A company's prospectus is a formal legal document designed to provide information and full details about an investment offering for sale to the public. Companies are required to file the documents with the Securities and Exchange Commission (SEC). The prospectus documents must be made available to a prospective public investor prior to purchase. Investors are encouraged to read and understand the terms of the offering before making a purchase decision.
- A prospectus is a formal document that is required by and filed with the SEC that provides details about an investment offering for sale to the public.
- This document is used to help potential investors make a more informed decision on whether or not to invest.
- EDGAR is a public online tool that allows individuals and analysts to search for and retrieve corporate prospectus filings.
- Investors may also seek to obtain a prospectus through their broker or by contacting a company's investor relations department.
Mutual funds and hedge funds must also offer potential investors a prospectus; however, here we focus on firms' prospectus prior to a corporate IPO or secondary offering.
What's in a Prospectus?
Company prospectus documents have become increasingly accessible with the advent of the internet. Most companies have a corporate website with a section labeled Investor Relations that should have available a wide range of company documentation, including quarterly and annual reports. Many investment websites may also offer links directly to a company's or fund's prospectus documents.
The prospectus document is issued to inform investors of the potential risks involved with investing in a particular stock or mutual fund. The information provided in the prospectus also serves as a form of protection for the issuing company against any claims that information was not fully disclosed or detailed prior to the investor putting money into an investment.
Companies that wish to offer stock or bond for sale to the public must file a prospectus as part of the registration process with the SEC. Companies must file a preliminary and final prospectus. However, the SEC has specific guidelines as to what's listed in a prospectus for various securities.
The preliminary prospectus (sometimes known as a red herring) is the first offering document provided by a security issuer and includes most of the details of the business and transaction. However, the preliminary prospectus doesn't contain the number of shares to be issued or price information. Typically, the preliminary prospectus is used to gauge interest in the market for the security being proposed.
The final prospectus contains the complete details of the investment offering to the public. The final prospectus contains any finalized background information as well as the number of shares or certificates to be issued and the offering price.
A prospectus will include the following information at a minimum:
- A brief summary of the company’s background and financial information
- The name of the company issuing the stock
- The number of shares
- Type of securities being offered
- Whether an offering is public or private
- Names of the company’s principals
- Names of the banks or financial companies performing the underwriting
Some companies are allowed to file an abridged prospectus, which is a prospectus but contains some of the same information as the final prospectus.
Investigating New Offerings
The first offering is detailed by the preliminary prospectus provided by the security issuer, which outlines information about the company, its business plan and structure, and the transaction in question. The preliminary document also discloses names of the company's principals, details about the amount the underwriters are earning per sale and specifies whether the offering is public or private.
The final prospectus contains details and information about the finalized offering, including the precise number of shares or certificates being issued and the offering price of shares.
In the case of mutual funds, a fund prospectus contains information on and details about its objectives, proposed investment strategies, perceived potential risks, projected performance, distribution policy, fees and expenses and fund management.
In the U.S., all companies filing with the SEC must supply their documentation to a service known as EDGAR, or the Electronic Data Gathering, Analysis and Retrieval System. The EDGAR website allows you to get all the filings of a company, including its prospectus and annual reports, which include financial statements. The EDGAR database can be searched using the company ticker symbol. EDGAR’s Companies & Other Filers Search will list a company's filings with the most recent filings shown first. Most of the filings made through EDGAR are available for download or can be viewed for free.
Canada has a similar website known as SEDAR+, which includes SEDAR (System for Electronic Document Analysis and Retrieval), which provides company filings on the web. Like EDGAR, the SEDAR+ website provides easy access to public company documentation.
As an example, the figure below, produced from EDGAR, shows a sample prospectus for the company PNC Financial Group's offering of corporate bonds maturing in the year 2024.
We can see the following information listed:
- Securities offered, which are senior notes that pay 3.50%
- The maturity date of the notes, which is January 23, 2024
- The issue date, which has yet to be determined
- How interest will be paid and denominations to be issued
- Use of proceeds or how the money raised will be spent, which might include financing operations, paying down debt, or buying back stock