STATUTORY FRAMEWORK FOR PROSPECTUS LIABILITY (I)
The Netherlands, Curaçao, St. Maarten and the BES-islands compared
That a prospectus must be approved (in the Netherlands and the BES Islands by the Authority for the Financial Markets, and in Curaçao and Sint Maarten by the Joint Central Bank of these countries) does not guarantee that the prospectus is not misleading. Therefore approval by the regulator does not entail a guarantee. The approval can be considered as an administrative approval contributing to better quality and more uniformity of the prospectuses.
A prospectus is an offer or an invitation to make an offer directed to the general public or to one (more specific) group of interested parties. The average person does not know anything about investing. The average person does not go further than generally known notions, such as: (i) risks are associated with investing; (ii) prices can rise but also drop and (iii) as the promised return increases the risks associated with investing are also higher.
Whether the last notion is equally in focus for everybody, I dare not say with certainty. I have the impression that in the past decades particularly those (extremely) high returns which people thought to be able to earn, have made them incautious. The hunger for returns makes them blind; strong hunger as blind as a bat even. And when investing – in any event in the West – has almost become a national sport, the large number of accidents should not really surprise you.
And these accidents are not uncommonly followed by lawsuits. If the average person is successful he boasts of his own qualities, if he suffers a loss he feels cheated and looks for a scapegoat. A variety of cases can be found in case law particularly in the past thirty years.
Although a prospectus can relate to all kinds of products, we will concentrate on securities. Where a prospectus requirement is in place the law includes detailed rules about the information which must be included in a prospectus. This can be indicated as an obligation to provide information. Against such an obligation there is usually the other party’s obligation to examine the offer. The question is whether and to what extent investors have an obligation to examine the offer before they decide to acquire the securities on the basis of a prospectus. An exception might have to be made for certain professional investors or professional advisors engaged by an investor, but I would like to assume that the average investor has no obligation to examine the offer with regard to the accuracy, completeness and truthfulness of a prospectus.
Even if an investor has read an article in a newspaper in which questions are asked about the euphoria of a certain offer to the general public and critical comments are made about the prospectus, I would still think that the conclusion should not be lightly drawn that there is an obligation to examine the offer. Considering the rules applicable with regard to drawing up and approving the prospectus, and the obligation of the issuing company to correct publicly any material inaccuracies or omissions emerging after the prospectus has been distributed, after which – in the normal situation – these have been incorporated into the market sentiment, the investor can continue to rely on that market sentiment.
The most important purpose of a prospectus is to provide interested investors, and these can be laymen but also professional investors, with all the relevant information, so that these investors are or should be able to form an opinion in a sensible, properly informed manner on the basis of which they can take a decision to buy securities or to subscribe to an issue.
The jurisdictions we are discussing here have rules with regard to liability for a misleading prospectus. These regulations aim to provide the investors with protection, even though they were not directly guided by a prospectus with regard to their decision to acquire shares. They were guided by the market sentiment and that sentiment is usually affected by a prospectus (and the announcements made in addition to it). We will discuss the various legal rules and regulations in the next posting. (To be continued.)
Karel Frielink
Attorney (Lawyer) / Partner
(26 March 2014)
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