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What is a ‘Prospectus’

A Prospectus is a formal legal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering for sale to the public. The preliminary prospectus is the first offering document provided by a security issuer and includes most of the details of the business and transaction in question; the final prospectus, containing finalized background information including such details as the exact number of shares/certificates issued and the precise offering price, is printed after the deal has been made effective. In the case of mutual funds, a fund prospectus contains details on its objectives, investment strategies, risks, performance, distribution policy, fees and expenses, and fund management.

BREAKING DOWN ‘Prospectus’

A prospectus includes the name of the company issuing the stock or the mutual fund manager, the amount and type of securities being sold and, for stock offerings, the number of available shares. The prospectus also details whether an offering is public or private, how much the underwriters are earning per sale and names of the company’s principals. A brief summary of the company’s financial information, whether the SEC approved the prospectus and other pertinent information is included as well.

Fees in a Prospectus

Because the fees that mutual funds charge take away from investors’ profits, the fees are listed in a table near the beginning of the prospectus. Fees for purchases, sales and moving among funds are included. This simplifies comparing the costs of various mutual funds. High-cost funds have fees exceeding 1.5%, whereas low-cost funds have expenses below 1%.

Risks in a Prospectus

A prospectus is issued as a way of informing investors about the risks involved with investing in a stock or mutual fund. The information also guards the issuing company against claims that pertinent information was not fully detailed before the investor put money into a security.

Risks are typically disclosed early in the prospectus and described in more detail later. The age of the company, amount of management experience and involvement in the business, and capitalization of the stock issuer are described. A table detailing which people own stock is included and should be studied to determine whether the principals are holding onto their stock. If shares are being liquidated, there may be a financial issue with the business.

Prospectus Example

When social media company Snap Inc. went public in March 2017, it issued a prospectus to shareholders and potential investors that February. The document outlined what the company does, its strategy, capital structure, share offering details, financial information and risks involved in its business. For instance, investors learned that 158 million people used Snapchat daily and that it made $404 million in revenue in 2016.

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