Writing a prospectus is an necessary part of planning to seek funding, either through a private placement or an initial public offering. A private placement memorandum (PPM) is used when soliciting private investment. A Form S-1 prospectus is used for an IPO. They are very similar documents and require the same systematic approach to their creation. The key to building a good PPM or prospectus is to use it as a tool in readying your company for the scrutiny a private or public offering will entail. In fact, it is a great way to expose areas of your company that need improvement.
Hold a positioning session and perform SWOT analysis for every department of your company and your mission statement. A SWOT analysis examines the strengths, weaknesses, opportunities and threats associated with each element being analyzed. This session is a great way to know exactly what you need and how you should go about attaining it.
Hire an accountant experienced in public offering financial reports. Many young companies find they need to reorganize their financial records prior to holding an audit. If you are planning an IPO, an audit is necessary. It is not always necessary for a private placement, but it is a good idea to have an audit, anyway. It makes your company look more worthy of investment.
Write or update your business plan. Your positioning session should have produced enough information for an updated or new business plan, portions of which will be used in your prospectus.
Read and understand the requirements of an SEC offering under the Securities Act of 1933 using Form S-1 -- or if you are planning a private placement, study the Reg. D 506 offering process.
Use the forms provided by the SEC for your prospectus. Form S-1 is used for IPOs and Form D is used for PPMs. Write an answer for each section of the form, taking care to avoid projections and hyperbole. Be as concise and truthful as possible, and have an experienced SEC attorney review your prospectus before filing.
Your prospectus must have standard legal disclaimers regarding the intention of the document and the downside of investing in the the company. It should have a thorough description of the offering, what the investor is buying, a complete listing of major shareholders to date, a listing of the costs associated with the offering, and a description of the business of the company along with a roster of officers and their bios. The financials are extremely important, particularly the notes to the financials. Every question in Form S-1 must be answered or the SEC will send it back for further work.
It doesn't matter if you think the company is the greatest thing since sliced bread. In preparing a prospectus, there is no room for promises or projections -- only facts. You should be prepared to defend in court anything you say in the prospectus, or don't say it.
- U.S. Securities and Exchange Commission: EDGAR Filer Manual (Volumes I - III)
- MSN Money: Meet the S-1
- Practicing Law Institute: An Overview of the IPO Process
- University of Delaware: SEC S-1 Form Filed by Google
- U.S. Securities and Exchange Commission: Form S-1
- MSN Money: IPO Basics
- SEC Law; Introduction to Private Placements; Mark J. Astarita, Esq.