What is a Preliminary Prospectus?

This is a registration statement that is filed by a firm as a first draft before going forward to sell their securities. These securities offered to the public include stocks and bonds of the firm. It should also be filed by the Securities and Exchange Commission.

How is a Preliminary Prospectus Used?

The initial public offering (IPO) process of a corporation is never an easy task. Similarly, an investor may find it difficult to invest in a corporation that has not gone through the public exchange process. That is why a preliminary prospectus will come in handy. This document, however, is usually incomplete as it does not have detailed information about the money the firm wants to raise during their offer. The prices of the shares are not outlined either. 

Nevertheless, this changes when the registration of the preliminary prospectus is operative. The final prospectus will contain price ranges of the shares and bonds. This takes up to 20 days to be effective. The company's management team then plans for a roadshow. This is done in order to advertise their securities to the public. The roadshow might be limited to one country, or it might be international. The main determining factor is the size and type of corporation. This contributes to the overall success of initial public offerings.

What does a Preliminary Prospectus Contain?

A preliminary Prospectors has the following information:

• The name of the company offering the stock. Also, the founders information, registration details of the company, and its growth
• The company's financial background and income statements within the last 3 years
• The kind of securities that are on offer and their prices. The expected rates of return on the funds invested are mentioned here as well
• The company's principals and the management team. This includes their educational background and years of working experience that qualifies them for the job
• The risks related to the investment of funds
• The general business activities of the company. This section outlines the general information about the products and services produced over the years
• The banks and financial institutions doing the underwriting
• Whether what they are offering is private or public
• The expenses incurred during the promotion
• The legal departments opinion regarding the whole issue

Note that the above information is considered crucial to the potential stakeholders and investors of the company. It gives investors the assurance regarding their investment and confirmation on the capability of the team to run the company.

Risks and Special Considerations in a Prospectus

To know the risks of investing is another reason why a preliminary prospectus is issued. Investors need to be aware of the company's financial history and ensure that the company is capable of meeting its end of the bargain. Other risks that need to be disclosed include government regulations, restrictions on capital, and any investors with a large number of shares. The risks should be disclosed early enough and described in a detailed form later on. This will protect the company from later claims that the risk factor was not fully disclosed to the public.