A prospectus is an invitation by a company to the public to subscribe to the share capital of the company, thus any notice, circular, advertisement, or any other invitation, (excepting; trade advertisement), circulated to the public is known as a prospectus. It is a printed booklet advertising a school or university to potential parents or students or giving details of a share offer for the benefit of investors. It supplies the public with all the necessary information about the business of the company. Every public company either issue a prospectus or file a statement in lieu of prospectus. This is not mandatory for a private company.
A prospectus is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering to the public. One of the most common reasons for issuing a prospectus is when a company is making an initial public offering, putting shares of stock up for sale for the first time. The document can help investors make more informed investment decisions because it contains a host of relevant information about investment security. A prospectus contains key facts and information about the offering to help investors make an informed decision. The purpose of the prospectus is to make investors aware of the risks of an investment. Without this information, they would essentially have to evaluate investment offerings without complete information.
Generally, they fall into one of these four categories:
- Preliminary – A prospectus for stocks and bonds is issued in different stages. The first stage is the preliminary prospectus, which contains the details of the business and proposed financial action.
- Abridged – An abridged prospectus is basically the summary of a prospectus. It contains all the important features of a prospectus in a condensed, reader-friendly version.
- Shelf – This refers to the ‘shelf-life’ of the information as to its only relevant for one year or less. Generally, only finance-based companies are eligible for creating a shelf prospectus.
- Deemed – When a company agrees to give shares to an issuing house and then later sell to the public, the document disclosing the offer is deemed to be a prospectus.
A prospectus is basically a formal and legal document issued by a body corporate which acts for inviting offers from the public for subscription or purchase of any securities. Every public company is entitled to issue the prospectus for its shares or debentures. But, the same is not required for a private company.
A prospectus includes some of the following information:
- 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.