A prospectus is the document on which a retiree, a church finance committee or a landowner company decides whether to invest in a unit trust. The Capital Market Act 2015 controls its contents in two layers: formal requirements and a general duty to disclose everything that matters.
The formal requirements in section 131
Section 131(1) requires that a prospectus:
- is dated, and that date is taken to be the date of issue unless the contrary is proved (paragraph (a));
- states that it has been approved by the Commission and lodged with the Registrar of Companies, and that approval “shall not be taken to indicate that the Commission recommends the securities or assumes responsibility for the correctness of any statements made or opinions or reports expressed in the prospectus” (paragraph (b));
- states that no securities will be allotted or issued on the basis of the prospectus later than the period the Commission specifies from the date of issue (paragraph (c));
- where it contains or extracts an expert’s statement, report, memorandum or valuation, states the date it was made and whether it was prepared for inclusion in the prospectus (paragraph (d));
- does not name anyone as having made a statement unless that person has consented under section 140 (paragraph (e));
- sets out such other information, matters or reports as the Commission specifies (paragraph (f)).
The last item is where the detail lives: the Commission’s guidelines dictate the financial statements, fee tables, investment policy and risk disclosures expected in a unit trust prospectus. A condition requiring an applicant to waive these requirements, or deeming notice of a contract not referred to in the prospectus, is void (section 131(2)). Issuing a non-compliant prospectus is an offence by the issuer and every director, punishable by a fine of up to K10,000,000 or ten years’ imprisonment, or both (section 131(7)).
The general duty of disclosure
In deciding whether a prospectus is false or misleading or omits something material, regard is had to “whether the prospectus contains all such information which investors and their professional advisers would reasonably require, and reasonably expect to find in the prospectus, for the purpose of making an informed assessment of (a) the assets and liabilities, financial position, profits and losses and prospects of the issuer and, in the case of a unit trust scheme, of the scheme; and (b) the rights attaching to the securities; and (c) the merits of investing in the securities and the extent of the risk involved in doing so”.
This is the heart of prospectus law. Ticking the boxes in section 131 is not enough; silence about a matter investors would want to know is a material omission for the offence in section 142 and the civil claim in section 144. For a unit trust the test is applied to the scheme itself: the portfolio, borrowings, valuation method, liquidity and outlook must all be covered.
Whose knowledge counts
Section 132(2) fixes the pool of knowledge against which omissions are judged: what is known to the issuer’s directors, anyone named as a director or proposed director, the promoter, the principal adviser, any person named as having made a statement, the named stockbroker, underwriter, auditor, banker or advocate, and any other named professional adviser, together with what any of them “would have been able to obtain by making such enquiries as were reasonable in the circumstances”. A director cannot plead that an uncomfortable fact sat in the fund manager’s files.
Section 132(3) lists what is weighed in deciding how much must be said: the nature of the securities, the issuer’s business and the scheme; the kind of people likely to invest; matters a professional adviser could be expected to know; and whether the offer goes to existing unit holders who have already received information under the Act or exchange rules. A rights issue to existing holders may justify a shorter document than a first retail offer.
Consents from named persons
Where a prospectus quotes or relies on a statement by an identified person, such as a valuer or auditor, section 140 forbids its issue unless that person has given written consent to the statement appearing in that form and context, has not withdrawn it, and the prospectus says so. Knowingly participating in a breach is an offence (section 140(2)), punishable under the general penalty in section 461. Extracts from official statements are exempt. The consents must be filed with the Commission and kept for inspection; see how a prospectus is approved.
Relief orders and short-form documents
The Commission may relieve a person from, or vary, the form and content requirements, with conditions (section 131(3)–(4)), but only if satisfied that compliance is unnecessary to protect people who would normally deal in the securities and understand the risks, and would impose an unreasonable burden on the issuer (section 131(5)). A prospectus issued under such an order is deemed compliant (section 131(6)), but breaching a condition is itself an offence (section 131(8)).
Section 136 allows regulations for shelf prospectuses, short form prospectuses and profile statements, specifying their content, duration and the investors they may cover; full prospectus liability applies to each (section 136(3)). Section 133 requires an abridged prospectus for renounceable rights issues that will be quoted on an exchange.
A reading guide for investors
Start with the date and the section 131(1)(b) statements; without them the document is not a lawful prospectus. Read the risk section before the returns section. Confirm the trustee’s and fund manager’s licences with the Commission. Find the fee table and the valuation and withdrawal rules, and compare them with the trust deed. Check the dates of any valuation reports; an old valuation of property assets is a warning sign. If a question is not answered, section 132 says it probably should have been.
Sources
- Capital Market Act 2015 — ss 131, 132, 133, 136, 140, 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.