Prospectus

What Is a Prospectus?

A prospectus is an official document that describes a securities offering to the public. When a company wants to sell stock or bonds to investors, or when a mutual fund or exchange-traded fund (ETF) is launched, the issuer usually must provide a prospectus. Its purpose is disclosure: it lays out the facts an investor needs to judge the offering, including what is being sold, who is selling it, and what could go wrong.

What a Prospectus Contains

For a company, a prospectus typically explains the business, its products and markets, and its management. It includes audited financial statements, a discussion of recent results, and information about how the money raised will be used. It also contains a section on risk factors, which describes the uncertainties that could hurt the business or the value of the securities. For a fund, the prospectus describes the investment objective, strategy, fees and expenses, and the principal risks of the portfolio.

How It Is Used

In the United States, securities offered to the public are generally registered with the Securities and Exchange Commission (SEC), and the registration process requires a prospectus. Many issuers first file a preliminary version, sometimes called a "red herring," which can be shared with potential buyers before the terms are final. Once the offering is priced, a final prospectus is issued. Similar disclosure documents exist in other countries under their own securities regulators.

Why It Matters to Investors

A prospectus is one of the most complete sources of information about a particular offering. Reading it can reveal details that do not appear in marketing materials, such as fee structures, dilution from new shares, or conflicts of interest. Investors should be aware that a prospectus is a legal disclosure document written with an emphasis on completeness, which means it can be long and technical. Reviewing the risk factors, fees, and financial statements is a common way to understand what is being offered, but it does not guarantee that an investment will perform well.