Tombstone

A document used in finance to advertise an offering

Author: Jonathan Jonas Mazyopa
Jonathan Jonas Mazyopa
Jonathan Jonas Mazyopa
I Hold a bachelor's degree in Business Administration obtained from Cavendish University in 2021 and currently, I am pursuing a CFA designation. I am the creator of the PENNJONS Index on gothematic.com which is an equally weighted equity index. My skills include Excel, PowerPoint, Google Spreads, Docs, SAP, Slack, and Financial Modeling. I am also the Founder and CEO of Luangwa Germfields Mine.
Reviewed By: Manu Lakshmanan
Manu Lakshmanan
Manu Lakshmanan
Management Consulting | Strategy & Operations

Prior to accepting a position as the Director of Operations Strategy at DJO Global, Manu was a management consultant with McKinsey & Company in Houston. He served clients, including presenting directly to C-level executives, in digital, strategy, M&A, and operations projects.

Manu holds a PHD in Biomedical Engineering from Duke University and a BA in Physics from Cornell University.

Last Updated:October 4, 2023

What Is a Tombstone?

A Tombstone is a document used in finance to advertising an offering, whether an Initial Public Offer or a Private Placement. This document is commonly used in the Financial markets and is issued by investment banks. 

Financial Market is a place where financial securities and derivatives are exchanged at low transaction costs. Examples of Financial markets are the:

The emergency of Tombstones in financial markets stems from the Securities Act of 1933. Congress instigated this move following the depression of 1929. The Act aimed at providing full and fair disclosure of the character of securities sold in the United States financial market.

The Securities act of 1933 aims to guarantee that investors receive detailed and valid information before they invest. It is from this act that a legal document such as Tombstone emerged.

This was done to ensure that prospective investors in the securities market had access to specific information before anything else. The document was intended to inform the general public of a company's offer.

The financial markets became more efficient after this document was adopted. Information flow improved in the markets.

This document is prepared by Investment Banks who are underwriters of the issue. Investment Banks are the ones that carry out the work of preparing this document on behalf of a company issuing stock.

Key Takeaways

  • A Tombstone is a document used in finance to advertising an offering, whether an Initial Public Offer or a Private Placement.
  • Tombstone finds its roots in the Securities Act of 1933. Congress instigated this following the depression of 1929. The Act intended to provide full and fair disclosure of the character of securities sold in the United States financial market.
  • Tombstone is used to inform the buyer of the securities a company offers on the stock exchange. In addition, it notifies the potential investors of the securities available for purchase.
  • The second purpose of this document is to provide information that would lead the investors to the prospectus.
  • Thirdly, the function of this advert is to disclose the type of security offered. The document shows the date when the sale will occur and the underwriter's name.

Uses of a tombstone

A Tombstone plays a significant role in the financial market. It has been used since 1933 by institutions and entities that intended to raise capital.

There are several main uses of this document in the industry. These reasons are as follows:

1. Serves as an advertisement

It is used to inform the buyer of the securities a company offers on the stock exchange. It notifies the potential investors of the securities available for purchase. It can also be defined as announcing the equity available for sale. 

Additionally, it serves more purposes than simply alerting people to an investment opportunity. It lets the investor know the company, especially for companies offering shares for the first time.

This process of offering shares for the first time in the financial markets is called the Initial Public Offering, abbreviated as IPO.

2. Use to disclose the Underwriter

This document is meant to announce the security underwriter. An Underwriter is a party responsible for raising capital's accounting and legal processes. 

He is a specialist who's skilled in the operations of financial markets and raising capital for companies going public or issuing securities. 

3. To direct investors to the Prospectus

The other purpose is to provide information that would lead the investors to the prospectus. The advertisement contains details that direct the reader to the prospectus.

A prospectus is a legal document filed at the Securities and Exchange Commission or SEC. Unlike the advertisement designed to inform investors of the security on sale generally, this other document contains all information needed to help investors decide whether to buy the security offered.

The equity advert is designed to be general and provide basic information about the offer.

Importance of a tombstone

There are several reasons why a tombstone might be necessary.

The importance of tombstones in the financial industry lies in several aspects:

1. Public Recognition

Who doesn't love public recognition? Tombstones provides visibility to all the parties involved in a financial transaction. Whether it's the company, investment bank, or other stakeholders, a tombstone enables them to showcase their expertise and success in completing the underlying financial transactions.

2. Marketing and Reputation

The underlying aspect of showcasing expertise in financial transactions is to build good reputation and market skills that the investment banks, law firms, and other associated financial institutions possess. If a good reputation is built, it becomes a lot easier to attract potential clients for future transactions.

3. Investor Awareness

The tombstones also help to become investors and the general public aware of the financial transaction. This may help them to build a thesis based on market perception surrounding those companies.

4. Legal and compliance

Tombstones provide all the necessary disclaimers, which are important from the compliance perspective. By providing accurate and transparent information about the transaction, tombstones protect the interest of both investors and companies alike.

5. Communication
Tombstones bring together all the parties involved in the financial transaction. This helps to summarize the essence of the financial transaction in an understandable and concise manner.

the role of underwriters

The financial markets have several parties involved in the financial industry processes. These parties are called intermediaries. 

Though there are several parties involved in the financial market, only investment banks play the role of an underwriter in the financial markets.

Some financial market intermediaries include:

  • Insurance Companies
  • Rating Agencies
  • Mutual Funds
  • Pension Funds
  • Commercial Banks

Note

An underwriter is an intermediary in the equity issuance process in the financial markets. The entity that plays the role of the underwriter is an Investment Bank. It plays a significant role in the raising of capital.

The role of the underwriter includes managing all accounting and legal processes. Tombstone usually names the underwriters who are issuing the equity. Furthermore, the underwriter is also responsible for creating the prospectus. 

A Prospectus is a detailed financial document created by an Investment Bank as per the mandate of a regulatory body, e.g., the Securities Exchange Commission. It includes the latest audited Financial Statements and other relevant information aiding investors in decision-making.

The details in the prospectus include sales revenue, production, and any information relevant to the investors. The document is also required to state the reason why it is raising capital for the company.

Examples of famous Investments Banks are:

  • Goldman Sach
  • JP Morgan Chase
  • Morgan Stanley
  • Credit Suisse 
  • Bank of America Merrill Lynch 
  • Barclays Bank

These are some investment banks that act as Underwriters in financial markets. They assist companies seeking to raise capital through bonds, shares, or mutual funds.

Understanding a Prospectus

The underwriter uses this legal document in the financial market to raise capital for a company. So why is a Prospectus of significance in the issuance financial market? 

Whether the company is issuing bonds, shares, or mutual funds, a Prospectus is used. 

A company intending to raise capital in the United States of America must file this document with the regulatory body, the Securities and Exchange Commission SEC. The Securities and Exchange Commission is an American financial market regulator and plays a significant role in influencing the markets.

In the United States, this document is filed when a company is also offering mutual funds. Nevertheless, it is an important requirement set by the regulatory body. This is because a Prospectus is meant to help investors make informed decisions regarding an investment opportunity advertised by a Tombstone.

Therefore, the two documents are inseparable and are necessary for the process of raising capital. These documents may have different functions and features, but they are instrumental to a company intending to raise capital. Therefore, they are both complementary and vital.

Tombstone ad vs. Prospectus

A Tombstone and a Prospectus are different documents that should not be confused. Below are the similarities and differences between the two documents.

There are several similarities between the two documents:

  1. First, these two documents are important and needed in the financial markets by companies and investors. 
  2. These are used when a company intends to raise capital in the financial market. Whether through shares or bonds, these two documents are necessary for success.
  3. The documents are used at separate times, but consequently, they lead investors to buy the security. 
  4. The Securities and Exchange Commission SEC guides and regulates the two documents in both cases. However, companies or underwriters can only draw Prospectus or Tombstone in line with the laid out procedures by the regulatory body. 
Tombstone Vs. Prospectus
Tombstone Prospectus
This is an advert that shows the intentions of a company to raise capital. For example, the acquisition of American motors by Chrysler from Renault motors.  A prospectus is a legal document that provides detailed information about the company raising capital.
It is used to attract both individual and institutional investors. The aim is to draw investors to the company and the prospectus.  It aims to provide more information to potential investors, individuals, and institutions. It provides comprehensive information regarding the offer.
This document advertises to the general public in the financial market. It informs the potential investors of an investment opportunity. While the prospectus informs investors regarding the security and company to aid decision-making, it provides a comprehensive report regarding a company.
A Tombstone is a brief legal document used in the financial market. It is usually a page long and contains a summary of information. While a Prospectus is a long detailed document required by the Securities and Exchange Commission or SEC, it is intended to provide necessary information for decision-making purposes by investors in the financial market. 
This document can only be issued once per offer.  While a Prospectus can be issued and filed as two, there is a preliminary Prospectus and a final Prospectus filed on two separate occasions.
It is usually a short document and doesn't bear much information. Often, this document fits on a single page. This is often longer as compared to the latter. However, it's longer and has more information that touches on several aspects of the company. 

Therefore, following the differentiation of the two documents, it is incorrect to suggest that either of the documents is more important than the other. This is because they serve different purposes while encouraging investors to purchase the security.

Additionally, the SEC ( Securities and Exchange Commission) regulates:

  • How to draw these two documents, and
  • What should be included in them. 

The commission guides how to draw these documents and what should be included.

For example, the underwriter or company can not have ratings based on its assessment or include any information stating the benefits of investing in a particular security.

Researched and Authored by Mazyopa Jonathan | LinkedIn

Reviewed and Edited by Purva Arora | LinkedIn

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