A prospectus, in finance, is a disclosure document that describes a financial security for potential buyers. It commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company’s business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties and any other material information. In the context of an individual securities offering, such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential investors. Today, prospectuses are most widely distributed through websites such as EDGAR and its equivalents in other countries.
Contents of a prospectus:
- Address of the registered office of the company.
- Name and address of company secretary, auditors, bankers, underwriters etc.
- Dates of the opening and closing of the issue.
- Declaration about the issue of allotment letters and refunds within the prescribed time.
- A statement by the board of directors about the separate bank account where all monies received out of shares issued are to be transferred.
- Details about underwriting of the issue.
- The authority for the issue and the details of the resolution passed therefore.
- Procedure and time schedule for allotment and issue of securities.
- Capital structure of the company.
- Consent of directors, auditors, and bankers to the issue, expert’s opinion if any.
- Main objects and present business of the company and its location.
- Main object of public offer and terms of the present issue.
- Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash.
- Details of directors including their appointment and remuneration.
- Disclosure about sources of promoter’s contribution.
- Particulars relation to management perception of risk factors specific to the project, gestation period of the project, extent of progress made in the project and deadlines for completion of the project.
Prospectus for a stock or bond issue
When a company is issuing stocks or bonds, it publishes a prospectus to provide investors with all the information that they need to make an informed decision. The issuer provides both a preliminary and a final prospectus. A preliminary prospectus is the initial offering document that provides details about the proposed transaction. The final prospectus is offered when the offering’s been finalized and is being offered to the public for subscription.
Information in the final prospectus includes the number of shares issued, offering price, company’s financial data, risk factors, use of the proceeds, the dividend policy, and other relevant information. This information helps an investor make an informed decision on whether to invest in the company.
Prospectus for Mutual funds
A mutual fund prospectus is the legal disclosure documents that the SEC requires mutual funds to file and make available to interested investors. The details provided in the document include the fund’s objectives, risks, performance, distribution policy, executive team, investment strategies, etc.
A mutual fund may provide a summary prospectus, which is a few pages long and contains important information that investors require. It may also issue a statutory prospectus, which is long and extremely detailed, to provide investors with as much information as they may need to make a buying decision. Mutual funds are required to give investors the document after the purchase of shares. Investors can also access the information on the fund’s website.
A shelf prospectus is filed when a company intends to issue bonds. Bonds are a way for companies to borrow money to raise capital from the public. Unlike lending from a bank, issuing bonds can be a more affordable option. At the same time, as far as investors are concerned, it is an opportunity to get returns through a less risky investment option.
Reading the prospectus before investing in bonds will help you better understand the same. In addition, there are important numbers such as coupon rate, face value, tenure etc., that you should look at before investing in a bond, and all this information is available in a shelf prospectus.
In the case of a shelf prospectus though, the company will not have to file another one to reissue bonds. In fact, a company can issue bonds up to four times once they issue a prospectus.
Red herring prospectus
Thanks to the kind of demand that the IPO market sees these days, the red herring prospectus has become a known name among many investors. For those who don’t know, a red herring prospectus is a document filed to SEBI before an IPO. During an IPO, a private company becomes public, and a lot of information has to be then disclosed to the public. Companies use a red herring prospectus to publicise this information. The document thus will contain their financials, performance numbers, goals, risks etc., making it an ideal record for investors to dig deep and find the potential and risk in investing in the particular company.
Under the implication of law, any document from the company that is meant to sell shares is considered a prospectus. Deemed prospectus becomes important when a company intends to bypass the SEBI laws and issue securities through an intermediary. Here, whenever the company issues securities, even when it is done through a merchant bank or a broker, the company has to issue a document of an offer for sale. This document is called a deemed prospectus. This way, the sale of securities is marked, and investors’ rights are protected even when the company is trying to sell their stocks through intermediaries.
It is a type of prospectus that contains the list of all the prospectus and offers that the company has completed. This is for investors like you to understand more about the company and use it for research in decisions related to investment in the company.
Statements in view of Prospectus
In India, a company that intends to issue shares or debentures to the public is required to file a prospectus with the Registrar of Companies. A prospectus is a document that contains all the necessary information about the company and its shares or debentures, which is intended to be offered to the public. It is essentially an invitation to the public to invest in the company. In this context, there are certain important statements that are required to be made in the prospectus. These statements are as follows:
Nature and Objectives of the Company
The prospectus must contain a statement of the nature and objectives of the company. This statement should provide a clear understanding of the company’s business, the products or services it offers, and its long-term objectives.
Details of the Shares or Debentures
The prospectus must provide complete details of the shares or debentures being offered to the public. This includes the type of shares or debentures, their face value, the price at which they are being offered, and any special terms or conditions that apply to them.
Information about Directors and Promoters
The prospectus must provide information about the directors and promoters of the company. This includes their names, addresses, qualifications, and experience in the relevant field.
Details of Management
The prospectus must provide details of the company’s management. This includes information about the key personnel, their roles and responsibilities, and their experience in managing similar businesses.
The prospectus must provide financial information about the company. This includes the company’s financial statements, balance sheet, profit and loss statement, cash flow statement, and any other relevant financial information.
The prospectus must provide a statement of risk factors. This should identify the risks that are associated with investing in the company’s shares or debentures. The statement should also provide information on how the company plans to mitigate these risks.
Legal and Regulatory Compliance
The prospectus must contain a statement of legal and regulatory compliance. This should provide information on the laws and regulations that the company is required to comply with, and how it plans to comply with them.
The prospectus must contain certain statutory statements, as required by law. For example, the prospectus must state that the company has obtained all necessary approvals and licenses to issue the shares or debentures. The prospectus must also state that the company has not defaulted on any statutory payments.