What is a Prospectus?

Published by Thomas Herold in Corporate Finance, Investments, Laws & Regulations

'Prospectus' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

In the world of finance and investments, a prospectus proves to be a legal document. This document is utilized by businesses and institutions who must describe in great detail the type of stock or bond securities that they are issuing for potential buyers. Such a prospectus generally offers great information to investors concerning stocks, mutual funds, bonds, and even other types of investments.

The information contained in a prospectus will be reports like the financial statements of the company, a detailed description of their business, biographies of directors and other officers along with their pay packages, lists of properties and assets, and information concerning any lawsuits with which they are involved.

When stocks are first being issued as in an IPO, or initial public offering, such a prospectus is given out to the interested parties of investor prospects by brokerages and underwriters. This prospectus should always be read by an interested investing party in advance of putting capital into their security. This is especially important so that you will know the risks that are inherent in the company’s business and their stock or bond issue in advance of becoming involved with their securities.

In the U.S., securities may not be offered to the public until after a prospectus has been first placed on file with the SEC, or Securities and Exchange Commission. This is a component of a registration statement. Once the SEC states that the registration is in effect, the stock or bond issuing company is then allowed to utilize the prospectus to help finalize the shares of stock or the bonds in question. The SEC examines a prospectus to ensure that is maintains the appearance of abiding by the disclosure rules.

Some corporations are allowed to work with a simplified prospectus to issue stock and bond securities. These companies must be up to date with their Form 10-K filings with the SEC for a given amount of time, keep their level of market capitalization over a minimum amount, and engage in some procedures. Some scenarios do not mandate that an offering has to be SEC registered. In these cases, a prospectus is called either an offering circular or offering memorandum.

A good example of this is the offerings of municipal securities. These turn out to be exempted from the majority of federal security laws. Such municipal types of issuers usually make up a disclosure document type that is referred to as the official statement instead. This would not offer the depth and scope of a standard prospectus, but will still contain a great deal of helpful and useful information on the particular offering.

Companies generally do not have the time to put together a prospectus entirely on their own. Since this is the case, they commonly engage the help of an issue manager who is also the underwriter of the new issue. These issue managers are also known as book running managers.

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The term 'Prospectus' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.