3. Potential liabilities relating to share issues

Financial Promotions with reference to FSMA and the FPO

s. 21 FMSA	General prohibition on all types of investment activity but does not apply if falls within any of the exemptions set out in FPO or if A is authorized person or content approved by authorized person
Scope	Applies to communication sin UK and communications originating outside but capable of having affect in UK
Key terms	“communication” = telephone, email, meetings, presentations, websites, radio, TV, etc.. “invitation” = includes invitation to treat so inviting someone to enter into investment agreement would be invitation, e.g. prospectus with application form attached “inducement” = FCA Guidance says depends on context and reasonable person, must contain an objective element of “persuasion or incitement”.
Exemptions (s 21(5) FSMA empowers FPO)
Articles 19,47,49 FPO	Communications made to persons sufficiently expert to understand the risks involved, eg Professional investors (Art 19) Substantial companies (Art 49) Financial press (Art 47)
Article 48 FPO	Cert High Net Worth Individuals (unlisted companies only): Aims to cover communications between new companies and rich individuals wishing to invest in new enterprises
Article 50 FPO	Sophisticated Investors, i.e persons certified by an authorized person as being sufficiently knowledge to understand risks
Article 62 FPO	Communication relating to transaction to acquire or dispose of controlling shares of a company or to acquire or dispose of shares which when aggregated take total shareholdings to a level which amounts to a controlling interest.
Article 70 FPO	Non-real time communications included in a prospectus or supplementary prospectus or “any other document required or permitted to be published by…prospectus rules under part VI of the Act
Article 71 FPO	Limited non-real time communications relating to a prospectus or supplementary prospectuses offering transferable securities (listed or unlisted) (Reference to a “public offer of unlisted securities” in heading is misleading)
Consequences if breach
FSMA s. 25
FSMA s. 30		Unenforceability of agreements resulting from unlawful communications and entitlement to recovery unless court thinks it’s just to enforce (subs (4))
FSMA s 137S		If an FCA authorized person has made communication or has appropsed communication which FCA considers would be likely to breach fin promotion rules, regulator can make a direction under this section to require authorized person to inter alia withdraw communication
FSMA s. 400		Offences by bodies corporate under this Act

The Advertisement Regime in the Prospectus Rules

PR 3.3	Who do rules apply to? An advertisement must not be issued if rules apply unless conditions satisfied, and anyways information disclosed must be consistent with prospectus
PR 5.6.3G	FCA has power to suspend or prohibit an advertisement. Conditions on when FCA will use powers.
UKLA note: PD Advertisement	(See to be printed attachment)

‘Persons Responsible’ for a prospectus

s. 90 FMSA	Must establish whether client is caught in liability “net” under this section
PR 5.5.3R(2)*	Sets out long list persons who may be responsible for prospectus
PR 5.5.6	Director NOT responsible if prospectus published without his knowledge or consent and on becoming aware of its publication he a.s.a.p gives reasonable public notice that it was published without his consent. Very unusual in practice.
PR 5.5.3R(2)(f)	Appreciate that reporting accountants could be person responsible for the parts that they produced under Annex I para 23.1 to authorize contents of financial information sections of prospectus NB: Sponsor not normally person responsible unless he accepts responsibility or authorizes contents.
PR 5.5.8R	Save for issuer or directors, can accept responsibility ONLY IN PART
PR 5.5.9R	Solicitor in professional capacity NOT RESPONSIBLE
PR App 3.1.1	Requires that prospectus relating to listing of shares contains a declaration of responsibility by those persons who are deemed to be responsible for prospectus by virtue of PR 5.5
Sponsor
LR 8.3.1R	General duty of sponsor
LR 8.3.2G	FCA expects to communicate with sponsor directly and sponsor remains liable even if relying on statements by applicant or TP
LR 8.4.2	Sponsor must not submit application to FCA unless Sponsor, after having made due and careful inquiry, has satisfied himself that…
S 88 FSMA	Definition of Sponsor and in severe cases can cancel authorization of sponsor but must give warning
S 88A FSMA	Disciplinary powers: contravention of s. 88(3)(c) or (e). 88A(2) sets out actions can take and s88B requires to give sponsor warning notice of proposed action.
	Unhappy sponsor can refer matters to FSA Tribunal

Potential civil and criminal liability relating to share issues

Civil Liability
s. 90 FMSA s. 90(11)	Most important remedy: powerful and effective for aggrieved investor Extends remit of s.90 to prospectuses. Advantages of s.90: No need to show reliance, only causal connection to loss No need to show inducement Available to subsequent purchasers of securities Directors can avoid s.90 liability if Sched 10 FSMA* applies
s. 118 FSMA	Market Abuse
Common law	Negligent Misstatement if duty of care owed to reader, breached, and causes loss. Duty implied where issuer has special skill or ought to know reader will rely on skill. Remedy: damages in tort.
Misrep Act 1967	Any untrue statement of fact inducing someone to enter into a contract could form the basis of a claim for misrepresentation.
Breach of contract	Investor may have claim for loss of bargain.
Criminal Liability
s. 21 FSMA	Breach is a criminal offence
Part 7 FS Act	Misleading statements and net is wide (see s 400 FSMA)
Fraud Act 2006	False representation Failing to disclose info Abuse of position But remember threshold is criminal so much higher (Gosh dishonesty), but would be caught eg issuer knowingly included incorrect information in prospectus or knowingly omitted relevant information from it.

Importance of verification

Definition	Checking accuracy of statements in prospectus and other documents
Purpose	Check accuracy and that nothing has been omitted
Method	Solicitors prepare “verification notes” which asks questions to directors
Procedure	Private and not disclosed to FCA/Investors
Re-verification	As prospectus changes during process, needs to be re-verified

Omission of information from a prospectus

PR 2.5.3 and s. 87B FSMA	Can apply to FCA to request to omit information, must fulfill conditions and a s 87B ground.

Exemptions from liability under Schedule 10 FSMA

READ SCHED 10 FSMA

When a supplementary prospectus would be relevant

s. 87A(2)	Before thinking about supplementary, if new factor comes to light before approval, should amend document.
s. 87G FSMA	Three situations that will trigger requirement for supplementary prospectus: Significant new factor (as against s 87A(2)) Material mistake Inaccuracy relating to the information included in a prospectus approved by the competent authority
s. 87G(1) and (2) s. 87(G)(3) s. 87(G)(3A)	If during “relevant period”, then sup prospectus must be submitted to FCA, and relevant period defined: Relevant period for institutional only offer ( approval start of trading) Relevant period for retail offer (usually commencement of trading)
s. 87G(6)	Content of supplementary prospectus must contain info to correct any mistake or inaccuracy.
PR 3.4.3	FCA needs to approve it
Ss...

#4843 - Potential Liabilities Relating To Share Issues - Public Companies and Equity Finance

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