Initial public offerings are big for investors—and big news for business journalists. Because of SEC regulations, once a company says that it is IPO bound, there is little to no information you will get on the record from insiders.
But the SEC requires the company to file an S-1 document, which is the first and, in some ways, the most revealing piece of information management will issue. Head to the SEC’s Edgar site, type in the company name and click search. That brings you to a page for the company. (If you’ve typed in only part of the name, you may get a list of multiple companies. Simply pick the right one.) If the S-1 isn’t on the first screen, type “s-1” in the box labeled Filing Type and click search.
Here are some tips on finding and understanding what’s really going on.
Look at amended versions
The first S-1 document filed will have important information. But sometimes companies update the document (possibly at the insistence of the SEC) and file an addition version called an S-1/A. For example, if you check Facebook’s S-1, you’ll find one S-1 and eight S-1/As. You need to go through all of them for the truest picture of what is happening.
Check the front sections
Start with the areas that everyone looks at. On the first page you’ll see a box called the Proposed Maximum Aggregate Offering Price, which is the number of shares the company expects to sell multiplied by the planned share price (although that can go up when the selling actually starts).
On the next page, the company will indicate the types of shares it plans to sell. If there will be multiple types, or classes, of stock, the company has to explain the difference among them. When Facebook went public, it offered two types: Class A and Class B. The difference was that Class B shares had ten votes while Class A shares had one. That tells you someone will likely have an outsized say if shareholders vote on any issue.
Look at the prospectus summary
This is where the company explains what it does in some depth. This important information allows you to put the financial data into some context and to see if things pass the “smell” test—whether expectations match what similar companies have been able to achieve.
In Facebook’s prospectus, the company reported the number of users, the number of likes and comments per day, and other information such as how it creates value for users, advertisers and marketers. All of this helps an analysis.
Be wary of the risk factors
This is popular with many reporters as they think they’re getting a sneak look into the company’s weaknesses. Actually, it’s a litany of anything that could reasonably go wrong and cause a real problem. It doesn’t mean the company is actually facing any of these at all. However, don’t dismiss the information. I’ve seen companies run into the problems they listed as potential risk factors.
Look at the financials
Sections like capitalization, dilution and selected consolidated financial data offer important insights into how the company operates and its current financial resources. Of particular interest is whether the company is profitable or not, and details of its expenses. You can see if they seem to be overspending in a given area, for example. There are typically several years of data that help you follow the development of the company.
Read management’s discussion and analysis
In this section, the company discusses what it considers important, such as metrics or specific strategies. You will learn more about sources of revenue and operating costs.
Management and compensation
Don’t be satisfied with the short biographies of the management team and board of directors, which are written to make people look as attractive as possible. Check into their backgrounds and histories with other companies. Compensation of managers as well as the rationale for how they are valued can broaden a story or become one on its own.
This section can hold real surprises and additional details that are worth reading through, whether it’s information about technology strategies or a detailed breakdown of performance measures over time.
Who owns what
The description of capital stock along with principal and selling stockholders and the section covering shares eligible for future sale shine a light into who owns stock, who will sell and how voting is controlled.
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