What is a Prospectus? Definition, Types, and Feature

Overview and Definition

Equity Financing is considered to be a top notch external financing avenue for almost all companies that are large enough to undergo and IPO.

In this regard, there are a couple of things that need to be undertaken by organizations in order to make their offer attractive to potential customers.

These procedures and documentation protocols are important in order to create a free and fair system using which enables investors to have a clear cut idea regarding the organization, and if it should be a choice for their investment or not.

There are many tools that need to be utilized in this aspect, and prospectus tends to be one such task in this regard.

Prospectus is a formal document that needs to be filed with the Securities and Exchange Commission, in order to provide details about the existing investment offering to the general public.

It is mainly filed for offerings of stock, bonds, as well as for mutual funds. It mainly helps investors make informed investment decisions because of the fact that it contains considerable relevant information regarding investment security.

Therefore, prospectus can simply be defined as a document that enlists all the relevant details about the company, as well as their offering to the general public.

With the stock exchange acting as an intermediary in this regard, it is rudimentary for them to provide all the relevant information to the investors, and prospectus is one way to do that.

Types of Prospectus

There are numerous different types of prospectus that is prepared by organizations, depending on the rationale behind creating a prospectus in the first place. Few of the main types of prospectus are enlisted below:

  • Deemed Prospectus: This prospectus is issued as a representation of intent of the company to issue shares or equity to the general public. In this regard, it is rudimentary to include this relevant information on basis of which it is easier to convey about the offer made to the general public.
  • Red Herring Prospectus: Red Herring prospectus does not include all the information regarding the prices of the securities that are offered, and the number of securities that are issued against it.
  • Shelf Prospectus: Shelf Prospectus is issued in the cases where company has multiple offerings for the investors. This might include numerous different types of equity that is given out to the general public.
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In the same manner, the process of issuing prospectus for the company can also be broadly categorized into 2 broad themes, which include the preliminary prospectus, as well as the final prospectus.

As far as the preliminary prospectus is concerned, it does not contain the number of shares that are supposed to be issued, or the information regarding the pricing point of the issued shares.

It is mainly sent out to gauge the level of interest of the potential investors and if they are willing to invest in the company.

On the other hand, as far as final prospectus is concerned, they contain complete details regarding the investment offering to the general public.

The final prospectus includes any possible finalized background information, in addition to the number of shares that are issued, as well as the number of shares that are issued at the offering price.

Features of Prospectus

Prospectus is considered to be an extremely important document that needs to be prepared by stock exchanges and the equity overlooking body.

Therefore, it includes the following features and information that needs to be presented in the prospectus:

  • A brief information regarding the company’s background as well as financial information.
  • The name of the company that is issuing the stock.
  • Number of shares that are supposed to be issued under the stock regime.
  • Types of the securities that are offered
  • If the offer that is made is public or private – depending whether they are being sold to the general public or certain class of investors only.
  • Names of the company’s principals
  • Names of the banks or financial companies that perform the underwriting
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Therefore, it can be seen that a prospectus is issued in order to notify the public that the particular business has been formed, and is now open for issuing shares to the general public.

Through the prospectus, the company, as well as the investors are able to preserve a record of authentic items of the terms, as well as the allocation on the basis of which the public has been invited in order to purchase shares or the debentures of the company.

Furthermore, it can easily secure the directors, as well as the decision-makers of the company to accept the due responsibility on the statements that have been made in the prospectus.