A prospectus is a document that’s offered to potential investors to describe a given investment. Prospectuses are most commonly received by individuals who are being solicited for purchases made on the stock market as well as bonds, mutual funds, exchange-traded funds (ETFs) or other types of securities. They include a great deal of detailed information that can help potential investors make informed decisions. They cite the risks involved.
Prospectuses are filed with a local regulator or with the U.S. Securities and Exchange Commission (SEC). Securities can't be offered to investors without an SEC or regulator filing of a final prospectus.
The contents of a prospectus can vary somewhat depending on whether it’s a mutual fund prospectus or the offering is stocks, according to the Corporate Finance Institute. Some components are more common than others although they're not always given in the same order.
The Investment Objective
All funds have an investment objective. Some seek capital growth, while others are looking for income and still others are looking for stability of principal. The fund manager or issuer of the investment must disclose the purpose of the investment in this section and how it is desired to perform.
The Company’s History and Background
The company's business history dating back to its inception is included in this section, with events and information stated in chronological order. It can be a strong selling tool because most companies include all the trends of their operation, such as how, when and why they've experienced growth. This section should also detail basic fundamentals about the issuing company, such as where it operates as well as a general overview of its business plan.
The Company's Management Profile
This section of a company’s prospectus details the experience and education of its executive management team. This is something of a selling tool too. It can assure potential investors that the company is in good, capable hands going forward, in addition to detailing what the team has accomplished so far. Both can help guide your investment decisions and investment strategy.
The Risk Factors Involved
The risk profile is related to the investment's objective. Different investments are subject to different types and amounts of risk. The fund company must disclose what risks are present in this section of the prospectus. Examples include liquidity risk, market risk, timing risk, interest rate risk, currency risk and more. This section safeguards the company from any accusations that it held back important information to promote the sale of shares and that the omissions ultimately cost investors money.
This section may be camouflaged with the title "Certain Considerations" or something similar, according to the Missouri Secretary of State. Each risk that’s identified should be disclosed and explained more fully somewhere else in the prospectus.
Prospectuses will always show the past performance of a given investment, assuming that it’s not an initial public offering (IPO). While it’s not guaranteed, the average of all past returns is the expected future return for financial calculations. The company might also divulge how the new issue is expected to affect its existing capital structure.
Every fund must disclose who is running the fund and cite their credentials. Funds must also disclose that past performance is no guarantee of future results. The prospectus should also explain what the funds raised by the issuance of securities will be used for. It should fully describe the nature of the stock being issued, the number of shares being issued and whether those shares come with voting rights.
Fees and Expenses
The last major section of a prospectus reveals the offering price and the associated fee structure of the investment. Virtually every investment has an ongoing fee that’s expressed as a percentage of the annual assets under management. Most funds will also have distributor and solicitor fees, known as loads. Some loads are applied at purchase, some are ongoing and others are applied at redemption. All loads and fees and available methods of reducing them must be disclosed.
They might include account maintenance fees, management fees and annual expenses, a percentage of which will be charged to each investor's account. The percentage is usually referred to as the "expense ratio," according to OneOp.org.
Some Additional Documents
A prospectus doesn't always stand on its own. You can expect to find a variety of the company’s financial statements attached, such as an income statement and/or balance sheet, both of which offer more detailed financial information about facts that have been established elsewhere in the prospectus. The company should also provide a copy of its registration statement from the SEC.
This article was written by PocketSense staff. If you have any questions, please reach out to us on our contact us page.