Mis-Statements in the Prospects

Every person authorizing the issue of prospectus has a primary responsibility to see that the prospectus contains the true state of affairs of the company and does not give any fraudulent picture to the public. People invest in the Company on the basis of the information published in the prospectus. They have to safeguard against all wrongs or false statements in prospectus. Prospectus must, therefore make full and honest declaration of materials facts without concealing or omitting any relevant fact. It is known as the golden rule for framing prospectus as laid down in New Brunswick etc. The true nature of company’s venture should be disclosed. The statements which do not qualify to the particulars mentioned in the prospectus or any information is intentionally and willfully concealed by the directors of the company would be construed as mis-statement. They are in other words either false or untrue statements in the prospectus or information which ought to have been disclosed is concealed or omission of any material fact. Statements which produce wrong impression of actual facts would also be construed as mis-statement

Mis-statements include: (1) untrue statement (2) statements which produce wrong impression (3) statements which are mis-leading (4) concealment of material facts, and (5) omission of facts.

The prospectus must take all statements with absolute accuracy and not state the facts which are not strictly correct. A statement may be not only because of what it states but also because of what it states but also because of what it conceals or omits.

1) The statement is misleading in the form and context in which it is included and
2) The omission from a prospectus of any matter is calculated to mislead.

Misleading Prospects:

The prospectus which contains mis-statements or misleading statements, is called a Misleading Prospectus.


The liability may be civil or criminal.

Who are liable for mis-statement in the prospectus?

1) Every person who is a director of the company at the time of the issue of the prospectus;
2) Every person who has authorized himself to be named and is named in the prospectus either as director or as having agreed to become a director either immediately or after an interval of time;
3) Every person who is a promoter of the company and
4) Every other person who has authorized the issue of the prospectus.

Civil liability

Compensation; The above persons shall be liable to pay compensation to every person who subscribes for any shares or debentures for any loss or damage sustained by him by reason of any untrue statement included therein.

In McConnel v Wright it has been held that the measure of the damages is the loss suffered by reason of the untrue statements, omissions etc the difference between the value which the shares would have had and the true value of the shares at the time of allotment.

Damages for deceit or fraud: Any person induced to invest in the company by fraudulent statement in a prospectus can sue the company and person responsible for damages. The shares should be first surrendered to the company before the company is sued for damages.

Fraud occurs when any statement is made without belief in the truth or carelessly. A statement made with knowledge that it is false will constitute fraud or deceit. In the leading case on the point it has been held that if the person making the statement honestly believes it to be true he is not guilty of fraud even if the statement is not true. The facts of this case were:

The Tramway company had power by special Act to make tramways and to use steam power with the consent of the Board of Trade. The plans of the company were approved. The directors of the company honestly believed that since the plans were approved, permission to use steam power from Board of Trade was only a formality and would be granted Prospectus was issued wherein the directors stated that the consent to use steam power was obtained by the company. Subsequently the consent was refused and the company had to be wound up. On the action by plaintiffs for deceit it was held that the directors were not liable for fraud as they honestly believed that the consent would be obtained though the statement was untrue.

Source: Business Law