Statement in Lieu of Prospectus

When a public company is formed and chooses not to issue a prospectus, it is legally required to submit a statement in lieu of a prospectus, which is also referred to as a substitute prospectus or substitute circular. This statement contains essential information about the company and its offering and must be filed with the registrar of companies to ensure transparency and compliance with regulatory requirements.

It serves as an alternative to a traditional prospectus, providing investors with necessary details while accommodating situations where a full prospectus may not be suitable.

What is a Statement in Lieu of Prospectus?

Statement in lieu of prospectus means a statement instead of a prospectus. A statement in lieu of a prospectus is a statement issued by a public unlisted company instead of a prospectus. It’s a document prepared by public companies that don’t issue a prospectus when they are formed.

This statement has all the information that a prospectus has and it is signed by all the directors of the public company or the directors-to-be. If the company doesn’t file a statement in lieu of prospectus, it won’t be allowed to allocate any shares or debentures.

Contents of Statement in Lieu of Prospectus

Information in the statement instead of a prospectus includes:

• Company Name.
• The company’s share capital is divided into ordinary shares and the value of one share.
• Description of the planned activities and prospectus.
• Names, addresses, roles and responsibilities of proposed or appointed directors, officers, appointed lawyers and company secretaries.
• Rules for selecting and compensating these corporate representatives.
• Voting rights during company meetings.
• Quantity and value of shares and debentures intended to be issued.
• Names, jobs and addresses of those selling goods bought or offered for sale by the company.
• Amount to be paid in cash, stocks or bonds to each real estate seller.

Provision for Statement In Lieu Of Prospectus [Section 70, Companies Act, 2013]

Section 70 of the Companies Act, 2013 deals with statement in lieu of prospectus as:

A company with share capital that either doesn’t issue a prospectus or has issued one but hasn’t allocated any shares to the public must follow certain rules before allotting shares or debentures. At least three days before making the allotment, the company must submit a ‘statement in lieu of prospectus’ to the Registrar for registration.

This statement should be signed by every person listed as a director or proposed director of the company or by their authorised agent in writing. It should contain the details outlined in Part I of Schedule III and include the reports specified in Part II of Schedule III, while taking into account the provisions in Part III of that Schedule (Section 70).

When a private company transforms into a public company, it must provide the Registrar with a statement in lieu of prospectus. This statement should include the particulars described in Part I of Schedule IV, along with the report outlined in Part II of Schedule IV, subject to the provisions in Part III of that Schedule (Section 44(2)(b)).

Failure to comply with these rules can result in a fine of up to Rs. 1,000 for the company and every director responsible.

If the ‘statement in lieu of prospectus’ contains false information, the person who authorised its submission can face imprisonment of up to two years or a fine of up to Rs. 5,000 or both. However, they can avoid liability if they can prove that the statement was not significant or that they had reasonable grounds to believe it was true. The legal and criminal consequences for incorrect statements or misrepresentations are the same as those for a prospectus (Section 70(5)).

Differences Between Prospectus and Statement in Lieu of Prospectus

The differences between prospectus and statement in lieu of prospectus are:

Purpose

A prospectus is a detailed document that provides information about a company’s securities offering, while a statement in lieu of prospectus serves a similar purpose but is used in specific situations where a regular prospectus cannot be used.

Issuer

A prospectus is usually issued by a company that is going public or issuing new securities, whereas a statement in lieu of prospectus is issued by a company that is already publicly traded.

Content

A prospectus typically contains extensive information about the company’s management, financial statements and the terms of the securities offering. In contrast, a statement in lieu of prospectus may have less detailed information.

Regulation

Prospectuses are subject to strict regulatory requirements and must be filed with the appropriate securities commission. Statements in lieu of prospectus may have fewer regulatory requirements.

Approval

A prospectus needs approval from the securities commission before it can be used, while a statement in lieu of prospectus may not require approval.

Distribution

A prospectus is usually distributed to potential investors, whereas a statement in lieu of prospectus may not be widely distributed.

Timeframe

A prospectus is typically prepared and distributed when a securities offering takes place, whereas a statement in lieu of prospectus may be prepared and distributed at any time.

Purpose of use

Prospectuses are used to attract investment in securities, whereas a statement in lieu of prospectus is typically used for less formal purposes, such as enabling a company to make a public offering without the cost and time associated with preparing a prospectus.

Table on Differences Between Prospectus and Statement in Lieu of Prospectus

Conclusion

A Statement in Lieu of Prospectus is a document issued by a publicly traded company, which provides essential information about the company’s securities without the extensive detail found in a traditional prospectus. It is employed in specific situations where a regular prospectus cannot be used, such as when a company that is already trading in the market wishes to offer additional securities.

Unlike a prospectus, a statement in lieu of prospectus does not require prior approval from securities commissions and is not widely distributed. It serves a less formal purpose, allowing companies to make public offerings without the time and expense associated with a full prospectus.