Prospectus
A formal document filed with the SEC that provides details about an investment offering to potential investors.
What is Prospectus?
A prospectus is a formal legal document required by the SEC that provides detailed information about a securities offering to potential investors. For an IPO, the company files an S-1 registration statement containing a prospectus with audited financial statements, business description, risk factors, use of proceeds, management backgrounds, and capitalization structure. After the SEC declares the registration effective, the final prospectus is distributed to investors. Mutual funds also issue prospectuses disclosing investment objectives, strategies, risks, expenses (expense ratio), and performance history. A preliminary prospectus — called a 'red herring' because of a red-ink disclaimer — is distributed before the offering is priced.
Example
Before Meta's 2012 IPO, the company filed an S-1 prospectus disclosing $3.7 billion in 2011 revenue, key risk factors (including dependence on advertising), Facebook's governance structure (Mark Zuckerberg's super-voting shares), and planned use of IPO proceeds. The 221-page document allowed investors to evaluate the company before investing at the $38 IPO price.
Source: SEC — Form S-1