An initial public offering, or IPO, is the first sale of securities by a company to the public. IPO involves the submission of a prospectus, which provides prospective shareholders with considerable information about the company. An IPO is likely to result in a large, diverse group of new shareholders. As this information is the main source based on which the prospective shareholders of the company make their investment decisions, it may become the basis for litigation if shareholders suffer losses on account of wrong statements, false proclamations and negligent pronouncements in the prospectus.
Prospectus discusses the objective of the issue, details of the offer, risk factors, management perceptions thereof and notes to risk factors, past financial statements, bio-data of the directors and key officers of the company, outstanding litigation, defaults, material developments and material contracts. Prospectus is the main source of information for intending investors.
For the purpose of POSI, the offering can be an IPO/ FPO/ Rights issue/ ADR issue/ GDR issue etc.
If due diligence is not exercised and adequate care is not taken in drafting the prospectus, it can lead to error, breach of trust and duty, misleading statement, act, omission or neglect. This has serious implications in terms of liability and punishment for those associated with the prospectus as per various sections of the Companies Act 2013.