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What Is a Prospectus in Finance?

Generally speaking, the word prospectus refers to a small publication that describes the activities of a school or business. The use of a prospectus differs, however, in the financial world. In a financial context, a prospectus relates specifically to a planned investment opportunity.

What does prospectus mean?

In terms of finance, a prospectus is a legal document required by the Financial Conduct Authority when a company makes an investment security open to the public. Such investments may be in the form of stocks, bonds, or mutual funds.

A prospectus helps investors make informed decisions and contains information on risks and, in the case of mutual funds, for example, other pertinent details like objectives, strategies, fund management, and fees.

The Prospectus Rules, part of the Prospectus Directive in European Law, govern the publication of this information for public investment and admission to regulated markets like the London Stock Exchange. In addition to requiring the approval of the Financial Conduct Authority, a prospectus may need the approval of an ‘authorised person’ if it carries the intention of attracting investors.

Regulators require a preliminary prospectus, or red herring, and a final prospectus, referred to as a statutory prospectus or offering circular, of companies offering stocks or bonds to the public. Mutual fund prospectus documents are required in statutory form only and are updated annually.

The preliminary prospectus

The preliminary prospectus is used to gauge market interest in the proposed security. It contains general information on the business and transaction as well as the number of shares being offered and associated fees.

Other information that may be included in a prospectus:

  • name of the company issuing the stock and its background, financials, and principals

  • age of the company and experience of the management team

  • type of securities being offered, number of shares, or certificates

  • whether the offering is public or private

  • names of the banks or financial institutions responsible for the underwriting

A prospectus may also include biographical information about the company’s officers and directors such as their compensation, litigation, and property holdings.

In addition to the above, the final prospectus includes pricing and is an official offering to sell investment securities to the public. Both preliminary and final drafts of a prospectus, however, contain details related to risk.

More about the risks

Potential investors should carefully examine a company’s prospectus in order to weigh the risks of the investment and determine if the company is financially solvent. Examples of risk include capital restrictions, government regulations, large numbers of stock holdings by individuals, and others. Disclosing risks offer companies protection in the event that investors claim that financial losses incurred were due to the withholding of information.

The new European Prospectus Regulation of 2019 placed particular emphasis on risk. The Prospectus Regulation specifically stipulates that risk factors in securities prospectuses need to be:

  • Specific to the issuer and/or the securities.

  • Material to an investor's informed investment decision.

  • Corroborated by the rest of the prospectus.

The e-prospectus and other online financial documents

The Financial Conduct Authority stores e prospectus documents on its National Storage Mechanism webpage as well as other regulated information required of UK enterprises. Companies House is another online resource that registers company information and makes it available to the public. An executive agency, Companies House is sponsored by the Department for Business, Energy, and Industrial Strategy.

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