The prospectus and participants’ assumption of liability

With the anticipated launch of the Science and Technology Innovation Board (STIB), the Shanghai Stock Exchange has stated that prospectuses are among the most important documents for information disclosure, but the quality of existing prospectuses varies greatly.

According to the Shanghai Stock Exchange, existing prospectuses fall short of the standard in five areas: (1) disclosure of science and technology innovation; (2) disclosure of business model; (3) risk disclosure; (4) wording; and (5) format. Admittedly, these issues are related to the fast progress of the STIB and the relevant parties’ mindset of trying to gain ground in this area.

The author holds that this phenomenon not only demonstrates a lack of attention and emphasis on the prospectus, but also shows that people are not clear about the legal position, disclosure obligations and legal liabilities relating to the prospectus.

If we look beneath the surface of the above-mentioned shortfalls, we find that it actually results from immature institutional reform at a fundamental level, and an immature inherent concept. Under the existing institution, there is no clear boundary regarding the liability of different participants, which leads to an unfair assumption of liability.

There are overlapping areas in the role and responsibility of agencies. As to the prospectus document, the wording is not as precise and accurate as that of many overseas prospectuses. In addition, the contents of many prospectuses tend to be lengthy (more than 500 pages) and repetitive.

What’s more, the issuers tend to have many requirements and concerns when it comes to risk disclosure. As the Shanghai Stock Exchange also pointed out, these issues reveal the participants’ lack of understanding, attention and enforcement when it comes to implementing the regulatory requirements, with information disclosure at its core, based on the philosophy of the pilot programme of the registration system.

The concept of a prospectus in legal terms is not clearly defined in the relevant laws and regulations in China. The Company Law stipulates only that promoters shall make an announcement of the prospectus for a share offering to the public and prepare a subscription form. The Securities Law specifies only that prospectuses are among the documents that shall be submitted to the securities regulatory authorities.

Let’s make a comparison with the American market. Pursuant to the Securities Act of 1933, the term “prospectus” means any prospectus, notice, circular, advertisement, letter or communication, written or broadcast by radio or television, which offers any security for sale or confirms the sale of any security.

The literal meaning of the definition emphasizes the offer nature of a prospectus. A similar definition concerning the nature of a prospectus can be found in the Contract Law, which makes clear that the legal nature of a prospectus should be an offer. By contrast, an invitation to offer means a declaration of intention inviting other parties to make an offer, i.e., tempting other parties to make an offer. An invitation to offer is often deemed as having no legal effect.

Obviously, we cannot thus deduce that an issuer shall not be bound by the contents of a prospectus. In the global capital market, all countries pay great attention to the information disclosure quality in the initial public offering (IPO) process, where the prospectus serves as the core document. A prospectus’ status as an important IPO document in legal terms can be confirmed by the relevant laws and regulations and the provisions relating to legal liability.