The Contents of a Prospectus

When listening to or reading promotional adverts related to new bonds or shares offered to the public, many investors should be accustomed to the general disclaimer, namely that “The value of the investments may increase as well as decrease and past performance is no indication of future performance. Investors are urged to read the Prospectus dated […] especially the Risk Factors contained therein.” Possibly, very few investors read the entire prospectus or the most important sections which helps gain a good understanding of the company, its business model and the main risks attached to the business.

It is therefore important to explain the general contents of a prospectus.

A prospectus is an offer document which a company is required to publish whenever there are offers of its securities being made to the public. A prospectus is also a requirement when securities are simply listed on the regulated Main Market of the Malta Stock Exchange, even when there is no offer to the public such as the recent listing of the shares of Trident Estates plc following the spin-off from Simonds Farsons Cisk plc. The contents of a prospectus are governed by a set of rules, policies, regulations and directives, both at European level and also locally via the Malta Financial Services Authority, which dictate the type of information that needs to be included. As such, the format is somewhat standard among most bond or equity issuers.

A prospectus is typically made up of three parts – the Summary Note, the Registration Document and the Securities Note. Some companies opt to publish a combined document where the three parts are included into one flowing document, while other companies issue the three parts as identifiable documents within one publication. Since most companies in Malta generally publish a three-part document, today’s article will provide an explanation of the contents within the various parts of a prospectus.

The contents of each document may vary if the securities being offered are equity (i.e. shares) or debt (i.e. bonds). Nonetheless, certain sections and information are identical in both instances. In the case of bond issues which are guaranteed, there are some sections, particularly in the Registration Document, that are repeated for the Guarantor, such as corporate information, business activities, the performance and financial status, in the same manner as disclosed on the issuer.

The Registration Document provides an introduction to the company. The section on risk factors aims to identify those risks that apply or could potentially apply to the company and its operations. This section is normally rather lengthy since a comprehensive list of risk factors is documented. Various promotional adverts normally make specific reference to the risk factors section since it is important that a prospective investor is made aware of all the risk factors that can affect the issuer and its business. Nonetheless, this does not mean that only those risk factors mentioned in this section can affect the issuer, since there may be factors, unknown at the time of the issue of the prospectus or which are beyond the control of the company, which may affect the company and its business activities.

The Registration Document lists those persons responsible for the contents and statements in the prospectus. This responsibility falls on the directors of the company who ought to take all necessary actions to ensure that whatever is included in the document and all statements made are factual and correct as at the date of issue. The names of the various advisers to the company who would have assisted the company to prepare the prospectus are also included in the registration document. Typically, an offer to the public requires assistance from the legal counsel of the company, the auditors and financial advisers as well as a sponsor, manager and registrar.

Detailed information on the company and its financials comprises the main part of the Registration Document including information on the group and any subsidiaries, its business operations and current and future trends. Any statements made by the directors regarding competition and financial prospects have to be supported by facts and / or statistics, otherwise the information may be misleading to potential investors. The prospectus also includes a review of the company’s historic financial statements, namely the income statement, the statement of financial position and the cash flow statement. In the case of bond issues, companies generally provide historic financial statements for the previous two years while an equity issuer generally publishes three-year historical financials.

Governance matters and structures are also given prominence within the Registration Document. The sections within the document that explain the governance provide details on how the company is managed, the identities of the executive management and the requirements to organise meetings of shareholders and bondholders. Details are also provided on the management of conflicts of interest of directors for the benefit of transparency and good governance.

The board of directors of a company whose securities (equity or debt) are listed on the Malta Stock Exchange need to have structures and processes in place that cater for an oversight mechanism of strategic transactions. In fact, the requirement is that there is a committee set up, called the audit committee, that is responsible with dealing with issues of risk, control and governance. This committee has to be made up of a majority of non-executive directors, who are not involved in the day-to-day affairs of the company, and therefore take a more independent view of any transaction.

Other information that is also presented in the Registration Document include information on any legal proceedings which the company is party to and which are material, any contracts entered into by the company which are not in the ordinary course of business and information on the share capital structure of the company (including details of the majority shareholder/s)) and main details emanating from the memorandum and articles of association of the company. The latter is a statutory document that details the objectives of the company, how it is to be managed, who has the right to undertake business on behalf of the company, how general meetings are to be conducted, etc. This is a statutory document which is publicly available through the Registry of Companies – the Registration Document only highlights some key information from the memorandum and articles of association.

The Securities Note provides all details on the securities being offered. As such, one can expect to find information about the securities, such as term, coupon, yield, interest payment dates and any guarantee in place for bond issues. In the case of equity securities, apart from the information on the number of shares being issued and the offer price, the securities note also details the rights and obligations of a shareholder. This part of the prospectus also includes a section on risk factors, which aims to identify those risk factors that can apply to the securities themselves. The Securities Note also includes a section detailing the use of the funds being raised via the debt or equity offering. In the case of debt securities, the funds being raised pursuant to the offer would typically be used by the company to fund particular new investment opportunities, extensions of existing business, or to repay existing borrowings. The Securities Note also includes the terms and conditions applicable to applications, such as the minimum application amount and the procedure for the lodging of applications.

The Securities Note of debt instruments also includes details as to what constitutes an event of default and the negative pledge, which is a pledge by the company that it will not go beyond a certain level of indebtedness that would otherwise possibly jeopardise the bondholders’ right to capital and interest payments.

The Summary Note, as the name implies, provides a summary of the Registration Document and the Securities Note. Its length is pre-determined by the Prospectus Regulation which states that such a document cannot be more than 7% of the overall length of the prospectus, or 15 pages, whichever is the lengthier. Some companies publish this document as a stand-alone document, although this does not mean that a prospective investor should solely read this document for a comprehensive review of the company and the securities on offer.

Most prospectuses include also a number of annexes, typically containing (i) a specimen of the application form and the instructions to complete the form, (ii) a copy of the valuation report when the company is a property company, (iii) a report by the accountants on any forecasts that are included within the Registration Document (typically for an equity issue) and the financial analysis summary (when there is a bond issue which is offered to retail investors).

A prospectus is widely available online or via financial intermediaries during an offer period. Investors should start dedicating time to reading the salient details of a prospectus in order to gather the required information necessary to make informed investment decisions.

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