What is a Prospectus?

A prospectus is an official document required and filed with the Securities and Exchange Commission (SEC) that provides details of an investment offer to the public. A prospectus is filed for stock, bond and mutual fund offerings.

The prospectus can help investors make more informed investment decisions because it contains a wealth of relevant information about the investment or security. In fields other than investing, a prospectus is a printed document that advertises or describes an offering such as a school, business venture, forthcoming book, etc. All forms of prospectuses exist to attract or inform customers, members, buyers or investors.

Understand the prospectus

Companies wishing to offer bonds or stocks for sale to the public must file a prospectus with the Securities and Exchange Commission as part of the registration process. Companies must file a preliminary prospectus and a final prospectus, and the SEC has specific guidelines as to what is listed in the prospectus for various securities.

The preliminary prospectus is the first offering document provided by a securities issuer and includes most of the details of the company and the transaction. However, the preliminary prospectus does not contain the number of shares to be issued or price information. Typically, the preliminary prospectus is used to gauge market interest in the proposed security.

The final prospectus contains full details of the investment offering to the public. The final prospectus includes all finalized background information, as well as the number of shares or certificates to be issued and the offering price.

A prospectus includes some of the following information:

• A brief summary of the company’s history and financial information
• The name of the company issuing the shares
• The number of shares
• The type of securities offered
• Whether an offer is public or private
• Names of company officers
• Names of banks or financial companies making the subscription

Some companies are permitted to file a short form prospectus, which is a document that contains some of the same information as the final prospectus.

Another reason a prospectus is published is to inform investors of the risks of investing in the security or fund. Although a company can raise capital through the issuance of stocks or bonds, investors should study the finances of the company to ensure that it is financially viable enough to meet its commitments.

The risks are generally disclosed at the beginning of the prospectus and described in more detail later. Company age, management experience, management involvement in the company and capitalization of the stock issuer are also described. The prospectus information also protects the issuing company against claims that relevant information has not been fully disclosed.

Sample flyer

In the case of mutual funds, a prospectus contains details of the fund’s objectives, investment strategies, risks, performance, distribution policy, fees, expenses, and management of the fund. Because the fees that mutual funds take from investors’ returns, the fees are shown in a table at the beginning of the prospectus. The costs of buying, selling and moving between funds are also included, which simplifies the process of comparing the costs of various mutual funds.

As an example of a prospectus for an offering, PNC Financial (PNC) filed a prospectus with the Securities and Exchange Commission in 2019 requesting a new debt issuance. The senior note offered to the public is a bond or promissory note to pay a specific yield at maturity.

As a reminder, senior notes are debt securities, or bonds, which take precedence over other unsecured notes in the event of bankruptcy. The senior notes must be paid first if assets are available in the event of the liquidation of the company. A senior bond pays a lower coupon interest rate than junior unsecured bonds because senior debt has a higher level of security and reduced risk of default.

Below is part of the Table of Contents Prospectus, which provides basic information about the offering. 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 date of issue, which remains to be determined
• How interest will be paid and denominations will be issued
• Use of proceeds or how the money raised will be spent, which may include fundraising, debt repayment or share buyback

The essential

In general, a prospectus is a document that provides details about an offering made available to the public. More commonly, a prospectus is an official document required and filed with the Securities and Exchange Commission (SEC) that provides details of an investment offering to the public.

Investors use a prospectus to know the details of a company and its stock, just as an employer uses a CV to know the details of a job applicant. Topics covered in a prospectus include risk, financial history, a description of the management team, the value and amount of the security, whether the offer is public or private, the number of shares offered and the manner whose investment proceeds will be used.