Prospectus definition

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What is a Prospectus?

A prospectus is a document containing the details of a prospective securities offering. It is filed with the Securities and Exchange Commission (SEC). The depth of information covered is intended to inform investors about the risks involved if they were to purchase the related securities. By including a massive amount of information in a prospectus, the issuer protects itself from charges by investors that they suffered losses because the issuer withheld key information from them. The SEC does not restrict investors from making foolish investments, but it does require that all key information about these investments be made available to investors through the prospectus document. Examples of the topics found in a prospectus are:

  • The identity of the issuer

  • The identities and experience of the management team

  • The capitalization of the issuer

  • The number, type, and price of securities to be offered

  • The fees to be paid by the issuer that associated with the offering

  • The purposes to which the resulting funds will be put

  • Details about what the issuer does

  • The risks to which the issuer is subjected

  • The audited financial statements of the issuer

Related AccountingTools Course

Public Company Accounting and Finance

The Difference Between a Preliminary Prospectus and a Final Prospectus

The preliminary version of a prospectus does not state the quantity or price at which securities will be offered. This information is included in the final prospectus, once the issuer has negotiated with investors what the security price will be. Price and quantity information has to be added last, since it depends on the results of the issuer’s prior discussions with institutional investors regarding who will buy what, and at what price.

Some background information may also be updated in the final prospectus.