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Many misunderstandings about the meaning of prospectus approval by AFM

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There are many misunderstandings among investors concerning what approval of a prospectus means. Some investors think they are protected if the prospectus has been approved by the AFM. They are confident that approval means that the investment is by definition a good investment, or that the provider is reliable.

This is evident from the AFM's Consumer Monitor (autumn 2012), in which more than 400 investors were invited to choose between correct and incorrect answers to the question of what approval of a prospectus by the AFM means.

Unfamiliarity with (approved) prospectus

More than four out of ten investors answered correctly that approval means that the AFM has checked that the prospectus contains the information required by law (43%). Furthermore, 29% knew that a check has been made to establish that the prospectus is understandable, complete and consistent. One out of five (21%) investors checked both answers. They thus gave one or more "wrong" answers. Only 1% of the investors gave only the two correct answers, without also giving a wrong answer. All things considered, only 1% knew exactly what duties the AFM has and does not have regarding the approval of a prospectus. It is also remarkable that 25% of the investors were not familiar with the (approved) prospectus at all. 7% were aware of (approved) prospectuses, but did not know exactly what this means.

Greatest misunderstanding: the information in the prospectus is correct

The greatest misunderstanding was that investors thought that approval means that the prospectus contains correct information (33%), whereas in fact the AFM does not check whether the information is correct. Approval of the prospectus was also quite frequently considered to be an endorsement by the AFM: one out of five (19%) respondents assumed that approval is an AFM quality mark, while 15% assumed that it means that the AFM has approved the investment.

Checking the provider

Some investors actually thought that approval of the prospectus by the AFM means that they have a sound investment: 17% thought that it meant that the promised returns were realistic and attainable, and 12% considered that approval meant it was safe to invest in the product. There were also misunderstandings about the assessment of providers of investment products. Many investors were under the impression that approval means the provider of the investment has been assessed. More than a quarter (28%) thought that the provider had been checked for expertise, reliability and ethical business practice. A further 27% assumed that the provider's reliability had been assessed.

Why a prospectus?

A company that wants to offer securities to the public needs a prospectus approved by the AFM. A prospectus contains information needed by investors to assess whether an investment is suitable and what risks are attached to the investment.

A prospectus contains information on:

  • The company that offers securities (organisational structure, financial condition etc.)
  • The securities themselves (the rights of the investor, the return, tax implications etc.)

  • The risks associated with the investment

 

The AFM promotes fairness and transparency within financial markets. We are the independent supervisory authority for the savings, lending, investment and insurance markets. The AFM promotes the conscientious provision of financial services to consumers and supervises the honest and efficient operation of the capital markets. Our aim is to improve consumers’ and the business sector’s confidence in the financial markets, both in the Netherlands and abroad. In performing this task the AFM contributes to the prosperity and economic reputation of the Netherlands.

 

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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