Prospectus vs. Registration Statement: What’s the Difference?

When a company decides to raise capital by selling securities to the public, it enters a regulated environment governed by federal law. This process requires creating disclosure documents to ensure transparency for investors and regulators. Two of the primary documents are the registration statement and the prospectus. While they are linked, they serve distinct purposes and audiences, and understanding their roles helps clarify the public offering process.

The Registration Statement’s Role and Content

A company’s journey to a public offering begins with creating a registration statement. This document’s primary purpose is to provide the Securities and Exchange Commission (SEC) with information for its regulatory review. Its main audience is the SEC staff, not the investing public. Section 5 of the Securities Act of 1933 makes it unlawful to sell securities without a valid registration statement on file.

The most common form used for an initial public offering (IPO) is Form S-1. The registration statement is structured into two parts. Part I contains the full preliminary prospectus, the document intended for investors. This section includes a detailed description of the company’s business operations, its financial condition, risk factors, and information about its management team. It must also feature audited financial statements, with the SEC requiring at least three years of such statements for review.

Part II of the registration statement contains supplemental information that is filed with the SEC but not required to be delivered to investors. This section includes details on the plan for distributing the securities, issuance expenses, and the indemnification of directors and officers. It also holds exhibits, such as material contracts and legal opinions. Non-financial disclosures are guided by Regulation S-K, while financial statements are governed by Regulation S-X.

The Prospectus’s Role and Content

The prospectus is the primary disclosure document for potential investors, designed to provide the information to make an informed investment decision. Its purpose is to communicate detailed information about the securities being offered and the company’s operations and financial health. Misleading investors through omissions or misrepresentations in this document can lead to liability for securities fraud under Section 11 of the Securities Act.

Within the prospectus, an investor will find a thorough discussion of the company’s business model and a clear explanation of how the company intends to use the proceeds from the offering. It also provides biographical and compensation details for the management team. The inclusion of audited financial statements provides a historical view of the company’s financial performance.

During the offering process, two main versions of the prospectus are used. The first is the preliminary prospectus, often called a “red herring” because of a red-ink legend on its cover stating that the registration is not yet effective. This version is used to gauge market interest and may omit final details like the offering price and number of shares. Once the SEC completes its review and the offering details are set, the company issues the final prospectus, which contains all the finalized information and must be delivered to all purchasers of the securities.

The Relationship and Process Flow

The registration statement and prospectus are intertwined in a process overseen by the SEC. The preparation of the registration statement is a collaborative effort, involving the company’s legal counsel, accountants, and underwriters to ensure it meets the detailed requirements of SEC regulations.

Once complete, the company files the registration statement with the SEC. This filing initiates a waiting period, during which the company can begin marketing the securities using the preliminary prospectus to solicit non-binding indications of interest from potential investors. The SEC’s Division of Corporation Finance then undertakes a review of the registration statement.

The SEC provides its initial comments in about 30 days. The company must then address these comments by filing amendments, which can lead to several rounds of correspondence and revisions. This entire review process, from the initial filing until the SEC is satisfied, often takes between 90 and 150 days.

Once all issues are resolved, the SEC will declare the registration statement “effective,” which grants the company the legal authority to sell its securities to the public. With an effective registration statement, the company and its underwriters finalize the offering price and the number of shares to be sold. This information is added to create the final prospectus.