• A Public company may issue securities-

 To public through prospectus

 Through private placement
• A private company may issue securities –

 Through private placement

• Prospectus is the window through which an investor can look into the
soundness of a company’s venture.

• The investor must therefore be given a complete picture of a company’s

intended activities and its position.

• This is done through prospectus which must secure the fullest disclosure
of all material and essential particulars and lay the same in full view of all
intending purchasers of shares.
• Prospectus is a document described or issued as prospectus or
any notice, circular, advertisement or other document inviting offers
from the public for the subscription or purchase of any securities of
a body corporate.

• Prospectus must be in writing. An oral invitation to the public to

subscribe in or debentures of a company is not a prospectus.

• Likewise advertisements in television or film is not treated to be

prospectus.
• A document is not a prospectus unless it is an invitation to the public to subscribe for
shares in, or debentures of, a company.
• But if the document satisfies the condition of invitation to the public (Nash v Lynde)
• An advertisement which stated that “some shares are still available for sale according to
the terms of the company which may be obtained on application” was held to be a
prospectus as it invited the public to purchase shares (Pramatha Nath v Kali kumar Dutt).
• If the invitation is made to a small circle of friends of the directors or the existing
shareholders it is not an offer to the general public.
• In order to finance its activities a company needs capital which is raised
by a public company by issue of a prospectus inviting offers for shares
and debentures from the public.

• A private company is prohibited from making any invitation to the public

to subscribe for any shares in or debentures of the company. Hence it need
not issue a prospectus.
• The central theme of a prospectus from the money raising point of view is
that it sets out the prospects of the company and the purpose for which the
capital is required.

• The prospectus is the basis on which the prospective investors form their
opinion and take decisions as to the worth and prospects of the company.
 Misstatements in prospectus and their consequences

• If there is any misstatement of a material fact in a prospectus there may

arise –

Civil liability

Criminal liability
 CIVIL LIABILTY

• A person who has been induced to subscribe for shares (or debentures) on the faith of a
misleading prospectus has remedies against the company, and the directors, promoters
and experts.
Remedies against company –
 If there is a misstatement or withholding of a material information in a prospectus, and if
it has induced any shareholder to purchase shares he can -
1. Rescind the contract
2. Claim damages from the company whether the statement is fraudulent or an innocent
one – (Damages for deceit) Derry v Peek
• The Statement must be untrue (Rex v Lord Kylsant)–
• A prospectus was issued by a company stating that the company had paid
a dividend every year between 1921 and 1927 (years of depression) and
thus giving the impression of a financially stable company. However the
company had in each of those year incurred considerable trading losses.
This fact was suppressed. It was held that the prospectus was ‘false in
material particular’ in that it conveyed a false impression.
• If a person purchases shares in the open market he has no right against the
company (Peek v Gurney)
• A company issued a prospectus containing false statements. A, relying on
the prospectus applied for and was allotted shares. Later he sold these
shares to P. The company was wound up and P had to pay nearly $100,00
as a contributory. Sought an indemnity for his loss from the directors at
the time of the issue of the prospectus. It was held that directors were not
liable to P.