Investors and companies refer to the potential liability of a company for incorrect or erroneous information in its securities prospectuses as “prospectus liability”.

Before selling shares to investors, listed companies in many countries, including Germany, are required by law to produce a prospectus containing all relevant information about the company. This prospectus must be provided, but it must also describe the company and its activities accurately and completely.

A company can be held liable for damages caused by its claims if it contains misleading or inaccurate information in its prospectus. Investors and the company itself may pay a high price for this compensation.

What to expect in this article

What is prospectus liability?

Liability for inaccuracies in a prospectus is called prospectus liability. A prospectus is a document that a company issues to inform investors about a good or service. This document can contain a wide range of information, including risks, costs, profit prospects and historical data.

When a company publishes a prospectus, it can be held accountable if the data is unreliable or inadequate. Both the company and the persons who wrote and compiled the prospectus can be held liable.

Investors who have lost money due to inaccurate or missing information can claim damages. Third parties, such as financial advisors or securities dealers who provided the prospectus to investors, can also be held liable under the Prospectus Act.

What are the principles of prospectus liability?

The principles of prospectus liability apply to the publication of prospectuses and other securities documents. They are designed to prevent investors from suffering financial losses as a result of purchasing securities that have been misrepresented in a prospectus.

Investors may be entitled to compensation under the prospectus liability rules if a prospectus contains incorrect or incomplete information that reduces the quality or value of the securities.

Prospectuses must also contain certain basic information, such as the type of security, the issue price, the issuer, the name of the securities and the risk of the investment. In addition, prospectuses issued in a Member State of the European Union must meet the standards of the EU Prospectus Directive.

According to this Directive, prospectuses must contain a range of information, including a description of the company, a detailed description of the securities and a risk assessment.

All individuals and companies issuing securities must comply with the Prospectus Directives. They help investors to obtain important information before investing. This way, investors can base their investment decisions on accurate and thorough information.

What are the examples of prospectus liability in Germany?

Companies can be subject to prospectus liability in Germany if they either provide a prospectus with incorrect or misleading information or if they fail to prepare a prospectus in accordance with the regulations.

The 2018 Federal Supreme Court case in which a company was held accountable for selling bonds because the prospectus contained material that did not comply with the law is an example of liability based on a prospectus.

Another example is the 2004 BGH ruling in which a company was held accountable for failing to file a prospectus on time.

In this case, the company was held liable for repayment because it had failed to publish a new prospectus after the terms of the bond issue had changed.

Another example is the 2019 Federal Supreme Court liability case in which a company was held liable for the sale of its shares because the prospectus contained inaccurate or misleading information.

A company can always be held accountable if it breaches its prospectus obligations. It is therefore crucial that companies submit their prospectuses on time and in accordance with the law.

When can a claim for damages be brought under civil law?

According to the provisions of the Capital Investor Model Case Act (Kapitalanleger-Musterverfahrensgesetz, KapMuG), a claim for damages based on prospectus liability can be brought before a civil court. If a securities prospectus is defective, an investor may assert a claim for damages against the issuer pursuant to Section 37 KapMuG.

The investor must prove that he lost money due to the false information in the prospectus. The claim for damages must be asserted within three years after discovery of the error.

How can you protect yourself?

Companies should take the following precautions to protect themselves from prospectus liability:

Create a prospectus document that meets all legal requirements. A prospectus must meet all legal requirements, be clear and easy to understand and contain all relevant facts and information. 2.
Add a disclaimer clause. By lowering the company’s potential legal culpability, a disclaimer protects the company from prospectus liability.
File the prospectus material in a database. Companies must register their prospectus documents with the relevant regulator in order for them to be accepted as legitimate documents.
Maintain the prospectus documents. Companies must update their prospectus documents for any changes that may affect the prospectus.
Regularly review compliance with the law. To ensure that their prospectus document complies with all applicable laws, companies should review it regularly.

How can fund companies deal with it?

When a fund prospectus is published, fund companies must bear responsibility for the truth and completeness of the information it contains. Fund companies can take various measures to reduce their liability and offset this prospectus liability.

In order to ensure that all information is correct and comprehensive, fund companies should first carefully examine the fund prospectus and all data contained therein. To ensure the objectivity of the audit results, this audit should be carried out by an external auditing firm.

In order to identify and assess the risks associated with the fund, fund companies must also operate an efficient risk management system. To ensure that the risks are fully and accurately presented in the fund prospectus, a risk management system should also include continuous and systematic risk monitoring.

Last but not least, fund companies must take out sufficient insurance to cover prospectus liability. This insurance should cover all potential liability risks and be tailored to the risks of the fund.

Fund companies can reduce their prospectus liability and ensure that all disclosures in their fund prospectus are accurate and comprehensive by taking the steps described above.

How can real estate agents avoid prospectus liability?

Real estate agents can avoid potential liability by being prudent. They should first ensure that all disclosures in the prospectuses are accurate and adequate.

They should also follow the law when preparing prospectuses and ensure that all relevant information is included. To ensure that all prospectuses are compliant with the law, estate agents should also have an external audit carried out on a regular basis.

Real estate agents should also identify potential dangers and inform their clients about them. To ensure that all prospectuses are up to date, this audit should be carried out regularly.

How do companies and brokers insure themselves against prospectus liability?

By taking out prospectus liability insurance, companies and brokers can protect themselves against prospectus liability. The liability risks that may arise from a breach of the prospectus duty or from inaccurate prospectus information are covered by this insurance.

Both direct and indirect damages are covered by the insurance. When choosing an insurance policy, companies and brokers should make adjustments to their individual needs and risks.

How can a lawyer assist with the issue?

A lawyer can offer a range of services related to prospectus liability. He or she can advise you of your legal obligations when drafting and distributing prospectuses and assist you in complying with the rules.

He can also help you identify and assess potential liability issues in connection with the publication of a prospectus. In certain circumstances, he can also help you to reduce liability risks by determining an appropriate limitation of liability.

He can assist you in resolving conflicts relating to prospectus liability. He can help you to preserve your rights and obligations and to find a compromise that is acceptable to both sides.

A lawyer can also help you decide whether it is worth filing a prospectus liability lawsuit. He or she can help you weigh the risks and costs of such a case against the possible benefits.

Last but not least, a lawyer can help you organise and present your defence in a prospectus liability action. He or she can help you to make your case convincingly by helping you to formulate your ideas clearly.

Prospectus liability – lawyers inform

An important protection for investors and a fundamental part of securities law is prospectus liability. Investors are protected against incorrect or misleading information in sales prospectuses.

If investors are affected by inaccurate or misleading information, they can claim damages under this law against issuers of securities and their representatives.

Therefore, issuers and their agents should thoroughly verify and confirm all relevant facts before offering a security to the public. Otherwise, they risk being held accountable for damages caused by the incorrect or misleading information in the prospectus.

If you have any further questions about prospectus liability that you would like to discuss with one of our lawyers, please feel free to contact us by phone or write to us.

Prospectus liability – claim for damages?