Prospectus of a Company: Meaning, Types and Uses

What is a Prospectus?

A Prospectus is a final document that is required by and filed with the Securities and Exchange Commission (SEC). It provides details about an investment offering to the public and is filed for offerings of stocks, bonds, and mutual funds. The Prospectus helps investors to make more informed decisions on investment because it contains a host of relevant information about the investment or security. All forms of the prospectus are in existence to attract or inform clients, members, buyers, or investors.

Geeky Takeaways:

• A Prospectus is a legal document describing a company’s securities that have been put on sale.
• It generally discloses the company’s operations along with the purpose of the securities being offered.

Prospectus: An Overview

Companies that wish to offer bonds or stocks for sale to the public should file a prospectus with the Securities and Exchange Commission (SEC) as part of the registration process. Companies have to file a preliminary and final prospectus, and the SEC has certain specific guidelines as to what is listed in the prospectus for various securities.

The Preliminary Prospectus is a first offering document that is provided by a security issuer and includes most of the details of the business and transaction. However, it does not contain the number of shares to be issued or price information.

The Final Prospectus, on the other hand, contains the entire detail of the investment offering to the public. The final prospectus includes any final background information as well as the number of shares or certificates to be issued and the offering price.

A prospectus includes the following listed information:

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

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

Another reason behind issuing prospectus is to inform investors of the risks involved with investing in the fund or security. Although, a company might be raising capital by issuing bond or stock, investors must study the financial statements of the company. This ensures the company is financially viable enough to fulfill its commitments. The information on the prospectus also guards the issuing company against claims that information is not fully disclosed.

Types of Prospectus

As per the provisions of the Companies Act, 2013, there are majorly four types of prospectus:

1. Deemed Prospectus: Section 25(1) of the Companies Act, 2013 mentions Deemed Prospectus. When a company allows to allot any securities of a company, the document is considered to be a Deemed Prospectus through which the offer is made to the investors.

2. Red Herring Prospectus: It is the prospectus that does not contain all the information regarding the prices of securities offered and the number of securities that are to be issued. As per the provisions of the act, the firm must issue this prospectus to the registrar at least three times before the opening of the offer and the subscription list.

3. Shelf Prospectus: It is stated under Section 31 of the Companies Act, 2013 and is issued when a company or any public financial institution offer one or more securities to the public. A company must provide a period of validity of the prospectus, which shall not be more than one year. An information memorandum must be provided by the organization when filing the Shelf Prospectus.

4. Abridged Prospectus: It is a kind of memorandum that contains all the salient features of the prospectus as specified by SEBI (Securities and Exchange Board of India). Abridged Prospectus includes all the information in brief, which provides a summary to the investor to make further decisions.

Why is Prospectus useful for Investors?

A Prospectus is a legal document that is submitted to the concerned authority and contains information for the public regarding an investment offering. It is very useful for investors since they learn about the risks associated with buying securities or funds. Generally, risks are briefly mentioned in the prospectus at the early stage and described in more detail later. When the company is acquiring funds by issuing stocks or bonds, it is the investor’s duty to review the company’s financial statements to make sure it is financially stable enough to uphold its obligations.

Conclusion

A Prospectus is a document that is legal and formal in nature and is issued by a body corporate which acts to invite offers from the public for subscription or purchase of any securities. It is mandatory for every public company to issue the prospectus for its shares or debentures but the same is not required in the case of a private company.

So, a Prospectus plays a vital role for any public company and it must be laid down under the provisions of the Companies Act, 2013.

Frequently Asked Questions (FAQs)

1. What is a Prospectus?

Answer:

A Prospectus is a final document that is required by and filed with the Securities and Exchange Commission (SEC). It provides details about an investment offering to the public and is filed for offerings of stocks, bonds and mutual funds.

2. What are the two kinds of prospectus that companies have to file?

Answer:

Companies have to file a preliminary and final prospectus, and the SEC has certain specific guidelines as to what’s listed in the prospectus for various securities.

3. What are the four major types of Prospectus as per the provisions of the Companies Act, 2013?

Answer:

As per the provisions of the Companies Act, 2013, there are majorly four types of prospectus: Deemed Prospectus, Red Herring Prospectus, Shelf Prospectus and Abridged Prospectus.

4. Why is Prospectus useful for investors?

Answer:

A prospectus is very useful for investors since they learn about the risks associated with buying securities or funds. When the company is acquiring funds by issuing stocks or bonds, it is the investor’s duty to review the company’s financial statements to make sure it is financially stable enough to uphold its obligations.

5. Is Prospectus mandatory in both Public as well as Private Companies?

Answer:

It is mandatory for every public company to issue a prospectus for its shares or debentures, but the same is not required in the case of a private company.