When is a prospectus not a prospectus?
29 May 2020
Today, when a company IPO’s we are presented with a large bound document; the hundreds of pages that make up the prospectus. Pages that have been put together describing the company, the shares it is issuing, its financials, market position, management team, the advisers who have diligenced the information and various risk factors to warn you of what could potentially go wrong. This document will have been carefully crafted, considered, certified and ultimately presented to you in your consideration of whether to subscribe for shares. There will be analyst reports available, pitch presentations (also carefully vetted and verified) to also help you decide on whether to invest. This is a well-trodden process and has been developed over the hundreds of years of public markets since the Dutch East India Company IPO’d in 1602.
But, I believe we are about to go through a technology driven revolution in prospectus drafting that will ultimately mean we may not even have a prospectus at all. This is not a coordinated effort specifically targeted at ridding the world of the prospectus, but the result of a combination of the way ESEF is changing the way companies report, and the way stock exchanges are looking to improve the attractiveness of capital markets as a source of capital to help drive economic growth. The European Single Electronic Format (ESEF) became law in May 2019, forcing a process of digitisation which, as many have commented, will have a profound effect on company reporting across Europe. However, the implications of ESEF on capital raising in the UK and Europe are equally profound. ESEF means that all listed entities and PIEs from this year will have to file annual reports digitally as inline XBRL filings – allowing not only humans to read them, but also machines. The idea being that the data contained can be used to do much greater analysis and improve business transparency, particularly for investors, pension funds, investment banks etc.
At the same time stock exchanges are looking to improve the attractiveness of public capital markets for SMEs which are the heart of a good economy. The number of SMEs going public to raise capital in the UK and Europe has been falling for over 20 years with key factors being the cost of issuance and ongoing governance. Public capital competes with private capital and as stock exchanges look to improve the competitiveness of public markets they have to look at reducing the cost of capital for companies looking to list – a lower cost of capital and simpler ongoing governance will drive interest in companies listing. The competition for capital is where technology will come into play for stock exchanges.
Stock exchange driven technologies combined with the ongoing reporting required by ESEF will come together and ultimately mean the most efficient prospectus is not one that is documented and presented in the way that it has been for hundreds of years, but one that has been produced in a digital form. The prospectus will be a set of XBRL readable data containing information produced, approved and authorised by the traditional participants. Information that the regulator can review by AI quicker, more efficiently and at lower cost. Information that can be read by the investors’ models in the way that allows them to focus on the parts they are interested in. Information that works with the investors’ tax algorithms. Information allowing comparisons to peers. Information that combines with other data sets in similar XBRL form allowing easier analyst reviews.
So why will we need a prospectus at all? We will need something because investor protection matters. However, the shape and the form of the prospectus as we know it will become obsolete. An authorised data set will be all that is needed. Data that the investors know has been vetted, that has all the required parts as needed by the regulator, that they only get access to once approved.
So, when is a prospectus not a prospectus? Much sooner than you think…