A prospectus is only as good as the people behind it. The Capital Market Act 2015 backs the disclosure rules with criminal, civil and administrative liability spread across everyone who had a hand in the document.
The criminal offence
“A person shall not authorise or cause the issue of a prospectus which contains (a) any statement or information that is false or misleading; and (b) any statement or information from which there is a material omission.”
Although the limbs are joined by “and”, each is an independent ground. A statement is deemed to be in the prospectus if it is in a report or memorandum appearing on the face of the document, or issued with it with the consent or knowledge of a person who authorised its issue (section 142(2)). The penalty is a fine of up to K10,000,000 or ten years’ imprisonment, or both (section 142(3)). Whether an omission is “material” is judged by the general duty of disclosure in section 132; see what a prospectus must contain. On conviction, the court may also order the offender to pay compensation to anyone who suffered loss (section 463).
Section 143 limits the net. The Commission and the Registrar of Companies are never taken to have authorised or caused the issue of a prospectus merely by approving or receiving it (section 143(1)), and a person who merely gave a section 140 consent to be named has not, for that reason alone, authorised the issue (section 143(2)).
Who must pay the investor
Section 144(1) gives a person who acquires, subscribes for or purchases securities and suffers loss or damage as a result of a false or misleading statement or material omission in a prospectus the right to recover the amount of that loss from all or any of the following:
| Person | Extent of liability |
|---|---|
| The issuer and each director at the time of issue (for a unit trust, the trustee and its directors) | Any loss or damage |
| A person named with consent as a director or proposed director | Any loss or damage |
| A promoter | Loss arising from the prospectus, or the portion of it, that the promoter helped prepare |
| The principal adviser | Any loss or damage |
| A person named with consent as having made a statement in, or relied on by, the prospectus (an expert such as a valuer) | Loss caused by the inclusion of that statement |
| A named stockbroker, underwriter, auditor, banker or advocate who made a statement included in or relied on by the prospectus | Loss caused by the inclusion of that statement |
| Anyone who authorised or caused the issue in breach of section 142 | Loss caused by that contravention |
“Director” includes any person by whom the offer is made (section 144(2)), so a fund manager distributing units in its own name is exposed. A sub-underwriter is not an underwriter (section 144(3)). The investor may sue “all or any” of them, so a retiree need not pursue an insolvent trustee if a solvent valuer is also liable. “Promoter” of a unit trust means a promoter of the scheme, excluding someone acting only professionally (section 122).
Misleading or deceptive conduct
Section 145 reaches conduct that is not confined to the prospectus text. A person must not act in a manner that is misleading or deceptive, or likely to mislead or deceive, in connection with a prospectus, an offer or allotment of securities, any advertising notice or preliminary prospectus under section 137, or negotiations and arrangements preparatory to any of these (section 145(1)). A sales pitch that contradicts the prospectus falls within it. Breach is not an offence, but an investor who suffers loss may recover it under section 446 (section 145(2)). Section 446(1) allows the action whether or not anyone has been charged or convicted, and section 446(2) permits it to be brought within six years of the cause of action accruing or of the investor becoming aware of the contravention, whichever is later. Section 446 also covers loss caused by any other breach of Part IV.
No contracting out
Section 152 makes an agreement void insofar as it purports to exclude or restrict liability for contravening sections 142, 144 or 145 or for loss recoverable under section 446. Disclaimers in the prospectus or application form, such as “no responsibility is accepted for the accuracy of this information”, are therefore ineffective against an investor. Section 131(2) separately voids any condition requiring an applicant to waive the contents requirements.
Action by the Securities Commission
Section 443 lets the Commission act without going to court. Section 443(2)(l)–(p) deems the issuer and its directors, persons named as directors, the promoter, persons named as making statements, and named stockbrokers and underwriters to be bound by the Act’s requirements and the Commission’s guidelines. If they breach them, the Commission may, after a hearing, direct compliance, impose a penalty proportionate to the breach of up to K5,000,000, reprimand them, order restitution to aggrieved investors, refuse to consider future Part IV submissions and, for promoters and directors, impose a trading moratorium or publicly state that the director’s retention of office is against the public interest (section 443(3)). Unpaid penalties and restitution are recoverable as civil debts (section 443(7)–(8)). Section 120 adds an offence, with the same K10,000,000 or ten-year penalty, for false or misleading submissions to the Commission in the approval process.
An investor who suspects a prospectus was misleading should keep the prospectus, application form and marketing material, note the date the problem came to light (the six-year clock may run from then), complain to the Commission and take legal advice. The defences available to those sued are explained in defences to prospectus liability.
Sources
- Capital Market Act 2015 — ss 120, 122 (“promoter”), 131(2), 132, 140, 142–145, 152, 443, 446, 463
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.