Misstatement of the prospectus is any inaccurate or deceptive statement within the prospectus. This article examines a company's responsibility for falsifying information in its prospectus.
Any firm needs a prospectus to be successful. Consumers typically look up a company’s prospectus to decide whether or not they would invest in it. The items listed in the prospectus must be authentic. Companies produce prospectuses to entice investors to come in and purchase their debentures or obtain credit from them.
The prospectus’s data must be precise. When there are any inaccuracies in the prospectus, and the public relies on such information, the company could be held accountable on a civil or criminal level.
Misstatements in the Prospectus: What is it?
Because the public relies on the prospectus to register for or buy securities from a corporation, any inaccuracies invite legal repercussions. A statement made in the prospectus that is false or deceptive in form or circumstance is considered a misstatement. A prospectus error may result in civil (section 34) and criminal liability (sec. 35). Under Section 447, errors can result in fraud penalties.
Additionally, any information that is included or left out but is likely to mislead may also be regarded as a false statement (sec. 34). Misstatement in prospectus would include, for instance, an incorrect statement about the reason for the issuing of shares or a deceptive statement about where a firm has its offices.
Prospectus Types
There are various prospectus types, including:
Shelf Prospectus
Any funding organisation or bank may produce a prospectus for one or more releases of securities or categories of securities specified in the prospectus. This prospectus is known as a shelf prospectus.
Deemed Prospectus
Section 64 of The Companies Act defines a deemed prospectus. It is a clause that forbids the release of a prospectus. A firm can get around this by spending the entire sum to an intermediary defined as an issuing house to avoid the complicated and demanding prospectus requirements. The issuing house subsequently notices to release the shares to the public.
Information Memorandum and Red Herring Prospectus
An Information Memorandum is a process carried out ahead of the filing of a prospectus during which a supply of securities destined to be provided by a company is evoked, as well as the conditions for the issue and even the price of these securities are analysed through circulars, notices, documents or advertisements. A Red Herring Prospectus is a kind of prospectus that lacks full details on the cost of the securities provided and the number of securities issued.
Criminal Liability
A person is punishable under Section 34 if they permit the release of a prospectus that contains false or deceptive information. Fraud is punishable in this way, according to Section 447.
Following Section 447, ‘fraud’ refers to any action taken or omission made with the intent to deceive, obtain an unfair advantage, or harm the interests of the firm, creditors, its shareholders, or any additional person. Such an act need not result in any wrongdoing in terms of benefit or loss. Fraud also includes a person abusing their position.
Section 447 also specifies the following penalties for fraud:
- The individual found guilty of fraud faces a minimum sentence of 6 months in jail and a maximum sentence of 10 years in prison, whereas if the sum involved in the fraud is ₹10 lakh or maybe more, or 1% of the company’s revenue (whichever is less). Such an individual will also be subject to a fine of up to three times the sum involved in fraud, although it cannot be less than that amount.
- When the fraud includes an amount below ₹10 lakh or 1% of the company’s annual revenue (whichever is less) and doesn’t involve a matter of public importance, the sentence may be increased to five years in jail, as well as a penalty of up to ₹50 lakh, or even both.
- The sentence must be at least 3 years in jail if the fraud in concern impacts the public interest.
Civil liability
Depending on a deceptive prospectus, people who purchase a company’s stocks may be held legally liable for any losses or damages they incur (sec. 35).
In such cases, the following people are subject to liability under Section 447 and must make restitution to those who have suffered such damage or loss:
- A person who agrees to be designated as a director there in the prospectus and therefore is mentioned as a company director or has consented to serve as a director; a supporter of the firm; a company director at the time the prospectus was issued;
- A person who is a specialist and has been involved or committed to the creation, promotion, or the company’s management and has approved the release of the prospectus.
Penalties for Making False Claims in a Prospectus
If someone is found to have committed fraud, they will receive a term that ranges from 6 months to 10 years in prison. Additionally, they will be subject to a fine that will not be lower than the sum involved in the fraud, although it could be as much as three times that sum. The punishment must be at least 3 years unless the fraud was committed for the benefit of the public.
Exceptions to the Prospectus’s False Statement Liability
- When a person can show that the claim or exclusion was irrelevant, that they had good reason to think it was true, that now the exclusion or omission was required, and that they held that belief up to the prospectus‘ release, they will not be held criminally accountable under Section 34
- A person may also avoid civil liability under Section 35’s Subsection 1 when they can demonstrate one of two things: either the prospectus was given without their consent or knowledge. They informed the public as soon as they became aware of it, or the prospectus was provided without their knowledge or permission, and they informed the public as soon as they became aware of it
- A person who might not be held accountable for a misrepresentation made by a specialist
- The person had legitimate cause to think that the expert was qualified to make the assertion, and the document is a correct and decent representation of the declaration, an accurate copy, or a right and proper extraction of the report or valuation.
Conclusion
The company prospectus summarises a problem’s goal and outlines the organisation’s core values. Only publicly traded firms publish a prospectus to provide avenues for buyers interested in purchasing the company’s securities. You can get in touch with Vakilsearch to learn more about legal issues and their solutions involving Indian companies that operate in the country.
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