PROSPECTUS
TOPIC:
“How does the
law protect an investor who has acquired shares in a company based on
inaccuracies in its prospectus? Do you consider such protection adequate?”
By
Mohd. Zamre Bin Mohd. Zahir
Master in Laws (LL.M), UiTM
2012
PROSPECTUS
A
prospectus frequently provides investors by means of material information about
mutual funds, bonds, stocks and other investment. For example, a description of
the company's business, financial statements, biographies of officers and
directors, detailed information about their compensation, any litigation that
is taking place, a list of material properties and any other material
information. A prospectus is distributed by underwriters or brokerages to
potential investors.
If we look
to the history, until the year 2000, the regulatory framework for fund raising
in Malaysia was to some extent quite different with some aspects of fund
raising exercise requiring Securities Commission of Malaysia (hereinafter called as SC)
approval such as for the issuance of securities while approvals for
prospectuses resided with the Registrar of Companies.[1] In 2000,
based on Section 231 (2) of the Capital Markets and Services Act
2007 (hereinafter called as CMSA), the SC began registering
prospectuses for all issuance of securities unless for prospectuses issued by
unregistered recreational clubs.[2] Shanti
Geoffrey
in her book contends that the changes were significant as gradually shifted
from a system based on merit regulation to the introduction of a disclosure
based regulatory framework governing securities offering.[3]
However,
this is not to indicate that the existing framework of regulation is fully
disclosure based. What currently in place is a hybrid system of regulation that
to follow Section 212 of the CMSA 2007 as to submit information to the
regulators for purposes of corporate proposals and a disclosure based system of
the regulation pursuant to Division 3 of Part VI.[4]
If we look to other
states, for example in United Sates of America, in a securities offering in the
United States, a prospectus is required to be filed with the Securities and
Exchange Commission (SEC) as part of a registration statement.[5] The issuer may not use the prospectus to
finalize sales until the registration statement has been declared effective by
the SEC, meaning it appears to comply on its face with the various rules
governing disclosure.[6]
In United Kingdom,
publication of information in relation to the issue of securities in the United
Kingdom is governed by the Prospectus Rules, which implement the European Law
Prospectus Directive.[7] A prospectus must be published where certain
types of securities either are offered to the public or are requested for
admission on a regulated market. In the United Kingdom, the only regulated market
is London Stock Exchange full list.[8]
In
Malaysia like other states, the investors who involve in selling or purchasing
shares of the corporation always rely on the prospectus. In the event the
prospectus is inaccurate, there are several actions can be taken in protecting
the investors based on Common Law, Malaysian statutes such as Companies Act
1965 (hereinafter called as CA), CMSA and Securities Commission Act 1993
(hereinafter called as SCA) and by the regulators such as our Malaysian
Securities Commission (SC).
In
Malaysia we can see some changing happened and we can find the development of
law concerning to prospectus. Earlier, the Companies Act 1965 provided specific
regulations and play roles relating to prospectus. One issue may arise which is
does Companies Act 1965 have role to play? The answer is no. However, Companies
Act 1965 still applies to Unlisted Recreational Clubs. However, our Malaysian
law relating to prospectus keeps on developed. On 1st July 2000,
Securities Commission Act 1993 regulates and has role to play on a matter relating
to prospectus. But, previously some sections relating to prospectus in SCA 1993
already deleted and amended. Now, it is under Capital
Markets and Services Act 2007 (CMSA) that provides specific regulations and
play big roles to the matter relating to prospectus.
The regulations have done several aspects. Firstly, a prospectus
is required to be registered in the Securities Commission (SC). Secondly, the
disclosure based approach as replaced as merit based approach. Thirdly,
introduced a due diligence requirement by those who prepared the prospectus
filing which they risk both civil and criminal liability. Fourthly is an
introduced prohibition on share banking and advertisement. The disclosed based
approach and merit based approach is for making assessment of public issue and
to ensure that they provide sufficient information The share banking
prohibition is unsolicited invitation such as credit card and cannot simply
issue share without asking and the public must ask for it.
Besides that, one question may arise in a context of prospectus as
why must be regulation in public issuance prospectus. Actually, prospectus is
for investor protection in the context of public issue of shares. It is because
the purpose of regulation of public of shares is to ensure that potential
investors are provided in sufficient and accurate into so as to ensure that
there are able to make a sound investment decision. It is also because to
ensure that new diligent is exercised by those who prepare the disclosure
documentation. For example, he must have enough information either to invest or
not in the company. And the information is found in the prospectus.
DEFINITION
First and foremost, an ordinary
meaning of prospectus is a document containing information of corporation. Oxford Dictionaries defines prospectus as a printed document that advertises
or describes a school, commercial enterprise, forthcoming book and others to
attract or inform clients, members, buyers, or investors.[9]
Bursa Malaysia also defines prospectus as a document to
be issued by a company intending to make an issue of shares to the public.[10]
A
legal meaning of prospectus can be seen as a legal document that potential
shareholders of an initial public offering of a stock must be provided before
they can invest.[11]
It lists complete financial details of the company as well as the associated
risks of the investment.[12]
A prospectus is also required for mutual funds and any regulated security.[13]
Furthermore,
a prospectus is a document or a publication by, or on behalf of, a corporation
containing information on the character, nature, and purpose of an issue of
shares, debentures, or other corporate. Actually, securities extend an
invitation to the public to purchase the securities.[14]
The content of a prospectus is regulated by federal law. It must contain all
material facts relating to the company and its operations so that a prospective
investor can make an informed decision as to the merit of the investment.[15]
A prospectus must be furnished to an investor before any purchase is made.[16]
Prospectus
is a legal document which offering securities like shares or mutual fund shares
for sale required by Securities Act of 1933. It must explain the offer,
including the terms, issuer and objectives if it is mutual fund or planned use
of the money if it is securities, historical financial statements and other
information that could help an individual decide whether the investment is
appropriate or not for him.[17]
The
Malaysian statutory in Section 4 CA defines prospectus as may be summarised to
its essentials as a document inviting applications or offers from the public to
subscribe or purchase shares or debentures of any corporation.[18]
However
based on Part VI CMSA 2007, prospectus means a notice, circular, advertisement
or document inviting applications or offers to subscribe for or purchase
securities or offering any securities for subscription or purchase and unless expressly specified, includes a supplementary
prospectus, replacement prospectus, shelf prospectus, short form prospectus,
profile statement, supplementary shelf prospectus and abridged prospectus.[19] Section 226 CMSA explains the invitation
or offer to suscribe or purchase share or securities is prospectus. Based
on the case of Edgington
v Fitzmaurice (1885), a company
issued a ‘prospectus’ which means a document inviting subscriptions for
debentures.
[1] Section 37 of the
Companies Act 1965.
[2] Section 231 (2) of
the Capital Markets and Services Act 2007.
[3] Shanti Geoffrey,
Capital Market Laws of Malaysia, (Lexis Nexis 2010), p. 319.
[4] Ibid.
[5] U.S. Global
Investors, “Prospectus”, online, available at http://www.usfunds.com/investing-with-us/prospectus/
accessed on 14 November 2011.
[6] Ibid.
[7] Ibid.
[8] Ibid.
[9] Oxford Dictionaries,
“Prospectus”, online, available at http://oxforddictionaries.com/definition/prospectus?region=us
accessed on 10 November 2011.
[10]
Bursa Malaysia, “Glossary
of Stock Market Terminology”, online, available at http://www.bursamalaysia.com/website/bm/bursa_basics/market_terminology/glossary_resources/terminology-P.html
accessed on 14 November 2011.
[11] US Legal,
“Prospectus Law & Legal Definition”, online, available at http://definitions.uslegal.com/p/prospectus/
accessed on 10 November 2011.
[12] Ibid.
[13] Ibid.
[14] Farlex, “Prospectus”
(2011) The Free Dictionary, online, available at http://legal-dictionary.thefreedictionary.com/prospectus
accessed on 14 November 2011.
[15] Ibid.
[16] Ibid.
[17] InvestorWords,
“Prospectus”, online, available at http://www.investorwords.com/3911/prospectus.html
accessed on 14 November 2011.
[18] Section 4 of the
Companies Act 1965.
[19] Part
VI CMSA, Section 226 of the Capital Markets and Services Act 2007.
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