Prospectus (finance)
Encyclopedia
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, a prospectus is a document that describes a financial security for potential buyers. A prospectus commonly provides investors with material information about mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s, stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
s, bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
and other investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
s, such as a description of the company's business, financial statements
Financial statements
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties and any other material information. In the context of an individual securities offering, such as an initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
, a prospectus is distributed by underwriters or brokerages to potential investors.
United States
In a securities offering in the United States, a prospectus is required to be filed with the Securities and Exchange Commission (SEC) as part of a registration statementRegistration statement
In the United States, a registration statement is a set of documents, including a prospectus, that a company must file with the U.S. Securities and Exchange Commission before it proceeds with an initial public offering....
. The issuer may not use the prospectus to finalize sales until the registration statement has been declared effective by the SEC, meaning it appears to comply on its face with the various rules governing disclosure.
If a company has been filing Form 10-K
Form 10-K
A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission , that gives a comprehensive summary of a public company's performance...
with the SEC for a certain period of time, has a market capitalization above a certain threshold and takes certain procedural steps, it is permitted to offer securities using a simplified prospectus that incorporates information by reference to its SEC filing
SEC filing
An SEC filing is a financial statement or other formal document submitted to the U.S. Securities and Exchange Commission . Public companies, certain insiders, and broker-dealers are required to make regular SEC filings. Investors and financial professionals rely on these filings for information...
s. In certain situations, such as when the offering is not required to be registered with the SEC, a prospectus is instead referred to as an "offering memorandum" or "offering circular
Offering circular
An offering memorandum or offering circular is a type of prospectus for a bond or other security. The terms "offering memorandum", "OM", or "offering circular", "OC", are used instead of "prospectus" in certain situations, such as when the offering is not required to be registered with the...
." In the case of municipal securities offerings, which are generally exempt from most of the federal securities laws, municipal issuers typically prepare an analogous form of disclosure document known as an "official statement." Prospectuses are generally prepared with the assistance of the underwriter acting as issue manager (also called a bookrunning manager or "bookrunner
Bookrunner
In investment banking, a bookrunner is usually the main underwriter or lead-manager/arranger/coordinator in equity, debt, or hybrid securities issuances. The bookrunner usually syndicates with other investment banks in order to lower its risk. The bookrunner is listed first among all underwriters...
").
United Kingdom
Publication of information in relation to the issue of securities in the United KingdomUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
is governed by the Prospectus Rules, which implement the European law Prospectus Directive. A prospectus must be published where certain types of securities either are offered to the public or are requested for admission on a regulated market. In the United Kingdom, the only regulated market is London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
full list. The Alternative Investment Market
Alternative Investment Market
AIM is a sub-market of the London Stock Exchange, allowing smaller companies to float shares with a more flexible regulatory system than is applicable to the main market....
(AIM) does not constitute a regulated market, nor does the Professional Securities Market ("PSM") for issues of debt securities. There are numerous exceptions to the requirement to publish a prospectus, although an exempt company may still be required to publish listing particulars where it is seeking admission of its shares to the full list or an admission document where it is seeking admission of its shares to AIM.
The prospectus must be approved by the competent authority in the United Kingdom, which is currently the Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
in its capacity as the United Kingdom Listing Authority. If the purpose of the prospectus is to induce people to engage in an investment activity, it will also need to be issued or approved by an 'authorised person', or it will constitute an unlawful financial promotion under section 21 of the Financial Services and Markets Act 2000
Financial Services and Markets Act 2000
The Financial Services and Markets Act 2000 is an Act of the Parliament of the United Kingdom that created the Financial Services Authority as a regulator for insurance, investment business and banking.-Outline:...
.
See also
- Capital markets
- IndentureIndentureAn indenture is a legal contract reflecting a debt or purchase obligation, specifically referring to two types of practices: in historical usage, an indentured servant status, and in modern usage, an instrument used for commercial debt or real estate transaction.-Historical usage:An indenture is a...
, a document describing a bond issue. - Securities law
- Electronic Municipal Market AccessElectronic Municipal Market AccessThe Electronic Municipal Market Access system, operated by the Municipal Securities Rulemaking Board , serves as the official source for municipal securities disclosures and related market data...
System