What is a Prospectus? How to Read and Understand One

Key Takeaways

• Security issuers must file a prospective when offering investment securities to the public.

• A prospective lays out the details of a company’s offerings, including opportunities and risks.

• Many investors use prospectus to help them make decisions.

Because they contain a host of pertinent information about their investment “prospects,” prospectus can help investors make better decisions about where to put their capital. But what is a prospectus, and how are investors to read and understand one?

What is a Prospectus?

It is a formal document filed by companies to describe a prospective investment offering. It is filed when a new security such as a stock, bond, or mutual fund is issued, and contains details about the company or fund, its history, and more.

The filing shields the issuing company or fund from claims that pertinent information was unavailable or not made clear.

How Does the SEC Review Prospectus?

The U.S. Security and Exchange Commission (SEC) requires companies seeking to offer shares to the public to first file a preliminary and final prospectus with the regulatory agency.

Prospectus for Mutual Funds and ETFs/Stocks or Bonds

Prospectus for mutual funds and exchange-traded funds look at bit different than those for stocks and bonds.

A mutual fund or ETF prospectus will include details about fund management, fees, distribution policies, performance, strategies, and investment objectives. A stock or bond prospectus will include no discussion about investment strategy. Further, each mutual fund prospective must include information about the fund’s investment risk, including its provenance.

For mutual funds, there are two types of prospectus: summary and statutory.

Summary: Sufficient for most investors, this document is usually only a few pages long and contains fundamental fund information.

Statutory: A longer and more thorough document, this prospectus contains significantly detailed fund information, although there usually is a summary in the first few pages.

How to Read a Prospectus

What is a prospectus? That has been explained. Investors must also know how to read one – once they locate it. To do so, they can visit the SEC’s website for its Electronic Data Gathering, Analysis and Retrieval (EDGAR) database. Searches may be done by company/fund name, filing date, ticker symbol, etc.

With regard to prospectus perusal, investors need not read each word. Rather, they should look through it with a focus on critical information. Specifically, investors should:

• Understand, where applicable, the company’s business model and goals.
• Weigh presented risk factors.
• Consider whether what investment proceeds will go toward aligns with personal investment goals.
• Determine whether they already have similar securities or funds in their portfolio, and if so, whether an investment would diminish portfolio diversification.

What is Included in a Prospective?

Generally, a prospective will include:

• Company history and management team information.
• Financial information such as audited financial statements.
• The asset’s principal value and amount.
• Whether the offering is private or public.
• Number of shares offered.
• How investment proceeds will be used.
• Investment risk factors.
• The underwriting bank or financial institution.

Who Needs a Prospectus?

In addition to investors, a prospectus is commonly used to promote or describe an offering such as a commercial startup, upcoming book, or school. All such documents seek to lure or inform buyers, investors, clients, or members.

What is the Difference Between a Preliminary and Final Prospectus?

Preliminary prospectus. This document typically includes all company and security information other than pricing or the number of shares to be issued. This prospectus is generally used to assess market interest.

Final prospectus. This includes complete details of the offering, including price, the number of shares or certificates to be issued, and any finalized background information.

What Does a Prospectus Tell Investors?

A prospectus aims to spark investor interest and help investors make more-informed decisions. It provides investors with specifics about a company and its history, and what it is offering.

How Do Alternatives Differ from These SEC Rules?

Investors are increasingly turning to alternative investments, generally described as those other than stocks and bonds. Such alternatives, which include art, real estate, collectibles, and venture capital, for example, can provide steady secondary income while working to diversify portfolios. Their low correlation to the stock market helps mitigate volatility.

While practices pertaining to alternatives are subject to SEC examination, alternatives are not required registration with the regulatory agency. In other words, while alternative investment vehicles are regulated, their securities have few regulations.

Historically, alternatives have only been accessible to wealthy individuals or institutions. That changed with the emergence of opportunities with lower buy-in minimums.

What is Yieldstreet’s Due Diligence Process?

When investors examine a company’s prospectus before making an investment decision, they are performing due diligence. Ideally, investment platforms do their part, too. Yieldstreet does. The alternative investment platform offers a variety of private market opportunities such as short-term notes, private credit, and private equity.

Each offering, though, must first undergo a robust, multi-pronged vetting process that includes originations and screening, diligence, assessment, and committee review. In fact, less than 10% of investment opportunities presented to Yieldstreet ultimately reach the platform.

Alternative Investments and Portfolio Diversification

Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially attractive gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other alternative investments.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Summary

How to read and understand a prospectus is important to investing success. However, it is also important for investors to do their own due diligence regarding companies in which they are interested. That calls for studying a company’s finances.

It also might be a wise move to diversify portfolios with alternatives, which are not as subject to constant stock market shifts. And if such alternatives are rigorously vetted before being offered, even better.

This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact [Yieldstreet] or consult with the professional advisor of their choosing.”

“Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.