What is a Prospectus?
In regards to finance, a prospectus is a formal legal document used by institutions and businesses to elucidate and detail the securities they offer to investors and the general public.
A common prospectus provides investors with information concerning stocks, bonds, mutual funds and other investments aligned with the company, primarily a description of the company’s business model, their financial statements, and biographies of the underlying directors and officers of the company. The information of the directors and officers of the company typically contain information regarding their compensation, any legal matters aligned with the company, and a comprehensive list of material properties that the underlying company possesses.
In the case of an initial public offering, a prospectus will be distributed by the underwriters aligned with the offering or the brokers offering the IPO to potential investors.
Why is a Prospectus Important?
As a result of the information contained in a prospectus, the document is used as a fundamental evaluation. A prospectus contains the financial information of a company, including all debts and assets, to better illustrate the company’s financial health and standing in their particular market or sector.
By viewing a prospectus an individual investor or a prospective investor can observe the company’s business model, their ability to meet future goals, and the tangible statistics which elucidate upon the vitality of the company. Without the issuance of a prospectus, investors would be ignorant towards the financial statistics and numbers of a company. The information within a prospectus is necessary when evaluating whether an investment is suitable or worthwhile.
A Prospectus for a Securities Offering:
In the United States, a prospectus for a securities offering is required to be filed with the Securities and Exchange Commission (SEC). The filing with the SEC is part of the registration statement, which is the formal starting point of an initial public offering.
The issuer of the security may not use the prospectus to finalize any sales until the registration statement has been affirmed and declared effective by the Securities and Exchange Commission. This simply means that the securities offers comply with the various rules governing disclosure.
Companies must file Form 10-K with the Securities and Exchange Commission and meet the requirements for market capitalization. Following this adherence, it is permissible to offer securities using a simplified prospectus that will incorporate information referenced to its SEC filings.
The prospectus is the formal document that describes securities offered for public sales; the prospectus is created according to a well-defined format. The format explicitly defines the information required for a prospectus to be legally recognized.
Although writing styles may vary, all filings must follow certain rules. A prospectus must be updated annually, must disclose all fees associated with investment, all tax liabilities and must effectively calculate the potential risk of investment in the underlying company. Additionally, the prospectus must contain an SAI or Statement of Additional Information.
There are eight formal categories that comprise the accepted prospectus format: Performance, Risk, Fees, Management, Investment Objective, Services, Buying or Selling Shares, and the Statement of Additional Information.
The prospectus is a binding legal document that must truthfully disclose all pertinent information to potential investors. Any attempts to falsify information or any material that may result in investigation by the SEC will be punishable by fine and or imprisonment.