Criminal Liability for the Prospectus

In one line

A prospectus that contains an untrue or misleading statement, or an inclusion or omission likely to mislead, makes every person who authorised its issue liable for fraud under s.447 unless he proves the statement was immaterial or that he reasonably believed it true; and anyone who knowingly or recklessly makes a false or deceptive statement, or deliberately conceals material facts, to induce investment is liable under the same section.

In exam wording: under section 34, where a prospectus issued, circulated or distributed under this Chapter includes any statement which is untrue or misleading in form or context in which it is included, or where any inclusion or omission of any matter is likely to mislead, every person who authorises the issue of such prospectus shall be liable under section 447.

Why the law has this at all

Disclosure regulation works only if untruth is expensive. A prospectus is a document written by people who profit from the subscription, read by people who cannot verify it, and relied on to part with money that is gone the moment it is paid. If the only sanction for a false prospectus were compensation, the calculation would favour lying: the issue succeeds, most subscribers never sue, and the few who do are paid out of the money raised.

The Act therefore places three sanctions on the same conduct, and the reason each exists can be stated in a line.

Criminal liability, s.34, punishes the authorisation of a misleading document, whether or not anybody subscribed and whether or not anybody lost. The wrong is the falsity itself.

Civil liability, s.35, compensates the subscriber who acted on the document and sustained loss, and is treated in the next chapter.

Section 36 reaches further than the prospectus altogether. It punishes fraudulent inducement to invest by any statement, promise or forecast, in or out of a document, and extends to inducements to obtain credit facilities from a bank or financial institution.

Underneath all three sits s.447, which supplies the definition of fraud and the punishment. That is the architectural point of this chapter: the 2013 Act deliberately routed prospectus falsity into a single general fraud offence rather than leaving it with its own scattered punishments, and that decision is what an LL.M. answer should notice first.

Section 34: the offence

The trigger. A prospectus issued, circulated or distributed under this Chapter which:

includes any statement which is untrue or misleading in form or context in which it is included; or

where any inclusion or omission of any matter is likely to mislead.

Two features of that formula do a great deal of work.