Making sense of a prospectus

When a company wants to offer shares to the public, they may offer securities such as shares, debentures and options to the public via an initial public offering (IPO) or 'float'. These securities may be offered as listed or unlisted securities. To meet their legal disclosure requirements and inform potential investors how their money will be used, the company will issue a prospectus.

The prospectus should contain all the information you need to make an informed decision, but don't get distracted by the glossy pictures, do your own research and make sure you understand where your money is going.

What to look for in a prospectus

All prospectuses must contain information on the features of the securities being offered, including how many are for sale, how you can apply to buy them, information on the company, its operations, financial position and the risks associated with the offer.

The front of the prospectus usually has a section called 'Investment Overview' or 'Summary'. The overview will contain important facts about the company and the offer, such as the key features of the company's business, major risks and financial information. It will also tell you where to find more detailed information on these topics within the prospectus.

We recommend you read the whole prospectus, to help you decide if the company suits your investment objectives.

Video: What to look for in a prospectus

What is a prospectus video

Kate O'Rourke and Jane Eccleston from ASIC talk about what to look for in a prospectus before you invest.

Here we explain in more detail the specific things to focus on in a prospectus.


You need to know

What you are getting for your money, how much it will cost now and if there are any future costs. For example, the purchase price might be payable in instalments. In this case, make sure you have sufficient funds to cover future instalments, which could be more than the security is worth when the instalment(s) are due.

You won't necessarily be able to tell whether the offer is cheap or expensive by the issue price. The company's price/earnings ratio (P/E) or earnings per share (EPS) is a better way to assess the value of a company.

Where to find this

This information is usually found in the 'Terms and conditions of the offer' or 'Details of the offer' section.

Business and plans

You need to know

How the company makes its money now, what will it do with the funds raised and what measures are in place to ensure a successful outcome.

Where to find this

The 'Overview' should summarise the key features of the company's business and plans and tell you where more information can be found. Also check the table of contents for the section dealing with the company's business and plans. Look for information explaining how the company will make money.

If the company does not intend to make money in the short term, what are the long term prospects? Find out what important assumptions the company is relying on for success. For example, do plans assume current interest rates remain steady or that a contract with a significant supplier or customer will be executed? Does the company have adequate contingency plans?


You need to know

How the company has performed in the past? Has the company made a profit from past activities and has the profit been enough to cover its running costs? Has the company paid dividends in the past? If this is a new company, how long before they expect to make a profit or pay dividends? What are their future profit predictions based on? Always question profit predictions.

Where to find this

Look in the 'Financial information' section of the prospectus for the company's financial performance. Are previous published financial reports available from the company website or ASIC? See researching companies for more ways to get company reports.


You need to know

Under what circumstances could you could lose some or all of your money. Companies are required to tell you about known risks they face in achieving their objectives. Make sure you understand all the risks associated with the offer and how the value of your investment will be affected should any of the risks eventuate. This will help you decide whether the investment is low risk or high risk and speculative, and whether you are comfortable with the level of risk.

Where to find this

Key risks can be found in the 'Overview' section and detailed information will be in the 'Risks' section.

Directors and managers

You need to know

Who the directors and managers are, what their experience is and whether they have a successful track record in similar companies or industries. Your investment in the company is also an investment in the skill and expertise of its directors and key managers.

Find out if they have ever been involved with companies that have become insolvent, if they have ever been convicted of fraud and if they hold positions in other companies. Also find out what they get paid, what the payments are made up of (e.g. cash, shares, options or fees) and consider whether they seem reasonable compared to similar positions within the same industry?

Where to find this

Check the section on 'Board and Management'.

Others involved

You need to know

If there are any related parties and if they will benefit under the current offer, or in the future. Related party contracts are contracts between the company making the offer and people or entities that are related to the company (including the directors). For example, contracts to provide administrative support to the company. A related party contract means that a related party (e.g. a director) has a personal interest in the company that may differ from yours. Check whether the related party is being paid more than is usual for the type of service they will provide and how the company expects to pay for the service.

Where to find this

Look for any 'Related party contracts' or 'Material contracts' listed in the prospectus. These could be in a section toward the back called 'Additional Information' or 'Material Contracts'. They could also be mentioned in the 'Overview'.

Question profit predictions in prospectuses

A prospectus may estimate how profitable they expect the company or venture to be, however, the estimates will be based on many assumptions, including:

  • demand for the goods or services they produce
  • the accuracy of their income and costs assumptions
  • economic factors
  • factors specific to the industry in which they operate
  • timing of income and profits.

Ask yourself whether these assumptions seem reasonable and what will happen if they vary. Also think about your investment timeframe and how you may be affected if projections turn out to be optimistic.

Companies do not always share profits with shareholders. In the early stages a company may choose to reinvest the profits rather than pay them to shareholders as dividends. What are the company's plans for profits and does this suit you?

If the securities are listed on an exchange and are regularly traded, it will be easier for you to sell them. If they are not quoted on an exchange or are not traded often, it may be more difficult for you to sell them when you want to.

ASIC's role with prospectuses

ASIC does not endorse, approve or verify the content of prospectuses but all prospectuses must be lodged with ASIC before any securities are offered to the public. To check if the issuer has lodged a prospectus, see ASIC's OFFERlist database.

If ASIC reviews a prospectus, it may, amongst other things, check that statements about future outcomes have a reasonable basis and that major risks are disclosed.

If ASIC thinks the prospectus contains misleading statements or information has been left out, the company may be asked to correct its prospectus by issuing a supplementary or replacement prospectus. You should review any supplementary or replacement prospectus, if there is one, to see what has changed.

ASIC does not always read or review all prospectuses. If you read something in a prospectus that you think is incorrect or misleading, you should not invest until you get a satisfactory explanation in writing or an amended prospectus is issued. You can also make a complaint to ASIC about the prospectus.

Get financial advice if you need help

If you don't understand anything in the prospectus, speak to a stockbroker or financial adviser first or don't invest. You need to be able to understand the information in a prospectus to decide whether the investment is right for you. If the company has not communicated relevant information clearly, this could be a warning sign that you need to dig deeper.

Always read a prospectus thoroughly before investing in debt securities and do some independent research to help you decide whether an investment in the company is suitable for your investment timeframe and risk tolerance.

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Last updated: 15 Oct 2018