Purpose of a prospectus After obtaining the certificate of incorporation the

Purpose of a prospectus after obtaining the

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Purpose of a prospectusAfter obtaining the certificate of incorporation the promoters will take steps to raise thenecessary capital for the company. A public company may invite the general public to subscribeto the capital of the company and for this purpose a prospectus has to be issued. The basic objective of issuing a prospectus is to arouse public interest in the proposedcompany and induce the general public to buy its shares and debentures. However, it isnot essential for a public company to issue a prospectus.If the promoters are confident of raising the required capital; privately from their relatives andfriends, they need not issue a prospectus. In such a case, a statement in lieu of prospectus mustbe filed with the Registrar of companies.A private company, by its articles, prohibits any invitation to the public to subscribe for anyshares in, or debentures of the company. It is also not required to file a statement in lieu ofprospectus.The central theme of a prospectus, from money raising point of view, is that it sets out theprospects of the company and the purpose for which the capital is required. The prospectus isthe basis on which the prospective investors form their opinion and take decision as to the worthand prospects of the company. A prospectus, from a legal point of view is not an offer but amere invitation to treat. When a person makes an application for shares on the basis of theprospectus, that application is the offer.Prospectus to be in Writing:A prospectus must be in writing. An oral invitation to subscribe shares in or debentures of, acompany, or deposit is not a prospectus. Likewise, an advertisement in television or a film isnot treated to be a prospectus.Subscription:The word subscriptionin the definition of a prospectus means takingor agreeing to take sharesfor cash. It means that the person agreeing to take the shares puts himself under a liability to paythe nominal amount thereof in cash. In Government Stock and Other Securities Investment Co.Ltd Christopher, an offer was made by company A to the members of companies B and C toacquire all their shares in these companies in exchange of allotment of shares in the company.The offer cannot be held to be an offer to the public because it does not invite subscription forshares since subscription means taking shares for cash. Moreover, the offer cannot be said tohave been made to the public as it can be accepted only by members to who it is made. Theshares were not open for subscription by the public.Be
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Invitation to Public:It may be noted here that a document will be treated as a prospectus only when it invites offersfrom the public. Section 57 defines the term “public” as follows: It includes any section of thepublic, whether selected as members or debenture holders of the company concerned or asclients of the person issuing the prospectus or in any other manner. It further provides that nooffer of invitation shall be treated as made to the public if:
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