legal issues: Securities Regulation : Prospectus

(vi) the Commission is of the opinion that the issuer has contravened any provision of the securities laws or the Company Act and that such contravention would cast a doubt as to whether the issuer is a fit and proper person to make an issue of, offer for subscription or purchase of, or invitation to subscribe for or purchase, any securities.

Moreover, if the issuer has violated any provision of the Company Act or securities laws, the Registrar can refuse to register the prospectus. If such violation of provision has lead to any doubt as to whether the issuer is properly issue, offer, subscribe or purchase of any securities, the Registrar can refuse to register the prospectus too.

The Securities Commission is also entitled by the provision in Section 232(4)[1] of CMSA to publish a registrable prospectus for public information before its registration. This enables the general public to comment on the prospectus before its actual registration and issue. Section 245(5) stated that the publication under subsection (4) shall not indicate that the Commission recommends the securities or assumes responsibility for the correctness of any statements made or opinions or reports expressed in the registrable prospectus.

It increases opportunities for material issues to be identified before any offering under the prospectus. The provision enables implementation of a practice already carried out in many major capital markets where for example, prospectuses intended for registration are made available for feedback and comment on websites.

If a person applies to subscribe for or purchase securities in a corporation and, before issue of securities, a supplementary prospectus is submitted to the Securities Commission for registration, then as soon as practicable after registration, the issuer must–

For a supplementary shelf prospectus issued under the SC (Shelf Registration Scheme for Debentures) Regulations 2000 (SRS), the declaration by issuers is required to be made in the supplementary shelf prospectus during the period between the date of the shelf prospectus and the date of application to the Securities Commission for registration of the supplementary shelf prospectus.

The Securities Commission may, on the application of the issuer, allow a supplementary shelf prospectus to be registered without containing the following information, provided the issuer undertakes to deliver to the SC a price information sheet containing such information:

In this regard, the issuer should not issue the debentures until the supplementary shelf prospectus has been registered by the Securities Commission. The price information sheet containing the above information must accompany the shelf prospectus as updated by the supplementary shelf prospectus when issued to investors.

A shelf prospectus may provide an indicative utilisation of proceeds based on the proposed maximum amount of the debentures to be issued but the supplementary shelf prospectus should contain information on the actual utilisation of proceeds.

A supplementary/replacement prospectus should be legible and appear in type size of not less than eight-point Times. All pages in the supplementary/replacement prospectus must be numbered and any blank or partly blank pages should contain a statement that the page has been intentionally left blank.

Under section 245(1) of the CMSA, the Securities Commission may order the issuer of the securities not to allot, issue, offer, make an invitation to subscribe for or purchase or sell further securities to which the prospectus relates, if;

245 (2) further stated that subject to subsections (3) and (4), the Commission shall not make an order under subsection (1) unless the Commission has given a reasonable opportunity to be heard to any affected person as to whether such an order should be made.

Under Section 47 of Company Act 1965, a person shall be guilty of an offence if any untrue statement or intention non-disclosure of prospectus is found. However, if the person can proves either that the statement or non-disclosure was immaterial or that he had reasonable ground to believe that statement was true or the non-disclosure immaterial up to the time of the issuance of prospectus. The person is being served for five years jail sentence or penalty of one hundred thousand ringgit if he is found guilty of an offence against the act.

Section 248 CMSA provides that if a person subscribes for securities on the basis of a defective prospectus, such person has the right to recover for loss or damage resulting from the false or misleading statement in prospectus against the issuer of securities and others involved in the preparation of the prospectus.

Under Section 46 of Company Act 1965, the person shall be liable to pay compensation to all people who subscribe or purchase any shares or debentures and they face loss or damage due to any untrue statement or willful non-disclosure in the prospectus. The person who is liable to pay compensation may include the director of the company at the time of the prospectus issuance or the person who authorized and named in the prospectus as director. Then, the person who is the promoter of the company or authorized or caused the issue of the prospectus shall be liable to pay compensation too.

However, there are several situations that no person shall be liable to pay compensation. If the person can proves that he is having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, or it was issued without his authority. Besides, the no one is liable to pay the compensation if the prospectus is issued without the director knowledge and he gives a public notice after he is aware of its issue (Companies Act, 1965).

The plaintiff engaged the services of the defendant firm of solicitors for the purposes of listing on the 2nd Board of the then Kuala Lumpur Stock Exchange (`KLSE'). The plaintiff was successfully listed but however brought this action against the defendant claiming that the defendant breached the terms of its appointment or negligently failed to exercise reasonable skill and care in its role as solicitors under the listing exercise. It was contended that the defendant failed to make full disclosure of material particulars as prescribed under the KLSE Listing Rules and Requirements relating to a charge, a shadow director and related party dealings in the prospectus that was done in the listing process. The omission to make such disclosure was the operative cause to the plaintiff being listed, albeit wrongly, and the subscribers misled by the omission to purchase the shares under the impression that the plaintiff was financially fit and sound when that was not the case.

“ Looking at the law and the evidence before this court, it is my finding that the duty to maintain the veracity of the content of a prospectus is owed by the company and its board of directors to the potential subscribers, as it is the company and its board that authorizes and caused the issue of the prospectus. Reference may be made to the following provisions of the relevant legislations. Section 42 of the Companies Act 1965 states:

(1) A person who acquires, subscribes for or purchases securities and suffers loss or damage as a result of any statement or information contained in a prospectus that is false or misleading, or any statement or information contained in a prospectus from which there is material omission, may recover the amount of loss or damage from all or any of the persons set out in paragraphs (a), (b)...

Clearly, in our case herein, if the plaintiff's directors are responsible for issuance of the prospectus, and if the information set out therein is wrong or misleading as alluded to by the plaintiff in its own claim, the injury and consequent damages/losses are due not to the defendant, but to the plaintiff through its directors for failing to take reasonable care.

In Public Prosecutor v. Huang Sheng Chang[2], five directors pleaded guilty and were convicted in the District Court of Singapore on a charge, inter alia, that they being directors of a company caused a document to be sent out offering shares in the company to the public. They sent invitations to 2000 individuals and companies to join a exclusive club and take one share each in the company. The letter of invitation and its enclosures disclosed no information whatever about the company. The letter also did not disclose that one ordinary share of the company with a par value of (RM)5,000 had to be purchased at (RM)30,000, (that is) at a premium of (RM)25,000. In addition an individual was required to pay (RM)2,000 (in the case of a company (RM)3,000) described in the letter as the entrance fee. It was held by the District Court that the letter of invitation was an offer to the public to purchase shares in the company and was deemed to be a prospectus under s. 43 of the Act. It was further held that the letter did not comply with the requirements of the Companies Act as to the issuance of prospectuses under s. 39(4).

(2) Section 47 [s. 56] provides criminal sanctions for misstatement in a prospectus. A director may be criminally liable if he "authorized the issue" of a prospectus containing an untrue statement or wilful non-disclosure. The prosecution need only show that the statement was in fact false. A director may, however, avoid liability by proving either (a) that the statement or non-disclosure was immaterial, or (b) that he had reasonable grounds to believe and did up to the time of issue believe that the statement was true.

[1] The Commission may for public information publish the registrable prospectus submitted to the Commission before the registration of the prospectus under section 233.