One thing that is clear to both entrepreneurs and investors is that the legal framework around raising money through the issue of equity shares can be both complex and daunting.
This position is made ever more acute when the fundraising is combined with an IPO and involves the issuer being listed or admitted to a trading market.
If you have invested in a public company offering before, you may well have already come across the terms ‘IPO Prospectus’ or (in the case of AIM companies) ‘Admission Document’. This article explains the concepts behind each document and gives a bit of guidance as to why they are important and what you should be looking out for in them.
What is a Prospectus and when is it needed?
A Prospectus is essentially a form of marketing document that issuers publish in the context of an IPO that sets out details of the issuer and the securities being issued.
It is a heavily regulated document with strict content requirements, which are ultimately derived from European law. For a UK issuer, before being published it will have been vetted and approved by the Financial Conduct Authority (FCA).
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The ultimate aim behind the extensive legislation governing each Prospectus generally is to promote investor protection and market efficiency, based on the premise of full disclosure. The Prospectus must contain all information necessary to enable the potential buyers to make an informed assessment of the issuer and the shares.
When is a Prospectus needed?
A Prospectus would be required when one of the following holds true:
- There is an offering of ‘transferable securities’ (which would include shares) to the public
- An admission to trading on a ‘regulated market’
This is the case unless a relevant exemption applies. It is worth noting that AIM is not a ‘regulated market’ for the purpose of the second point (although an issuer would still need to consider the first).
However, producing a Prospectus is time consuming and costly. There are some key exemptions that issuers rely on to avoid drawing up a Prospectus on an IPO:
Smaller offerings: where the consideration of the public offer across the EEA is less than €5 million
‘Qualified investors’:offerings to institutional investors would be exempt only from the first limb of the Prospectus test above
Selective offerings: if an offer is made to fewer than 150 people (other than qualified investors) per EEA state, then a Prospectus is not required
Each of these exemptions applies only to the first (‘offer of securities’) test. If there is an IPO on the main market, a Prospectus will likely be required.
So, how is a Prospectus different to an Admission Document?
AIM Admission Documents are also a form of marketing document but, unlike Prospectuses, they do not need to be approved by the regulator. Instead, the London Stock Exchange delegates responsibility to the issuer’s nominated advisor (‘NOMAD’) to confirm that the Admission Document conforms with the content requirements in the AIM rules (and indeed the appropriateness of an applicant for the AIM market generally).
Admission Documents have similar content requirements as Prospectuses, but in practice tend to be shorter. It will be apparent from the face of the document whether it is an approved Prospectus or not.
What is in a Prospectus?
The FCA imposes a general requirement that a Prospectus must contain all such information as is necessary to enable investors to make an informed assessment of:
The assets and liabilities, financial position, profits and losses, and prospects of the issuer and of any guarantor
The rights attached to the shares to be issued
With the above general requirement in mind, a Prospectus must be drawn up using one or a combination of the schedules and building blocks prescribed by the Prospectus Regulation. Different specific requirements apply for different types of the proposed activity, but broadly the following specific contents are generally included:
- A summary, including key information that allows investors to understand the securities and decide whether to consider the offer further
- Information about the issuer’s directors and auditors, including a declaration by the directors accepting responsibility for the Prospectus
- Technical information about the shares being issued
- Details of the issuer’s management, including their remuneration, service contracts and directors’ interests
- General information about the trends in the issuer’s business and prospects for at least the current financial year and, where a profit forecast is included, the principal assumptions on which it is based and a report by the accountant
What should I be looking out for when reading them?
Both Prospectuses and Admission Documents can be incredibly useful and should provide all you need to know about the company in which you are thinking of investing and the rights attaching to the shares being offered. These documents tend to provide much more detail than you would normally receive from a private company looking to raise money from the crowd.
In each document there will be a detailed description of the company’s business, its market opportunities and the various risk factors that it considers are relevant to its future success. The Prospectus and Admission Document will also include certain financial statement including (if it has them) the issuer’s last three years’ historical financials.
Despite any concurrent marketing or announcements regarding a company coming to market, your ultimate decision to invest will be made on the basis of the Prospectus/Admission Document. It is therefore important that you take care to review the Prospectus/Admission Document in detail and ensure that the story being presented is the same as the one you are expecting to see.