Question

Define a prospectus.

Answer 1

A prospectus is a legal document issued by companies that are offering securities for sale. Mutual funds also provide a prospectus to potential clients, which includes a description of the fund's strategies, the manager's background, the fund's fee structure and a fund's financials statements.

The role of the prospectus is the make investors aware of the risks of an investment. Without this information, they would essentially have to make investments "sight unseen." This disclosure also protects the company from claims that it did not fully disclose enough information about itself or the securities in question.

The final prospectus must contain:

-Description of the offering

-History of the business

-Description of management

-Price

-Date

-Selling discounts

-Use of proceeds

-Description of the underwriting

-Financial information

-Risks to buyers

-Legal opinion regarding the formation of the company

-SEC disclaimer

When the final prospectus is released, brokers can take orders from those clients who indicated an interest during the cooling-off period. A copy of the final prospectus must precede or accompany all sales confirmations.