What are some of the ways that an investor may learn about a company involved in an IPO (Initial Public Offering)?

An initial public offering (IPO) gives the investing public an opportunity to own and participate in the growth of a formerly private company. By their nature, however, IPOs can be risky and speculative investments. Consequently, it is important that you fully understand all of the information contained within the prospectus relating to the specific investment you are considering.

Please keep in mind that this post is being provided for educational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon for legal or investment advice. If you have any questions concerning the contents of this post, please contact a qualified professional.

A company undertaking an IPO discloses required information in the registration statement, typically on Form S-1. Form S-1 and its amendments, which are denoted as S-1/A, are filed with the SEC and publicly available through the SEC’s EDGAR database at www.sec.gov/edgar/searchedgar/webusers.htm. Comment letters issued by the staff during the course of an IPO filing review are also made available on EDGAR, but they are not posted until at least 20 business days after the registration statement is declared effective.

Most of a Form S-1 is comprised of the prospectus, which contains important information about the company. A new public company typically has no prior reporting history, and the information that can inform a decision to invest often can only be found in the prospectus, although, if it has sold securities in reliance on an exemption, the company may have filed one or more notices on Form D.

Being well informed is critical in deciding whether to invest. Therefore, it is important to review the prospectus and ask questions when researching an IPO. Whenever possible, verifying the information you are given against independent sources is also recommended. If you buy directly in an IPO you will receive a copy of the prospectus before your broker confirms your sale, but you can also read the prospectus before then by reviewing the prospectus included in the company’s most recent registration statement on EDGAR. When you read a prospectus, you should check to make sure you are referring to the company’s most recent filing, because the contents of the prospectus may be revised during the course of the registration process. In addition to reading the prospectus, be sure to ask questions if the information is not clear.

After a company’s IPO registration statement has been declared effective, the company will typically file a final prospectus-usually identified as a 424B3 or 424B4 filing in the EDGAR database. The final prospectus generally includes information related to the final offering price that is not available at the time the preliminary prospectus is distributed.

Highlighted below are some of the sections of an IPO prospectus that an investor should consider. Of course, other or additional sections may contain information that is important to an investment decision in the context of a particular IPO.

  • Prospectus Summary briefly summarizes information that is disclosed in greater detail throughout the prospectus, including the company’s business, strategy, plans for using the funds raised in the IPO and financial condition, as well as the terms of the IPO itself.
  • Risk Factors identifies risks that the company’s management feels could significantly impact the company’s business, operations or performance, or an investment in the securities being offered.
  • Use of Proceeds specifies what the company plans to do with the money it raises in the offering.
  • Dividend Policy describes the company’s history of paying, and possibly its plans to pay, dividends to shareholders.
  • Dilution illustrates the usually significant disparity between the price that investors are paying for shares in the company’s IPO to both (1) the book value of such shares and (2) the average price paid by existing shareholders that include founders, officers and early investors.
  • Selected Financial Data discloses certain key financial and other data in a summarized column format. The information and presentation can highlight significant trends in the company’s financial condition and results of operations. Companies are generally required to disclose selected financial data for the prior five years. However, if the company is an “emerging growth company” (as described in a section below), this disclosure can be limited to the prior two years. “Smaller reporting companies” (generally those expected to have less than $75 million in publicly held common stock following the IPO) are not required to provide selected financial data.
  • Management’s Discussion and Analysis gives management an opportunity to discuss in narrative form management’s perspective on the company’s financial condition, changes in financial condition and results of operations. This narrative section should provide investors with information to help them understand how and why the company’s financial results have changed over the time period covered by the financial statements and factors that management thinks might affect the company’s future financial condition or operating results.
  • Business describes the company’s lines of business, its principal products or services and their markets, any significant suppliers and customers on whom the company’s business depends, and its competitive landscape and principal methods of competition, among other matters. This section may also provide information regarding the relative contribution to the company’s financial results from different significant lines of business or operations in foreign countries. In addition, Legal Proceedings, which is usually located at the end of Business, discloses the significant litigation involving the company.
  • Management offers biographical information regarding the directors and executive officers of the company.
  • Financial Statements and Notes provides standardized financial reports on the company’s financial condition and performance. Emerging growth companies and smaller reporting companies are required to include two years of audited financial statements in their IPO prospectuses (compared to three years for other companies conducting IPOs). In addition, immediately prior to the financial statements is the auditor’s opinion that sets forth the independent auditor’s opinion of the financial statements it audited.

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