How to Read a ProspectusMedium

Hundreds of pages, written by lawyers, approved by a regulator that checked whether it says enough and not whether the shares are worth the price. Here is the order that works.

5 min read · 923 words

What approval means, and what it does not

A prospectus is approved by a regulator before it may be published. That approval means the document contains the disclosure the rules require. It does not mean the regulator thinks the shares are worth the price, that the business is sound, or that the forecasts are reasonable.

Nobody in the process is asserting that the price is right. The company wants the highest one, the banks are paid on the transaction, and the regulator is checking a list. The only person deciding whether the price is right is the reader — which is the whole reason this document exists and is public.

The transaction it belongs to is the initial public offering, and reading that page first makes this one much faster.

The order to read it in

Not front to back. The front is marketing, and the parts that decide anything are scattered.

1. The offer terms. How many shares, who is selling them, and what the company receives. Two minutes, and it frames everything else.
2. Use of proceeds. What the money is for.
3. Selected financial information. Three years of numbers on one or two pages.
4. Risk factors, read in the way described below.
5. Operating and financial review, which is where the numbers are explained by the people who produced them.
6. Related party transactions, which almost nobody opens and which is frequently the most informative section in the book.
7. Everything else, as needed.

1. Primary or secondary: the first question

• New shares issued by the company — the money funds the business, and existing holders are diluted.
• Existing shares sold by a holder — the money leaves with the seller, and nothing changes inside the company.

Most offers are a mixture and the split is stated. A listing that is overwhelmingly a sale by existing owners is a different proposition from one raising money to build something, and the document will not say so in those words.

Then check the lock-up: who has agreed not to sell, for how long, and with what exceptions. That expiry is a dated supply event and it is disclosed here and nowhere else.

2. Use of proceeds, read strictly

"General corporate purposes" on a large raise is the least informative sentence in equity capital markets. Look for specificity: a named acquisition, a named facility, a stated repayment. And check whether proceeds are repaying debt — a company raising equity to pay down borrowings is telling you what its lenders said.

3. The financial information, and what has been adjusted

• Three years, audited. Start with revenue growth and margin trend, not with the latest year alone.
• Adjusted figures. Nearly every prospectus presents an adjusted measure alongside the statutory one. The reconciliation is required and it is where the add-backs are listed. Read the list rather than the total.
• Pro forma information, where acquisitions or a reorganisation happened during the period. It shows the group as if it had always been this shape, which is useful and is not what happened.
• Capitalisation and indebtedness — the balance sheet after the offer, which is the one that matters.

4. Risk factors, read backwards

Everybody skips these because the first ones are generic — competition, regulation, economic conditions. The specific ones are further down, and they are specific because a lawyer insisted.

Read from the bottom up, and look for anything naming a number, a customer, a contract, a jurisdiction or a legal proceeding. A risk factor that could only have been written about this company is the one worth reading, and it is usually surrounded by ones that could have been written about anybody.

5. Related party transactions

Rarely read and frequently the most informative pages in the document. What the company buys from entities its owners control, what it pays them, what leases it has with them, and what will continue after listing. A business whose supplier, landlord and largest customer are all connected to the selling shareholder is a business whose margins are a negotiation rather than a fact.

6. Share classes, and who actually decides

Whether the shares being sold carry the same votes as the ones being kept. Dual-class structures are disclosed plainly and their consequences are not: a listing where public shareholders hold most of the economics and a fraction of the votes is a listing where the ability to change anything stays where it was. It also affects index eligibility, and therefore who is obliged to buy.

7. The parts that are about the offer rather than the company

• The price range, and how it compares with the peer multiples and with any recent private valuation. A range set below the last private round is the most informative number in the whole book.
• Stabilisation — the named manager, the limits and the period. See the greenshoe.
• The underwriters and their other relationships with the company, disclosed in the plan of distribution.
• Expenses, which say what the exercise cost and who paid.

The four questions to leave with

1. Who is selling, and what does the company actually receive?
2. What do the adjusted numbers exclude, and would I exclude it?
3. Which risk factor could only have been written about this company?
4. Who controls it after the listing, and what do they buy from themselves?

None of those requires modelling. All four are answerable in an hour from a free public document, which is more than can be said for most of what is written about any new listing.