Securities Prospectus
Investors Should Take Care to Understand their Investment Vehicles
A securities prospectus can be several hundred pages long, filled with hard to understand legal terms and financial data. Investors need to know how to read it effectively, and how to best use it to ensure their best chance at a good investment. Careful examination, re-reading of the most important sections, and researching what is not understood are the best tools the investor can use. A good understanding of the role of the prospectus helps when attempting to read it.
Function of a Prospectus
A prospectus serves as an explanation of the security offering, giving details about the security, the underwriter of the offering, and the future plans of the issuing company. The structure of the prospectus is designed to give a quick overview of the most salient information, followed by more detailed information, and appendixes usually consisting of the company’s by-laws, articles of incorporation, and other similar documents.
Risk Factors
Risk factors detail the risks to the investor’s investment in the offering, consisting of such items as possible insolvency of the issuing company, if the company is a start-up (has not begun operations), if it is a blind pool offering (the company has not acquired any tangible assets, such as property), tax liability issues, and other similar risks. Careful reading of this section is of utmost importance, as these items detail how much, if not all, of the investment can be lost.
Financial Statements
The financial statements included in the prospectus detail the solvency of the company, including total assets, liabilities, stockholder equity, net income, and additional financial data. If the offering has not begun operations, the amount of the initial investment the company (or its promoter) has put into the offering will be recorded. Additionally, any outstanding loans, options or warrants will be documented, as well as historical financial data. The solvency of a company is vital to the investor, as it is unusual for an investor to reclaim the entirety of their investment when a company is forced to declare bankruptcy.
Understanding Securities
Securities offerings often have a complex structure, and do not always use easy to understand language; it is the rare prospectus that includes a glossary. Consequently, investors will not always understand all of the terminology used, as well as the form of the offering. The securities market is always changing, and new ways of making money are constantly being devised; it is impossible for anyone to keep up with every nuance of the securities industry. Therefore, it is imperative for the investor to always ask questions about things not understood; the broker-dealer selling this offering, or the company issuing it, are there to answer every question investors have.
A securities prospectus documents all the facets of the offering, detailing the structure and business plan of the issuing company. The potential investor should pay close attention to the listed risk factors, which detail ways in which the investment could be lost, as well as the financial statements, showing the solvency of the issuing company. If the investor has trouble comprehending any part, care should be taken to ask questions of the broker-dealer selling the offering, as well as the issuing company, so that investors can determine if the offering is suitable for their investments.
Reading a Securities Prospectus can be daunting
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