Basic Information Found in a Stock Prospectus

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Basic Information Found in a Stock Prospectus

While there is some variation between one prospectus and another, all of them contain similar information in a predictable format. Here are the basic parts:

Cover

The cover of the prospectus itself contains the highlights of the offering—the name of the company and its underwriters, the opening price to the public, how much the company intends to raise on the offering, and the discounts and options the underwriters may exercise as they put the stock on the market.

Prospectus summary

An executive summary of the entire prospectus, this contains a brief description and history of the company and its business, along with the number of shares in the offering, the number of outstanding shares, how the company will use the proceeds of the sale, and the company’s trading symbol. A summary of the company’s financial information for the past five years is also presented here.

Risk factors

Here the company lays out the various sources of risk inherent in buying the stock. These can include internal factors such as the recent performance of the company, its dependence on key vendors or sources of revenue, personnel issues, and any litigation the company is facing. They can also include external factors such as market size, competition, and share price volatility.

Use of proceeds

Here the company tells you what it will do with the funds it raises from the sale of its equity: how much will go to previous investors, to settle financial obligations and retire debt, to compensate employees, and/or go to fund development and expansion.

Dividend policy

Does the company intend to make regular distributions of profits to shareholders through dividends? Or will it retain its earnings to fund growth? The company’s recent history and policy regarding dividends is described in this section.

Capitalization

How much of the company’s assets are already spoken for? Here the company lists both short-term and long-term debt, as well as the amount of equity that holders of its preferred and common stock own.

Dilution

This section lists the loss in proportional equity of each share of stock due to the issuing of new shares.

Historical financial data and management commentary

A table lists income and expense figures for the previous five years, and is followed by management’s explanation of items it wants to either explain or draw attention to: growth or declines in revenue, increased expenses, changes in net sales, and so on.

Business

This is management’s chance to spell out at length its history and mission, how it views its market positioning, what its business philosophies are, and how it intends to overcome any hurdles it faces and prepare for future growth.

Management

This includes basic background information on the company’s board of directors and senior managers, and how they are compensated.

Description of capital stock

This section describes the kinds of shares the company has issued, lists the various rights of holders of common and preferred shares, and spells out any internal or legal provisions that influence the buying of stock or the ability of shareholders to influence the operations of the company.

Underwriting

This section contains the names of the firms (usually investment banks) that are actually purchasing the original block of securities issued by the company, with the intention of reselling the shares immediately to the public. The number of shares allocated to each firm in the underwriting syndicate is shown along with how much each is being compensated.