the United Kingdom is the home State in relation to the issuer of the transferable securities to which it relates, (b) the prospectus contains the necessary in  formation, and (c) all of the other requirements imposed by or in accordance with this Part or the prospectus directive have been complied with (so far as those requirements apply to a prospectus for the transferable securities in question).
• 2. Where the competent authority of the home Member State considers, on reasonable grounds, that the documents submitted to it are incomplete or that supplementary information is needed, for instance due to inconsistencies or incomprehensibility of certain information provided, it shall notify the issuer, offeror or person asking for admission to trading of the need for supplementary information and the reasons therefor, in writing, via electronic means. …
• 3. Where the issuer, offeror or person asking for admission to trading on a regulated market is unable or unwilling to provide the supplementary information requested in accordance with paragraph 2, the competent authority of the home Member State shall be entitled to refuse the approval of the prospectus and terminate the review process.
• Issue of prospectus

When a company intends to issue securities to the public, it must file the prospectus with the SEC. The security issue must wait for the SEC to declare the registration statement effective before they can finalize the sale. The registration statement is only approved if the federal agency is satisfied that the security issuer has complied with all the rules governing disclosure.

However, there are certain exemptions when filing a prospectus with the SEC. If a security issue is from a company that has been consistent with their 10-K Form filling and reports a market capitalization above the required threshold, the company may issue a simplified version that incorporates the information into their 10K filings.

Registeration of prospectus

In general, all securities offered in the U.S. must be registered with the SEC or must qualify for an exemption from the registration requirements. The registration forms a company files with the SEC provide essential facts, including:

• A description of the company's properties and business;
• A description of the security to be offered for sale;
• Information about the management of the company; and
• Financial statements certified by independent accountants.

B) A misstatement in the prospectus can invoke criminal (sec. 34) and civil liabilities (sec. 35). Misstatements can lead to punishment for fraud under Sec. 447.

• Criminal liability

A person who authorizes the issue of a prospectus which has untrue or misleading statements is liable for punishment under Sec. 34. Such a punishment is for fraud as set out in Sec. 447. “Fraud” under Sec. 447 includes an act, omission, concealment of any fact with an intent to deceive, gain undue advantage, or to injure the interests of the company or its shareholders or its creditors or any other person. It is not necessary that such an act involve any wrongful gain or wrongful loss. Abuse of position committed by a person is also considered fraud under this section. Sec. 447 further sets out the punishment for fraud:

• If the fraud involves an amount of ten lakh rupees or more, or one per cent. of the turnover of the company (whichever is lower) the person who is found guilty of fraud shall be punishable with imprisonment for a minimum term of six months which may extend to ten years. Such a person shall also be liable to a fine of an amount not less than the amount involved in the fraud and the fine may extend to three times of such amount.
• If the fraud involves an amount less than ten lakh rupees or one per cent. of the turnover of the company (whichever is lower) and does not involve public interest, the imprisonment may extend to five years or with fine which may extend to fifty lakh rupees or with both.
• If the fraud in question involves public interest, the term of imprisonment shall not be less than three years.
• Civil liability

Civil liability for misstatements in prospectus will arise when a person has sustained any loss or damage by subscribing securities of a company based on a misleading prospectus (sec. 35). In such instances the following persons shall be liable under sec 447 and will have to pay compensation to persons who have sustained such loss or damage:

1. director of the company at the time of the issue of the prospectus;
2. person who has agreed to be named as a director in the prospectus and is named as a director of the company, or has agreed to become such director;
3. is a promoter of the company;
4. has authorised the issue of the prospectus; and
5. is an expert who has been engaged or interested in the formation or promotion or management of the company.