What is a Prospectus

A prospectus is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering for sale to the public. A prospectus is filed for stock, bond, and mutual fund offerings. A prospectus is used to help investors make an more informed investment decision.

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Prospectus

Understanding a Prospectus

Companies that wish to offer a stock or bond for sale to the public must file a prospectus as part of the registration process with the SEC. Companies must file a preliminary and a final prospectus. However, the SEC has specific guidelines as to what's listed in a prospectus for various securities.

The preliminary prospectus is the first offering document provided by a security issuer and includes most of the details of the business and transaction. However, the preliminary prospectus doesn't contain the number of shares to be issued or price information. Typically, the preliminary prospectus is used to gage interest in the market for the security being proposed.

The final prospectus contains the complete details of the investment offering to the public. The final prospectus contains any finalized background information as well as the number of shares or certificates to be issued and the offering price.

A prospectus includes some of the following information:

  • A brief summary of the company’s background and financial information
  • The name of the company issuing the stock
  • The number of shares
  • Type of securities being offered
  • Whether an offering is public or private
  • Names of the company’s principals
  • Names of the banks or financial companies performing the underwriting

Some companies are allowed to file an abridged prospectus, which is a prospectus but contains some of the same information as the final prospectus.

Mutual Funds

In the case of mutual funds, a fund prospectus contains details on its objectives, investment strategies, risks, performance, distribution policy, fees, expenses, and fund management. Because the fees that mutual funds charge take away from investors’ profits, the fees are listed in a table near the beginning of the prospectus. Fees for purchases, sales, and moving among funds are included. The format simplifies comparing the costs of various mutual funds. Typically, high-cost funds charge fees in excess of 1.5 percent, whereas low-cost funds charge 1 percent or less.

Key Takeaways

  • A prospectus is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering for sale to the public. 
  • Companies that wish to offer a stock or bond for sale to the public must file a prospectus as part of the registration process with the SEC. 
  • A prospectus for a mutual fund contains details on its objectives, investment strategies, risks, performance, distribution policy, fees, expenses, and fund management. 

Prospectus Example

PNC Financial filed a prospectus to the SEC in 2019 requesting a new issuance of debt. The senior note being offered to the public is a bond or a promissory note to pay a specific yield by maturity.

For review, senior notes are debt securities, or bonds, that take precedence over other unsecured notes in the event of bankruptcy. Senior notes must be paid first if assets are available in the event of a company liquidation. A senior note pays a lower coupon rate of interest compared to junior unsecured bonds since the senior debt has a higher level of security and a reduced risk of default.

Below is a portion of the prospectus from the table of contents, which provides basic information about the offering. We can see the following information listed:

  • Securities offered, which are senior notes that pay 3.50%
  • Maturity date of the notes, which is January 23, 2024
  • The issue date, which has yet to be determined
  • How interest will be paid and denominations to be issued
  • Use of proceeds or how the money raised will be spent, which might include, financing operations, paying down debt, or buying back stock
PNC Financial Prospectus Example
PNC Financial Prospectus Example.  Investopedia


[Important: Companies that wish to offer a stock or bond for sale to the public must file a prospectus as part of the registration process with the SEC. An overview of the business, the company's financials, as well as the risks associated with the investment, are included in the prospectus.] 

Special Considerations and Risks in a Prospectus

Another reason a prospectus is issued is to inform investors of the risks involved with investing in the security or fund. Although a company might be raising capital through stock or bond issuance, investors should study the financials of the company to ensure the company is financially viable to enough to honor its commitments.

Risks are typically disclosed early in the prospectus and described in more detail later. The age of the company, management experience, management's involvement in the business, and capitalization of the stock issuer are also described. The prospectus information also guards the issuing company against claims that pertinent information was not fully disclosed.