A prospectus is a detailed document prepared by an issuer selling financial securities to the public. As per capital market regulations, it must provide complete, accurate, and plain disclosure of all-important facts relating to the securities being issued.
Prospectus helps the public access information to make sound investment decisions. Companies and mutual funds must prepare prospectuses, financial statements, and other public disclosure materials.
It gives information about a company or mutual fund, including products, management, financial and strategic planning, and risks. Reading a prospectus is the first step to becoming an informed individual.
The Prospectus, also known as an Offer Document
An ‘Offer document’ is a document that contains all the relevant information about the company, promoters, projects, financial details, objects of raising the money, terms of the issue, etc., and is used for inviting subscriptions to the issue being made by the issuer. ‘Offer Document’ is called “Prospectus” in case of a public issue and “Letter of Offer” in case of a rights issue.
Process of Issuing a Prospectus
When an issuer decides to sell its securities to the public, it first prepares a preliminary prospectus and files that document with the capital market regulator like SEBI in India for review. A preliminary prospectus has most of the information that will end up in the final version of the Prospectus but may be missing certain necessary information, such as the price or number of securities planned to be sold.
When the securities regulators complete their review, the issuer prepares and files a final version of the Prospectus. The regulators issue a receipt confirming that the regulators have vetted the Prospectus. Once the vetting is done, the issuer can begin to offer its securities.
Different Terms Used for a Prospectus
Terms used for offer documents vary depending upon the stage or type of the issue where the document is used. The terms used for offer documents are defined below:
Draft Offer Document
It is an offer document filed with SEBI to specify changes, if any, before filing with the Registrar of Companies (ROCs). In addition, the draft offer document is made available in the public domain, including websites of SEBI, concerned stock exchanges, or concerned Merchant Bankers, to enable the public to give comments, if any, on the draft offer document.
Red Herring Prospectus
It is an offer document used in case of a book-built public issue. It contains all the relevant details except the price or number of shares offered. It is filed with ROC before the issue opens.
It is an offer document in case of a public issue, with all relevant details, including price and number of shares or convertible securities. This document is registered with ROC before the issue opens in case of a fixed price issue, after the closure of the issue in case of a book-built issue.
Letter of Offer
It is an offer document in case of a Rights issue of shares or convertible securities and is filed with Stock Exchanges before the issue opens.
It is an abridged version of the offer document in public issue and is issued along with a public problem application form. It contains all the salient features from the Prospectus.
Abridged Letter of Offer
It is an abridged version of the letter of offer. It is sent to all the shareholders along with the application form.
It is a prospectus that enables an issuer to make a series of issues within one year without the need to file a new prospectus every time. This facility is available to public sector banks, scheduled banks, and Public Financial Institutions.
It is an offer document for Qualified Institutional Placement and contains all the relevant and material disclosures.
Important Information Provided in a Prospectus
- The history of the issuer and a description of its operations.
- Audited financial statements for the previous three years.
- Description of the issuer’s business and investment plans.
- Description of the intended use of the money raised from selling the securities.
- Summary of the significant risk factors affecting the issuer.
- Information about the issuer’s management and its principal shareholders.
Why Should One Read Prospectus?
A prospectus is required by law to contain the facts. The facts, not promotional hype or a sales pitch, should be the basis for investment decisions.
A prospectus allows individuals and investors access detailed information about the issuer and the securities sold. In the Prospectus, an individual can find answers to many questions one is expected to ask before investing. With these facts, an investor may make the right decisions. Look at the merit of the investment, the risks, and how the particular investment fits the needs and objectives.
Reviewing the Prospectus can determine whether the investment has merit and whether the risk and potential return levels fit particular investment needs and objectives.
Securities laws require issuers to take great care to ensure the statements made in their prospectuses are accurate, as it is illegal to file a false or misleading prospectus.
Conclusion: Prospectus; A Document that Dissects a Company
It’s essential to read the Prospectus while subscribing to an IPO. Nonetheless, it’s often ignored. You should understand the information in a prospectus to decide whether the investment suits you.
If the company has not communicated relevant information clearly, this could be a warning sign that you must dig deeper. Check more about the company beyond prospects online and others like stock brokers, experts’ views, newspapers, etc.