Prospectus or Offering Document

There are numerous potential red flags of investment fraud. A prospectus is the filing the Securities and Exchange Commission (SEC) requires for a company to make to sell securities. A prospectus generally contains detailed information about a company including the risks of an investment. A stockbroker attempting to sell an investment without a prospectus may be an indication of fraudulent behavior. Alternatively, even if no prospectus is required, an investment without a prospectus may leave an investor without important information related to the security.

Prospectus

A prospectus is a formal legal document which contains details about an investment that is being offered to the public for purchase. The SEC requires a prospectus to be filed with it before investments are sold or offered to the public. The prospectus is intended to provide the investor with information that will enable the investor to make an informed decision related to the purchase of the security. A prospectus may also be referred to as an “offering document.”

For stocks and bonds there are two forms of prospectuses. A preliminary prospectus is a first draft of the prospectus provided by a securities issuer. It includes general information about the business and transaction at issue. A preliminary prospectus is also known as a “red herring” because some of the lettering on the front cover was historically printed in red ink.

A final prospectus is printed after the deal has been made effective. At this point, the stock or bond can be offered for sale to the public. The final prospectus supersedes the preliminary prospectus and contains finalized information, such as the exact number of shares or certificates issued and the specific offering price.

For mutual funds, there are also two forms of prospectuses: the statutory prospectus and the summary prospectus. However, both contain information related to details on the objectives of the fund, investment strategies, risks, performance evaluations, fees and expenses, and how the fund is managed.

Registration With the SEC

Companies must file a prospectus as part of the registration information filed with the SEC in order to sell the securities on the open or public market. This registration is required prior to any public offering. An unregistered security is one in which there is no effective registration statement on file with the SEC. The sale or offer to sell an unregistered stock or security which is required to be registered is a felony, though many exemptions apply. For example, the purchase of unregistered shares of stock can be solicited from individuals considered to be “qualified investors.” A qualified investor is an individual with a net worth of at least $1 million or an annual income of greater than $200,000 ($300,000 or more for married couples). These unregistered offerings, frequently called private placements, are routinely used by companies before they go public or as a structure for the creation of alternative investments.

Remedies

Investors harmed by investment fraud and other stockbroker misconduct can pursue legal action against those responsible for the unsuitable or fraudulent sale of securities through the Financial Industry Regulatory Authority (FINRA) arbitration or mediation processes. During arbitration, a neutral third-party (or panel of three) listens to both sides of a dispute and issues a final, binding ruling. Through mediation, a neutral third-party facilitates discussion and negotiation between the parties to a dispute, with the goal of reaching an agreement.

Whether through arbitration or mediation, it is possible for investors harmed by stockbroker misconduct to recover for their losses. For more information about investment fraud and other forms of stockbroker misconduct, speak with an experienced securities law attorney today.

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