This is my third article in a series on IPO investing. The goal of these articles is to arm you with a few basic tools to wade into new IPO space…and alert you to a few pitfalls that you’ll want to avoid.
Don’t be completely turned off by the potential pitfalls to investing in a new IPO. There are strong companies out there that have the potential to grow through the IPO proceeds, and the share price should follow.
Of course, you want to know how to distinguish the potential winners from the losers. The good news is that the information to distinguish between the two is public. The bad news is that it takes a little time to sift through.
Before a company can offer its shares to the public, it must file a registration statement with the SEC. This form is known as a Form S-1 (or a Form F-1 for foreign issuers). The first part of that statement is the firm’s prospectus. This is where you can find all the details on the company, including whether an IPO is a firm commitment or a best-efforts offering.
Although it may be long, sifting through the Form S-1 will enhance your ability to make an investment decision. You wouldn’t (or at least shouldn’t) invest in a company without first checking out its quarterly (10-Q) and annual (10-K) SEC filings, so why would you invest in a newly public company without first checking out the same information?
Once you get to the prospectus, the same rules of the road apply. We’re looking for revenue growth, earnings growth, solid management, etc. We also want to know how the company plans to use the IPO proceeds.
Distinguishing between the potential winners and losers with a new IPO seems difficult, but not if you simply return to investing basics. Companies make money by developing a strong business model, executing a solid strategy for growth, and mitigating risks to their lines of business.
Pick up the prospectus and all this information is available to you. You can then make an educated investment decision, and avoid investing solely on hunches and rumors. Even if you don’t read every word of the prospectus, make sure you at least skim it so you have an accurate view of what you may be buying with your hard-earned money.
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