Importance of a Prospectus

03/02/2007 00:00:00 - views: 5,113

 When issuing stocks, the issuer has to publicize the information about the company itself, the company’s commitments and basic rights for the stock buyers, etc. so that the investors can make right decisions whether to buy stocks or not. This kind of document is called the Prospectus or the Announcement of Information.

1. What is prospectus?

The prospectus is an invitation or an offer for the public register to invest in or buy stocks from the issuer. The Prospectus consists of all information relating to the issue. Therefore, the information in the Prospectus will stick to the terms and conditions of fulfilling the invitation or offer.
As usual, a company that wants to issue stocks must craft a Prospectus which will be investigated by the State Securities Committee. This is called a preliminary prospectus. After being approved by State Securities Committee, the preliminary prospectus will be regarded as the official Prospectus. When offering a stock, apart from the official Prospectus, the issuer often attaches a brief Prospectus. The content of the brief Prospectus is a summary of the main ideas of the official Prospectus but it must comply with the regulations of State Securities Committee.
2. Why is it necessary to read the Prospectus?
The Prospectus is a highly important document. For an investor, the Prospectus serves as a means for the investor to evaluate the level of profitability and the potential of the company before he or she decides to invest in the company or not. A decision that lacks necessary information may cost a lot.

As a result, it is advisable to read the Prospectus carefully and to investigate the practical risks of the company before reaching a final decision. Investors should cautiously evaluate the basic elements of the listing company through the information in the Prospectus. Even though the first offers are usually good opportunities to invest because they will bring about high initial profit thanks to the stock ballooning; still, there are risks remaining.
3. What does a Prospectus include?
The Prospectus often comprises of 8 following main sections:
- Cover page;
- Abstract of the Prospectus;
- Risks;
- Concepts;
- Issuing stocks;
- Relevant partner(s) in the issue;
- Operating performance and features of the issuer;
- Appendix(es).
4. Prospectus’s usage

You should begin analyzing the issuer by its Prospectus. In the fulfilling process, you should raise some important questions. For example, “Is the operating performance of the company progressing?”, “Does the increase of sales revenue mean the increase of profit and stock price?” and so on.
However, figures will not tell everything. Hence, you ought to suspiciously look into the Prospectus in order to find out the development signals of the company. You should also explore the Board of Directors of the issuer, its product lines, and ask yourself if these products are still marketable or not.
5. Necessary information

- Cover page (front and back-front);
- Offer time;
- Concepts;
- Operating performance and features of the issuer;
- Table of contents;
- Abstract of the Prospectus;
- Summary of capital stock, statistics of the issue/ offer, debts and strategies to use the revenue;
- Issuing stocks;
- Information of business sector;
- Information of finance;
- Information of share-holders, Board of Management and Board of Directors;
- Relevant partner(s) in the issue;
- Risks related to business sector and potential of the company;
- Appendix(es);
- Procedures of hand in case file and acceptance.
6. Major information of the cover page

- Stocks to be sold;
- Stock volume to be sold;
- Time for stock to be sold;
- Relevant partner(s) in the issue.
7. Abstract of the Prospectus

This section helps you to get general information about the company.
- Introduction of the issuer, business activities, issuing supporters, big share-holders and the Board of Directors;
- Brief information of finance and the company’s potential;
- Brief information of related risks that affect on the business activities and financial situation of the company;
- Brief information of capital stock, statistics of the issue/ offer, debts, sum of money generated from the issue and strategies to use the revenue.

Moreover, you had better compare those to other corresponding sections in the Prospectus so as to have the detailed information that you are in need of.
Information about business sector – what business activities that the company is taking?
The information regularly includes:
- The situation of the business sectors that the issuer is taking part in;
- The potential of relevant sector(s) that put impacts on the performance of the company’s main business sector;
- Sorts of key products and services of the company;
- Customers and providers of the issuer;
- Technology, methodology of production and distribution channels;
- Commercial factors like retail and agent system, distribution system, brand, business license, patents and the ability to do research and develop.
For the listing companies that enjoy favoured policies, the information section of business sector in the Prospectus also needs to announce their technologies in details.
8. Information of finance – do investors reduce the profit?
Financial information plays a crucial part in the Prospectus and is usually divided into 2 parts:
- Financial information in the past;
- Financial information in the future.
a) Financial information in the past
Financial information in the past often consists of the financial summaries audited and the balance sheet by sample extracted from the Audit Report in the appendixes of the Prospectus. Several business sectors require the information about income flow. The announcement of financial information in the past is constantly calculated for the 2 previous financial years. If there is any mistake in the publicized financial information that is detected by the State Securities Committee, the auditing organization as well as the guaranteeing one will have to take the associated legal responsibilities along with the issuer.
b) Financial information in the future
Financial information in the future comprises of plans of:
- Revenue;
- Before-tax profit before and after calculating the profit for the minor share-holders out of the company;
- After-tax profit;
- Total dividends and gross dividends.
From the plan of profit and stock’s offer price of the issuer, you can calculate the levels of market price of a stock in accord with the income on each stock in the year of the issuer, which is called P/E index. This index illustrate the time when stock price is suitable with income, which means companies that have many opportunities to develop frequently have higher P/E index than those that have very few opportunities to develop. Nonetheless, in some cases, high P/E index may results from low income level (E). Based on P/E index, accompanied by the analysis of the issuer’s quality, you can totally evaluate the issue and stock offer of the company in comparison with listed stocks of others in the same industry.
9. Share-holders, Board of Management and Board of Directors – who are the leaders of the issue?

It is advisable to read the list of share-holders, Board of Management and Board of Directors. Although the given data are not the guarantee for the quality of their management skills, you can still have an overview of their speciality qualification and management experience.
You need to pay attention to the rights of big share-holders, Board of Management and most important leaders in similar fields or competitive ones if they are stated in the Prospectus. And also, you should have an eye on the trading in the past or the future of relating companies. The Prospectus will supply you with the sufficiency of member groups as follows:
- Big share-holders and the founder of the company, even names and shares of individuals backing up for the company;
- Board of Management including the shares that are presented by them, detailed information about their qualification, experiences and responsibilities of each Director, and whether they are Managing Director or not;
- Managing staff under the member of Management Board, detailed information about their qualification, experiences and responsibilities of them;
- Stock and bond ownership rate of each mentioned member.
10. Risks

Common risks consists of:
- The rise and fall of stock price depending on the conditions of the stock market in particular and of the economy and the world in general;
- The changes in Government’s policies;
- The risks of foreign exchange;
- The changes of interest rate;
The possible risks of the company are:
- The reliance on the most important officers;
- The reliance on some certain customers, suppliers or internal projects;
- The changes of raw materials’ price;
- The integration of competitors or new entrants in the industry;
- Disputes newly emerged or taken to court.
In this section, you need to take a look at how the company’s Management Board intends to settle or lessen the impacts of risky factors.

From Science Research & Securities Training Center

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