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Misstatement in Prospectus

Any inaccuracy or deception in the prospectus’s text is considered a misstatement. This article investigates a company’s liability for omitting material facts from its prospectus.

A prospectus is necessary for any company to succeed. Typically, consumers research a company’s prospectus before deciding whether or not to invest in it. The things that are listed in the prospectus have to be real. Prospectuses are created by businesses to convince investors to buy their debentures or acquire loans from them.

Data in the prospectus must be accurate. The corporation may be held liable on a civil or criminal level if there are any errors in the prospectus and the public relies on that information.

Misstatements in the Prospectus: What is it?

Any errors bring legal ramifications because the public relies on the prospectus to register for or purchase securities from a corporation. A misrepresentation is one that is made in the prospectus that is false, misleading, or deceptive in any other way. Both civil (section 34) and criminal (section 35) responsibility may emerge from a prospectus error. Errors may result in fraud fines under Section 447.

A false statement may also be considered to include any material that is either included or omitted yet is likely to deceive (section 34). An example of a misleading statement in a prospectus would be one that gave the wrong information about why shares were being issued or one that misrepresented the location of a company’s offices.

Prospectus Types

There are various prospectus types, including:

Shelf Prospectus

A prospectus may be created by any funding institution or bank for one or more securities releases or categories of securities that are mentioned in the prospectus. A shelf prospectus is what this prospectus is called.

Deemed Prospectus

A presumed prospectus is what The Companies Act defines in Section 64. It is a provision that prohibits the distribution of a prospectus. This can be avoided by a company by paying the entire amount to an intermediary, such as an issuing house, in order to get past the complex and onerous prospectus requirements. The issuing firm then issues a notice announcing the public release of the shares.

Information Memorandum and Red Herring Prospectus

An information memo is a procedure carried out prior to the filing of a prospectus during which a supply of securities intended to be provided by a company is invoked, as well as the terms of the issue and even the price of these securities are examined through circulars, notices, documents, or advertisements. A prospectus that does not include all necessary information regarding the price of the securities offered and the quantity of shares issued is known as a red herring prospectus.

Criminal Liability

If someone permits the distribution of a prospectus that contains false or misleading material, they are in violation of Section 34. This is the punishment for fraud under Section 447.

According to Section 447, “fraud” is defined as any action or omission that is performed with the purpose of deceiving, gaining an unfair advantage, or endangering the interests of the business, its creditors, shareholders, or any other person. A similar action need not cause harm in terms of gain or loss. Fraud also includes abuse of power by a person.

Section 447 also specifies the following penalties for fraud:

  • If the amount involved in the fraud is $10,000 or more, or 1% of the company’s income (whichever is smaller), the offender faces a minimum term of 6 months in jail and a maximum sentence of 10 years in prison. Additionally, the fine for such a person might be up to three times the amount of the fraud, but it cannot be less.
  • The term may be enhanced to five years in prison, a fine of up to 50 lakh rupees, or even both when the fraud involves less than 10 lakh rupees or 1% of the company’s annual sales (whichever is less).
  • If the fraud in question affects the public interest, the penalty must be at least 3 years in prison.

Civil liability

People who purchase a company’s stock may be held legally responsible for any losses or damages they suffer in accordance with a misleading prospectus (section 35).

In such circumstances, the following individuals are liable under Section 447 and are required to compensate persons who have incurred such harm or loss:

  • A supporter of the business; a director of the company at the time the prospectus was published; a person who consents to be named as a director and is consequently identified as such in the prospectus;
  • a professional who has contributed to the development, advancement, or management of the company and has given their approval for the prospectus to be released.

Penalties for Making False Claims in a Prospectus

The penalty for fraud is a prison sentence that can last anywhere from six months to ten years. They will also be liable to a fine that must be less than the amount involved in the fraud but may be up to three times that amount. Except in cases where the deception was committed to benefit the public, the sentence must be at least three years.

Exceptions to the Prospectus’s False Statement Liability

  • A person will not be prosecuted under Section 34 if they can demonstrate that the claim or exclusion was irrelevant, that they had reason to believe it was truthful, that the exclusion or omission was now necessary, and that they retained that belief up to the prospectus’ distribution.
  • If a person can show one of the following two facts, they may be exempt from civil liability under Section 35’s Subsection 1: either the prospectus was distributed without their knowledge or consent. They either provided the prospectus without their knowledge or consent, and they told the public as soon as they were aware of it, or they did so after becoming aware of it.
  • a person who might not be held liable for a professional’s deception
  • The document is a correct and respectable depiction of the declaration, an accurate copy, or a right and suitable extraction of the report or valuation, and the individual had good reason to believe that the expert was qualified to make the assertion.


The aim of a problem is outlined in the company prospectus, along with the organization’s basic principles. Only companies that are publicly traded provide a prospectus to offer options to investors interested in buying the company’s securities.







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