Why You Should Read A Prospectus/Rights Circular Before Buying Shares

A company prospectus contains vital information about companies looking to source funds from the public.
Retail Investors often ignore reading the prospectus and hastily base their investment decisions on the advice of sell analysts
This article explains why you should read up prospectus if you are a retail investor.
The Nigerian Stock Exchange All Share Index is currently up by over 40% year to date, buoyed by the ease of foreign exchange liquidity and improved macroeconomic fundamentals.

Companies that were hard hit by the foreign exchange crisis resorted to rights issues, some of which are still ongoing. Investors, however, tend to skip reading a rights circular or prospectus.

What is a rights issue circular?

A rights issue circular is issued by a company when it intends to raise funds from existing shareholders. It has to be approved by the Securities and Exchange Commission (SEC) before it can be released to shareholders.

What is a prospectus?

A prospectus is a legal document that is issued by companies that are offering shares for sale. It must also be approved by the SEC before it is released to investors.

What is an abridged prospectus?

An abridged prospectus contains just the basic information about a share sale. It is advisable to go through a complete prospectus, which will contain past financial statements of the company.

Preliminary vs Final prospectus

A preliminary prospectus is the first version released by an issuer, and usually contains details that are subject to change. The preliminary prospectus is usually circulated among a select audience and labelled clearly. The final prospectus states the number of shares that will be issued.

Difference between a prospectus and rights circular

While the two documents have different audiences, they both may contain similar information. Rights circulars are also a great way to ascertain how well a company has been run.

5 things you should watch out for in a prospectus/rights circular

1. Management

The document gives clear details of the management and board of a company. Knowing the management of a company enables you to determine their competence as well as if there are any individuals who have had poor records of running previous coins.

1. Financial statements

Previous financial statements by the company are included. This enables the investor to know if the company has a track record of profitability.

1. Past performances

For an established company, going through past offer prospectuses enables the investor to ascertain if the company has met up with past forecasts. If not, why?

1. Risks

Risk factors which the company seeking to raise funds considers critical are also stated. These factors may include political factors, economic issues, as well as industry specific matters that may be significant.

1. Legal issues

Companies are also mandated to state if they have any court cases for or against them. In addition, an estimate of the total judgement sum for or against them, as well as the likelihood of it having a negative effect on the functioning of the business.

The most important thing to look out for is the section which indicates where the funds being raised would be channelled to. Will the funds be used for new projects or to pay down existing debts? These serve as guides for prospective investors; they help the investor to make informed decisions on whether to invest, or pass.