Golden Rule of Framing a Prospectus

Golden Rule of Framing a Prospectus

The ‘Golden Rule’ for framing of a prospectus was laid down by Justice Kindersley in New Brunswick & Canada Rly.

The Golden Rule of Prospectus has a meaning and a moral in it, which says whatever information comes from the company to the public, through the medium of a prospectus, must be true, fair and accurate. Those who issue a prospectus hold out to the public great advantages which will accrue to the persons who will take shares in the proposed undertaking.

A company issues prospectus to attract the general public to purchase its shares, interested people rely on the information presented in the prospectus and on the basis of which they desire to make an investment in the shares of the issuing company. The public is invited to take shares on the faith of the representations contained in the prospectus. The public is at the mercy of company promoters.

According to the ‘Golden Rule’ the followings must be kept in mind when preparing the prospectus of a company:

The prospectus must be an honest statement of the company’s profile; there must be no misleading, ambiguous or erroneous reference to the company in its prospectus.
Every important aspect of a contract of the company should be clarified.
The contents of the prospectus should conform to the provision of the Companies Act.
The restrictions on the appointment of directors must be kept in mind.
The conditions of civil liability as laid down must have strictly adhered to issue and registration of prospectus or legal requirement regarding the issue of the prospectus.

The persons liable for an untrue statement in the prospectus under Sec-62 are;

(a) Director – every person who is a director of the company at the time of the issue of the prospectus;

(b) Proposed Director – every person who has authorized himself to be a director, either immediately or after an interval of time;

(d) Authorized person – every person who has authorized the issue of the prospectus.