Prior to the admission of a security for trading on a stock exchange, the company in question, or the bank acting on behalf of this company, has to inform the public in certain national newspapers (mandatory stock exchange publications) about the intended launch on the stock exchange.
For this purpose, a stock exchange or issuing prospectus must be presented on admission to the more important and more regulated market segments. Among other facts, the prospectus must contain information on the past and expected business developments, the product range, the latest balance sheet and much more. False or inaccurate information can justify claims for damages by investors against the stakeholders pursuing the issue.
Within the framework of prospectus liability, the issuer of a security and the syndicate bank are liable for damages if the issuing prospectus contains false or misleading information on the value of a security or a closed-end fund to the detriment of buyers of the IPO. This is regulated in Germany, by the Börsengesetz (BörsG) (Stock exchange act) and the Verkaufsprospektgesetz (VerkProspG) (Sales prospectus act). While drawing up the prospectus and regulatory approval of prospectuses are fully harmonised under EU law, the civil liability regime is still largely regulated under national law.
Because the prospectus is an important basis for the buyer’s investment decision, it should contain all essential information that allows a true appraisal of the issuer and the securities. The scope of liability is quite extensive: founders, initiators, backers and the other guarantors of the prospectus, possibly including fiduciaries, may also be liable.
In addition general prospectus liability according to the provisions of Germany’s Civil Code has arisen praeter legem based on case law and legal developments. This is based on culpa in contrahendo (c.i.c.) and takes effect where no special law exists for old cases and non-regulated capital markets. In this respect, two cases can be distinguished in which initiators or related businesses will be liable for prospectus information:
prospectus liability in the stricter sense, where no contract negotiations take place between the investor and the entity is subsequently liable for damages. If an investor trusts in specific information because it was published in a prospectus, and if the prospectus is incorrect, the prospectus publisher is liable for standardised trust. Claims for damages from this lapse in line with special rules in accordance with the Anlegerschutzverbesserungsgesetz (Investor protection improvement act).
In contrast, prospectus liability in a more general sense continues to apply. It concerns in particular closed fund models. Closed funds are typically private limited companies created by the corporations who initiated the fund. The investors then regularly join the private limited companies or funds. These founding shareholders of the fund companies are liable for prospectus errors because they have used the personal trust of each investor culpa in contrahendo as the investor’s contractual partner.
BDO has the qualifications and experience that you need to be sure of competent advice in all legal questions regarding stock exchange prospectuses.