Any firm that wishes to offer securities such as bonds or shares to the public must issue a registration statement describing the issue and the firm’s future prospects with the security’s exchange commission (SEC). This statement is called a prospectus. A prospectus helps investors make informed decisions about investing in a company because it contains a host of information about the company’s securities and future financial plans.
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What is a Prospectus
A prospectus is a description of the firm and the shares it is issuing. It is a formal document filed with the security’s exchange commission (SEC) as indicated above. A prospectus provides details of an investment offering to the public. It is any kind of document issued in order to invite the public to subscribe to shares or debentures or to invite deposits from the public. It can also be a public notice issued by the company or a circular advertisement. It is a document that is used by a company to procure the share capital needed to carry on its operations.
This is the first draft registration statement with the SEC that a company files before proceeding with an initial public offering (IPO). The prospectus contents provide information to prospective shareholders about the company’s business, strategic initiatives, financial statements and ownership structure. It simply solicits expression of interest in the new issue.
- The contents of a preliminary prospectus are printed in red ink on the left side of the cover which is why it also called a red herring
- It also has a bold disclaimer on the cover page stating that the registration has not yet become effective
- The contents of the preliminary prospectus are incomplete and bound to change
- The issuer can only accept offers to buy or sell when the registration has become effective
- Also included on the contents of a preliminary prospectus are the company details and its intended use of the proceeds from securities.
- The company’s products and services are also included in the prospectus contents
- The financial statements, potential market potential, management details and the company’s existing shareholders form part of the prospectus contents
- In addition, any legal opinions and information about the risks of the issue are included
A preliminary prospectus is done together with the issuer’s road show. Through a roadshow the company’s senior management together with the underwriters travel all over the country presenting the new company’s securities to investors.
The contents of the final prospectus include the complete details of the investment offering to the public. That means all the relevant background information is finalised including the number of share certificates to be issued with the offering price.
- In addition, the prospectus contents include a brief summary of the company’s background and financial information
- The name, registered office address of the issuing company and the property details of the firm
- Main objectives of the company
- The number of shares
- The prospectus contents also indicate whether the offering is private or public
- The names of the company’s principals, their addresses, and occupations are included in the content of prospectus
- The details of the managing directors, secretaries, treasurers and managers
- Preliminary expenses and issuing expenses
- The details of the underwriters, which can be banks or any financial institutions
- Details of the company’s bankers and the company’s auditors
- Contracts the company has
- The amount of reserves and reserves capitalised
- Time of opening and closing of the subscription list
- Also included in the contents of prospectus are the assets, liabilities, dividends and bonus issues together with the profit and loss accounts
- The risks arising from offences, litigations, losses and any related information
Going through a deemed prospectus content in detail is time consuming given that it is a voluminous document. An abridged (shortened) prospectus that contains the important information regarding a firm can be issued instead. The contents of the prospectus are the same with the ones found in the deemed prospectus but brief, such as the name and logo of the issuer, corporate entity number and the details of the registered office.
A shelf prospectus is another type of prospectus that is issued by a company for one or more issues of securities. With this prospectus a company will not need to issue a separate prospectus for future securities. The prospectus contents are more or less the same with the contents of a deemed prospectus.
It is important that the issuing firm provides the correct information in the prospectus contents, regardless of the type. Otherwise it will be liable for misrepresentation and fraud.