The UK Department of Trade and Industry (DTI) has stated that FreshAer, the company planning to set up a budget airline in the Republic, illegally offered shares in the business to the public and broke a number of other laws governing investment and equity offerings.

UK-based FreshAer this week stopped selling flight tickets for its proposed services from Dublin, which were due to begin in October. The company also pledged to refund all money collected from Irish consumers. The Irish Times understands that this amounts to approximately €250,000. Bibit, a German merchant bank is holding the money on trust.

The DTI began investigating FreshAer in May. According to a letter from its deputy inspector of companies, Mr John Gardner, to former FreshAer director Mr John Roche, the company appeared to breach both the English Companies Act 1985 and the Financial Services and Markets Act (FISMA) 2000.

FreshAer ran foul of the legislation when it published a prospectus on its website in the spring. The DTI found that it was possible for members of the public to download the prospectus and a share application form from the site. Mr Gardner's letter states that, as FreshAer was a private company, it was a criminal offence to do this.

FreshAer has since removed the prospectus and application forms from the website.

It was also in breach of an FISMA provision banning anyone who is not authorised by the British Financial Services Authority (FSA) from offering shares to the public. Mr Gardner warned that this was also a criminal offence.

The company's prospectus did not comply with the English Public Offers of Securities Regulations 1995 on a number of fronts. It failed to advise readers to seek professional advice and the price at which shares were offered varied from day to day, according to Mr Gardner.

Mr Gardner's letter states that this offence was "exacerbated by the fact that FreshAer sought and ignored legal advice on the content of the prospectus". He points out that the document failed to state the minimum amount amount of shares that it was seeking to place, which is a breach of the Companies Act.

According to the letter, the company raised a total of £10,000 sterling (€14,200) from four individual investors. It is not clear if the investments came via the website or through another channel. Mr Gardner ordered that the subscriptions be returned.

Mr Roche was one of the company's original directors and shareholders. However, he had resigned before it published its prospectus. Last night, he said his name appeared on the document without his knowledge or consent. Nobody was prosecuted as a result of the DTI investigation.

It also emerged yesterday the Iceland Air sister company, Luftleidir, which was supposed to provide the FreshAer service when it began in October, has stopped negotiating with the company. A Luftleidir spokesman said the talks ended at the weekend and added that it was unlikely that it would enter into any agreement with the British-based business.

FreshAer has begun the process of applying to the Irish Aviation Authority (IAA) and the Commission for Aviation Regulation (CAR) for its airline and tour operator licences. It is likely to take at least six months to get certification.

The firm had been running a promotion with the Evening Herald newspaper offering free flight vouchers to readers. A spokesman for Independent News & Media, which owns the paper, said it had not issued any vouchers after learning FreshAer was not licensed.