QUESTION 1

A security is defined under section 700 of the Corporations Act as a share in a body or a
debenture of a body or a legal or equitable right or interest in a security covered by a share or a
debenture of a body, or an option to acquire, by way of issue, a security covered by a share or a
debenture of a body. It also includes a right to acquire, by way of issue, a share or a debenture of
a body.
Offering of securities for issue and for sale is the most basic form of fundraising for a company.
Offering securities for sale is the process of inviting offers to purchase the securities while
offering securities for issue is the process of inviting applications for the issue of the securities.
The law requires that any person offering securities needs to disclose relevant information to the
potential investors. Section 727 of the Corporations Act prohibits offering securities without
disclosure. Disclosure is done through the use of various documents as provided for in section
705 of the Corporations Act. These documents include prospectus, short form prospectus,
profile statements and an offer information statement. Section 708 of the Act however goes
ahead to state the offers securities that do not need disclosure to be done.
Therefore, Kenny and his company should consider offering for sale or issue debentures or
shares in his company to potential investors. This would enable the company raise the required
capital. It will be required to prepare a prospectus in actualising the third option that involves
raising $20 Million. This should be followed by a profile statement if the ASIC has provided for
its use. In actualising the first two options, Kenny is required to prepare a prospectus or an Offer
Information Statement as the amount to be raised is $10 Million or less.
I would recommend the company Jams to go for the third option as it raises more capital and also
gives the company an international perspective of its business. Moreover, a prospectus ensures

there is ultimate investor protection, for example through the principle of continuous disclosure
and thus more investors are likely to subscribe to the offering of security.
QUESTION TWO
The law makes it an offence under section 728 of the Corporations Act for the disclosure
document to contain misleading or deceptive statements, omissions or a new circumstance that
has risen since the lodging of the document and is statutory required to be included in the
document. The forecasts made by the company in the prospectus amount to misleading and
deceptive statements. This is because the company had no reasonable grounds for making the
statements as the forecasts were based on data from America as opposed to global or Australian
figures. Secondly, there was a change in the price and availability of materials. This is a new
circumstance and has led to incomplete material information in the prospectus.
Section 729 of the Corporations Act stipulates persons that can be held liable in civil court for
offences related to disclosure. These persons include: directors, experts, underwriters and
proposed directors.
The shareholders can sue the above persons for any loss or damage they have suffered and seek
compensation, injunctions, declaration orders, banning orders and publicity orders. This is
illustrated in the ASIC v Axis International Management Pty Ltd case.
The shareholders also have access to remedies available in common law. They can seek
rescission of the contract as it was observed in the infamous case of Peek V Gurney (1873). They
can also sue for breach of the fiduciary duty of care owed to them by the promoters and directors
of the company. They would also seek damages under tort for the action of deceit and negligent
misstatement as elucidated by the Hedley Byrne & Co V Heller Ptnrs case. The shareholders
would also sue for material representation of fact as the directors intentionally, negligently or

recklessly induced them to enter into the contract through false representation of material facts.
This is supported by the case of Derry V Peek (1889).
However, there are a few defences available to the directors of the company under sections 731,
732 and 733 of the Corporations Act. One is that they exercised due diligence in the preparation
of the disclosure document by making all the necessary inquiries in good faith. Two is that they
did not know that the statements referred to were misleading of deceptive and that they believed
on reasonable grounds there were no omissions on the disclosure document. Three is that they
reasonably relied on information given to them from other sources and four is that they were
unaware of the new matter or circumstance that is of concern. And lastly, a person who was
named in the disclosure document may also claim to have publicly withdrawn their consent to
the naming.
REFERENCE
1. Corporations Act 2001.