Hagit Ross

Everybody who invests wants to make gains. The incredible year the Tel Aviv Stock Exchange and many other exchanges worldwide have had has inspired many to leave their comfort zone and become a part, even if only a small one, of the money flooding the capital market.

However, it is common knowledge that all investments involve risk and that one must learn as much as possible about the channel one chooses to invest in beforehand.

The prospectus is a popular way to obtain comprehensive, reliable information before investing.

What Is a Prospectus, and Who Is in Charge of It?

A prospectus is a document intended to reflect to potential investors all important and material information about a company embarking on an offering.

The information the company must provide is divided into three main categories:

Description of the securities – For example, if a company wishes to offer shares, the prospectus must include the number of shares for sale, the shares’ total value, the shares’price , the offered shares’ part of the company’s value (in percentages), etc. The company must also state how to buy the shares, whether some shares are allotted to a specific buyer, the purchase timetables, the payment terms, etc. Sometimes, the company may decide to publish a “preliminary prospectus” to gauge market conditions and then publish the final terms of the securities and the timetables for buying them in a document known as a “supplementary notice.”

Description of the company's operations – The prospectus must state the company's structure. It must state the names of the main officers and controlling shareholders, the transactions in the company's capital, the company’s activities (including the effect of external factors and risk factors on its operations), material transactions, potential and actual competitors and the company's position in the market in which it operates, the company's financing, short-term and long-term plans, the company’s strategy, and more.

Financial statements – The prospectus must also include the financial statements describing the company's financial condition in the three years before the prospectus’s publication. The company's auditor must audit the annual statements attached to the prospectus.

Publishing a prospectus in order to make a securities offering requires a permit from the Israel Securities Authority (ISA). Thus, upon completing the prospectus draft, a company must submit the draft to the ISA and request permission to publish the prospectus. A team on behalf of the ISA reviews the prospectus and makes sure it provides all the required information on all items required by law and that the disclosure of these items is adequate. Note that the ISA does not carry out due diligence on the company. Once the ISA issues a permit to publish the prospectus and the Tel Aviv Stock Exchange grants permission to list the securities offered under the prospectus for trade may the company publish the final prospectus and make the offering.

The prospectus has four key objectives: to give investors information so that they make rational investment decisions; to deter the company and its executives from inappropriate behavior; to encourage public trust in the capital market; and to increase efficiency in the securities market.

The signatories to the prospectus or parts of the prospectus – the company itself, directors, underwriters, controlling shareholders (even if they are not signatories to the prospectus), the company's CEO, and the parties that provide opinions or confirmations included in the prospectus (such as accountants, auditors, lawyers, evaluators, and so on) – are responsible for the reliability of the information in the prospectus. This means that  these parties may face exposure to legal action if a prospectus contains a “misleading detail.” (A misleading detail may refer to giving misleading information or incomplete information.)

Types of Prospectuses

There are two main types of prospectuses:

Offering prospectus

Publication of this type of prospectus comes close to the initial public offering (IPO), or when a company that already issued securities to the public (a “reporting corporation”) wishes to raise capital from the public through a securities offering but does not have an effective shelf prospectus (see below). In some cases, a company may issue a “preliminary prospectus” followed by a “supplementary notice.”

Shelf prospectus

A shelf prospectus is a prospectus the company publishes that does not announce an immediate securities offering, meaning the company keeps it “on the shelf” to use as necessary. A shelf prospectus is effective for two years. Before the two-year period expires, the company may reach out to the ISA and request a permit to extend for one more year. As long as the shelf prospectus is effective, the company may make a securities offering and raise capital and/or debt quickly by publishing a “shelf offering report.” Except in unusual cases, publishing a shelf offering report does not require an ISA permit.

Instead, it requires only the Tel Aviv Stock Exchange’s permission to list the securities offered under it for trade. This means that the process of drafting a shelf offering report and the initial conditions for publishing it are much shorter compared to an offering through an offering prospectus. Nowadays, companies may publish a shelf prospectus before they become reporting corporations, so most companies publishing an issuing prospectus combine it with a shelf prospectus.

As noted above, the prospectus mainly seeks to prevent unlawful actions and investor deceit. The aim of the prospectus is to bridge the significant knowledge gap that naturally exists between senior company officers, who know the business operations and the market the company operates in inside and out, and investors in the company.

So, where can one find examples of prospectuses and shelf prospectuses by companies undertaking capital raising or an offering? Both the Israel Securities Authority and the Tel Aviv Stock Exchange publish various types of company prospectuses on their websites.

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Adv. Hagit Ross is a Partner in the firm's Capital Markets Department. 

For any additional questions, Barnea law firm is at your service. 

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