What a Prospectus is all about

What is a Prospectus?
A prospectus is a document which contains specific financial information that the securities watchdog in the USA and the stock exchange require from companies who are issuing stocks, bonds or selling mutual funds or other investment products to the public.

The Requirements by Law of of a Prospectus
If a company is looking at raising capital by offering its shares to the public for the first time (this is called a float or initial public offering) then it has to issue a disclosure document which is called a prospectus. This prospectus document will help the public decide whether they want to take shares in the company and whether it will be a suitable investment for them.

The prospectus is required by law and must contain specific information that will enable the public and their advisers to be fully informed on making investment decisions about that company. The prospectus also needs to show clearly if there are any risks associated with the investment.

What to Watch for in a Prospectus
Here are a few things that you need to keep in mind:

  • Make sure you understand how a public listing of a company is carried out. For example, in a new float you may send in your check and be under the impression that you will receive a proportion of the shares that you have applied, if the float is oversubscribed. This is not true because under the law the directors of a company do not have to do this. Provided the company issues shares according to what it says it will do in the prospectus then you won’t have any recourse if you miss out on the shares.

  • Understand all the assumptions in the forecast contained in the prospectus. Companies will make profit forecasts in the prospectus which often are not met. This means you need to study the prospectus and make a decision on whether those assumptions are reasonable and whether the forecasts are going to be met. The company has to show the assumptions in the prospectus including the likelihood of them being met and the effect on the company if the forecasts are not met.

  • The prospectus is just a glossy brochure. Be aware that the prospectus is not just a glossy brochure from the company. It is an important document that contains information about the company and the shares that have been offered. It is a valuable tool that will help you to make a decision on whether to invest or not. Don’t look on it as just a glossy brochure from a company that is floating.