The Prospectus on the Series 7 Exam: The Issue and the Issuer

While preparing for the Series 7 exam, it’s important to understand the role of the Prospectus and what happens when companies issue securities. These issues will be tested and are important in understanding the registration of securities.

The issuer prepares a preliminary prospectus (sometimes with the help of the underwriter) that’s sent in with the registration statement. The preliminary prospectus must be available for potential purchasers when the issue is in registration (during the cooling-off period) with the SEC.

The preliminary prospectus is abbreviated, but it contains all the essential facts about the issuer and issue except for the final offering price (public offering price, or POP) and the effective date (the date that the issue will first be sold).

A preliminary prospectus is sometimes called a red herring, not because it smells fishy (or is totally misleading and irrelevant) but because a statement in red lettering on the cover of the preliminary prospectus declares that it’s not the final version and that some items may change in the meantime.

The final prospectus, which is prepared toward the end of the cooling-off period, is a legal document that the issuer prepares; it contains material information about the issuer and new issue of securities. The final prospectus has to be available to all potential purchasers of the issue. It includes

  • The final offering price

  • The underwriter’s spread (the profit the underwriters make per share)

  • The delivery date (when the securities will be available)

Because all mutual (open-end) funds constantly issue new securities, they must always have a prospectus available. In addition, many mutual funds also provide a statement of additional information (SAI), which provides more detailed information about the fund’s operation that may be useful to some investors. A statement of additional information is also known as “Part B” of a fund’s registration statement.

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