The prospectus is a legal document that institutions and corporations, as well as businesses use to explain the types of securities they provide to buyer and participants.
Henry et al mention that prospectus informs the investors about the issue and whatever it needs to be cleared with the Stock Exchange in order for the firm to obtain a listing and they support that “... regulatory framework states that a prospectus must include all information deemed necessary by investors and their professional brokers/advisers would practically entail and expect to find for the purpose of making an informed judgment and evaluation of the assets and liabilities, current financial position, profits and future outlook of a corporation.”
The prospectus is not just a report that provides information to the investors. It is a valuable document in the hand of many knowledgeable individuals, who are able to assess the potential performance of the firm.
Prospectus includes figures that will double checked statements, which will be evaluated and proposals on the uses of capital raised that will be assessed in the future. Every single firm has to face many questions during the preparation of this document.
A prospectus commonly provides investors with material information about stocks and other investments, such as a description of the company’s business, financial statements, a list of material properties, qualitative information about the company and its management (scope of diversification, the business and financial risk of the company, quality of the management), the intended use of proceeds from the issue, the forecast of next year’s gross earnings per share and gross dividends per share, the key assumptions on which these forecasts are based and any other material information.
Among the plethora of information, there is one that by its own, can signal the quality of the firm (Allen and Faulhaber, 1989). In markets with voluntary status, the provision of earnings forecasts is a crucial figure that will motivate many investors to apply for shares.
A lack in providing this source will cost the reputation and capital that can be raised. On the other hand, it is not the simplest target for an IPO to include earning forecast, as they need to spend a significant amount of money in order to provide an accurate figure. Failure to do so will cost in the future.
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 statement. The issuer may not use the prospectus to finalize sales until the registration statement has been declared efective by the SEC, meaning it appears to comply on its face with the various rules governing disclosure.
In the context of an individual securities offering such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential investors.