Types of Prospectuses

There are many varying types of Prospectuses. The type of offering will determine the specific nature of the prospectus. The two-main private placement offering memorandum documents used throughout the world are an equity private placement or a debt private placement.

  • Equity: In an equity offering, a company will sell an ownership stake. The most common type of equity Prospectus is one that sells shares or stock in a company. In addition, a limited liability company (LLC) or a limited partnership (LP) may sell units, or limited partnership interests of the company. Some issue sweeteners, like preferred shares or preferred stock.
  • Debt: In a debt offering, a company will sell securities such as a bond or a note. In a debt Prospectus, a company will detail the securities being sold, such as the interest rate, maturity date, and other terms of the notes or bonds. In other types of debt issuance offering memorandums a company might offer convertible bonds or convertible notes. In this type of transaction, the debt securities will convert to equity at a pre-determined date.
  • Rules: In addition to debt or equity, there are various national and in some cases, international rules that apply to each Prospectus. For example, there is Rule 504, 505 and 506 of Regulation D (Reg D). Included in Reg D is also 506b and 506c offerings. There is also Regulation A (Reg A). A popular rule in the equity and debt private placement sphere is Regulation S (Reg S) and Rule 144A.

Sections of a Prospectus

There are many features and sections that go into the writing of a Prospectus that is geared for raising capital. Here are just a few segments of the prospectus:

  • Executive Summary: an executive summary is normally a one or two-page summary of the business plan. It’s always suggested to include an executive summary in a private placement offering memorandum document as this help explain what the business does.
  • Jurisdictional Legends: the jurisdictional legends are specific country and state regulations governing the sale of securities in each jurisdiction. If it’s a US or Reg D offering, the jurisdictional legend will comprise of various states and rules for raising capital for selling stocks or bonds. If a company is raising capital worldwide they will use international legends that are country specific. Each country has their own rules regarding the flow of capital from outside investors and local investors.
  • Terms of the Offering: the terms of the offering will highlight the relevant features of the issuance. Included in the offering term section will be the stock or share price, or bond or note price, investors requirements, use of proceeds, some risks factors, and, if a debt offering, the maturity date and interest rate. The terms of the offering are the main component of a Prospectus.
  • Investor Suitability: the investor suitability section of a prospectus will deal with investor standards. For example, if a company is raising capital and is required to only accept accredited investors then this section would detail that. Or if the suitability standards allow for non-accredited investors, or non-US investors under Regulation S (Reg S), or US investors in a 144A offering, the investor suitability section will detail that, which may include net worth requirements for each investor.
  • Risk Factors: the risk factor section will deal with the pertinent risks of the business. Included in the risk factors would be industry specific risks that could materially affect the business, as well as micro and macro risks toward the company, including competitors, and factors outside the control of the company such as natural disasters, recessions and so. Listing the company’s risk factors is important as omissions can come back to haunt entrepreneurs.
  • Management Team: the management team section will showcase the team’s skills, including the CEO and the support staff, and possibly even the board of directors or an advisory board. It is wise to include the strengths of the management team as this can help build investor confidence.

What About a Business Plan?

While a business plan is not always included in the Prospectus, many companies do create a section for some information related to the business. Others will create a full exhibit and put the entire business plan in that section, while others will just put an executive summary in the prospectus. The business plan is normally the first document a company would create when starting a business and most likely prior to raising capital. The business plan and the Prospectus are in many ways two sides of the coin.

Here at Prospectus.com we are “traditionalist-specialists”. We believe that having a solid business plan is the key to creating a solid company and getting to the point where one can raise money by creating a Prospectus.

If you company requires a Prospectus or business plan, feel free to contact us anytime for a free consultation.

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