New issues

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6. What to look for in the prospectus (1) - directors and advisers

Every one of the prospectus headings is important and deserves your full attention (unless of course your only intention is to stag the shares). But for new issues in general, and smaller companies in particular, there are two subjects of special importance:

1. The directors

   The smaller the company, the more it will depend on the character and skills of its key executives. Here are some of the questions you might want to ask to check that they have what it takes:

   • Is there the right mix of entrepreneurs and experienced managers?
   • Have they been with the company a long time?
   • Are their ambitions for the company realistic?
   • Do they have enough strength in depth to manage rapid growth?
   • Is the board too top-heavy for a company of this size?
   • Have any directors been associated with worrying company failures?
   • Does the financial director have a solid track record in good companies?
   • Do the board members have significant shareholdings?
   • Are they committed to retaining these for a long period after flotation?
   • Are they overpaying themselves, or are incentives linked to results?

   It is unwise to invest in any company that cannot provide satisfactory answers to all or most of these questions. It is also unnecessary - there will always be other opportunities that offer a better risk-reward ratio.

2. The advisors

   The top sponsors in the City are jealous of their reputations. They do not like to be linked to failures. So you will rarely find them sponsoring companies of dubious quality. This certainly does not guarantee their new issues will make better investments than other people's, but it does help to reduce your risk.

   It would be invidious to mention some sponsors' names and not others. But you will easily recognise the firms in question after a few months of reading the City press and online reports. Their names crop up frequently, and their analysts, economists and directors are quoted repeatedly on matters of financial importance.

   You should be wary of issues sponsored by lesser-known firms, or by those with only a patchy record of previous successes. If in doubt, ring up the sponsors themselves and ask which companies they have helped to float in the last few years. Then check how they have performed. Make sure you get the complete list!

1. After Sid - a short history of the new issues market 2. Do new issues offer good value? 3. Types of new issue 4. Applying via brokers and intermediaries 5. The prospectus 6. What to look for in the prospectus (1) - directors and advisers 7. What to look for in the prospectus (2) - standard company analysis 8. What to look for in the prospectus (3) - blue-sky company analysis 9. Making your application 10. Stagging 11. A word on warrants 12. A tale of two issues 13. Conclusion

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