Abstract
A prospectus is a legal document that describes a company’s securities that is for sale. It is a legal disclosure document that offers information to the public about an investment offering and must be filed with the Securities and Exchange Commission (SEC) or a local regulator. The Prospectus includes information on the firm, its management team, recent financial performance, and other pertinent information for investors.
Prospectus is defined as “any document which is described or issued as a Prospectus” as well as “any notice, circular, advertisement, or any other document acting as an invitation to offers from the public” under section 2(70) of the Company’s Act 2013.
A prospectus should be distributed to the general public as an invitation to subscribe to a public share or document. It might be issued directly by the corporation or on its behalf. Every publicly traded firm either issues a prospectus or submits a statement in lieu of one. This is not required for a private corporation. However, when a private business changes to a public corporation, it must either publish a Prospectus if one was previously issued or file a statement in lieu of a Prospectus.
Keywords
Prospectus, companies act 2013, SEC, mutual funds
Introduction[1]
A prospectus is a mandatory disclosure document that a corporation must provide to the public when it issues investment securities. These legal documents give potential investors with precise information on mutual funds, bonds, equities, and other public investment offers.
Mutual funds are one of the most prevalent types of prospectuses you may have encountered. Companies or investment entities in the United States who wish to sell securities for public investment must submit a prospectus with the SEC (Securities and Exchange Commission).
When a mutual fund or other financial instrument is made available to the public for investment, the issuing firm or fund house gives a wealth of information, including:
- Public (Initial Public Offering or IPO) or Private Placement objectives Offering
- Type of security provided (for example, mutual funds, bonds, stocks, etc.)
- The name of the issuing firm, its history, financial statistics, and other relevant information that gives you a sense of its basics
- Risks associated with past performance
- Strategies
- The distribution policy, as well as the quantity of shares issued
- Expenses (all fees and exemptions included)
- Management of funds
- Names of the financial firms or banks involved in the underwriting process
- Names of the company’s principals
- Basic information on the issuing firm, such as its history
What is prospectus[2]
A prospectus is a formal document required by the Securities and Exchange Commission (SEC) and submitted with it that offers information about a public investment offering. A prospectus is required for stock, bond, and mutual fund offerings.
Because it offers a wealth of essential information about the investment or security, the prospectus can assist investors in making better educated investing decisions. A prospectus is a printed document that advertises or discusses an offering other than investment, such as a school, business venture, upcoming book, etc. Prospectuses of many types exist to attract or inform clients, members, purchasers, or investors.
Companies that want to sell bonds or shares to the public must register with the Securities and Exchange Commission and prepare a prospectus. Companies must file a preliminary and final prospectus, and the SEC has particular rules for what information should be included in the prospectus for each security.
The preliminary prospectus is the initial offering document issued by a securities issuer and contains the majority of the company and transaction facts. The preliminary prospectus, however, does not include the number of shares to be offered or the price. Typically, the preliminary prospectus is designed to measure market interest in the proposed security.
The final prospectus provides all of the information about the public investment offering.
Concept of prospectus under the Companies Act, 2013[3]
- Section 30 of the Companies Act of 2013https://ledroitindia.in/courses/incorporation-of-a-company/ specifies requirements for prospectus advertising. This section states that when a prospectus advertisement is published in any form, the contents of the company’s memorandum regarding the object, member’s liabilities, amount of the company’s share capital, signatories and the number of shares subscribed by them, and the capital structure of the company must be specified.
- A shelf prospectus is a prospectus published by a public financial institution, corporation, or bank for one or more issues of securities or classes of securities specified in the prospectus. When a shelf prospectus is produced, the issuer is not required to issue a separate prospectus for each offering; instead, he can offer or sell securities without issuing any further prospectus. Section 31 of the Companies Act of 2013 discusses the provisions relating to shelf prospectus. The shares and Exchange Board of India will issue regulations for any class or classes of firms that may file a shelf prospectus with the registrar at the stage of the first sale of shares.The information memorandum must be filed by the corporation that is filing a shelf prospectus. It should include all of the details about the additional charges, as well as any changes in the company’s financial status after the initial offer of the security or between the two offers.
- It must be lodged with the registrar within three months of the second or subsequent offer made under the shelf prospectus, as specified in Rule 4CCA of Section 60A(3) of the Companies (Central Government’s) General Rules and Forms, 1956.
- A red herring prospectus is one that lacks comprehensive details on the amount of the securities’ pricing. When a corporation intends to make an offer of securities, it may release a red herring prospectus before the prospectus.This form of prospectus must be submitted with the registrar at least three days before the subscription list or offer opens. A red herring prospectus carries the same duties as a prospectus. If there is any difference between a red herring prospectus and a prospectus, it should be noted as a change in the prospectus.
- Under Section 60B(7), the applicant or subscriber has the right to withdraw the application within 7 days of receiving notification of a change, and the withdrawal must be conveyed in writing. The shortened prospectus is a synopsis of a prospectus that has been filed with the registrar. It has all of the characteristics of a prospectus. An abbreviated prospectus condenses all of the prospectus’s material so that an investor may learn all of the important information quickly and easily.
- Section 33(1) of the Companies Act of 2013 additionally requires that any form for the acquisition of a company’s stock be accompanied with an abbreviated prospectus.
- Section 25(1) of the Companies Act of 2013 defines a considered prospectus. When a corporation offers or agrees to sell securities for sale to the public, the document will be considered a presumed prospectus via which the offer is made to the public for sale. The court ruled in SEBI v. Kunnamkulam Paper Mills Ltd[4]. that when a rights issue is given to current members with the right to renounce in favour of others, it becomes a presumed prospectus if the number of such others reaches fifty.
Conclusion
A prospectus is a formal and legal document produced by a corporation to solicit bids from the public for the subscription or purchase of securities. Every public corporation has the right to issue a prospectus for its stock or debentures. A private corporation, on the other hand, is exempt from this requirement.
A prospectus must have fundamental requirements and be registered in order to be legitimate. If a prospectus is not registered, it is regarded invalid and in violation of the conditions for a valid prospectus. Section 26(9) makes such a violation criminal. As a result, a prospectus is essential for each public company, and it must comply with the rules of the Companies Act 2013.
This article is written by Piuli Banerjee, New Law college Bharati Vidyapeeth, Pune,2nd year student(5year of B.A.LL.B) during her internship at LeDroit India.
[1] https://economictimes.indiatimes.com/definition/prospectus
[2] https://www.investopedia.com/terms/p/prospectus.asp
[3] https://blog.ipleaders.in/concept-prospectus-companies-act-2013
