So you’re thinking about investing in a company’s shiny initial public offering, and you’ve just downloaded — or spent a while printing out — its lengthy prospectus.
How do you make sense of these dense, long and detailed documents?
The prospectus 411
Most prospectuses reach well beyond 100 pages, and whilst we don’t recommend reading every single word, it’s perhaps the best way to get an impression of whether the company fits your investment profile.
When preparing to list on the ASX, a company must offer potential shareholders a series of disclosure documents, the most common and crucial being the prospectus.
Filed with the Australian Securities and Investment Commission (ASIC), the prospectus outlines in great detail the terms of the offer and a deep dive into the business’ past, present and future outlook.
Headline information to look for
The first few pages of any prospectus will outline the offer - how much money the company is seeking to raise, how many shares it is offering and the asking price to purchase one of those shares.
These pages also contain basic information on the company’s name, location, corporate directory, proposed ASX listing code and the lead manager.
The lead manager is an independent financial institution appointed by the company to facilitate its progress to listing, including roadshow promotion, which drums up investor interest.
There’s plenty of legalese in these early pages that you can skip; the first really important part that you’ll want to read is the chairman’s letter, which in a page or two summarises the company’s interests and what they propose to do with the money you give them.
Usually, this is followed by more granular details on the offer, such as expected market capitalisation on listing and a total number of shares issued, as well as a timeline to listing.
Deep dive into the company
The investment overview section is where you’ll want to cast a close eye over the finer details.
This section helpfully, and usually quite logically and simply, breaks down what the company does, where it operates, how it will achieve its objectives and what the funding will be used for.
All entities issuing a prospectus are required to run would-be investors through the key risks that could jeopardise the company’s prospects in this section.
Though you would think that companies are loath to detail any such potential risks so as to not deter investors, most cover the risks adequately, and it is an important part to read; not all stocks are made equal, and an investor with knowledge of risks stands to avoid frightening losses.
In the investment overview section, you will also find a wealth of information on the board of directors and management team, including ownership structure, remuneration, substantial shareholders and other interests.
This early section — yes, we’re still not the bulk of the way through yet — also contains a breakdown of how it will use the money raised, whether to fund project development, build-out marketing or for working capital.
It’s all in the details
The investment overview contains the bulk of the relevant information you’re seeking, but not quite all of it.
The company overview follows, which is an incredibly detailed, almost minute-by-minute breakdown of the company’s history, structure, business model, sector overview, growth strategy, financing, dividend policy (if it has one) and more.
After the company overview, you will find an even more detailed run-through of the risks facing the company, followed by a look into the background of the company’s board and management (note, these sections are sometimes presented in a different order).
Dollars and sense
Taking up a great deal of real estate around the middle of the document is a detailed look at the company’s financial standing.
It is here you will find information on how the company has managed its finances, and what, if any, money it has made in the past.
Some companies provide this information themselves, others present it through an independent audit by an accountant.
These pages see the company’s financials laid out in a format very similar to a standard profit-and-loss statement, making it easy to get a read on the entity’s financial position.
Mining companies will often at this point include an independent geologist’s report as well.
Much of the remaining documentation in the prospectus contains information on material contracts, additional information on the terms of the offer, more legalese and a glossary - if you’ve reached this point, we think it’s okay to start switching off.
Too long, didn’t read
To recap, if you are perusing a prospectus, there are a number of sections it’s important to pay attention to:
- The details of the offer;
- The chairman’s letter;
- The company overview;
- Key risks, board; and
- Management makeup and financial history.
If you can parse these parts of a prospectus, you will gain a strong knowledge of whether the company is a solid investment for your risk profile.
- Daniel Paproth