The purpose of prospectus is to help investors, to act in an informed environment based on broad information pertaining to a particular investment. A company interested in issuing securities to the public in the United States must file a prospectus with the SEC. Securities includes shares, preference shares, bonds and mutual funds.

A prospectus is part of the initial registration a company makes when it is registered with the SEC as a public company.

The prospectus includes many parts, includes, but not limited to:

  • The name of the company issuing the stock.
  • The number of shares the company has.
  • Type of securities offered, and description of the number of securities after the issue (if the issuance was successful).
  • Description of whether an offering is public or private.
  • A brief summary of the company’s background.
  • The company’s financial information, which includes an audited report by an accountant.
  • Description of the management of the company and the board of directors. The description includes the name, age and degrees; in addition, there is a section of biography where more information is given about each of the members of the management.
  • The names of the banks or financial institutions that carry out the underwriting.


In addition, one of the most important parts of the prospectus is the description of the risks involved in investing in the offered security. The risks listed in the prospectus include many risks, including:

  • Risks of the industrial segment in which the company operates (for example, business risks, regulatory risks).
  • Risks of the geographic location in which the company operates (for example, political risks, regulatory risks, security risks).
  • Risks of the specific company that offers the security (for example, the risk that the company will not succeed as it expects)
  • Risks of the security offered (for example, the risks of stocks are not the same risks as bonds. Risk of stocks, can be the possibility of future dilution, while bonds don’t have it).


In addition to making the investment process more informed, the prospectus can mitigate future problems and  to protect the company from future allegations regarding information concealment.

The prospectus is usually submitted to the SEC as part of Form S-1.


The process of submitting the form to the SEC is by submitting an initial draft to the SEC. Then the SEC checks it and sends back their questions and gives comments, the company submits amendments and after the draft approval the form is made public and the company can start to offer and issue the securities.


The prospectus process is a complicated and expensive process, which reveals a lot of information about the company, information which the company sometimes prefers not to disclose. In light of this, many companies are not interested in entering into this process. Some decide to continue as they are as private companies, and some are looking for other solutions. One of the solutions is when companies buy empty public companies and inject their content into the company. Most often, the process will be a reverse merger. In a reverse merger the public company is an empty company that acquires the private company, the company with the activity. However, in reality the owners of the private company become the owners of the public company. Therefore, in a legal aspect, the acquired company is the private company, however, in an economic point of view the acquiring company is the private company (hence its owners are the owners of the group at the end of the process).


The SEC does not support such activity, as it harms the market and investors, but in practice this process is legal and cannot be prevented. Therefore, the SEC tries to create an environment that enables this process.


It is important that the process be done in good faith, and not out of an attempt at concealment or fraud, as such a situation exposes the company and its management to many legal problems and future sanctions.