What Is a Tombstone?

A tombstone is a written advertisement of a public offering placed by investment bankers who are underwriting the issue. It gives basic details about the issue and lists each of the underwriting groups involved in the deal. The tombstone provides investors with some general information and directs the prospective investors to a link where they can obtain a prospectus.

Key Takeaways

  • A tombstone is a written advertisement that gives investors basic details about an upcoming public offering.
  • A public offering is when a company offers to sell equity shares in the company in order to raise money.
  • The Securities and Exchange Commission (SEC) requires companies to publish advertisements as part of the disclosure requirements before issuing new shares of stock.
  • The tombstone ad describes the type and number of securities offered, how they can be purchased, the availability date, the security's credit rating, and the names of the syndicate members authorized to sell the security.
  • The tombstone gets its unusual name from the black border and heavy black type that typically appears on the print advertisement, which some say resembles a gravestone marker.

How a Tombstone Works

In order to raise money, a company's management can sell equity shares in the company through a public offering. A tombstone is one component of the disclosure requirements for security offerings required by the Securities and Exchange Commission (SEC). The tombstone is simply an announcement that securities are available for sale.

Tombstone Ad vs. Prospectus

While a tombstone ad is just a brief announcement alerting investors to the upcoming security sale, a prospectus goes into greater detail and gives investors the information they need to make an investing decision. When a company issues securities to the public, the SEC requires that each investor receive a prospectus. The prospectus requirement applies to an initial public offering (IPO), which refers to the first time an issuer sells any type of security to the general public.

The prospectus requirement also applies to all seasoned issues, A seasoned issue, also known as a secondary offering, is when an established company that already trades on the stock exchange issues new shares of stock for sale. A tombstone for a secondary offering is mailed to all investors who already own the security, and all secondary offerings are sold using a prospectus.

The preliminary prospectus doesn't include price information, but is used to gauge market interest in the security being proposed; the final prospectus, however, includes price information as well as the number of shares the company will sell.

The Role of Underwriters

An underwriter is responsible for managing the legal and accounting process of creating a prospectus. The prospectus includes the issuer's most recent set of audited financial statements, as well as a legal opinion regarding the existence of any pending legal matters.

A prospectus goes into great detail about a firm's marketing, production, and sales process, and it explains why the company is raising more capital. In addition to the underwriters, there may be many other members of the syndicate who are brought in to sell the securities to their customers. The underwriter's sales force also sells the newly issued securities.

Examples of Tombstone Information

The tombstone describes the types of securities that are offered, the date they are available, the number of shares or bonds to be sold, and how the securities can be purchased. If a new debt security receives a credit rating, that rating can be included in the tombstone.

A tombstone advertisement gets its name from the black border and heavy black print one typically has in print media. The tombstone lists the syndicate members who are involved in the underwriting of the security, with the primary members listed in larger type at the top of the advertisement.

A syndicate member's level of involvement is based on the work the member performs on the security offering and the percentage of the total issue that the member's firm sells to the public. If a syndicate member is listed at the top of a tombstone for a popular issuer of stock, that document helps the syndicate firm market its expertise to other companies.