How to Write a Financial Prospectus

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

This lesson describes how to write a financial prospectus, along with why a prospectus is written and what its major components are. We describe those major components and give examples of each.

You Need to Write A Financial Prospectus

You started a company selling sheds 30 years ago, and your business was successful. You've now decided to expand the business considerably. You need cash to do that, so you will issue new shares in the company and use the proceeds to expand. The Securities and Exchange Commission (SEC) requires you to file a financial prospectus to potential investors.

This document will provide investors with the business and financial data that will help them answer the question - should I invest in this company? You now need to write the prospectus. This isn't your strong suit. Your whole life has been spent building and selling sheds, and now you need to write this legal document. You ask your friends for advice, and one friend gives you great advice. She asks, ''What information would you as a potential investor want to know? And also, you are not the first company that has to write a prospectus. What does the SEC require of new companies?''

With the advice still lingering in your head, you set off to write the prospectus. In this lesson, we will walk through the major components of a stock prospectus. We'll define each major part and then we'll give an example of what you may write.

Components of a Stock Prospectus

Cover page : the SEC requires that a prospectus disclose the number of shares being offered, those shares' selling price, the date the shares will be offered, the underwriters' names, and the amount of money the company expects from the sale.

  • For example, the prospectus may state ''Super Sheds LLC ('the company') will issue 500,000 shares at a price of $10 per share on October 13th. The stock will be sold by Main Street Bank ('the underwriter').''

Executive Summary : lists all the components of the financial prospectus along with the page numbers you can find each section at.

  • Example: '' Executive Summary - page 2…. Risk Factors - pages 3-10….. Use of Proceeds - pages 11-20…''

Risk Factors : a long list of factors that can hurt the company's performance or lower the value of the shares. The company gives some brief commentary on each factor.

  • Example: '' Increased Competition : the company has experienced considerable competition from 'big Box' home improvement stores who can offer standard sheds for a significant discount thanks to their ability to pressure suppliers and spread their costs over many stores…
  • Example: ''Currency Risk : the company operates in the U.S. and is not susceptible to changes in the value of the U.S. dollar relative to other countries.''
  • Example: ''Key Man Risk : our CEO/President has been with the company since its founding, and we do not have a detailed succession plan in place. The business may suffer if the CEO/President leaves suddenly…''

Use of Proceeds : this section answers the question, how will the company use the proceeds from the sale of stock? The company will include an analysis of the effects the new shares will have on their present shares and capitalization (i.e. the mix of equity and debt they use to fund their operations).

  • Example: '' The company will use the money from this stock issuance to build 5 more stores and to fill the stores with shed inventory. We will hire more employees and increase our marketing budget in the new areas. Before the issuance, we have 15M shares outstanding. The additional 500K shares will have a small dilutive effect on our currently outstanding shares.''

Financial Condition : discussion of the company's present financial condition and recent business performance, who its managers and board of directors are and how much they are compensated.

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