Australia’s financial watchdog ASIC has just completed a study into how different people invest in initial public offerings, or IPOs.

And one of its main findings was that prospectuses — the documents that set out the risks and potential rewards — were often too hard for regular people to understand.

“Prospectuses are not only challenging because they are long. They are also difficult because they are repetitive and the language used is often archaic, technical or legalistic,” the report said.

“The market research findings indicated that retail investors would be likely to find prospectuses more useful if the key information was explained in clear language.”

One of the participants in the study put it this way: “Prospectuses are too hard to understand. They’re written by lawyers and people with vested interests.

“[They should] provide information that the average investor who doesn’t have the knowledge can understand.

“I honestly believe it has to be spelt out clearly and align with the modern practices of explaining things that are critical in a simple way.”

133 companies listed on the ASX last year — more than on the NASDAQ, Hong Kong or London stock exchanges — raising a total of $6 billion.

To list through an IPO, a company has to make a document called a prospectus that contains all the relevant details for potential investors to make an informed decision about whether or not to buy in.

ASIC keeps a close eye on prospectuses and can take action against a company if information in a prospectus is found to be misleading.

How the study was conducted

ASIC looked at the experience of two kinds of investors in taking part in IPOs — institutional and retail.

Institutional investors are people like fund managers, who make a living being in charge of a lot of money and investments.

Retail investors are all the rest. They range from “mum and dad” investors to high-net-worth individuals (often called “sophisticated investors”) and people who manage their own super funds.

To conduct the part of the study on retail investors, ASIC hired a research firm to interview 52 people in Sydney, Melbourne, Brisbane and Perth from different walks of life who had recently invested in an IPO.

Cracking down on IPO marketing

Partly because prospectuses are so hard to read, many retail investors turn to other places to get an independent and plain-language overview of IPOs.

Those places can range from newspapers to email newsletters, social media forums and broker research reports.

But ASIC said there could be a blurred line between independent news and advertising content in those sources and it would be keeping a closer watch on the issue.

“Retail investors tended to view promotional content on IPOs, provided by some investment circulars of newsletters as ‘information’ rather than advertising,” the report said.

“We will increase our monitoring of promotional coverage of IPOs and review whether such coverage is clearly identified as paid advertising rather than independent, editorial-style content.”

The full report can be read here.