A Beginner's Guide to Reading and Understanding a Prospectus
A prospectus is a document that should disclose all the important facts about a company that is selling securities. It can be an important sales tool for both the company and the brokerage firms that market the securities for the company.
A prospectus is also a legal document. If the investment does not do as well as you expect and you end up in a dispute, the company and the brokerage firms may use the prospectus as evidence that you were given all of the important facts about the company and its securities offering.
State and federal law require that you be given a prospectus before you buy securities in a public offering. If you buy securities after the public offering, you may find the kind of information generally found in a prospectus in the annual report, and in reports that companies are required to file with the Securities and Exchange Commission (“SEC"). www.sec.gov
In an effort to make the prospectus easier to understand, the SEC requires that the cover page, summary and risk factors sections of the prospectus be written in “plain English." This means that companies should use active voice, short sentences, and no legal jargon or highly technical business terms in these sections. However, a prospectus is often prepared by lawyers and may contain legal jargon. You should make sure that you understand the information in the prospectus. Make sure that any explanations you receive are consistent with the information contained in the prospectus.
You should take whatever time is necessary to understand the information. First, become familiar with the basic parts of the prospectus. Then, consider the information in each part so you can make an informed investment decision.
Although these considerations will help you make an informed investment decision, they are not comprehensive. You need to do your own homework, and use your own judgment.
Before making any investment, be certain that you know what you are investing in and what risks you are taking. Make sure that you are given a copy of the prospectus, and read it before you invest. If you don't understand a part of the prospectus, don't hesitate to ask your financial professional for assistance.
Make sure that you contact our office to check the registration status of the investment that you are being offered. While the Maryland Securities Division cannot advise you on the merits of a particular investment, we can tell you whether or not that investment is registered or needs to be registered with our office.
You may also contact our office for information about the brokerage firm or stockbroker who sells you securities and the investment adviser who gives advice about securities. The Securities Division can tell you whether or not the financial professional or firm is or needs to be registered in Maryland, or is the subject of any complaints.
THE MARYLAND SECURITIES DIVISION (410) 576-6360
Visit our Web site at https://www.marylandattorneygeneral.gov
200 St. Paul Place, Baltimore, MD 21202
410-576-6300 / En español 410-230-1712 / 1-888-743-0023 toll-free / TTY: Dial 7-1-1 or 800-735-2258