Concept and Significance of Civil Prospectus Liability
Die civil prospectus liability forms an important part of capital markets law as well as general civil law. It describes civil liability for damages caused by faulty or incomplete capital market prospectuses, especially during the issuance of securities, investments, or other financial products. The legal background of prospectus liability is primarily to protect investors from false or missing information in the prospectus. Liability is intended to ensure that investment decisions are based on accurate, comprehensive, and up-to-date information.
Legal Foundations of Prospectus Liability
Regulations in the German Civil Code and Capital Markets Law
Civil prospectus liability is not regulated in a single, unified statute. Rather, it arises from various legal sources, especially:
- Section 826 German Civil Code (BGB) – Immoral Intentional Damage
- Prospectus liability under special legislative provisions, e.g.:
- Securities Prospectus Act (WpPG)
- Investment Act (VermAnlG)
- Capital Investment Code (KAGB)
- General tort provisions in Sections 823 et seq. BGB
The main focus is on civil liability for incorrect statements or omissions in the issuance prospectus that result in financial losses for investors.
Distinction from Criminal and Supervisory Prospectus Liability
Civil prospectus liability must be distinguished from criminal sanctions (e.g., violation of Section 264a Criminal Code) and administrative prospectus liability (regulatory measures by the German Federal Financial Supervisory Authority, BaFin). It relates exclusively to civil law claims for damages by injured parties.
Requirements for Prospectus Liability
Faulty or Incomplete Prospectus
The main requirement is a faulty prospectus. A prospectus is considered faulty if it:
- contains incorrect information,
- conceals material facts,
- is misleading, or
- is no longer up-to-date due to subsequent developments and is therefore factually and temporally inaccurate.
The disclosure obligation covers all circumstances that are materially relevant to the investor, for example regarding the issuer’s assets and earning position, creditworthiness, existing risks, and the use of the invested capital.
Causality Between Prospectus Error and Loss
Liability requires a causal connection between the prospectus error and the loss incurred. The loss must be due to the investor relying on the accuracy of the prospectus and investing for that reason (proof of causality).
Scope of Persons Liable
Liable parties include:
- Issuers,
- Providers of the investment,
- Prospectus responsible parties,
- Members of the management or administrative body
- Advisors involved in the preparation of the prospectus, e.g., companies accompanying the issuance
The exact allocation arises from the respective special law.
Scope and Content of Liability
Liability generally covers reimbursement of the invested capital and compensation for consequential losses arising from the investment in the defective product. Depreciation claims or lost profits can also be compensable. Typically, liability is limited to losses that occurred during the purchase or subscription of the investment.
Case Law on Prospectus Liability
The courts, particularly the Federal Court of Justice (BGH), have developed the principles of prospectus liability further. Especially stringent is the investor-appropriateness of prospectuses, i.e., the information must be so complete and understandable that risks are clearly communicated. The courts do not generally lower the burden of proof regarding causality, but the so-called presumption of proper conduct applies—that is, it is presumed that, had the investor been properly informed, they would not have subscribed to the investment.
Special Statutory Prospectus Liability
Prospectus Liability in Securities Trading Law
According to Sections 21 et seq. Securities Prospectus Act (WpPG), the issuer is liable, among other things, for the content of the prospectus. The liability rules are mandatory and contain comprehensive provisions regarding the requirements for liability, its scope, and limitation periods.
Liability Under the Investment Act
The Investment Act (VermAnlG) contains its own prospectus liability provisions in Sections 20 et seq., particularly for publicly offered investments such as closed-end funds, company participations, or subordinated loans.
Prospectus Liability under Investment Law
According to the Capital Investment Code (KAGB), there are specific prospectus liability regulations for investment assets and their distribution prospectuses.
Tortious Prospectus Liability in the ‘Grey Capital Market’
Aside from special legislative liability, there is tortious prospectus liability under the general provisions, namely Section 826 BGB and Section 823 Para. 2 BGB in conjunction with statutory protective laws. This applies especially to offerings outside the regulated capital market (“grey capital market”).
Limitation Period
The limitation period is determined by the respective special laws. Typical periods are two years from knowledge of the defect, and a maximum of five years from acquisition of the investment (e.g., under the WpPG). For tortious claims, the general limitation periods of the BGB apply.
Distinction from Public Law Prospectus Liability
Unlike supervisory prospectus liability, which entitles BaFin to order administrative measures, civil prospectus liability includes only civil claims for damages.
Special Features and Practical Aspects
One special feature is that liability typically cannot be contractually excluded or limited. In practice, providing evidence of the existence of a prospectus error and the resulting loss is often decisive.
Significance of Prospectus Liability for Capital Market Regulation
Civil prospectus liability increases transparency in the capital market and strengthens investor protection. It incentivizes providers and issuers to prepare and maintain accurate, complete, and understandable prospectuses.
Summary: Civil prospectus liability is a central institution of civil law in the capital markets sector. Through a differentiated liability framework, drawing on special laws and general tort provisions, it effectively protects investors from damages arising from defective capital market prospectuses. The practical questions mainly concern the requirements for liability, its scope, and the limitation of claims. Prospectus liability thus makes a significant contribution to the functioning of and confidence in the capital market.
Frequently Asked Questions
Who is entitled to make claims under civil prospectus liability?
Entitled to make claims under civil prospectus liability are primarily purchasers of securities or other capital investments who suffer a financial loss as a result of a faulty prospectus. The decisive factor is that the acquisition directly results from the statements in the prospectus, and that this acquisition took place during the relevant public offering or the initial stock exchange listing. The group of entitled persons is legally determined by Section 44 BörsG, Section 13 VerkProspG, or Section 21 Securities Prospectus Act (WpPG). Indirect purchasers may also have a claim if, viewed as a whole, they can be treated as having acted in reliance on the accuracy of the prospectus and explicitly or implicitly based their investment decision on it.
Who is liable for faulty, incomplete, or misleading prospectuses?
Liability for faulty prospectus information lies initially with the so-called persons responsible for the prospectus. These are, under legal provisions, among others, the issuers (i.e., publishers of the securities), the providers, possibly guarantors, and all persons who, as members of a governing body, signed the prospectus or were responsible for its publication. In addition, further persons may be liable under law or contractual agreement, such as lead managers of a banking syndicate, provided they were significantly involved in the preparation of the prospectus. Liability covers both intentional and negligent prospectus errors. Third parties, e.g., auditors or experts, may be liable according to Federal Court of Justice (BGH) case law under certain circumstances, if their opinions were incorporated into the prospectus and they knew or should have known this.
What are the requirements regarding the causality between prospectus error and loss?
To assert claims under civil prospectus liability, it is essential to prove causality between the faulty prospectus and the resulting damage. The plaintiff must show that they actually took note of the prospectus and made their investment decision in reliance on its accuracy. According to prevailing opinion and established case law, it is generally presumed that an average investor would have based their investment decision on a flawless and complete prospectus (“presumption of causality”). However, the defendant has the opportunity to rebut this presumption (“reversal of proof burden”), especially if it can be shown that the investor would have made the investment without the prospectus or despite knowledge of the defect.
Within what timeframe can prospectus liability be asserted?
Claims under civil prospectus liability are subject to strict limitation periods, which are determined by the relevant special statutes. Depending on the legal basis, periods are generally two years from knowledge or grossly negligent ignorance of the prospectus error, but no later than five or ten years from the time of prospectus publication or acquisition (see Section 46 BörsG, Section 13 (1) VerkProspG, Section 21 (3) WpPG). After the expiry of the limitation period, legal action is excluded, even if the damage only becomes apparent later.
What limitations or exclusions of liability does the law provide?
The law provides for exclusions and limitations of liability both in personal and in material terms. In particular, no compensation is owed by anyone who proves that the error in the prospectus could not have been detected despite exercising due care (exculpation). Section 15 VerkProspG or Section 22 WpPG also stipulate that persons who were involved in the preparation or publication of the prospectus without fault are not liable. Compensation for damages is also limited: only so-called reliance damages are compensable, not, for example, lost profits. Although the purchaser must be put in the position as if they had not made the acquisition, any claim for additional gains is legally excluded.
What special features apply to liability claims against persons responsible for the prospectus?
With liability claims against those responsible for the prospectus, it is important to note that they are generally jointly and severally liable, i.e., the injured party may choose to pursue any one of the obligated parties. Another peculiarity applies to class actions, as may be used in specific investor model proceedings (under the Capital Investor Model Proceedings Act – KapMuG), in which certain legal questions can be settled for groups of investors. The enforcement of claims may also be modified by contractual liability limitations or formal prospectus liability agreements, insofar as they are consistent with mandatory law.
To what types of prospectuses and investments does civil prospectus liability apply?
Civil prospectus liability applies to securities prospectuses as well as other investment prospectuses within the meaning of the relevant laws (such as the Securities Prospectus Act or the Investment Act). It covers not only shares, bonds, and Genussrechte, but also fund shares, GmbH participations, and other public investment offers, provided these are subject to prospectus requirements under the applicable regulations. Exceptions apply, for example, to private placements or certain transactions exempt from the prospectus obligation. Secondary market transactions are also covered if the acquisition still falls within the period of the public offer.
