Keeping Prospectus In Perspective

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As is true of other companies that wish to offer securities publicly, an investment company must file a registration with the Securities Exchange Commission (SEC). When the SEC has permitted the registration statement to become effective, shares may then be sold. A copy of the prospectus, which is a condensation of the registration statement, must be given to the investor to make a sale legal.

The basis of the Investment Company Act, like the Securities Act of 1933, is an insistence upon full disclosure to the investor of all material facts concerning companies, which intend to offer stock to the public. The Commission does not "approve" the security in the sense of passing on the wisdom of raising the funds or on the merits of the particular type of Investment Company that has been organized, nor does it pass on the policies of management with respect to investments.

The purpose of the prospectus is to make available to the investor the facts upon which an intelligent opinion may be formed. Unfortunately, too many investors do not read the prospectus, or cannot understand the most elementary financial language. Since 1933, the prospectus has undergone many changes. Today, it is a streamlined document, generally brief, and written as simply and clearly as the subject matter permits.

The Commission has gone far to prevent the prospectus from being misleading even though it is a selling document intended to persuade the prospective investor. In an early proceeding, the Commission decided that the type used to name the custodian of an investment company was so prominent that it presumably was intended to impress the reader with the standing of the financial institution and lead him into thinking that the custodian would have a voice in the fund's management. Revision was required.

The prospectus generally contains the following information about the fund: its objectives and features, investment policy, the securities being offered, management personnel, dividends and capital gains distributions, investment powers and restrictions, redemption or repurchase of shares, pricing of shares, portfolio, and financial statements, including a record of per share income and changes in net asset value.

The prospectus may also present information about such matters as a cumulative investment program and reinvestment of dividends; withdrawal plans, and even photographs of the members of the board of directors. If the new company requires purchase of securities from an approved panel, the prospectus may list that along with the names of the members of the advisory board, if such a board is provided for, and also set forth the advantages of ownership of shares in the company. Every prospectus states the names of the transfer agent and custodian, legal counsel, auditors, and underwriter or distributor.

Many investors regard the statement that the shares being offered may be obtained at the net asset value, plus a sales charge equal to 8 or 8.5 percent (or less as the case may be) of the offering price, scaled down depending on the size of the purchase, as the most important information in the prospectus. This is open to question, but it certainly serves to avoid misunderstanding and surprise on the part of the investor who is willing to read the entire prospectus.

Supplementing the prospectus, underwriters produce a tremendous quantity of sales material. The kind of material is limited only by the requirements of the SEC and the Investment Company Institute and by the ingenuity of those preparing the material.

Despite all these sources of information, investors must not allow themselves to be persuaded that it is essential to buy the shares of an investment company before they have had an opportunity to read the prospectus. This is an essential aspect of protecting one's interests, which as always takes effort that many are unfortunately reluctant to put forth.

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