A prospectus lists all the opportunities, risks, and financial details about a company’s investment offering.
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A prospectus is a formal document that a company files to describe a potential investment offering.
The document is filed when the company issues a new security, like a stock, bond, or mutual fund.
Interested investors should still do research to evaluate the issuing company’s financial document.
We all know that a well-crafted resume is one important part of getting the attention of a hiring manager during the job application process. In the finance world, a prospectus is a document that serves a similar purpose for investors as a resume does for employers. It provides details about a company, its history, and what it’s offering to spark interest and help facilitate more informed decision-making.
The Security and Exchange Commission (SEC) requires companies aiming to offer an investment to the public to file a prospectus. This formal document details an overview of the company’s history and financials, what type of security is being offered, and how many shares of it has, among other things.
What is a prospectus?
A prospectus is a formal statement that describes the details of a new security being offered to the public. These documents are filed with the SEC for stocks, bonds, and mutual funds, and include key context and information that may help guide an investment decision.
Information on a prospectus may include:
Company history and information about its management teamFinancial information, including audited financial statements The security’s principal value and amountWhether the offering is public or privateNumber of shares offeredHow investment proceeds will be usedRisk factorsBank or financial institution doing the underwriting
Why is a prospectus important?
A prospectus provides a level of transparency to the public by outlining the company’s background and goals for raising capital. One of the main purposes of a prospectus is to bring attention to a new company and initiate interest in a security with the hopes of raising capital once its securities are made available to buy.
It also details potential risks the company faces, including how long it’s been around, management experience and involvement level, and the market capitalization of the issuer.
Filing a prospectus protects the issuing company from claims that relevant information was not made clear or available. The consequences of including false information in a prospectus are severe: Those responsible for misleading information on a prospectus are subject to both civil and criminal penalties, including fines and potential imprisonment.
However, just because the information is there doesn’t mean investors don’t still have the responsibility to do thorough background research. Interested investors should still evaluate the issuing company’s financial documents to understand exactly how much risk they’re taking on and the likelihood that they’ll eventually be paid back.
Preliminary vs. final prospectus
A prospectus typically comes in two forms: a preliminary prospectus and a final prospectus. It takes time for a complete prospectus to be finalized, and a company typically releases a preliminary prospectus before a final one to gauge investor interest.
A preliminary prospectus is the first iteration of the document, and includes most of the same information that’s required on the final prospectus, except for the number of shares that will be issued and how much they’ll be issued for. This is because a preliminary prospective aims to assess market interest in a certain security, meaning it precedes its official market debut.
The final prospectus is typically filed after a company has issued an IPO, or officially gone public in the market. It includes all of the details of the offering, updated background information on the company, and the number and price of that security’s shares.
Example prospectus
Etsy officially went public in April 2022, releasing a final prospectus with important information about company and stock being offered. This document included:
Company overview and mission statement: “Our mission is to reimagine commerce in ways that build a more fulfilling and lasting world.”IPO price: $16 per shareNumber of shares of common stock being offered: 13,333,333Business strengths: Including the marketplace’s authenticity and credibility, loyal user community, innovative technology, and scaled, “global-local marketplace”Risk factors: Including history of operating losses, revenue fluctuations, and the warning that it may not achieve or maintain profitability in the future
How to find and analyze a company’s prospectus
The easiest way to find a company’s prospectus is through EDGAR, a free online database maintained by the SEC. All foreign and domestic companies must file all important corporate information with EDGAR, which is short for Electronic Data Gathering, Analysis, and Retrieval system.
EDGAR houses many different types of filings and documents, but the best way to search for a prospectus is to type the company’s name or ticker symbol in the search bar.
If you’re overwhelmed by the idea of reading a prospectus in its entirety and sifting through the jargon, fear not. because you may not need to read the whole thing to understand what you’re getting into.
However, going through this document can be beneficial, as a prospectus provides a portrait of the investment and a broader understanding of a company’s business objectives and goals. Note that it’s best to assess the document with a skeptical and inquisitive eye.
A financial advisor is the best person to help you cull the information you need as it relates to your investing goals.
The bottom line
A prospectus is a formal document that a company files with the SEC to describe a potential investment offering in detail. It includes information about the company’s background and financial position, as well as what investor money will go towards specifically.
A final prospectus is thorough and comprehensive, but should still be supplemented by your own research.