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We all know that a well-crafted resume is one important part in getting the attention of a hiring manager during the job-application process. It is, after all, a tool that outlines your relevant experiences and qualifications.  

In the finance world, a prospectus is a document that serves a similar purpose for investors as a resume does for employers. It provides details about a company, it’s history, and what it’s offering to spark interest and help facilitate more informed decision-making.

The Security and Exchange Commission (SEC) requires companies aiming to offer an investment to the public to file a prospectus. This formal document details an overview of the company’s history and financials, what type of security is being offered and how many shares of it, among other things.

What is a prospectus?

A prospectus is a formal statement that describes the details of a new security being offered to the public. These documents are filed with the SEC for stocks, bonds, and mutual funds, and include key context and information that may help guide an investment decision. 

Information on a prospectus may include:

Company history and information about its management team
Financial information, including audited financial statements 
The security’s principal value and amount
Whether the offering is public or private
Number of shares offered
How investment proceeds will be used
Risk factors
Bank or financial institution doing the underwriting

A prospectus provides a level of transparency to the public by outlining the company’s background and goals for raising capital. One of the main purposes of a prospectus is to bring attention to a new company and initiate interest in a security with the hopes of raising capital once its securities are made available to buy.

It also details potential risks the company faces, including how long it’s been around, management experience and involvement level, and the market capitalization of the issuer. 

Filing a prospectus protects the issuing company from claims that relevant information was not made clear or available. The consequences of including false information in a prospectus are severe: Those responsible for misleading information on a prospectus are subject to both civil and criminal penalties, including fines and potential imprisonment.

However, just because the information is there doesn’t mean investors don’t still have the responsibility to do thorough background research. Interested investors should still evaluate the issuing company’s financial documents to understand exactly how much risk they’re taking on and the likelihood that they’ll eventually be paid back.

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Source:: Business Insider


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What is a prospectus? How it can help you make informed decisions on whether to invest in a company

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