Issued but unpaid (K2,000,000) A2
3. From the Public
Companies are normally formed for purposes of carrying out individual entrepreneurial enterprises. This may require massive amounts of money which banks may, especially in formative stage, not be able to give. For this reason public limited companies (Plcs) are authorized to raise capital from the public. This arises by way of the company inviting external investors to buy shares in the company. Raising capital in this way which, is also known as equity capital, is cheaper for the company. It is cheaper for the company to issue shares, which are paid for because the obligation for the company to obtain a loan is not there.
Raising capital from the public is something, which the law takes seriously. Hence the Companies Act, sections 122 and 123, sets out the legal requirements that are associated with the public issue of shares or debentures. This privilege of raising capital from the public is reserved for public limited companies. However, under section 122(2) of the Act, a private company may be allowed to invite members of the public to purchase its shares under the supervision of the High Court though by and large inviting members of the public to buy shares is a preserve of public limited companies.
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Being a public limited company is not necessarily synonymous with having every public limited company’s shares floated on the stock market for purposes of sale to the investing public. If a public limited company wishes to invite members of the public to acquire shares in the company, it must first seek to be admitted on the stock market, i.e. Lusaka Stock Exchange in the case of Zambia.
Floatation is that process of launching a public company by offering its shares to the public. This can arise whether the company involved is a brand new public limited company or is a former private limited company.
Floatation is not the only way in which public limited companies may raise capital from the public. A company can also raise additional capital by way of rights issue. A rights issue arises by way of a company offering new shares to existing shareholders in proportion to their existing shareholding. The other way would be by placing. A placing arises by way of a company identifying selected investors who agree to take these shares.
The law imposes stringent requirements for a company to be allowed to have its shares publicly traded. The Companies Act contains provisions regulating the manner in which a company may trade its shares to the public. The making of public invitation requires that the company which is trading these shares must prepare a prospectus which must comply with Part VI of the Companies Act dealing with public issue of shares. Apart from compliance with Part VI of the Act, a company which wishes to have its shares listed for purposes of public trading must ensure that in inviting people to invest or buy the shares so listed, the invitation itself must comply with section 32(2) of the Securities Act, Cap 354, in addition to the prospectus. Subsection (2) provides that, “if:
a) Any security of a public company is publicly traded, or directly or indirectly promoted or advertised or offered for sale to the public; and
b) The security has not been registered under this section, and is not guaranteed by the Government or exempted, by the rules made under this Act, from the requirements of this section, the issuer of the security shall be guilty of an offence and shall be liable on conviction to a penalty not exceeding 2,000 penalty units.”
36. What is a Prospectus?
It is an invitation that a company makes to members of the public inviting them to subscribe for shares in the company. The Securities Act requires any security of a public company which is publicly traded or directly or indirectly promoted or advertised or offered for sale to the public to be registered in accordance with the provisions in section 32(2) of the Act. It should also be noted that any prospectus which is issued or prepared for the purpose of any public offer must contain or be accompanied by all such information as investors and their professional advisers would reasonably require, and reasonably expect to find there, for the purpose of making an informed assessment of the assets and liabilities, financial position,
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profits and losses and prospects of the issuer of the securities and the rights attaching to the securities (section 33(a)).
Apart from complying with section 33 of the Securities Act, the prospectus must also comply with the requirements of the Companies Act and any directions issued and directed by the Securities and Exchange Commission (SEC).
(i) What Constitutes an Invitation to the Public?
The law says a company making an invitation to the public must comply with these laws. Therefore, when can it be said that the company has made an invitation to the public? The Companies Act in section 119 answers the question by reference to 3 kinds of invitation that do not constitute an invitation to the public, i.e. an invitation:
a) Made to 15 or fewer persons, or b) Made –
i. To 50 or fewer persons; or
ii. Of the company exclusively to its existing shareholders, debenture holders or employees:
On the basis that a person who accepts the invitation may not renounce or assign the benefit of any shares or debentures to be obtained there under in favour of any other person.
Anything that goes outside the confines of these three categories would constitute an invitation to the public.
(ii) The Prospectus
In terms of section 123 of the Companies Act, an invitation to the public to purchase shares or debentures in a public company or a proposed public company can only be made if:
a) Within 6 months prior to the making of the invitation, the company concerned prepares and registers a prospectus relating to the shares or debentures proposed to be sold to the public. The prospectus must comply strictly with the requirements contained in Division 6.2 of the Companies Act.
b) Every person to whom the invitation is made must be supplied with the true copy of the prospectus at the time the invitation is first made to such a person.
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c) Every copy of the prospectus must state on its face that it has been registered with the Registrar of Companies.
In terms of section 123(2) of the Act the contents of the prospectus can be summarized in the newspaper or advertisement provided that such advertisement does not contain or is not accompanied by any application form for shares. Secondly, the advertisement must state with reasonable prominence where copies of the full prospectus can be obtained; the fact that the prospectus has been registered; and the date of actual registration. The advertisement itself must be couched in terms, which have been approved by the Registrar of Companies.
(iii) Contents of the Prospectus
Section 124 of the Companies Act sets out what should be contained in a prospectus. A prospectus shall not be lodged with the Registrar of Companies unless:
a) It does not contain any untrue or misleading statements. The directors of the company must ensure that;
b) It contains all information that prospective purchasers of the shares or debentures and their advisers would reasonably expect to be provided in order to make a decision on purchase; and
c) The prospectus must also contain all issues that are addressed by the Fourth Schedule of the Companies Act.
Upon being registered, it is a requirement that the registered copy of the prospectus must contain a statutory declaration by a director and the secretary in which they confirm that the prospectus will have been prepared in accordance with Division 6.2 of the Act. In terms of section 126 of the Act, the Registrar is empowered to decline to register a prospectus for shares or debentures in a company or in a company proposed to be formed if the copy lodged does not conform to Division 6.2 of the Act.
Once a prospectus has been duly registered, the Registrar will issue a certificate stating that the prospectus in question has been registered. In terms of section 129 and 130 of the Act, issuance of a prospectus containing any untrue statement or omitting truthfully to state any of the matters, shall result in criminal or civil liability. Apart from that if the Registrar considers that although the contents of the prospectus where accurate at the time of their issue but that subsequently the contents have become misleading or inaccurate, he can apply to the High Court to secure the withdrawal of the prospectus together with the shares in respect of which the same will have been issued (section 131).