There comes a time for many businesses when the decision is made to attract investors. No matter the age of the business, the proper way to approach soliciting investors involves the creation of an investment prospectus: a document that describes a financial security to potential investors and contains information about the company, how the investment will be used and the financial risks that accompany an investment in this particular company.
Who Might Solicit Investors?
For new companies, the time to seek investors may come as the company is starting up, as outside investors may be needed to meet the full vision for the new business. For established companies, this may come at the time the company decides to go public — that is, to offer stock publicly in the stock market.
A company that is already well established and on the public market may need additional investment down the road and may open up new investing opportunities or change its stock offerings.
The Parts of an Investor Prospectus
The investment prospectus PDF or other document format contains all of the information investors will need to know, and if a company goes public with its stock, the prospectus must be approved and filed by that country’s controlling securities board.
In the United States, this is the Securities and Exchange Commission. In the United Kingdom, this is the Securities and Investment Board. In the case of an informal investment prospectus (for a small business looking for individual investors, for example), the components are still expected to be present.
Executive Summary Section
The prospectus should begin with an executive summary that collects the critical points of the document. It will need a mission statement, an overview of the goods and services the company offers and an overview of the company’s current financial state as well as a brief history of the business. Include a summary of the request for funding and for what it will be used.
Objectives, Overview and History
This piece will describe the company’s objectives, both overall and specifically as related to the prospectus. It should include an explanation as to how the company intends to generate a profit with this particular investment and how that fits into the company’s overall guiding strategy.
This section should also include the company’s history, showing how it was founded and what principles have been used to guide it toward growth. Include any previous public offerings, mergers or other significant business events in the company’s history.
Goods and Services Section
This piece includes a full summary of the products and services provided by the company, their current markets, how the product portfolio may have changed over time and any key competitors or notes about the market landscape.
Executive Profile Section
The executive profile provides biographical information about the executive staff involved. It should include the highlights of their resumes and should contain enough information to show potential investors that these leaders are qualified to undertake this particular business opportunity.
Funding Requirements Section
The funding requirements section spells out the investment offering. It should include the total desired amount as well as the price of shares being offered and the date the offering will open.
The desired deal structure should be clearly spelled out along with any particular selling discounts, additional options and other details on the security offering. This portion contains information on how interest, principal and dividends will be paid out to investors as well.
The Use of Proceeds Section
This section includes an analysis of how the funding will be used to generate revenue and the projections the company has made based on current and future market conditions. This tells the investor exactly what the business intends to do with the funds.
Financial Information Section
This piece includes the company’s publicly reported financial information, starting with a current balance sheet and including other financial information like net profit, current debt ratios or stock performance. This gives potential investors an idea of the company’s past performance, current place in the market and whether it has the resources to make the investment worthwhile.
Risks of Investment
Here the risks of the potential investment are summarized. This section discloses any industry-related risks that could greatly affect the profit projections included. It should list factors considered as risks, lay out how these events could change the company’s performance and specify the chances of recovering from these types of upsets.
Conclusion and Summary
This final piece wraps up all of the information and makes the best possible case for this investment opportunity. It should include the points that make the investment likely to succeed, a summarized description of the plan and an exit strategy for the investors. Additional financial or product information may be attached as appendices.
Business Plan vs. Investment Prospectus
Keep in mind that the investment prospectus and a business plan are two different documents. A business plan is a document created at the startup of a new business venture (which can be anything from an entrepreneur startup to an established company’s efforts to open a new branch of the business) that provides the structure for the new business and its operations.
The business plan is focused on how the business will operate: what the plan is for this new venture and how objectives will be executed within the business structure in order for the company to succeed. A business plan may be enough for an entrepreneur to present to a bank or an interested investing partner, but when it comes to the larger investments, the business plan is too focused on strategic operations and how the company will meet goals rather than specific project parameters.
Purpose of an Investment Prospectus
The investment prospectus steps back from the how and focuses more on the what and why with regard to future company operations. This document also shows that business operations are successful and efficient but spends more time focusing on the investment opportunity and the company’s plans to grow using the funds discussed.
An investment prospectus is dedicated to showing investors why this venture is a good business decision, how the money will be used to create future value and what can be built with this investment moving forward. In an investment prospectus, the focus is on the opportunity and its value proposition rather than the day-to-day details of how the business will operate.
The investment prospectus is the document investors will use when deciding whether to invest. It offers background information about the company as well as details on price, timing, fees and performance history. It should also detail future operations to which investment money may go.
From the investors' side, the prospectus is a critical part of their decision. It helps them match their own investment goals with a company that meets those goals. For example, some investors look for long-term opportunities, while others look for a reliable income. The purpose of the document is to offer shareholders transparency when considering an investment.
How to Create a Good Prospectus
The first part of creating a good, professional, convincing investment prospectus is to ensure the document itself resembles a perfect, professional document. Make sure the details are technically written as per normal grammar, and have a good editor look it over to ensure everything is arranged in a way that will make the message clear, concise and constructive.
This is the case especially with a new or startup company, as the prospectus is communicating the business’s level of expertise to potential investors and needs to be as precise and professional as possible. Keep these tips in mind when creating this kind of prospectus document:
- Consider the audience. In this case, the audience is potential investors, but identify what sorts of investors will be intrigued by this proposal and/or what investors are already available for contact and be sure to tailor everything in the proposal to that specific audience. It’s important to identify the target market for investors and make sure all of the information within the prospectus is specifically directed toward that audience.
- Keep it simple. With documents like this, it can be easy to devolve into extraneous information and unrelated details in the desire to be comprehensive. However, it’s important that the document shows management’s ability to filter out unnecessary information and concentrate on the most important pieces of the message. The prospectus should show this in the text.
Additional Investment Prospectus Basics
In addition, be sure to do the following in your investment prospectus:
- Look at the future. Be able to give an estimate on the scalability of the company’s production. This is a measure of its ability to grow, given the current and future market landscapes. Most new investments start small on a pilot scale to prove the concept. It’s important that investors are able to read the prospectus and see how the company will be able to grow to fully develop the new opportunity.
- Be methodical. Make sure the prospectus flows easily from one section to the next. The goal is to have it spell out a consistent overall message about the company’s capabilities, so it’s important to have the document move methodically and deliberately from step to step. It represents the company’s ability to put a plan in a cohesive order and execute it.
- Stick to facts. Since the investment prospectus is prepared by the company, any investor is going to read it with some degree of separation since the company can technically frame the information however it would like. The prospectus is more likely to attract investors if it appears that all parties are being fair and honest. It’s best to stick to the historical and projection data that’s available. Identify and explain any negative spots and describe the positive periods without necessarily blowing them out of proportion.
- Remain optimistic. When a company is confident in its proposal and demonstrates that confidence in a manner that assures the investors that they are in good hands, it helps the investors make that connection to the company that makes them feel engaged in the operation.
Tweaking a Prospectus to the Business
It might seem like the components of an investment prospectus may change when comparing a small entrepreneurial startup and a large business looking to open individual investment options, but it’s only the scale that changes rather than the content.
A small company may not have a comprehensive financial history on which to draw, and it may not have the scope of operations that a large business does, but the scale of investment they are looking for is often equally small. With an entrepreneurial-scale business opportunity, it’s more important to showcase the creativity and uniqueness of the idea being offered and how that can turn into an advantageous value proposition within the current market.
Overall, the investment prospectus can be one of the most important documents a business may ever compose. Its contents will define the company’s ability to attract serious investors and move forward with opportunities that require on-hand capital that the company may not have. Creating this kind of document requires thought, detail and a thorough hand and can change the future direction of the company if successful.