Prospectus

A prospectus – is an official document that refers to a company’s public investment proposal. In the US this document is filed by an issuer of the securities on the Securities and Exchange Commission (SEC) demand and under its control. In other countries the SEC functions can be undertaken by other government agencies. For example, by the Federal Securities Commission in Russia or Financial Conduct Authority in the UK.

The main aim of the document is to present precise and sufficient enough information on the issued financial instruments (shares, bonds, mutual funds, promissory notes, senior notes etc.) as well as on the company’s activity in general.

The forms of prospectus for different financial instruments vary slightly. For example, the prospectus on the mutual funds is more concentrated on the investment strategies, while the regular bond prospectus – on the company’s vitality and debt burden. Better to check the relevant form before filling up the prospectus and consult with a specialist on this matter.

Types of Prospectuses

There are a few types of prospectuses to consider:

1. An initial public offering (IPO) prospectus is a document that a company files when it issues shares or other financial instruments for the first time. The SEC requires this document as a part of the company’s securities registration on the market. It presents all the needed information for investors in order to decide whether they should or shouldn’t acquire the shares of the company.
2. A preliminary prospectus justifies its name and gets filed before any other prospectus. It represents general information about the company’s activity and its mission, objectives, financial statements, business strategies, etc. Usually, it helps to estimate investors’ interest in buying shares of the company. This prospectus is also known as red-herring prospectus.
3. A final, or abridged prospectus gives more detailed information on the company’s offering. In comparison to the preliminary prospectus the final one is more precise and states the amount of the issued securities and their offering price set by the investment bank.
4. A shelf prospectus is filed when the company issued several types of investment instruments at the same time. It saves the issuer’s time and effort by filing one form instead of several of them for each security.
5. A deemed prospectus is a type of the document that allows to present the issued securities to the public even if it hasn’t been registered with the SEC. 

If the company issues the financial instruments for the first time, then it’ll be required to file 3 types of prospectuses – the preliminary, IPO, and final ones. If it isn’t the first issuance, then the SEC will demand only preliminary and final forms of the prospectus. The last two types are more specific and uncommon.

Contents of Prospectus

Overall, a company states the following information in its prospectus:

• names of the company and its principal or principals;
• mission, objectives, and development strategies of the company;
• financial statement data, including the list of existing assets, profits, expenses, and possible debt burden;
• amount of shares or other securities to be issued;
• offering price of these financial instruments;
• definition of the offering as public or private (the latter will be presented only to a specific group of investors, while the first one – to all of them);
• underwriting conditions;
• associated risks.

The duration of the company’s existence, accumulated experience, and market capitalization are also considered as important parts of the company overview.

Usually, the prospectus takes around 100 pages and more.

Prospectus meaning

The prospectus is aimed to inform and attract investors. The given information helps them to make well-considered investment decisions. A potential investor can study the company’s performance, cash flows, and the way of managing business.

The prospectus is useful for the issuer as well, because it protects him from misunderstanding and false accusations about the issued items. 

Prospectus example

Let’s consider an old Netflix final prospectus dated 2002 to visualize some of the aforementioned points. Though this document is quite outdated, it represents some of the essential prospectus characteristics and is free to access on the internet. 

The document stated the full company description and its offering, defined the use of proceeds for the company’s further development, and listed the associated risks. For instance, one of the mentioned risks was the company’s high sensitivity to the clients’ behavior on the platform. The prospectus stated that the loss of subscribers would influence the company’s revenue. The current situation of Netflix demonstrates it clearly. The amount of Netflix subscribers has decreased significantly in recent years, and the stock price has gone down along with it.

According to the prospectus the company’s total revenues reached almost $76 million with the number of subscribers around 456 thousand people in 2002. The company showed a significant growth in 2001-2002 compared to the previous years.

If Netflix was issued bonds, then their maturity date and coupon rate would be stated in the prospectus along with the mentioned information.