Prospectus (invitation to purchase shares)

PROSPECTUS

After obtaining a certificate of Incorporation the promoters will take steps to raise the necessary capital for the company. A public Company may invite the general public to subscribe to the capital of the company and for this purpose a prospectus has to be issued. The basic objective of issuing a prospectus is to arouse public interest in the proposed company and induce the general public to buy its shares and debentures. If the promoters are confident of raising the required capital privately they need not issue prospectus. In such a case a statement in lieu of prospectus must be filed with the registrar of companies.

The word prospectus is not used under Companies Act and instead the term offer document is used to mean any document, prospectus, notice, circular, advertisement or other invitation, offering to the public for subscription or purchase any share or debentures of a company.

 Private companies are not required to issue prospectus see s. 27 of cap 212.

The central theme of a prospectus from money raising point of view, is that it sets out the prospects of the company and the purpose for which the capital is required. The prospectus is the basis in which the prospective investors form their opinion and take decision as to the worthiness of the company. From legal point of view prospectus is not an offer but a mere invitation to treat. When a person makes an application for shares on the basis of the prospectus that application is the offer.

Offer document is defined by S.2 of Cap 212 but in simple words it is any document inviting deposits from the public or inviting offers from the public for subscription of shares or debentures of a company (subscription in the definition of prospectus means taking or agreeing to take shares for cash.

Prospectus must be in writing; oral invitation advertisements in TV or film are not treated as prospectus.

Invitation to Public

The document will be treated as prospectus only when it invites general public to subscribe to it. The public is of course general word. But if the document satisfies the condition of invitation to the public, it is a prospectus even though it is issued to a defined class of the public. In Nash v. Lynde (1929) A.C. 158.it was stated that If however, the invitation is made to a small circle of friends of the directors or the existing shareholders, It is not an offer to the general public. Whether the shares have been offered to the public is a matter of fact and will depend on the circumstances of each case. In South of England Natural Gas & petroleum Co. Ltd Re (1911) I Ch. 573. A prospectus was issued marked ‘for private circulation only’ it also contained a statement that a copy of it has been filed with the registrar. It was not publicly advertised    and was stated to have been distributed by the promoters only to shareholders in certain gas companies in which they were interested.  3000 copies were sent out. It was held that it was offer of shares to the public.

An offer will not be treated as made to the public

(1) If it is not calculated to result directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation.

(2) It is domestic concern of the persons making and receiving the offer or invitation. Thus an offer to one’s kid cannot be considered to be an invitation to public; Sherevell V Combined Incandescent Mantle’s Syndicate (1907) 2.3 T.L.R 482.

FORM AND CONTENTS OF A PROSPECTUS.

Prospectus is the window through which an investor can look into the soundness of a company’s venture. The investor must, therefore be given a complete picture of the company’s intended activities and its position.

This is done through prospectus which must secure the fullest disclosure of all materials and essential particulars and lay the same in full view of all intending purchasers of shares or debentures.

S. 46 provided that every prospectus issued by or on behalf of a company must be filed, and the date, unless the contrary is proved, is taken to be the date of publication of the prospectus.

S.47 (1) States that offer document issued before on behalf of the company or, by or on behalf of any person who was engaged or interested in the formation of a company must state the matters specified and contains in the reports required to be included from time to time in regulations made by the Minister for the time being responsible for finance or by the Capital Markets and Security Authority or such other authority as may be designated by that minister for the purpose.

Prospectus is not required to be issued in the following cases.

(1) Where shares are not issued to the public.

(2) Where shares or debentures are offered to existing members or debentures holders.

(3) Where shares/debentures offered are uniform in all respects with previously issued shares/debentures.

(4) Where an offer is made in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to the shares/debentures. 

Registration of offer document (s. 49)

No offer document shall be issued by or on behalf of the company or in relation to intended company unless, on or before the date of its publication, there has been delivered to the Registrar for registration a copy thereof approved by the Capital Markets and Securities Authority.

Misstatements in Prospectus

If there is any misstatement of a material fact in a prospectus or if the prospectus is wanting in any material fact, there may arise

1) Civil liability – s. 50

2) Criminal liability- s. 51 & 472

A person who has been induced to subscribe for shares (or debentures) on the faith of a misleading prospectus has remedies against the Company, and the directors, promoters and experts.

Remedies against the Company

1) Rescission of the Contract

Any person, who takes shares on faith of statements of fact contained in a prospectus, can apply to the court for rescission of the contract if those statements are false or fraudulent or if some material information has been withheld. He must however, apply for the rescission with a reasonable time and before he will have to surrender to the Company the shares allotted to him. His name is then removed from the register of members and he gets back the money paid by him for the Company along with interest.

Conditions for rescinding 

a) The statement must be a material misrepresentation of fact. The misrepresentation is material when it is likely to influence a reasonable man in his judgment whether or not to apply for shares. In Henderson V Lacon (1867) L.R. 5 Eq. 249. A prospectus stated that the directors and their friends have subscribed a large portion of the capital and they now offer to the public remaining shares, where as the fact was that the directors had subscribed only 10 shares each it was held that, the subscriber could rescind the contract. 

A statement of fact must be distinguished from a statement of opinion. statement that property of a company is worth a certain sum of money or that due to hard work and efficiency of directors the profits are expected to reach a certain figure are only opinions and will give no ground for an action for rescission. The statement that “the surplus assets, as appear by the last balance sheets, are more than Tshs. 10,000/= is a statement of fact.

b) Statement must have induced the shareholder to take the shares.

This in fact is a question of fact depending on circumstance of each case if a statement would influence a reasonable man, the court will readily infer that it influenced the applicant. In the case of Smith V Chadwick (1087) A.C 187 it was stated that if the applicant’s acts show that he did not rely on the statements, he is not entitled to rescind.

c) It must be untrue

A statement is deemed to be untrue if it is misleading in the form and context in which it is included. Where an omission is calculated to mislead, the prospectus is deemed in respect to such omission, to be a prospectus in which untrue statement is included. But a mere non-disclosure does not amount to misrepresentation unless the concealment has prevented an adequate appreciation of what was stated.