Reading a Company's Prospectuses as a Socially Responsible Investor

Whenever a company issues a significant amount of new securities, it has to issue a prospectus. A prospectus looks a lot like a 10K report, but has even more information about the history of the business and the qualifications of the management team. Some companies issue only one prospectus at the time of the initial public offering and never issue another. Other companies may do another public offering of stock, issue public bonds, and make large acquisitions by using enough stock that a prospectus has to be printed.

The company that you're researching may not have any prospectuses. But if it does, be sure to read the most recent one to help you decide whether the investment will help you meet your financial and social objectives.

Following is some key information about the various types of prospectuses:

  • Stock prospectuses: When a company issues stock for the first time in an initial public offering (IPO), it has to issue a prospectus on SEC form S1. This sets out the company's history, gives detailed biographical information on the senior managers and board members, and describes its industry in depth. Some companies make other large offerings of stock after the IPO, referred to as a follow-on offering if new shares are issued or as a secondary offering if current owners are selling large blocks of stock. For these, a new prospectus has to be filed on form S3.

    If a company makes a major acquisition and has to issue stock to do it, it will issue an S3 prospectus, possibly in combination with a proxy if current shareholders have to vote on the deal. This prospectus describes the combined business, including pro forma financial statements that show what the financial results would look like if the companies were already combined. It's usually the best source of information about how a merger will work.

  • Debt prospectuses: Many companies issue publicly traded bonds. They usually do this through a shelf registration, which means they can file a bond offering with the SEC and then sell the bonds as they need to in order to raise the money. If the company's stock is already public, it can usually make the offering under form FWP (for free-writing prospectus), a supplementary statement that explains what the offering is and how the securities will work. It doesn't go into details about the company and its history.

    If a company doesn't have public stock but wants to issue public bonds, it has to issue a prospectus with information similar to that of a stock offering.

  • Mutual fund prospectuses: Open-end mutual funds issue new shares every day to people who want to invest in them. They are sold through prospectuses that are updated at least once a year.

    A mutual fund prospectus is a little different from a company prospectus. Instead of giving an extensive history of the fund, it explains what the fund is like right now, gives an overview of the fund's investment objectives and the strategy, and usually describes the amount of risk the fund is expected to have so investors can determine whether it matches their desires. The fund also has information about historic performance, as well as a detailed discussion of the types and amounts of fees that are charged.

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