A recent Court of Appeal decision has confirmed that directors and promoters can face criminal liability with respect to a statement in a registered prospectus or advertisement which becomes untrue after the prospectus or advertisement is first distributed.

The Court of Appeal decision arose out of criminal charges against five directors of the Bridgecorp group currently before the High Court. One of the directors, Mr Steigrad, submitted that there was no offence under section 58 of the Securities Act because a number of counts in the indictment were based on a statement in a prospectus that was correct when the prospectus was first distributed.

The Court of Appeal held that criminal liability under section 58 can arise where a statement becomes untrue (due to a change in circumstance) after the advertisement or registered prospectus is distributed. The Court of Appeal accepted the Crown's submission that accurate disclosure throughout the life of a prospectus or duration of an advertising campaign is essential to the integrity of markets for ongoing offers of securities and in line with the purpose of the Securities Act.

The court has also confirmed that the term "distribute" under section 58 contemplates individual communication. That is, it not only includes "making available, publishing and circulating" but also "communications by letter or by electronic means".

The Court of Appeal decision has clarified the legal position. In practice, public issuers who adopt best practice have processes in place to ensure that registered prospectuses and advertisements remain accurate and not misleading at all times when subscriptions are being taken.

We can expect further guidance from the courts on the application of the liability provisions of the Securities Act (and the scope of the due diligence defence) as Bridgecorp and other finance company prosecutions continue over the course of this year.

The decision R v Steigrad [2011] NZCA 304 is available here.