A prospectus, in finance, is a disclosure document that describes a financial security for potential buyers. It commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company’s business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties and any other material information. In the context of an individual securities offering, such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential investors. Today, prospectuses are most widely distributed through websites such as EDGARand its equivalents in other countries.
Section 2(14) of the Companies Act 1913 defined a prospectus as meaning any prospectus, notice, circular, advertisement or other invitation, offering to the public for subscription or purchase any shares or debentures of a company but did not include any trade advertisement which shows on the face of it that a formal prospectus has been prepared and filed.
The Act of 1994 omits the definition of prospectus but section 135 provides the contents of prospectus. The contents are given in Part I & Part II of Schedule III of the Act. Again Section 135(3) states that every form of application for share must be accompanied by a prospectus.
Features of Prospectus:
- According to section 2(1)(14), Prospectus is one kind of notice
- By prospectus, the company invites public to buy its share or debenture. So it’s an invitation.
- Prospectus is a means of expressing the soundness of the company and therefore it helps in achieving faith of the public.
- Prospectus must be signed by the directors and it must be registered with registrar on or before the date mentioned on it.
- Prospectus must be circulated among the public.
Necessity of Prospectus:
- Public Company collects money through public subscription. For this, company must invite public to subscribe and it is done by issuing prospectus.
- It is required by the Companies Act 1994 that any company which raises fund by public contribution, must issue prospectus.
- It represents the true picture of the Company’s financial condition and public is informed about the company before buying its shares.
Where Prospectus is not required:
- When fund is raised by the subscription of existing members and creditors of the company.
- If shares are already in the list of stock exchange and they are sufficient to raise required fund.
- When under-writers are invited to bear liability of the company for its shares.
Rules regarding Preparation, Submission & Circulation of Prospectus:
- The Prospectus must contain in it—
- a) Company’s name at the head
- b) Full address of the registered office
- c) Date of company’s incorporation
- d) Date of issuing prospectus
- The copy of prospectus must be signed by the directors and it must be registered with Registrar of companies on or before the date of issuing.
- It must be stated clearly in the prospectus that a copy of the same prospectus has been presented to the Registrar.
- Prospectus must be circulated within 90 days of its submission to the Registrar.
- For non-compliance of any provision, each person involved in the preparation, submission and circulation of prospectus shall be liable to pay fine not exceeding Tk. 5000.00
Liability of the Company relating to Prospectus:
Company is liable for any type of misstatement in the prospectus which induces the public to buy its share. Misstatement in the prospectus includes –
- False statement,
- True statement expressed in a faulty way,
- To omit some true fact likely to affect shareholder’s intention to buy its share.
Company is liable for misstatements in the prospectus if it is issued by the Company or its officials. The remedy may be of two kinds—
- Recession of Contract
- Suit for compensation
- Recession of contract:
If the shareholder can prove that the statement which induced him to buy its share was false, then he can repudiate the contract and claim restitution of his money with sufficient interest. His name will be deleted from the list of shareholders.
In order to rescind a contract a shareholder must prove the following things—
- That there was a material false statement of fact in the prospectus.
Case Reference: City of Edinburgh Co Ltd. vs. Gibson’s Trustee – 1869
Prospectus stated that most of the gentlemen involved in business have bought the shares of the company. Later it was found that only 10/12 among the 55 shareholders are involved in business. The shareholder claimed recession of contract. The court held that the statement was not completely false and therefore it is not a sufficient ground for rescinding the contract.
The following statements are normally considered as misstatements –
- a) Concealment of some important information [Rex vs. Kylsant (Lord)- 1932]
- b) Bona fide misstatement (Rose vs. Estate Investment Co. -1868)
- c) Statement must be of fact not of law.
- That the shareholder was induced to subscribe by the false statement. If a shareholder buys shares from the open market where there is no scope f being induced by prospectus, he cannot demand recession of contract on the ground of misstatement in the prospectus.
- That he acted promptly after discovering the true fact. The shareholder must rescind the contract within a reasonable time before the liquidation of a company.
In following cases a person loses his right of recession –
- By affirmative attitudes like even after knowing about misstatement joins the general meeting or receives dividend
- By unreasonable delay
iii. By commencement of winding up
- Suit for compensation:
The following rules are applicable —
- Company is not liable for compensation; company can only restitute the value of the shares with interest.
- Directors, promoters and other officials involved with prospectus are liable for fraud
iii. To make them liable it must be proved that they were aware of the facts.
Statement in lieu of prospectus:
When public subscription is not invited, prospectus is not mandatory. The company can, in such cases, submit a statement in lieu of prospectus. It is as good as prospectus. In following cases a company is liable to publish statement in lieu of prospectus—
- In case of formation of public company when fund is raised internally not by public subscription
- If a private company is converted into a public company.
Alteration of Prospectus:
A prospectus may be altered by an ordinary resolution in the general meeting.