Reading and using a Prospectus

How to Read a Prospectus Correctly
A company will issue a disclosure document called a prospectus if it is looking at raising money from the public for the first time in what is called an Initial Public Offering (IPO). Do not get the wrong idea of what a prospectus is used for. The law specifically sets out information that needs to be contained in this document.

This information is intended to help you make an informed decision on whether to invest in shares in that company or not. It also tells you about the company and the risk that is associated with investing in it.

It also tells you about the company’s future prospects and will outline financial forecasts which may or may not be met. It is always good to seek the advice of a professional investment adviser before investing but it is also important for you to understand what a prospectus is and how it can be useful to you.

Questions Relating to a Prospectus
When you receive a prospectus here are some of the questions that you need to have answered:

  1. Is the investment a speculative one?
  2. Do you understand the industry that the company is in?
  3. Do you understand the business of the company?
  4. Does the investment represent good value for you?
  5. Are you clear on why you are investing and what you want to achieve from the investment?
  6. Does buying these shares fit in with your investment strategy?
  7. Are you clear on why the company is listing?
  8. Do you know who the underwriters are?
  9. Does the management of the company have the necessary experience?
  10. Do the forecasts appear to be based on assumptions that could be achieved?
  11. Are the shares issued to the vendors excessive?
  12. Do you understand all the steps that are carried out in the float of company shares?

You must Never Assume Things
You should never assume the following:

  • When a float is oversubscribed the investors receive a proportion of the shares they apply for. Under the Companies Act the directors of a the company do not have to do this at all. Provided they issue shares according to the way outlined in the prospectus then you have no recourse. If you don’t receive any shares at all then you miss out. Some prospectuses state clearly that where there is an over subscription then the directors can allocate shares to subscribers at the board’s total discretion. This may mean that you miss out completely on receiving any shares at all.

  • Don’t assume that if you send money in for shares and you don’t get all or any of the shares you applied for, you will receive interest. This is not correct because unless the company states in the prospectus that it will pay interest to unsuccessful subscribers, the company and the directors are under no obligation to do so.