Martin Owiny
29 June 2008
opinion
A prospectus is a key tool when preparing for the arrival of a new share. How should it be read and used?
A new listings prospectus is published ahead of a stock exchange listing to inform investors - individual and institutional - about the company that is about to offer equity/shares for sale.
The underlying idea is obviously to induce investors to buy shares, but this does not mean those involved are allowed to make extravagant claims like any street trader.
The company seeking a listing and its sponsors have to behave responsibly and obey quite rigorous rules of disclosure.
The language used in a prospectus is usually quite measured.
If any information is found to be inaccurate, both the company and its sponsors can be subjected to disciplinary measures by the Capital Markets Authority. In the case of a serious breach, legal action could follow.
What is NOT said in a prospectus is also important. Those producing the prospectus are expected to fully disclose all information about the company that might affect share pricing or performance. Holding back information can also be a serious offence. (Rules about timely disclosure not only apply ahead of a listing, but when the company is on the exchange.)
Listing requirements may differ from stock exchange to stock exchange, but in general terms the trend is for listings rules to be regularly reviewed and to be tightened up for the better protection of the investing public.
Though quality control has improved down the years, investors should always remember the basic rule of buying anything - buyer beware. No one is giving you an absolute guarantee about the value of the shares.
Unfortunately, at listings time, human emotion often takes over. Potential investors can get quite excited, as occurred with a number of Ugandans during the Safaricom Initial Public Offering.
However, take time to read the prospectus carefully. Once you have read it, read it again. This document is a mine of information. It takes time to absorb all the facts. Make notes as you go along.
In particular:
Note the names of directors and executives. Confirm personal and background details if you can. In the computer age, some use 'Google' to see if anyone connected with the company has been linked to scandal or controversy. The old-fashioned way is to ask friends and relatives in the business community about key personalities.
Check the identity of major shareholders. You may feel some comfort if major institutions, well-respected companies or eminent personalities are listed as shareholders. This is not a guarantee. Even institutions make poor investments, but it may serve as a guide.
Note the identity of the listings sponsor and corporate advisers. Highly respected members of the financial services industry are unlikely to endorse a listings proposal that is without merit.
Study the section on the purpose of the listing. Why is the enterprise going public? What does it need the money for?
Check dividend policy. These paragraphs can often be read in conjunction with the purpose of the listing.
There may be no firm commitment on dividends that is sharing of profits if the listing is intended to fund major growth. So you might be disappointed if you want strong income flows from dividends, but there could be capital growth if the expansion activities drive up share values.
Heed all warnings. The prospectus may warn you that equity participation is speculative and professional investment advice is warranted. You might also be warned not to rely on information or 'representations' from other sources.
This is a reminder not to be swayed by 'friends', tips, nods and winks. The prospectus may also list general and specific business risks, read it carefully.
Profit history, forecasts, financial statements and associated information can be difficult to fathom. Get professional advice if you can, but in any event, read carefully and exercise caution.
Company history may suggest durability.
But remember, in many African jurisdictions the demands of the Companies Act and similar legislation are not onerous. A business may have been around for years, but this is no guarantee of solid, embedded value.
Scrutinise information on the nature of the business and its industry. You are investing blind unless you gather some general information about the sector and future prospects.
A prospectus is a tool. To get the most out of it, use it with care.
In future, we can expect an increasing number of companies to come to the stock market. They will introduce themselves by bringing us a calling card - the new listings prospectus.
It will no doubt carry the type of information described above. It is not disrespectful, but prudent, to read it carefully.
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