A prospectus is accurate on the day it is approved. Markets move, valuations change and mistakes come to light. The Capital Market Act 2015 deals with this through the supplementary and replacement prospectus, and gives applicants who relied on the old document a way out.
When a supplementary or replacement prospectus is required
The section applies, for a unit trust or managed investment scheme, “where a prospectus has been approved” and, in any other case, after approval but before the issue of securities, where the issuer becomes aware that a matter has arisen which would have had to be disclosed under sections 131 or 132, the Act, the Commission’s guidelines or a stock exchange’s listing requirements had it arisen when the prospectus was prepared; that there has been a significant change affecting a matter disclosed in the prospectus; that the prospectus contains a material statement that is false or misleading; or that it contains a statement from which there is a material omission.
The printed text joins these triggers with “and”, but each is plainly a separate trigger. The difference between unit trusts and other issuers is deliberate. A company’s offer closes when its shares are issued, so its duty ends then. A unit trust sells units continuously under the same prospectus, so the trustee’s duty to update runs for the whole life of the document. If the fund’s largest property is revalued downwards, the fund manager is replaced or the trustee’s licence is made subject to new conditions, a supplementary or replacement prospectus is needed.
The same duty applies to matters in a supplementary or replacement prospectus that has itself been approved (section 134(4)), so a fund may accumulate several supplements before it issues a clean replacement.
Supplementary or replacement?
The issuer chooses. A supplementary prospectus is a short document read together with the original; it “shall be regarded as being part of the prospectus to which it relates” and all prospectus liability rules apply to it (section 134(7)). A replacement prospectus is a complete new document that “shall be regarded as replacing the prospectus previously registered under Section 129” (section 134(8)). A single correction suits a supplement; a change affecting many pages calls for a replacement.
Timing, approval, lodgement and labelling
- Timing. The issuer must submit the document to the Commission for registration “as soon as practicable” after becoming aware of the trigger (section 134(2)). Delay is itself an offence.
- Approval. The Commission approves it on the same basis as the original. Until then the trustee should stop issuing units, because the original prospectus is known to be defective.
- Lodgement. The approved document must be lodged with the Registrar of Companies “immediately upon approval” (section 134(3)).
- Labelling. Every page of a supplementary prospectus must carry a clear statement in bold type that it is a supplementary prospectus to be read with the original and any earlier supplements (section 134(5)). A replacement prospectus must begin with a bold statement that it is a replacement and identify the document it replaces (section 134(6)).
- Distribution. Every copy of the original prospectus issued after a supplement is registered must be accompanied by the supplement (section 134(9)).
Contravening subsection (2), (3), (5), (6) or (9) is an offence punishable by a fine of up to K10,000,000 or ten years’ imprisonment, or both (section 134(13)).
The applicant’s right to withdraw
Section 135 protects people who applied on the strength of the old document. It applies where a person has applied for securities under a prospectus and, for a unit trust, units have not yet been issued or transferred to the applicant by the trustee or management company, and the issuer then delivers a supplementary or replacement prospectus to the Commission (section 135(1)).
As soon as practicable after the Commission approves the new document, the issuer must give each such applicant written notice (or such other notice as the Commission specifies) that a supplementary or replacement prospectus has been approved, give the applicant “no less than 14 days from the date of receipt of the notice an opportunity to withdraw his application”, and enclose a copy of the new document (section 135(2)). If the applicant withdraws, the issuer must “immediately” repay all money paid on the application (section 135(3)). Breach of either duty carries the same K10,000,000 or ten-year penalty (section 135(7)).
A church that has sent a cheque for units but not yet received a holding statement should read a supplementary prospectus carefully. Fourteen days is the minimum period to decide. If the news is bad, a written withdrawal must reach the trustee within the period stated in the notice; the refund is of the amount paid, without interest. Keep proof of the date of receipt, because the period runs from it.
Relief orders and conditions
The Commission may, on an issuer’s written application or of its own accord, make an order relieving the issuer from, or varying, the requirements of section 134 or section 135, and may attach conditions (sections 134(10)–(11), 135(4)–(5)). In each case it must first be satisfied that compliance is unnecessary for the protection of people who would normally deal in the securities and who would be expected to understand the risks, and that compliance would impose an unreasonable burden on the issuer (sections 134(12), 135(6)). Breaching a condition of a relief order is an offence (sections 134(14), 135(8)); no specific penalty is stated, so the general penalty in section 461 applies.
Where the defect is serious the Commission can also issue a stop order under section 141, and the people responsible for the original error may face liability under sections 142 and 144; see who is liable.
Sources
- Capital Market Act 2015 — ss 122 (“prospectus”), 131, 132, 134, 135, 141, 142, 144, 461
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.