An IPO prospectus usually is a quite thick book containing hundreds of pages, and it could be time-consuming to read the whole thing. Here we would like to single out the most important points in the prospectus for investors to look for and seek answers to the seven points spelled out below:
The Core of the Business
Before investors buy any stock, they should get a good understanding of what the company does: the core business segments, the prospects of the industry it operates in, capital raising potential, and its future plans.
Usually, this information is laid out right at the beginning of an IPO prospectus.
The IPO details
There are two types of offerings that most IPOS have: public tranche and placement tranche.
A public tranche is offered to retail investors, and a placement tranche is offered to a certain group of investors such as institutional investors, banks, trust companies, etc. Some IPOs may have both types of offerings, others may be restricted to placement tranches only.
The prospectus contains the per-share price that investors will have to pay, and the total number of shares in an IPO offer, specifying the total gross amount of proceeds the IPO is intended to raise.
The document defines how the IPO proceeds are going to be used. Usually, the funds raised are used for expansion of the business, financing its operations, covering IPO listing expenses, etc. It also outlines the dividend policy of the business and the percentage of earnings to be reserved for paying dividends.
Finally, the prospectus should indicate a timetable of when investors have to submit their conditional offers to buy shares (COBs) and the day when the stock starts trading on the stock market.
The section on “Risk Factors” outlines the risks related to the industry and business, and risks associated with investing in the shares. These risks may include such factors as excessive indebtedness, cash-flow problems, disruptions with supply chains operations, pending litigations, and others. Investors should take notes of the risks described in the IPO prospectus before investing in any IPO.
Financial Standing of the Company
The IPO prospectus includes the company’s financial documents such as income statement, balance sheet, cash flow statement, balance sheet, debt statement, any in stockholders’ equity covering each of the most recent fiscal years, or for the life of the issuer (and its predecessors). Investors need to do a thorough analysis of all these numbers before investing in an IPO offer.
The IPO shares price maybe and quite often is different from their real valuation. Many IPOs stocks surge on the first day of open trading because of all the hype surrounding the IPO, and some retail investors tend to interpret it that this stock is on its way up, thus getting lured into buying more of the stock in the secondary market. If the closing price ends up much higher it means that the company shares have been diluted, and the company lost on capitalization from initial investors, while it could have made more.
In any case, it is better to buy based on a fundamental analysis of stock price valuation. Usually, an IPO’s valuation is stated under the section called “Offering Statistics.” Most of the valuation there is done in line with the pre-offering share count. The picture typically changes with the adjustment of the post-offering share counts that reflect a more accurate valuation.
Top Management and Key Stakeholders
The prospectus also must disclose information about the company’s leaders and key stakeholders. The management team makes the day-to-day decisions of the business must be competent. When a company’s top leaders have a stake in the IPO issuing company it emphasizes the fact the shareholders’ interests are aligned with the top management ones.
Competitors and the Industry
At the end of the prospectus, there is usually a chapter devoted to the company’s industry and competitors. Investors need to get a broad picture of the industry, competition within the industry, and the IPO issuer’s upsides and downsides relative to their competitors. For example, If the industry is too competitive and the company has very thin profit margins, it may mean that the company does not have a distinguished competitive advantage.