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  A prospectus, which is derived from the Latin for "outlook," can describe a prospective business venture, a project or an educational institution's course offering. People most often associate the term with stocks or mutual funds. Under the Securities Act of 1933 (the "truth in securities" law of the United States), most stock offerings, all sales of mutual fund shares and certain related transactions must be registered with the Securities and Exchange Commission (SEC). A prospectus containing "financial and other significant information" accompanies each filing and becomes public information for use by investors, analysts and the general public.
  
  

Components of a Stock Prospectus

• Per SEC Rule 424, the issuer of a prospectus must disclose on the cover page the number of shares being offered and their price; the date the shares will be available; the lead underwriters' names and the dollar amount expected from the sale. Also included is a reminder to read the section headed "Risk Factors" and a disclaimer stating that the SEC does not endorse the shares or the prospectus. Next is an executive summary followed by an exhaustive discussion of risk factors. A section titled "Proceeds" accounts for how the issuer will use the sale proceeds. The issuer describes current and likely future dividend policy, presents a summary table of how it is currently capitalized and analyzes the new issue's dilutive effect on common share book value. Also included is a discussion of the issuer's financial condition and business performance, who its executive managers and board members are and how much each is compensated. Next, the issuer informs you about significant business arrangements, large pending transactions and litigation involving the company. Then it lists its current major stockholders, how many shares each owns and provides details on each class of securities the issuer has outstanding. In the remaining pages is a description of the issuer's legal form of organization and corporate governance and a list of all the underwriters and their allocations in the new issue. The prospectus ends with a complete set of the issuer's audited financial statements.
  
  

Components of Mutual Fund Prospectus

• SEC Rules 485 through 497 cover requirements for the two types of mutual fund prospectus, the statutory, or long-form, and the summary prospectus, or offering circular. Both include components detailing the fund's investment objectives; fees and expenses incurred; the portfolio turnover rate, which matters because it increases the amount of fees paid to the fund manager; principal investment strategies and the risks they incur; portfolio holdings; the fund's performance over one, five and 10 years and the fund managers' names. This is followed by information on how to purchase the fund's shares; the minimum required investment amounts; fund distributions and how they will be taxed and a statement alerting the investor to possible conflicts of interest involving brokers who sell the fund's shares.
  
  

Shared Components

• The SEC's Rule 420 requires the use of modern roman typeface of 10-point size and at least 2-point leading for printed or electronic text, with 8-point type permissible for tabular data and notes. Rule 421 stipulates that "you must present the information in a prospectus in a clear, concise and understandable manner" by employing simple organization, plain English, active voice and images or illustrations as needed, while avoiding legalese, double negatives and highly technical business terminology.