Prospectus
Also known as: final prospectus, statutory prospectus
A prospectus is the formal disclosure document an issuer must provide to investors when offering securities to the public. It describes the company, the offering price, risk factors, use of proceeds, and financial statements.
A prospectus is the disclosure document required by the Securities Act of 1933 for public offerings of securities. It gives prospective investors the material facts they need to evaluate an investment: a description of the issuer's business and management, the terms and price of the securities, risk factors, how the proceeds will be used, and audited financial statements.
In an IPO, the process happens in stages. During the cooling-off period, underwriters distribute a preliminary prospectus (the "red herring"), which omits the final offering price. Once the registration is effective, the final prospectus — complete with the public offering price — must be delivered to every buyer no later than with the confirmation of sale. Mutual fund investors must also receive a prospectus, since open-end fund shares are continuously offered new issues.
Delivery obligations continue into the aftermarket. Dealers must provide a prospectus to secondary-market buyers for 25 days after an IPO that lists on an exchange or Nasdaq, for 90 days after an IPO that does not list, and for 40 days after a non-listed follow-on offering. It's also important to know what a prospectus is not: SEC registration does not mean the SEC approves the security or guarantees the accuracy of the document, and claiming otherwise is prohibited.
The Series 6, Series 7, and Series 66 exams all test the prospectus — expect questions on the red herring versus the final prospectus, mutual fund prospectus delivery, and the aftermarket delivery windows, especially the 25-day rule for listed IPOs.
Key takeaways
- A prospectus is the mandatory disclosure document for public securities offerings under the Securities Act of 1933.
- The preliminary prospectus (red herring) circulates during the cooling-off period; the final prospectus adds the offering price and must be delivered by the sale confirmation.
- Aftermarket delivery is required for 25 days after a listed IPO, 90 days after a non-listed IPO, and 40 days after a non-listed follow-on offering.
- SEC registration is not approval — the SEC never passes judgment on a security's merits.
- Mutual fund purchases always require prospectus delivery because fund shares are continuously issued new securities.