S-1s – the often dry, detail-filled documents that companies must file with the Securities and Exchange Commission (SEC) in order to list their shares on a U.S. stock exchange – provide a rare and valuable window into the inner workings of companies. Form S-1 requires companies to provide information on the planned use of capital proceeds, detail the current business model and competition, as well provide a brief prospectus of the planned security itself, offering price methodology, and any dilution that will occur to other listed securities. The SEC also requires the disclosure of any material business dealings between the company and its directors and outside counsel. Investors are able to view S-1s so that they can perform their own due diligence prior to investing in new offerings.
With a public listing comes increased public scrutiny from the individuals and investors who are considering whether to invest in a company. Thus, publicly listed companies are obligated to disclose material financial and operational data with potential shareholders. It is important that investors read a company’s S-1 before making an investment.
Who’s Running the Company?
Any investor should know who’s at the helm, developing the strategy and executing on growth targets. The quality of the talent leading a company is critical for investors to figure out the entity’s long-term viability and value. The company’s board also deserves some scrutiny: Are members nameplate appointments or qualified professionals able to provide useful guidance to the executives they’re appointed to oversee?
Understand the Financial Statements
Investors should also zero in on the data. After all, the financials are what institutional and individual investors pay attention to. Factors to consider include the trend of revenue growth and how money has been invested towards future growth.
Does the Company Have a Workable Business Plan?
Different metrics can help assess the strength of a business plan. Revenue growth is a good indicator that a company is gaining traction with customers, but not the only one. Other tangible metrics – usually industry-specific so investors can compare against peer companies – are also important. How is the company reaching customers, are customers returning and are the sellers growing are all relevant considerations to examine.
Don’t Ignore the Risk
Any company going public has to highlight the positive as well as potential red flags that could derail their business. As such, S-1s also list potential risks that could hurt revenue and curb growth, including financial factors as well as the company’s strategic decisions.
S-1s contain critical intelligence that can help both individual and institutional investors make an informed investment decisions and should be a part of the consideration that any investor does when determining whether or not to consider investing in a particular stock.