Initial Public Offering Prospectus: What Should Investors Look Out For?

Whenever a new initial public offering (IPO) is announced, there’s almost always a sense of buzz and excitement among investors.

There are stories abound of people making some quick bucks off flipping IPOs and some might feel that they too can make some kopi money through IPOs. 

However, before we get all too excited and jump onto the IPO bandwagon, we should learn more about the company that is set to go public and not invest in shares solely based on “success stories”. 

A company’s IPO prospectus has all the required information we need to know about the IPO. However, a prospectus is usually hundreds of pages thick, and we won’t have the time to peruse through the whole thick tome.  

Therefore, here’s a quick summary of things you should look out for in the IPO prospectus before you consider buying an IPO. 

TL;DR: 8 Things to Look Out for in an IPO Prospectus

Too many things to read through in an IPO prospectus? You should focus on answering these eight questions at the very least:

1. What’s the business about?
2. What are the IPO details?
3. What are the risks with the company?
4. Is the company financially stable?
5. What’s the IPO valuation?
6. Who are the leaders and key stakeholders of the company?
7. Who are the competitors?
8. What’s the industry about?

#1: What’s the Business About?

First and foremost, we have to understand what the company is about before investing in any stock.  

To do that, we should look at how the company makes money, what are its business segments, the main investment highlights of the company, its future plans, and the industry prospects. 

Most IPO prospectuses have the above information lined out in colourful pages right at the start of the reports (under the gatefolds). 

#2: What Are the IPO Details?

Secondly, we have to understand the total number of shares on offer. Most IPOs will have a public tranche (offered to retail investors like you and me) and a placement tranche. 

A placement tranche is only offered to certain investors like institutional investors, banks, insurance companies or high net worth individuals. Some IPOs do not have a public tranche at all. 

We also need to know the IPO price or the price investors have to to pay for each IPO share. The total number of shares on offer multiplied by the share price will give the gross amount of proceeds the IPO will raise. 

The IPO prospectus will outline how the company plans to use the gross proceeds. The money is usually used to pay the listing expenses, fund business expansion, and for general working capital. 

The prospectus will also state the company’s dividend policy, which shows the percentage of earnings that the company wishes to pay as a dividend. Some companies do not pay dividends, and this will be stated in the IPO prospectus too. 

Lastly, the prospectus will contain an indicative timetable of when investors have to apply for the IPO by and when the stock will start trading on the stock market. 

#3: What Are the Risks With the Company? 

All companies come with risks. 

The section on “Risk Factors” outlines the risks related to the industry and business, and risks associated with investing in the shares. All investors should take note of the risks involved before investing in any IPO. 

Another thing to look out for is whether the company is reliant on a few key customers or suppliers to sustain its business. If so, it is a major risk for the company as it could be in deep trouble if the relationship with any of the key customers or suppliers goes south. 

#4: Is the Company Financially Stable?  

We should always invest in companies based on its fundamentals. One thing to look out for is whether the company is making consistent revenue, net profit, and cash flow. It’s also preferable for the company not to have too much debt, which could harm its business if a recession hits. 

The first few pages of the IPO prospectus usually lays out the financial highlights such as the revenue and net profit trend in the most recent years. For a more in-depth look, you can turn to the income statement, balance sheet and cash flow statement (collectively known as financial statements) given in the later pages of the prospectus. 

#5: What’s the IPO Valuation? 

“Price is what you pay. Value is what you get.” — Warren Buffett

The price of a stock tells us nothing about its value. So, we should understand the valuation of the company before buying its shares. 

Usually, an IPO’s valuation is stated under the section called “Offering Statistics”. Most of the valuation will be based on the pre-offering share count. Investors have to adjust the valuation for the post-offering share count to get a more accurate picture.  

#6: Who Are the Leaders and Key Stakeholders of the Company? 

On top of knowing what you are investing in, you should also know whom you are investing in. The management team makes the day-to-day decisions of the business, and thus, they must be competent. You can find out more about the leaders of the company and their collective experience from the IPO prospectus as well. 

We also want to know if the top leaders have a stake in the company that is set to go public. If they do, that would mean that their interests are aligned with those of the shareholders. 

#7: Who Are the Competitors? 

Knowing the firm’s competitors allows investors to size up the business’ competitive landscape. 

If the industry is too competitive and the company has razor-thin margins, it may mean that the company lacks competitive advantages. 

#8: What’s the Industry About? 

For those who wish to know more about the industry prospects, they can refer to independent market research reports on the company and the industry, usually found at the end of the prospectus. 

These reports provide insightful information for investors who are both looking to invest in the IPO and those who wish to gain more knowledge on the particular industry the IPO company is operating in.

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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock.