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The capital market is a system where owners searching for opportunities to invest and partnerships seeking funds come together. In order for the capital market to maintain this function, capital market activities must be carried out in a reliable and transparent environment and the investor must be protected. Under Turkish law the capital market system, which is based on the protection of investors, public disclosure is regulated in detail in terms of a public offering. To participate in the public offering, the investor must be aware of all the necessary and sufficient information regarding the issuer’s financial status. In the initial stage of the public offering of capital market instruments, this information is provided to the investor through a public disclosure document called: prospectus.

The rules regarding the prospectus are regulated under the Capital Market Law (CML) (No. 6362) (Official Gazette numbered 28513 and dated 30.12.2012) and Communiqué on Prospectus and Issue Document (II-5.1) (Official Gazette numbered 28685 and dated 22.06.2013). Accordingly, for capital market instruments to be offered to the public or admitted to trading on the exchange, a prospectus is required to be prepared, and to be approved by the Capital Markets Board of Turkey (Communiqué art. 5; CML art. 4, para.1). “Prospectus” refers to a public disclosure document containing all information required for a conscious assessment and choice of investors, with respect to the issuer’s or if any, the guarantor’s financial situation and performance, prospects and activities, and characteristics of and rights and risks associated to capital market instruments to be issued or admitted to trading on the Exchange (Communiqué art. 4, para.1-i; CML art. 3, para.1-j). The prospectus and all information contained in the prospectus must be prepared with adequate details for provision of all information about the issuer and if any, the public offeror and the issue, as envisaged by the applicable laws and as required by the Board, and must be complete, current and in conformity with standards determined by the Board, and must be formulated in such manner to be easily analysed, understood and assessed by investors, and must also contain additional information that may be requested by the Board at the time of application to the Board for its approval, and all information and statements included therein must, if required, be relied upon documents (Communiqué art. 7, para.; CML art. 4, para.2). It must be noted that the approval of the prospectus does not mean that the Board guarantees the accuracy of the information given in the prospectus (CML art. 6, para.1). Therefore, it cannot be accepted as a recommendation regarding capital market instruments (CML art. 6, para.1).

The fact that the prospectus is the most important public disclosure document and that the information contained in the prospectus must be complete, accurate and consistent brings the legal liability arising from the prospectus. Legal liability arising from the prospectus is regulated in the art. 10 of CML and art 32 of the Communiqué. As set forth in these articles, issuers are responsible for all kinds of damages and losses arising out of wrong, misleading and deficient information contained in the prospectus. If and to the extent the damages and losses cannot be compensated from the issuers or it is clearly understood that they shall not be compensated, then and in this case, the public offerors, the consortium leader(s) intermediating the issue, the guarantor (if any) and the members of the board of directors of the issuer shall be held liable to the extent they may be held liable for damages depending on their faults and the current requirements (Communiqué art. 25, para.1; CML art. 10, para.1). By making a distinction between the issuer and those who liable second degree, a gradual responsibility has been established for those responsible.

The persons and entities such as independent audit, rating and appraisal firms that prepare and issue reports for inclusion in the prospectus shall also be held liable for wrong, misleading and deficient information contained in their reports, within the context of pertinent provisions of the Law and the Communiqué. (Communiqué art. 25, para.2; CML art. 10, para.2). The responsibility of independent audit, rating and appraisal firms is an independent and private responsibility. It is therefore not subject to any restrictions, such as first or second-degree liability.

In the liability case, the plaintiff will be the damaged investor. The damaged investor may be the person who acquired the capital market instrument in the primary market or third parties who acquired the instrument in the secondary market. There is no doubt that the direct losses of the investor to be compensated. For instance, if an investor made a payment more than the necessary amount due to the false information which had been included in the prospectus, the loss of the investor will constitute a direct loss. In case the investors are indirectly damaged due to the prospectus, there may be no direct damage to the investors’ assets, but there might be a reflection of the loss which occurred in someone else’s assets. For example, incorrect, misleading or incomplete information in the prospectus may cause losses to the issuer company and consequently, the value of the shares may decrease. Although the decrease in the value of the shares does not cause a direct loss in the assets of the investors, it will affect the amount of the dividends. Therefore, with the less dividend being paid to the investor an indirect loss will occur. In the presence of an indirect loss, compensation should be paid to the issuer company as there is no direct loss on the investor's assets and the loss occurs in the assets of the company (TCC art.555, para.1).

For the liability arising from the prospectus, a causal link must be established between the action and the loss. Regarding this causal link, a presumption is set forth under the law. According to it, during the validity period of the prospectus containing inaccurate, misleading or incomplete information and immediately after the disclosure of the other public disclosure documents to public, in the event that a loss arises in the assets of investors upon the sale or purchase on the exchange of capital market instruments, purchased at the initial public offer or purchased or sold on exchange immediately after the date when the information consistent with the reality has arisen, a causal link shall be deemed as established between the public disclosure documents and the loss (CML art. 32, para.4). Although a presumption is included, determining the causal link in practice might be difficult. Because the market is a structure that is always in motion. Although it may be thought that the fluctuations in the market are caused by the fact that there is false information included in the prospectus, the real situation may not be so in all cases. The market is an environment that can be affected by many factors. Therefore, the causal link between the investor’s loss and the information contained in the prospectus may not always be established in a healthy way.

Although a presumption is included in the law towards the causal link, an exemption is set forth for those who wish to relieve themselves from the liability. According to it, persons who prove that they were not informed about the inaccurate, misleading or incomplete information included in public disclosure documents and that this information deficiency does not arise from their intention or gross negligence shall not be responsible (CML art. 32, para.3). With the acceptance of the presumption in terms of negligence, the burden of proof is considered to be on the defendant. With the defendant being the bearer of the burden of proof, the investor is protected.

The compensation requests arising from public disclosure documents shall lapse within six months starting from the date when the loss mentioned in the fourth paragraph (CML art. 32, para.6).

Agreements, provisions or expressions mitigating or removing the responsibility arising from public disclosure documents shall be invalid (CML art. 32, para.7). However, it is stated that this invalidity will be the case only for the investors, but the agreement will remain valid in terms of the internal relations between responsible persons.