What is a prospectus?

A prospectus is the document a company publishes when it offers shares to the public or lists them on a stock exchange. Think of it as the company’s CV, health check, and business plan, all stapled together.

In the UK, a prospectus for a main market listing generally has to be approved by the Financial Conduct Authority (FCA) before it’s published. The regulator isn’t saying the shares are a good buy. It’s checking the document gives investors what they need to make up their own minds. In the US, the prospectus forms part of a registration statement filed with the Securities and Exchange Commission (SEC), which reviews what’s disclosed, not whether the investment is any good.

A typical prospectus covers:

• The business. What the company does, where it operates, and how it makes money
• The numbers. Financial results, usually for the last three years
• Risk factors. Everything the company thinks could go wrong
• The people. Who runs the company and how they’re paid
• The offer. How many shares are on sale, the price or price range, and what the money will be used for
• Ownership. Who holds shares before and after the listing

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Fair warning: prospectuses are often hundreds of pages long. You don’t need to read every word, but the summary and the risk factors section are a good place to start.

You might also come across a pathfinder prospectus. This is an early draft sent to investors before the final share price is set. In the US it’s called a ‘red herring’, named for the red warning text on the cover, rather than anything fishy going on.

Related terms: IPO, Bookbuilding, Formal admission