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Investors' opinions on offer documents. Author Michael Wydeveld [1999] NZSecCom 1 (18 January 1999)

Last Updated: 2 November 2014

INVESTORS' OPINIONS ON OFFER DOCUMENTS
By Michael Wydeveld

Are issuers preparing offer documents that are easy to understand and useful to investors? To answer this question we surveyed investors' opinions of offer documents used in recent equity issues. In the future we plan to extend our survey to offer documents for unit trusts, group investment funds, insurance bonds and other managed investments.

The following presents the aggregate results from a survey of 300 investors who bought shares in three different equity issues during 1998. There were 100 investors sampled from each issue. The samples were obtained from Computershare Registry Services Ltd.1

Results of the Investors' Survey

The total number of responses received was 136, representing a response rate of 45.3%.

Of the 97 respondents who identified their age, the range of ages ran from 90 years to 10 years. The average age was 56 years.

Investors may have a variety of motivations when deciding to purchase shares. There were 7 respondents (5.1%) who indicated that they bought the securities for short term capital gains; 91 (66.9%) who indicated it was for long term capital gains; 79 (58.1%) who indicated it was for dividend payments; and 14 (10.3%) who indicated other reasons. Other reasons included diversification; enjoyment of company's facilities; to learn about shares; retirement saving; to support New Zealand companies; and low interest rates affecting income maintenance.

There were 11 respondents (8.1%) who indicated that they were first time investors. Of the 91 respondents who identified the last time they bought shares, the average length of time since their last purchase was 24 months. There were 14 respondents who bought shares less than a month prior to their current purchase.

There were 46 respondents (33.8%) who indicated that they sought professional investment advice. The professional advice investors receive may have come from a variety of sources. In 2 cases the respondents indicated that the advice they received was from a relation with professional knowledge and experience. The level of sophistication of investors was not surveyed. It is possible that some of those who did not seek professional advice were themselves professional advisers.

Offer Documents

The Investment Statement was on average 50 pages in length. The length of the Prospectus was on average 2.4 times longer than that of the Investment Statement.

Investment Statement

There were 94 respondents (70.1%) who believed they "received" an Investment Statement; 17 respondents (12.7%) believed they "did not" receive an Investment Statement; and 23 respondents (17.2%) who were "unsure" as to whether they received an Investment Statement.2

Of the 94 respondents who received an Investment Statement:

There were 2 respondents (2.2%) who spent "no-time" reading the Investment Statement; 20 respondents (21.5%) who spent "less than 15 minutes" reading the Investment Statement; 55 respondents (59.1%) who spent "between 15 minutes to 1 hour" reading the Investment Statement; and 16 respondents (17.2%) who spent "over an hour" reading the Investment Statement.3

There were 5 respondents (5.4%) who found the Investment Statement was "not easy to understand"; 80 respondents (86%) who found the Investment Statement was "understandable"; and 8 respondents (8.6%) who found the Investment Statement was "very easy to understand".

There were 8 respondents (8.6%) who found the Investment Statement was "not useful"; 73 respondents (78.5%) who found the Investment Statement was "useful"; and 12 respondents (12.9%) who found the Investment Statement was "very useful".

Prospectus

There were 88 respondents (66.7%) who believed they "received" a Prospectus; 31 respondents (23.5%) believed they "did not" receive a Prospectus; and 13 respondents (9.8%) who were "unsure" as to whether they received a Prospectus.

Of the 88 respondents who received a Prospectus:

There were 2 respondents (2.3%) who spent "no-time" reading the Prospectus; 15 respondents (17.4%) who spent "less than 15 minutes" reading the Prospectus; 56 respondents (65.1%) who spent "between 15 minutes to 1 hour" reading the Prospectus; and 13 respondents (15.1%) who spent "over an hour" reading the Prospectus.

There were 9 respondents (10.2%) who found the Prospectus was "not easy to understand"; 71 respondents (80.7%) who found the Prospectus was "understandable"; and 8 respondents (9.1%) who found the Prospectus was "very easy to understand".4

There were 6 respondents (6.8%) who found the Prospectus was "not useful"; 71 respondents (80.7%) who found the Prospectus was "useful"; and 11 respondents (12.5%) who found the Prospectus was "very useful".

Anecdotal Evidence

There were suggestions that the Investment Statement be reduced in length. There were indications that investors believed the length was a result of both repetitious information and unnecessary information. Conversely, there were indications that investors appreciated the comprehensiveness of the Prospectus.

There were investors who indicated that they kept the offer documents for future reference.

There were investors who had referred to other sources indicated under "What other information can I obtain about this investment?" In particular, the 0800 number was singled out as being useful.

There were investors who arranged their purchase through a share-broker without receiving or desiring an offer document.

There were concerns over the book-building process, which establishes a price after the commitment to invest has to be made. There were indications that investors thought this process could be better explained in offer documents.

There were concerns over the amount of shares received, which were less than expected, in a number of cases. Some investors noted that this has deterred them from participating in future initial public offerings. Could this issue be better addressed in offer documents?

1. Formally known as Corporate Registry Services Limited
2. Any differences between the total responses and the sum of responses to individual components of the questionnaire are the result of investors not answering all questions.
3. The scale was developed from submissions received by the Working Group on Improved Product and Investment Adviser Disclosure. Various submissions suggested that the typical investor would either not bother at all reading offer documents, would spend less than 15 minutes reading offer documents, or would not spend more than an hour reading offer documents.
4. The choice of a three-point scale encouraged investors to weigh heavily the responses they gave. A number of investors qualified their responses in the space provided. In all cases it was to put further emphasis on the choice at either end of the scale, e.g., "Importance of Prospectus immeasurable", "I found [the Investment Statement] counter-productive and nearly changed my mind in regards to buying the shares".