Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Prospectus====== A Prospectus is a formal legal document that a company, mutual fund, or other investment vehicle must file with a [[regulator]] (like the [[U.S. Securities and Exchange Commission (SEC)]]) and provide to potential investors. Its purpose is to disclose all the essential information an investor would need to make an informed decision about purchasing the company's [[securities]], such as stocks or bonds. Think of it as a company's ultra-detailed resume, but one that carries serious legal weight. It's not a glossy marketing brochure; in fact, it's often quite the opposite, packed with dry language and extensive risk disclosures. The prospectus is a cornerstone of investor protection, created to level the playing field by giving the public access to the same kind of detailed information that company insiders have. For anyone serious about investing, especially in a new public offering, it's required reading. ===== Why a Value Investor Should Care ===== In an age of slick presentations and hyped-up analyst reports, the prospectus is a breath of fresh, unadulterated air. For a [[value investor]], this document is a goldmine. Why? Because it’s a //primary source//. The information comes directly from the company and is legally vetted for accuracy. It's where the unvarnished truth lives, far from the optimistic spin of a CEO's television interview. Legendary investors like [[Warren Buffett]] built their fortunes by poring over these kinds of dense financial filings. Reading a prospectus allows you to move beyond the story and get to the facts. It helps you answer critical questions: Is the business fundamentally sound? What are the //real// risks, not just the ones mentioned in passing? How is management compensated? Where will the money I'm investing actually go? Skipping the prospectus is like buying a used car without looking under the hood—you're relying purely on the seller's pitch, which is rarely a winning strategy. ===== What's Inside a Prospectus? ===== A prospectus can be an intimidatingly thick document, but you don't need a law degree to understand its key components. Knowing where to look is half the battle. ==== The Nitty-Gritty Details ==== While the exact structure can vary, most prospectuses contain these crucial sections. Focus your energy here: * **Company Overview:** This section describes the business model, the company's history, its products or services, and its overall strategy. It sets the stage for everything that follows. * **Risk Factors:** **This is arguably the most important section for a value investor.** Companies are legally required to list everything that could possibly go wrong. Your job is to separate the boilerplate, lawyer-speak risks ("our business could be affected by an economic downturn") from the specific, potent risks ("our entire business depends on a single patent that expires in two years"). * **Use of Proceeds:** This tells you exactly how the company plans to use the money raised from the offering. Are they funding exciting new growth projects? Or are they just paying off massive amounts of debt or allowing early investors to cash out? The answer reveals a lot about the company's health and future prospects. * **Management and Ownership:** Who is running the company? This section provides biographies of the key executives and directors. Look for experienced leaders and, crucially, significant ownership by insiders. When management has a lot of [[skin in the game]], their interests are better aligned with yours. * **Financial Statements:** Here you'll find the company's audited financials, including the [[income statement]], [[balance sheet]], and [[cash flow statement]]. This is the quantitative heart of the document, allowing you to analyze the company's profitability, debt levels, and cash generation. * **Dilution:** If you're buying into an [[Initial Public Offering (IPO)]], this section is vital. It explains how much your ownership stake will be diluted by the new shares being issued and by shares reserved for employees. ===== Different Flavors of Prospectuses ===== You might encounter a couple of different types of prospectuses on your investment journey. ==== Preliminary Prospectus (The "Red Herring") ==== This is a first draft of the prospectus issued before the offering is finalized. It contains most of the key information but omits crucial details like the final offering price and the exact number of shares being sold. It gets its nickname, "red herring," from the bold red disclaimer on the cover stating that the information is incomplete and subject to change. ==== Final Prospectus ==== This is the finished product. It's filed with the regulator and given to investors once all the final details, including the price and share count, have been determined. This is the official document that governs the sale of the securities. ===== The Capipedia Bottom Line ===== A prospectus is your best defense against hype and one of your most powerful tools for fundamental analysis. It’s not designed to be entertaining; it’s designed to be //informative// and to protect you by laying all the cards on the table. While it can feel like homework, the insights you gain are invaluable. Use it to understand the business, identify the true risks, and check if the story you're being sold matches the reality on the ground. Think of it as a treasure map. It’s dense and sometimes cryptic, but the treasure—a deep understanding of a potential investment—is well worth the effort.