First of, what is a Prospectus?

A Prospectus is a formal legal document issued by a company seeking to raise capital from the public by
offering it's shares or debentures. It containes detailed information about thr company's business,
financial condition, management, and the risks involved in investing. According to Section 315 of the
ISA defines a prospectus as any notice, Circular, advertisement or other invitation offering to the public
for subscription or purchase any shares or debentures of a company.

While parties are in the process of negotiations,lot of things will be said which will be part of the reasons
the other party entered the contract. Where the things said are not part of the terms of the contract
even though they induced the other party to enter the contract, they are mere representations.

What is the meaning of misrepresentation or misstatement?

A misrepresentation is an untrue statement made by one party to the other before or at the time of the
contract to induce the other party to enter the contract. A misrepresentation is a false representation. A
misrepresentation can also cause an action in tort or in breach of contract. If A induces B to enter a
contract to purchase his three-year old car by telling him it is one-year old, it can cause an action in tort
for deceit. Where the representation also forms a term of the contract, it may support an action for
breach of contract.

In another vein, a misrepresentation can also cause a mistake in contract. One easy example is Couturier
v Hastie, where the defendant had a cargo of corn for sale which unknown to him had been sold. Such a
misrepresentation constituted an innocent misrepresentation. Also, in Leaf v International Galleries, the
defendant sold a painting claiming it was the work of a famous painter, whereas it was a cheap
imitation. This is another case of mistake flowing from misrepresentation.

Misrepresentation is covered by both common law and equity. At common law, a person who is induced
to enter a contract through a fraudulent or negligent misstatement is entitled to sue for damages, while
the remedy for misrepresentation at equity is rescission of the contract without damages.covered by
both common law and equity. At common law, a person who is induced to enter a contract through a
fraudulent or negligent misstatement is entitled to sue for damages, while the remedy for
misrepresentation at equity is rescission of the contract without damages.

Whether or not an action can be brought for misrepresentation depends largely on the purpose of the
misrepresentation and the intention of the representor. In Peek v Gumey, the plaintiff purchased a
company’s shares from a shareholder in reliance on a misrepresentation made by promoters. The court
held that the plaintiff could not recover the purchase money because the purpose of the
misrepresentation was for members of the public to buy new shares from the company, and not for
them to buy existing shares from shareholders.

Also, an action for misrepresentation cannot be brought unless the misrepresentation induced the
plaintiff to enter the contract. So, where a representee is not aware that a representation has been
made, or it did not affect his decision, or he knew that it was false, an action for misrepresentation will
not stand. In Smith v Chadwick, the prospectus of a company contained a false statement that an
important person was on the board of directors of the company and he admitted under cross
examination that he had in no way been influenced by the false statement. The court held that he could
not succeed in an action for misrepresentation.

Also, where a person or their agent knows the true facts, there can be no misrepresentation. This was
the rationale for the decision in Bawden v The London Assurance Co. It should also be noted that a
misrepresentation shall be deemed waived if the representee finds out about it and still continues with
the contract.

Another important aspect to know if a misrepresentation is actionable is the materiality. Where the
misrepresentation is so insignificant that it would have no significant impact on the contract in the
opinion of a reasonable man, then the contract cannot be rescinded for misrepresentation. However,
where the misrepresentation is a fraudulent one as opposed to a negligent or innocent
misrepresentation, it shall still be valid misrepresentation irrespective of its materiality.

Section 83 of ISA ,provides for the meaning of untrue statement or misstatement ,"For the purposes of
the provision of this Act,a statement -

a) included in a prospectus shall be deemed to be untrue if it is misleading in the form and context in
which it is included; and

b) shall be deemed to be included in the prospects if it is contained in the prospectus or in any report or
memorandum appearing on the face of it or by reference incorporated or issued with it.

Remedies for investors who suffer losses as a result of misstatements or misrepresentation

Prospectus Statements

The law provides remedies for investors who suffer losses as a result of their reliance on statements
contained in a prospectus. Under the Investment and Securities Act, 2007, particularly Section 87, any
person who authorizes the delivery of a statement in lieu of prospectus that includes untrue statements
or misstatements commits an offence and is liable for penalties. This section establishes a framework for
accountability and provides a basis for investors to seek remedies.

Validity of the Statement

The statement is valid as the law explicitly recognizes the potential for investors who suffer losses due to
misleading information in prospectus.The law aims to protect investors by imposing strict liabilities on
those responsible for the inaccuracies of the information provided.

Such statements contained in the prospectus must contain accurate and complete information to enable
informed investment decisions.

The standard for determining whether statements in a prospectus are actionable is whether they are
untrue, false, or misleading and whether the investor relied on them, leading to loss. This is reinforced
by Section 86(1) of the ISA, which imposes liability on those who authorize the issuance of a prospectus
containing misstatements.

There are three types of misrepresentation :

1) Fraudulent misrepresentation : This kind of misrepresentation is made with the intent to deceive
potential investors.

2) Negligent misrepresentation : This is falsehood made carelessly without ensuring accuracy.

3) Innocent misrepresentation : It is made with reasonable belief in its truth .

There are ethical obligations on the company to make full and honest disclosure to potential investors.
Transparency and due diligence are indispensable in public disclosures made by a company.

rsons encouraging actions that violate the ISA, including misleading prospectuses.

Companies and Allied Matters Act

• While CAMA primarily governs company formation and operations, it complements the ISA by
regulating the issuance of prospectuses. Section 70 of CAMA aligns with the ISA in requiring truthful
disclosures in prospectuses.

Remedies available to investors for misrepresentations or misstatement

The primary legal frameworks in Nigeria that provide remedies for investors harmed by misstatements
in a prospectus include:

1. Investments and Securities Act (ISA) 2007:

• Section 85(1): Entitles investors to compensation for losses caused by reliance on untrue or misleading
statements in a prospectus.

• Section 86(1): Imposes criminal liability on directors or officers who authorize a prospectus with
misstatements, with penalties including fines or imprisonment.

• Section 305: Allows the Securities and Exchange Commission (SEC) to impose penalties on persons
encouraging actions that violate the ISA, including misleading prospectuses.

Common law Civil Remedies for misrepresentation

In the event that a misrepresentation has been made to induce one party to enter into the contract,
there are a number of remedies available to the aggrieved party. They are as follows.

1. Damages

Damages, in the simplest of terms, is monetary compensation for a legal injury. Damages are only
available as a remedy for fraudulent and negligent misrepresentations, and the aim of the damages is to
put the party in the position they would have been in if they had never entered the contract. As stated
by the court in Doyle v Olby (Ironmongers) Ltd., the defendant is not in the position to say the loss was
not foreseeable.

2. Indemnity

It has been stated that the representee in a case of innocent misrepresentation cannot sue for damages
to be put in the position they would have been in if they had never entered the contract. All they can
sue for is the illusory and often inadequate remedy of indemnity. It is called illusory, because it is very
often not available, and not adequate when available. The remedy of indemnity only covers losses that
directly flow from the contract. If A rents a house from B with an innocent misrepresentation that the
house is inhabitable, and the house turns out to have a leaking roof which destroys A’s property, A can
only sue to recover the amount he paid for rent and not the amount for his property destroyed. For
more illustration on how damages and indemnity differ, the case of Whittington v Seale-Hayne should
be observed.

3. Recission

Rescission is the setting aside of a contract. The remedy of rescission may be used no matter the kind of
misrepresentation, whether innocent, negligent or fraudulent. A person who has been induced to enter
a contract through misrepresentation has the right of election, to either affirm or disaffirm the contract.

Where a contract is rescinded, it is terminated ab initio and the object is to restore the parties back to
their original position as if the contract had never been made. This remedy of rescission can be seen in
Sule v Aromire, where A owed B bank some money and was unable to pay. The court ordered A’s
property to be used as security for the loan to be sold by auction and that B should be paid from the
proceeds of the sale. C bought the house at an auction, and when he tried to take possession, D family
resisted on the ground that the property did not belong to A. The court stated that C could recover her
money by bringing an action for rescission if she had been a victim of misrepresentation.

In order to rescind without going to court, the representee must convey such an intention to the
representor except where it is not possible. When the representee intends to rescind the contract
through a judicial process, then informing the representor is not necessary.

While a contract is being rescinded, it is necessary to restore the status quo. This restoration is known as
restitutio in integrum. In the event that this restoration is not possible, there can be no rescission. If a
baker buys flour based on misrepresentation, he cannot sue for rescission after using the flour to bake,
and may only be entitled to damages or indemnity. The scope of restitution in common law is narrow, as
it requires precise restoration. However, equity is much broader as it only requires substantial
restoration. The perfect case to look at for the operation of the flexibility of equity is Oluwo v Adewale.
Clement Oluwo had been fraudulently induced to enter a contract to sell his land when the document
was presented to him as a mortgage. Before an action was brought for rescission, the defendant had
spent money to develop the land and had received rent on the land. In rescinding the contract and
carrying out rescission, the court set aside the contract for sale and kept a contract of mortgage in
favour of the plaintiff as a substitution. This meant that ownership of the land would revert back to the
plaintiff once the initial purchase price of 3,200 pounds was returned to the defendant, with interest per
annum. Also, an account was to be made of profits made on the land through rents and expenses, and
after subtracting the expenses from the profit, the remainder was to be used to reduce the total sum
payable.

There are some bars to the remedy of rescission. They are as follows.

• If the contract has been affirmed by the representee after discovering the
misrepresentation.

• If there has been a substantial lapse of time between when the contract ended and
when the action is being brought.

• If a third party as acquired rights on the property for value and without notice of the
misrepresentation.

• In the case of innocent misrepresentation only, where the contract has been executed.

Statutory civil liabilities

statutory law such as ISA provides for compensation;

Section 85 (1) ISA ,this section states that persons who subscribe for shares or debentures based on a
prospectus containing untrue or misleading statements are entitled to compensation for any loss or
damage suffered due to reliance on those mistatements. The claimant must prove that the negligence or
breach of duty causing the mistatement directly resulting in the loss.

This remedy is available against the company, its directors, principal officers, employees involved in
preparing the prospectus, and the issuing house.

• To succeed, investors must prove:

i. The prospectus contained an untrue or misleading statement.

ii. They relied on the statement when subscribing for shares or debentures.

iii. The reliance caused financial loss or damage.

• For example, in Union Bank of Nigeria P/c v SEC, the court held that a registrar's failure to exercise due
diligence constituted a breach of statutory duty, entitling affected investors to compensation to restore
their original position.
negligence.

2. CRIMINAL REMEDIES

Criminal remedies target those responsible for issuing a misleading prospectus, serving as a deterrent
and protecting the public interest. These include:

• Fines and Imprisonment:

• Section 86(1) of the ISA provides that directors or officers who authorize a prospectus containing
untrue statements commit an offense. Penalties include:

• Imprisonment for not more than three years.

• A fine of not less than N1,000,00.00 (though this amount may be higher under current SEC guidelines).

• Both imprisonment and a fine.

According to section 86(1) ISA ,where a prospectus included any untrue statement or mistatement,any
director or officer who authorised the issue of the prospectus commits an offence and is liable

a) on conviction to a fine of not less than N1,000,000,000 or to an imprisonment for a term not
exceeding three years or to both such fine and imprisonment,unless he proves either that the untrue
statement or misstatement was immaterial or that he had reasonable ground to believe and did, up to
the time of the issue of the prospectus, believe that the statement was true.

• SEC Penalties:

• Under Section 305 of the ISA, the SEC can impose administrative penalties on individuals or entities
that encourage actions violating the ISA, such as issuing a misleading prospectus. These penalties may
include fines or other sanctions deemed appropriate by the SEC.

ADMINISTRATIVE REMEDIES

The SEC and the Investment and Securities Tribunal

(IST) provide administrative avenues for resolving disputes and securing remedies:

• Complaints to the SEC:

• Remedies from the APC may include compensation orders, restitution, or sanctions against the
offending parties. APC decisions are appealable to the IST.

• Actions at the Investment and Securities

Tribunal (IST):

• The IST has exclusive jurisdiction over securities disputes under the ISA, including those involving
prospectus misstatements.

Investors can commence actions directly at the IST or appeal APC decisions.

• The ISA mandates that IST proceedings be concluded within 90 days, ensuring swift resolution.
Remedies from the IST may include:

• Compensation for losses.

• Orders to restore investors to their original position.

• Injunctions to prevent further violations.

4. OTHER REMEDIES

• Injunctions:

• Investors can seek court injunctions to prevent the company or its agents from continuing to distribute
a misleading prospectus or engaging in related activities.

This remedy is less common but available under common law and the ISA.

• Accounting for Profits:

• In cases of fraudulent misrepresentation, courts may order the company or its officers to account for
profits gained from the misleading prospectus, ensuring that ill-gotten gains are returned to investors or
forfeited.

B
Under Section 85(1) of the Investment and Securities Act (ISA), 2007, the following persons are liable to
pay compensation to individuals who subscribe for shares or debentures and suffer loss or damage due
to reliance on an untrue statement or misstatement in a prospectus:

Directors of the Company: Every person who was a director of the company at the time the prospectus
was issued.

Persons Authorizing Themselves as Directors: Individuals who have authorized themselves to be named
and are named in the prospectus as directors or as having agreed to become directors, either
immediately or after an interval of time.

Any employee who facilitated the creation of the prospectus: Any employee to the company who aided
the creation or production of the prospectus is liable to pay compensation for any misstatement.

Persons Authorizing the Issue of the Prospectus: Every person who has authorized the issue of the
prospectus, which may include principal officers or employees who participated in its production.

In conclusion,A crucial element for many of these claims is reliance on the prospectus. Investors must
demonstrate that they relied on the false or misleading statements in the prospectus when making their
investment decision.

¨A prospectus is a document that contains information that the public can use to subscribe to or
purchase a companys securities, if it contains any inaccuracies, it will have major ramifications.
Misstatement is also called misrepresentation and the provisions that regulate the accuracy and
truthfulness (candor) of what statements made by issues in a prospectus are found not only in the ISA
but also in the Securities and Exchange Commission Consolidated Rules and Regulations of 2013. Those
rules and regulations were made by the SEC pursuant to its rule-making powers under the ISA.¨It is
worthy of note that from common law there have always been civil and criminal liabilities on issues
pertaining to securities bothering on misstatements or misrepresentations in the prospectus. What is
regarded as the ‘golden legacy in this area was left by Kindersley VC as far back as the 19th century in
the case of New Brunswick and Canada Railway Co. vs. Muggeridge (1860D) R and SM363 (part 381) as
follows:

Those who issue prospectus, holding out to the public the great advantages which will accrue to
the persons who will take shares in a proposed when they are taking and inviting them to take shares on
the fate of the representation daring contain, are bound to state everything with strict and scrupulous
accuracy, and not only to abstain from stating as facts that which is not so, but to omit facts within their
knowledge, the existence of which might in any degree affect the nature, extent or quality of the
privileges and advantages which the prospectus holds out as inducements to take shares.
In essence, the law aims to protect investors from harm caused by misleading information in
prospectuses by providing mechanisms for them to seek compensation and other remedies against
those responsible for the misstatements.