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Prospectus Publishers off the Hook

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This article represents the views of its author and not necessarily those of ShareSoc.

The Government has published how it proposes to reform the Prospectus Regime. Among the welcome changes are the ability to omit a prospectus when shares are being issued to those who already hold equity securities in the offering company, subject to certain conditions, including that the offer is made pro-rata to a person’s existing holding.

The need for a prospectus introduced a costly barrier to the issue of shares via a rights issue and prejudiced private investors. It was always rather daft that those who already held the shares were assumed to know nothing about the company in which they held shares and required to be informed in detail about it. In general the proposed new prospectus rules are a welcome simplification. See link below for the details.

It should be noted, however, that whilst the liability to investors for a false or misleading prospectus will remain, the following paragraph gives me cause for concern:

“Para 14. While retaining the existing statutory remedy for false, misleading or omitted information, the government intends to raise the threshold for liability that applies to certain categories of forward-looking information in prospectuses. This will ensure that a person responsible for the preparation of a prospectus is liable to pay compensation only if: a) that person knew the statement to be untrue or misleading; b) was reckless as to whether it was untrue or misleading; or c) in the case of an omission, if that person knew the omission to be a dishonest concealment of a material fact.”

It has proved to be legally difficult to make liability for omissions from a prospectus stick – for example in the Lloyds/HBOS case. The above paragraph will require litigators to penetrate the minds of the directors and publishers of a prospectus and prove they knew that they were misleading investors – an impossible task.

I consider that this element of the reform is not a helpful change at all.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1058438/UK_Prospectus_Regime_Review_Outcome.pdf

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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