Mis-statements in Prospectus: Criminal & Civil Liabilities

Shreya Patel

28 Jul, 2023

Investors must consider the prospectus when considering whether to invest in a company. Its dependability and accuracy are essential for building confidence and assisting with financial decisions. Companies publish a prospectus to entice potential investors and raise money, underlining the critical need for factual disclosure. Serious consequences might result from any mistakes in the prospectus, exposing the corporation to legal and criminal obligations. In accordance with Section 447, “fraud” is defined as any action, omission, or knowing failure to act with the intent to deceive, get an unfair advantage, or injure the company, its shareholders, creditors, or any other party.

What is a Prospectus?

A prospectus is defined as “any document characterized or presented as a prospectus,” which includes any notice, circular, advertising, or other papers designed to solicit proposals from the general public under Section 2(70) of the Company’s Act of 2013

. The prospectus is a key document that enables people to evaluate the legitimacy of a company’s scheme. The firm must ensure the completeness and veracity of the information provided in the Prospectus.

A prospectus is a formal, extensive document that offers prospective investors key details about a financial asset or investment offering. It is an essential instrument for businesses, governments, or other entities seeking to generate money by issuing securities like stocks or bonds or conducting an initial public offering (IPO). The prospectus is expertly crafted to offer comprehensive insights regarding the sale of shares of a business by its members shall also be deemed to be a prospectus, as well as other important information. Its goal is to provide a fair and accurate depiction of the investment opportunity and related risks in order to assist investors in making educated decisions. The prospectus must conform to particular legal standards set by regulatory organisations and is normally produced in accordance with applicable securities laws.

Importance of Accuracy in the Prospectus

• Investors can obtain important details about the investment opportunity through the prospectus, which serves as their main source of information.
• Investors can understand the issuing firm’s risks, rewards, and financial stability with accurate and comprehensive information.
• Investors with access to trustworthy data can make wise investment decisions that align with their goals, reducing the possibility of unforeseen losses.
• As part of the procedures for issuing securities, several regulatory authorities require creating and distributing a prospectus. These rules are meant to safeguard investors and preserve the reliability of the financial system.
• An accurate prospectus guarantees that the issuer complies with the rules established by regulatory bodies, promoting honest and effective market practices.
• The market is more confident when a prospectus is well-written and accurate.
• A fair playing field for all players is encouraged when investors believe the information to be true. The financial system is subsequently strengthened, leading to increased market involvement and easier capital generation.

What are Mis-statements in the Prospectus?

A prospectus is a document that offers crucial details to the public about a company’s securities, such as stocks or bonds, to help them make a purchase decision. Serious repercussions may result if any material in the prospectus is inaccurate or misleading. Misstatements in prospectus refer to statements that are false or deceptive in the prospectus. This involves omitting crucial information that may also deceive the general audience.

Any inaccurate or deceptive statement included in a prospectus that is meant to alert potential investors about key facts regarding an offering of securities is referred to as a misrepresentation of the prospectus. A misrepresentation can happen when information in the prospectus is either false or omits crucial details that could greatly influence an investor’s choice. Inaccuracies in financial performance statistics, risk factors, business operations, management know-how, legal conflicts, or any other information that might sway an investor’s decision are all examples of what can constitute such information.

Inaccuracies in a prospectus can be quite damaging since they defeat the goal of giving prospective investors accurate information. Investors may suffer financial losses as a result of these mistakes, and the issuing company’s credibility and image may also suffer.

Who can be held liable?

• The company director at the time of the prospectus release
• Individuals who have granted permission to be identified as directors in the prospectus or who have agreed to become directors, either immediately or in the future.
• Promoters of the business.
• Individuals who have given their permission for the prospectus to be released.
• Sections 57 and 58 of the Act control the liability of experts.

Criminal Liability

Section 34 of the Companies Act states that a person can be held liable if they enable the publishing of a prospectus comprising false or misleading content. If the fraud affects the public interest, the minimum term is three years in prison.

• Amount more than 10 lakhs: If a person is found guilty of fraud in an amount of ten lacks or more, or 1% of the company’s sales (whichever is less), they risk a minimum jail term of six months and a maximum of ten years. They might also face a fine of up to three times the amount that was implicated in the fraud, but not less.
• Amount less than 10 lakhs: If the fraud involves less than ten lakh rupees or 1% of the company’s annual sales (whichever is less) and is not of considerable public interest, the penalty may be raised to five years in prison, a fine of up to fifty lakh rupees, or both.

Civil Liability

Section 35 states that when a false prospectus causes buyers to purchase a company’s shares, the purchasers may be held legally liable for any damages they sustain. In such instances, the following individuals are accountable under Section 447 and must pay those who have incurred losses:

• Director of the company
• Any individual who has agreed to be listed as the director
• Company promoter/supporter
• The director who was there at the time of making of the prospectus
• A specialist who was engaged in the creating or with the management and had approved the prospectus.

If convicted guilty of fraud, a person may receive imprisonment ranging from 6 months to 10 years. They will also be punished with an amount equivalent to or more than the amount involved in the fraud, up to three.

Conclusion

In conclusion, the problem of false information in prospectuses has serious repercussions for issuers and investors alike. Since the material in a prospectus serves as the foundation for investors’ educated investment decisions, its quality and thoroughness are of the highest significance. Any incorrect or misleading information can have serious repercussions and subject the person to both criminal and civil liability. Criminal penalties for securities fraud involving false assertions in a prospectus include hefty fines, time behind bars, and restitution. Investors have the legal right to pursue civil remedies for losses sustained as a result of misstatements in prospectuses. Investor recession rights, monetary compensation, and injunctive relief to stop additional injury are all possible in civil cases.

FAQs

Read, More: A Brief Overview on Company Directors: Duties, Powers, Appointment & Liabilities .

1. https://www.mca.gov.in/content/mca/global/en/acts-rules/companies-act/companies-act-2013.html