Once a company has been registered, it has to take off. This is described as floatation of a company. It is true that a company comes into existence once registered and can immediately upon do business. But a newly formed company often needs to get sufficient capital to take off. The promoters there have to take necessary steps to take off. The promoters there have to take necessary steps to obtain working capital for the successful take off of the company.
Where there is an existing business in the form may be of a sole business or a partnership, which is taken over by the new company, the capital of the former business becomes part of the capital to float the new company. Similarly there is transfer of capital where one company takes over another.
There exist various ways of floating or raising capital for a company. The method is usually affected by the type of company: whether private or public.
Private companies usually rely on equity contributions from their shareholders, though new shares may be issued for cash.
Also, capital may be raised by debentures, loans and overdraft. It could also be floated by private placement. On the other hand, public companies may be financed to take off by equity contributions, debentures, loans and overdraft and private placement. But additionally, it could invite the public to buy shares and purchase its debentures by being quoted in the stock or capital market.
A public company invites the public to subscribe for its shares and debentures through the issuing of a prospectus. Section 48 of the Investments and Securities Act (I.S.A.) provides that it shall not be lawful to issue any form of application for securities in a public company unless the form is issued with a prospectus of the company.
A prospectus is any notice, circular, advertisement, or other invitation offering to the public for subscription or purchase any shares or debentures of a company.
The ISA by section 57(1) provides that no prospectus shall be issued by or on behalf of a company or in relation to an intended company unless, on or before the date of its publication, a copy has been delivered to the Securities and Exchange Commission for registration.
CONTENT OF A PROSPECTUS
By section 50(1) of the Investment and Securities Act every prospectus issued by or on behalf of a company must state:
– The number of founders or management or deferred shares (if any).
– Directors’ qualification shares (if any) and remuneration of the directors as provided in the articles.
– Names, addresses and descriptions of the directors or proposed directors;
– The minimum subscription, which is the amount, which in the opinion of the directors, must be raised through the issue in order to provide sums for the following matters.
a) The price of any property purchased which is to be paid for out of the proceeds of the issue;
b) Any preliminary expenses and underwriting commission payable by the company.
c) Repayment of any money borrowed by the company in view of a and b above
d) The amount to be provided in respect of the matters stated in (iv) otherwise than out of the proceeds of the issues and the sources of such amounts.
– The time of the opening of the subscription lists.
– The amount payable on application and allotment on each share.
– Particulars of shares and debentures issued otherwise than for cash
– Particulars of options on shares or debentures
– Particulars of vendors of properties sold to the company.
– Amount paid for property, stating amount paid for goodwill.
– Date, parties, and general nature of every material contract.
– Names and addresses of the company’s auditors.
– Directors interest in the property proposed to be acquired by the company.
– Preliminary expenses, commission and brokerage.
EXPERT STATEMENT IN A PROSPECTUS
Where a prospectus includes a statement made by an expert before it is issued, two conditions must be satisfied:
1. He must have given his consent and must not, before delivery of a copy of the prospectus for registration, have withdrawn his written consent to the issue with his statement included;
2. A statement that he has given his consent must be contained in the prospectus.
LIABILITY IN RESPECT OF PROSPECTUS.
Since potential investors in the company know little or nothing about the company, the contents of a prospectus must include material facts as would enable the investing public to make a correct assessment of the true purpose and position of the company. Consequently, the prospectus must not contain false or misleading statements or information. The company and those responsible for the issue of a prospectus that contains misstatements at the action of the subscriber maybe civil or criminal.
This is both under the common law and the CAMA 2004; and they are:
1. Action by the aggrieved subscriber in damages for fraud under section 562, he may sue for compensation.
2. Action for recession of the contract of allotment (section 571).
To succeed in a claim for damages and /or recession under the common law, such subscribers must prove:
a) That the misstatements is a material statement of facts;
b) That he was induced by the misrepresentation to subscribe for the shares;
c) That the misrepresentation was fraudulent and that it was made by a person acting on behalf of the company;
d) That he suffered loss or damage thereby. Under the CAMA, to succeed, the aggrieved subscriber must prove that the prospectus contained a misstatement which he relied upon and thereby suffered loss.