What Is a Prospectus?
A prospectus is a legal document filed with the Securities Exchange Commission (SEC) to accompany securities or investment offerings for sale. Containing key facts and information about the offering, a prospectus makes investors more aware of the risks of an investment.
A prospectus also protects the company from claims that it didn’t disclose enough information about itself or the securities in question.
Who Needs a Prospectus?
Prospectus documents are for potential investors to understand the value of the offered public security, including information about the company’s history, financial performance, its management team, and the investment’s growth potential. In other words, they aim to inform investors about potential risks from investing in a specific mutual fund or other type of securities.
Who Issues a Prospectus?
US companies are required to file a prospectus with the SEC prior to offering the sale of stock or bonds to the public. Mutual funds also provide a company prospectus to potential clients, including a description of the fund's strategies, manager's background, fund's fee structure, and its financial statements.
There are several different types of a prospectus for an IPO that may be created for any number of offered products. Generally, they fall into one of six of the following categories.
1. Preliminary Prospectus
Also called a “red herring prospectus” (because the document’s cover needs to have a special notice printed in red), it’s the one most companies use to attract potential investors, since it’s the first document issued. The preliminary prospectus usually contains details of a company’s business and the proposed security.
2. Final Prospectus
The final prospectus is a document outline that fully details the security that’s been released to the public. Details include the number of securities issued, the offering price, and information included in the preliminary prospectus.
3. Abridged Prospectus
Also known as a summary prospectus, the abridged prospectus is basically a prospectus summary, containing all of the most important features in a condensed, reader-friendly version.
4. Statutory Prospectus
This type of prospectus is common with mutual funds or ETFs. It provides full detail of the fund being sold.
5. Shelf Prospectus
The information contained in this prospectus refers to its “shelf-life” (it’s valid for up to three years). A shelf prospectus is used for a shelf registration, which describes multiple securities offerings so the company does not need to offer a prospectus for each.
6. Deemed Prospectus
This document is for securities that aren’t directly issued to the public. Instead, a company agrees to give the shares to an issuing house who then later sells them to the public. The deemed prospectus discloses the offer from the issuing house.
How a Prospectus of a Company Is Written
When reviewing the contents of a prospectus, it’s a good idea to learn how a company writes it. The most crucial step a company needs to take is to consider what the investor needs (and wants) to know about security. This way, the document is compliant with SEC regulations while attracting potential investors.
A prospectus commonly includes – at a minimum – the name and overview of the company, types of securities offered, number of shares, the company’s principals and the type of offering.
However, documents such as the preliminary prospectus won’t contain the number of shares issued or details on price. Some companies may also be able to file an abridged prospectus, which contain much of the same information as a final prospectus.
What Goes Into a Prospectus?
Here’s an overview of what goes into a prospectus:
Gives investors an overview of a company’s history, including significant events that have helped its growth, initial service offerings, founders, and company registration. It may also include services or products the company offers.
This section has information pertaining to the company’s executive management, including their educational background, experience, and evidence of effective leadership for the company.
The deal structure looks at the company’s desired deal structure and an overview of the current capital structure. It may also provide information as to how the new security may affect the current capital structure and any previously issued securities. For instance, the company may outline how the proposed equity ownership structure may affect their expected return rate.
Use of Proceeds
The use of proceeds explains how the company intends to spend the money that will be raised.
This section provides information on the exact number of securities being offered publicly, as well as the price for each one. It also indicates the expected rate of return and when the securities will be available.
Companies typically include information on the company’s past financial performance (e.g. net profit, stock performance).
This section of the prospectus discloses issues that investors may come across (e.g. currency risks for an international mutual fund).
Where to Find a Prospectus
Most companies will post their prospectus documents online. Corporate websites tend to house them under their documentation or investor relations sections. Investment websites may also house links leading directly to a company’s or mutual fund’s prospectus documents. Otherwise, you can contact the company directly – one option is to call customer service representatives – to obtain a copy.
Since US companies need to file with the SEC using a service called the Electronic Data Gathering, Analysis & Retrieval System (EDGAR), you can access prospectus documents on the EDGAR database. Search using the ticker symbol of the company. Most can be viewed for free.
Sample Prospectus of a Company
The best place to view sample prospect documents is through the SEC. By looking at a few that have already been filed, you can either learn how to look for pertinent information or create one that can attract investors. This prospectus page on the SEC website offers a template for a summary prospectus.
Prospectus vs. Registration Statement
Registration statements are filed with the SEC, which requires disclosures connected to the registration of a securities offering or an investment company. These usually include the prospectus and any additional information required by the SEC.
Companies are required to use Form S-1 to complete their registration statement. It will only be approved when the federal agency is satisfied that the security issuer has complied with all the rules governing disclosure.