The prospectus is the most direct document for investors to understand a company to be listed and its industry. It is rich in content and covers a wide range. At the same time, it is also an important carrier for securities firms and investment banks to perform their duties as gatekeepers of the capital market.
However, now the prospectus is getting longer and longer, often hundreds of pages. For investors, some are difficult and obscure to read, while others are full of repetitive content; For investment banks, the preparation of long and huge prospectuses, which may be constantly revised, has also virtually increased the workload.
On January 28, 2022, the CSRC issued the guidance on improving the quality of information disclosure of prospectus under the registration system. In particular, it is mentioned to improve the quality of information disclosure in the prospectus, make the prospectus an information disclosure document that ordinary investors are willing to read and understand, and help intermediaries reduce duplication of work and return to their responsibilities.
So, in the view of securities firms and investment banks, what can be improved in the preparation of the current prospectus in practice? What do investors expect? The reporter of “daily economic news” conducted an investigation and understanding of this.
prospectus gets longer and longer. Reading the prospectus is comparable to reading a novel
From the current regulatory requirements, the prospectus usually includes 13 aspects: 1. Statements and commitments; 2. Issuance overview; 3. Tips on major issues; 4. Interpretation; 5. Risk factors; 6. Basic information of the issuer; 7. Business and technology; 8. Horizontal competition and related party transactions; 9. Directors, supervisors and corporate governance; 10. Financial information and management analysis; 11. Application of raised funds; 12. Other important matters; 13. Documents for future reference, etc.
Therefore, the prospectus is called “the most detailed research report”. It requires both depth and breadth. It not only introduces the issuer’s own business status, financial data and historical evolution, but also includes the issuer and investment bank’s introduction to industry barriers and industry prospects. It is the most important reference for institutional and individual investors to make new share subscription decisions.
Under the myth of unbeaten new shares in the past, ordinary investors rely on luck to purchase new shares, and reading the prospectus seems not so important. However, in recent years, with the deepening of the reform of the registration system, there is no longer a “red line” for the protection of 23 times P / E ratio in the listing of new shares, and there have been many examples of breaking the listing of new shares.
The comprehensive registration system is coming, and its essence is “information disclosure as the core”. Some companies that are still at a loss but may have broad growth prospects are likely to land in the A-share market in the future. Reading the prospectus is an important lesson that rational investors must do before investing. For securities firms and investment banks, it is their responsibility to prepare a prospectus and fully disclose the prospects and risks of a company to be listed.
However, it is precisely because of the requirements for full information disclosure that the prospectus is getting longer and longer.
Take Wo Mai shares offered on December 1 last year as an example. With 557.8 yuan per share, it became the first high priced new share last year, with a total of 434 pages of prospectus. Both the sponsor and the lead underwriter were Citic Securities Company Limited(600030) .
Nevertheless, this is still a prospectus with few pages, and blue chips and Big Macs tend to be longer. For example, the total number of pages in the prospectus of China Telecom Corporation Limited(601728) a shares is 1305.
What is page 1305 equivalent to? The reporter of “daily economic news” has at hand a volume 1 and 2 of the romance of the Three Kingdoms, the 1979 version of the people’s Literature Publishing House, with a total of 1039 pages.
A prospectus is written longer than that of the three countries. It is not easy to write and it must be difficult to read. Therefore, many companies to be listed have also prepared the summary of the prospectus, but the length is bound to be not too short to meet the requirements of the letter phi. For example, the summary of China Telecom Corporation Limited(601728) the prospectus is 150 pages in total, which is similar to Rousseau’s theory of social contract.
This also doesn’t matter if the investment bank needs to reply to the feedback after the supervisor gives it.
Take the capital securities that have submitted IPO application as an example. On January 14 this year, the CSRC gave feedback to Capital Securities and raised a total of 40 questions. The number of words alone exceeded 10 China Vanke Co.Ltd(000002) 736 recommended Asian fishing ports and wrote 128 pages of reply to the regulation. Finally, the IPO of Asian fishing ports was rejected.
investment bankers: it takes the team three to four months to write a prospectus and constantly revise
There is no doubt that the huge prospectus first makes the investment bankers work very hard.
The relevant person in charge of Sinolink Securities Co.Ltd(600109) investment bank told the reporter of the daily economic news that with regard to the external reporting process of the prospectus, the sponsor mainly follows the guidelines for internal control of investment banking business of securities companies and other relevant laws and regulations, and submits the prospectus to the internal quality control Department, the core department Risk management, compliance department and other relevant departments shall review and submit to relevant regulatory authorities after being approved by the head of investment banking department, general manager, chairman and other main leaders.
He pointed out that because different companies are in different industries, their own conditions and the focus of information disclosure, the project execution rhythm of different sponsors and different project teams are different, and some of the contents quoted in the prospectus also depend on the relevant work of other intermediaries, there is no unified standard in the industry for the completion time of a first draft of the prospectus. “Based on my previous project experience, we generally spend about 3-4 months writing the prospectus and constantly revising it during the reporting period.”.
So, what is the most painstaking part of investment bankers?
An investment banker from an East China securities firm told reporters that because each company’s industry and its own situation are different, there are also different places that need special effort and repeated polishing in the process of implementing different projects, and there is no unified standard. “Generally speaking, all the information disclosed in the prospectus will be carefully worded and repeatedly verified in the implementation process. In particular, the writing of the company’s main business and core competitiveness reflects the company’s real profitability and sustainable operation ability. It is particularly important under the conditions of market-oriented issuance, so it will take special effort to polish it repeatedly.”
has been criticized by regulators for too many small flaws in the prospectus, and investment banks have to purchase proofreading software
However, the prospectus, which is hundreds of pages long, also puts forward extremely high requirements for the investment bank writing team.
For example, before the introduction of the new securities law in 2020, there was news that the prospectus of the company to be listed was criticized by the CSRC due to various minor defects.
In 2019, Shanghai Securities News once wrote that the prospectus was approved due to low-level errors, and the practice attitude of sponsors needs to be improved, referring to three typical examples. One of them was that a prospectus was publicly criticized by the CSRC. In the IPO feedback letter, the CSRC pointed out that “there are many text errors in the prospectus” and asked “the issuer and the recommendation institution to carefully proofread and effectively improve the quality of application documents”. The second is that “700 billion yuan” is written in the column of the proposed financing amount disclosed on the official website of Shanghai Stock Exchange; In the prospectus, the fund-raising amount is shown as 70000 yuan, while in fact, the fund-raising amount is 700 million yuan.
Among them, the third is that the recommendation institution made wrong layout when disclosing the purchase amount form of the issuer’s main customers, and whether the issuer’s final IPO application was rejected.
The above-mentioned investment bankers of East China securities companies said that due to the long length and time-consuming of the prospectus; Therefore, its investment banking department also applied for the purchase of dark horse software, which was mostly used in the proofreading work of publishing houses in the past. However, despite the help of software and the lessons learned by our peers in the past, we will be cautious in controlling the details before sending the prospectus every time.
investment bankers support detailed disclosure, but propose that there is a lot of room for optimization in readability
It is worth mentioning that although it is hard to write, investment bankers support the requirements for detailed disclosure of the prospectus.
The person in charge of the above Sinolink Securities Co.Ltd(600109) investment bank pointed out that the current format standards related to the prospectus were formulated by the CSRC after widely learning from the experience of relevant overseas capital markets and combined with the practice of China’s capital market supervision, and are constantly revised and improved with the further development of China’s capital market. “The prospectus is an important bridge connecting investors and listed companies. With the implementation of the registration system of the science and innovation board and the gem, the regulatory concept of strengthening information disclosure has been further rooted in the hearts of the people. All important information related to investors’ investment judgment needs to be fully disclosed in the prospectus, so as to protect the interests of the majority of investors. From this point of view, the prospectus strives to disclose accurately and in detail in order to be more accurate Do a good job in information disclosure so that investors can master more information and make better investment decisions. “
But at the same time, the length of the prospectus is too long. On the one hand, it increases the workload and the possibility of mistakes for investment banks. On the other hand, it also increases the time cost and energy cost of investors’ decision-making. So, does the existing prospectus disclosure requirements have room for optimization?
As specifically mentioned in the guidance on improving the quality of prospectus information disclosure under the registration system issued by the CSRC on January 28 this year, to improve the quality of prospectus information disclosure, “make the prospectus an information disclosure document that ordinary investors are willing to read and understand, and help intermediaries reduce duplication of work and return to their responsibilities”.
The person in charge of Sinolink Securities Co.Ltd(600109) investment bank admitted that at present, regulators are also paying more attention to the long length of the prospectus, requiring issuers and sponsors to highlight the key points, express them in more concise and concise language, and delete redundant expressions.
In addition, in his view, in practice, in order to enhance readability and simplify the expression of the prospectus, there are two key improvements.
First, there is room for further optimization of the financial accounting disclosure part. The current regulations require that the main accounting policies implemented by IPO enterprises during the reporting period be disclosed in this part, and the main practice in practice is to list the main provisions of the accounting standards for business enterprises of relevant subjects. This part will occupy dozens of pages, “I personally think this part can be more targeted and simplified disclosure”.
On the other hand, he suggested that it is not necessary to rewrite the prospectus after replying to the regulatory feedback. “In addition to full information disclosure, the main reason for the long length of the prospectus is that the relevant feedback during the audit process requires supplementary disclosure on Relevant Issues in the prospectus, resulting in further growth of the length.” The supplementary disclosure content itself has its own logical structure. If its content is forced into the prospectus, it will make the prospectus first disclosed inconsistent with the supplementary disclosure content in terms of cohesion and overall structure, resulting in low readability. With the implementation of the registration system, relevant feedback replies will also be publicized on the website of the exchange. Therefore, it is not necessary to make supplementary disclosure in the prospectus, which will lead to repeated disclosure and too long length.
it is suggested to reduce the repeated work of intermediaries and improve the efficiency and quality of due diligence
In addition, in addition to the prospectus letter, the person in charge of Sinolink Securities Co.Ltd(600109) investment bank also put forward his own views on how to improve the efficiency of intermediaries on the premise of strict quality control.
He pointed out that in order to consolidate the responsibilities of intermediaries, regulators require sponsors, accountants and lawyers to conduct independent due diligence on issuers. However, in practice, because the boundary between independent verification and collaborative verification is not clear, some intermediaries have done more repetitive work, which not only increases the burden of issuers, but also reduces the due diligence efficiency of intermediaries. Specific performance and simplification suggestions are as follows:
Originally, the correspondence of banks, customers and suppliers was mainly reviewed by accountants, securities companies and lawyers. However, in order to practice the spirit of independent verification, sponsors and lawyers need to send letters separately and require the confirmation object to reply to the address provided by each intermediary, which not only leads to a significant increase in the cost of sending and replying to letters from issuers, customers and suppliers of issuers, It also causes sponsors and lawyers to focus too much on procedural work such as sending and receiving letters, squeezing the time for substantive risk adjustment. It is suggested that the sending and reply accountants should be the main body, and the sponsor should review the sending procedures such as the content of the accountant’s letter, the verification of the letter address and the control procedures of the reply, and form a review draft, and focus on identifying the matters such as the inadequate letter procedures and the audit of the reasons for the inconsistent reply.
Visits to customers and suppliers also face the problem of duplication of work. If the issuer has too many customers and suppliers, requiring three-party intermediaries to visit at the same time will greatly increase the burden of the issuer. Intermediaries will also affect the development of other due diligence work because of too intensive visits, and will also increase more uncertainty under the severe situation of epidemic prevention and control in recent years. It is suggested that intermediaries can be allowed to stratify the customers and suppliers visited. For customers and suppliers that have a significant impact on the operating performance of the issuer or have abnormal transactions, three-party intermediaries can be organized to focus on interviews. For other customers and suppliers, the proportion of video interviews can be appropriately liberalized. Securities companies, accountants and lawyers can also conduct collaborative on-site visits, that is, one party can go to the site for interviews, The other two parties conducted interviews through video access.
three parts of the numerous prospectus are worth reading by investors
So, for ordinary investors, how to quickly obtain useful information in the vast number of prospectuses? The reporter of “daily economic news” also learned about it.
The above investment bankers of East China securities companies said that the reading focus of the prospectus of companies to be listed in different industries may be different, but the risk factors, business and technology, management analysis and so on should be paid high attention.
Taking new energy as an example, he pointed out that in recent years, the new energy industry chain has become a hot industry, and there are many IPO companies in the industry. For companies to be listed in the industrial chain, investors are advised to focus on the following three parts:
(1) risk factors
The new energy industry is an emerging industry with rapid technological iteration, and the changes of market conditions, operation mode and competition pattern are faster than those of traditional industries. Moreover, some new energy industries have not formed a fixed profit model, and the uncertainty of sustainable operation ability is greater. Therefore, it is necessary to focus on the risk factors of the prospectus and understand the operational and financial risks faced by the issuer.
(2) future business and technology, industry and market competition of the issuer, etc
In the reading process, we need to focus on the future business and technology, as well as the industry and market competition of the issuer. Compared with traditional enterprises, the competition pattern of some new energy lines has not been formed. Therefore, we need to have a thorough understanding of the issuers’ main products, business models, effective production capacity, actual production and sales volume, technological routes and advanced nature, comparison with the advantages and disadvantages of traditional energy, the quality of customers, and so on. Compared with comparable companies in the same industry, we can roughly determine the position of issuers in the industry competition and their future direction of change. So as to make investment decisions.
(3) financial accounting information and management analysis
Through this chapter, investors can have a deeper understanding of the issuer’s financial status, profitability and cash flow. Combined with the business and technology chapter, investors can have a deeper understanding of the changes in the issuer’s operating income and gross profit margin, solvency and asset turnover. After comparing with comparable companies in the same industry, It can further confirm the market position disclosed by the issuer in the business and technology chapter.
Shenzhen Stock Exchange: the proportion of small and medium-sized investors reading the prospectus is low
In addition, regulators have also done some homework to help investors better understand the prospectus.
On March 2, the securities college on the website of Shenzhen Stock Exchange launched the investor entry manual (prospectus).
The manual is jointly produced by market experts organized by Shenzhen Stock Exchange under the guidance of the Investor Protection Bureau of China Securities Regulatory Commission. In the preface, the editor pointed out that, “Reading the prospectus well can not only understand the issuer’s operating performance and core competitiveness, but also understand the overall pattern and development trend of the industry. This process requires a certain amount of time and energy, which is an essential basic skill for practicing the concept of rational investment. Relevant surveys show that the proportion of small and medium-sized investors reading the prospectus is low, and there are some difficulties in reading and understanding, which makes the prospectus investment Failed to play its due role in decision-making. “
The manual is divided into seven chapters: basic knowledge, who is the issuer, core competitiveness, financial analysis, development strategy and the use of raised funds, standardized governance and other matters needing attention. It introduces in detail the contents and key points that investors need to pay attention to in the prospectus, helps investors master the skills of reading the prospectus and promotes investors to form the habit of reading the prospectus.
The reporter of the daily economic news noted that in the “thanks” column at the end of the manual, 19 investment bank or quality control employees were listed in total, including Anxin securities, Changjiang sponsor, Guosen Securities Co.Ltd(002736) , Haitong Securities Company Limited(600837) , China Securities Co.Ltd(601066) , China Merchants Securities Co.Ltd(600999) ; It shows that securities companies and investment banks take a very positive attitude in helping regulators fulfill their responsibilities of investor education services.
However, as stated in the preface of the manual, reading the prospectus “requires a certain amount of time and energy, which is an essential basic skill for practicing the concept of rational investment”. On the one hand, supervision and investment banks improve the readability of the prospectus, that is, to provide convenience for investors to make investment decisions; On the other hand, investors themselves also need to do their homework and be responsible for their every investment decision.
