Pre IPO Insights
IPO Prospectus

25 August 2022

IPO Prospectus: Unveiling the Blueprint for Investment Success

IPOs (initial public offerings) are a great way for investors to buy stocks of some of the fastest-growing companies in the world. On the other hand, it’s a chance for companies to raise cash to finance growth, research, and development. When buying shares in companies’ investors need to find out if the company matches their investment ideologies. One of the ways for investors to confirm this is by studying the public company’s RHP (red herring prospectus). This review will discuss the IPO prospectus summary, its importance, etc.

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What Is IPO Prospectus?

A prospectus is the main legal and marketing document of a company that wants to go public. A prospectus is compulsory for all companies conducting IPOs and aiming to raise $5 million and above. A prospectus is a registration statement required and filed with SEC (securities and exchange commission) by companies intending to go public.

What is the SEC (Securities and Exchange Commission)? This is a body that was established by securities laws contained in the United States Securities Act of 1933.

This registration statement is filed with the Securities and Exchange Commission for derivatives, mutual funds and stock markets offerings. Companies conducting IPOs must file two prospectuses; a preliminary prospectus and a final (closing) prospectus.

The preliminary prospectus, also known as the RHP (Red Herring Prospectus), is the first document a company going public provides, and it includes most of the company’s details and transactions. However, the preliminary prospectus doesn’t comprise the number of issuance shares or the share price. Usually, an initial prospectus is used to gauge market interest.

The final prospectus summary comprises the full details of a company conducting an IPO. It includes any complete background information, the number of shares and the share price.

Who Prepares IPO Prospectus?

An IPO prospectus is usually prepared by the company conducting an IPO. Usually, it’s a combined effort from the company’s accounting and legal teams. However, the company’s underwriter (usually a large financial institution like an investment bank that helps companies launch their IPOs) can also do it or hire qualified companies to do it for them. 

The Role of an IPO Prospectus


At the heart of an Initial Public Offering (IPO) lies the IPO prospectus, a document of paramount significance. Acting as a window into a company’s inner workings, the prospectus serves a multifaceted role in the investment landscape.

It stands as a testament to transparency and disclosure, offering potential investors an unobstructed view into a company’s financial health, operations, risks, and management. By enumerating potential challenges and uncertainties, the prospectus equips investors with the tools to make well-informed decisions and assess the level of risk they are willing to undertake.

Moreover, this document serves as a legal cornerstone, ensuring compliance with regulatory requirements and safeguarding the interests of investors.

As investors delve into the intricate details of financial statements, growth strategies, and market positioning, the IPO prospectus not only facilitates valuation but also lays the foundation for due diligence. Its role as a comprehensive information hub empowers investors to navigate the complexities of the financial markets, driving informed decisions that shape the course of investments and companies alike.

Navigating the Language and Jargon of an IPO Prospectus

Here, we’ll unravel the layers of language and jargon commonly found in IPO prospectuses, offering insights into how investors can decipher and make sense of these complex terms.

Simplifying the Complex

1. Financial Metrics and Ratios

IPO prospectuses are replete with financial metrics and ratios that provide a snapshot of a company’s performance. Terms like “EBITDA” (Earnings Before Interest, Taxes, Depreciation, and Amortization) or “P/E ratio” (Price-to-Earnings ratio) may initially seem baffling.

However, understanding that EBITDA measures a company’s operating profitability before certain expenses and that the P/E ratio compares a company’s stock price to its earnings can demystify these terms. Always seek definitions and comparisons to real-world scenarios to enhance comprehension.

2. Market Dynamics

Jargon related to market dynamics can include “bull market,” “bear market,” “volatility,” and “liquidity.” These terms describe the behavior of financial markets and the ease of buying or selling assets.

Breaking them down, a bull market signifies rising stock prices and optimism, while a bear market denotes falling prices and pessimism. Volatility refers to fluctuations in asset prices, and liquidity relates to how easily an asset can be converted to cash. Relating these terms to market conditions can aid in grasping their significance.

3. Regulatory Acronyms

Prospectuses often cite regulatory bodies and their acronyms, such as the SEC (Securities and Exchange Commission) in the United States. Understanding the roles of these entities—such as overseeing financial markets and enforcing regulations—can shed light on the prospectus’s regulatory context and underscore the document’s credibility.

4. Industry-Specific Language

Each industry has its own terminology that might seem arcane to outsiders. For example, the pharmaceutical industry might use terms like “clinical trials,” “FDA approval,” and “drug pipeline.” Researching these industry-specific terms and their implications can enhance your understanding of a company’s operations and growth prospects.

Unveiling the Jargon

1. Glossaries and Definitions

Many prospectuses include a glossary or definitions section that provides explanations for technical terms. Refer to this section to gain a clearer understanding of unfamiliar words and phrases. Additionally, online financial resources and investment dictionaries can be valuable tools for decoding jargon.

2. Comparative Analysis

Comparing jargon to familiar concepts can be immensely helpful. Drawing parallels between financial terms and everyday scenarios can provide a relatable context. For instance, comparing a P/E ratio to the concept of price-to-value when purchasing goods can make the concept more relatable.

3. Professional Guidance

Don’t hesitate to seek guidance from financial advisors or experts. They are well-versed in deciphering complex jargon and can provide insights tailored to your investment goals. They can also help translate technical terms into practical implications for your investment decisions.

The language and jargon embedded within an IPO prospectus may initially appear as an intricate tapestry of specialized terms. However, with diligence, patience, and a proactive approach to learning, investors can unravel this tapestry to reveal a wealth of valuable insights.

Why Prospectus Must Be Given to The Public in an IPO?

An IPO prospectus provides vital data regarding a company going public to investors. An IPO prospectus provides information to the public regarding risk factors associated with investing in a specific company. It also includes valuable financial information regarding the investment. 

For the public, knowing the amount and type of risk factors they’re involved in is vital; these details are highlighted in the initial prospectus and discussed in detail in the final prospectus. The financial condition of companies conducting IPOs is important to the public because they want to ensure these companies have the financial viability to honour their commitments. 

Key Components of an IPO Prospectus

An IPO prospectus is a comprehensive document that provides potential investors with essential information about a company going public. It includes several key components:

Company Overview

This section provides a detailed introduction to the company, its history, business model, products or services, and market positioning.

Risk Factors

Here, the company outlines potential risks and uncertainties that could impact its future performance, such as industry-specific risks, regulatory challenges, and economic factors.

Financial Information

This component presents audited financial statements, including income statements, balance sheets, and cash flow statements. It offers insights into the company’s financial health and performance over recent years.

Use of Proceeds

The IPO prospectus outlines how the funds raised from the IPO will be utilized. It may include plans for expansion, research, and development, debt repayment, or other corporate purposes.

Management Team

This section introduces key executives and their qualifications, demonstrating the leadership team’s expertise in driving the company’s success.

Business Strategy

Companies outline their growth strategies, market opportunities, and plans for the future. This gives investors insight into how the company intends to capitalize on its strengths.

Legal and Regulatory Information

This component includes details about legal matters, ongoing litigation, intellectual property, and any regulatory approvals necessary for the company’s operations.

Market and Industry Analysis

A prospectus may provide an analysis of the industry in which the company operates, including market trends, competitive landscape, and potential for growth.

Capital Structure

This section outlines the company’s current ownership structure, including details about existing shareholders, their ownership stakes, and any major investors.

Underwriting Details

Investors can find information about the underwriting process, including the underwriters involved, offering price, and any fees or commissions associated with the IPO.

Corporate Governance

Companies detail their governance structure, including board composition, executive compensation, and other governance policies.

Legal Disclaimers

The prospectus includes important legal disclaimers and disclosures, informing investors about the limitations and risks associated with the investment.

Each of these components serves to provide investors with a comprehensive understanding of the company’s business, financials, risks, and growth potential, enabling them to make informed decisions about investing in the IPO.

How Long After Prospectus Is IPO?

Any company intending to conduct an IPO should submit its registration statement; initial (Red Herring) prospectus with the Registrar of Companies, also known as the SEC, at least three days before the company starts selling shares to the public. All the obligations the company’s final prospectus has should also be noted in the Red Herring Prospectus. 

Any variations between the initial and final prospectus should be highlighted and approved by the SEC. Once the IPO bidding has concluded, the company must submit the closing prospectus to the SEC. This registration statement should include the sum of all issuance shares and the final share price at which the sale was concluded.

What Is the Difference Between IPO and IPO Prospectus?

An IPO (initial public offering) is the process via which a private company invites the public to subscribe to its shares for the first time. The objective of an initial public offering is to help the company going public to raise cash for growth. 

The shift from a private to a public company is a chance for a company’s private investors to fully realize the worth of their investment because the IPO usually includes a share premium or dividend for such investors. It also helps public investors to trade and earn a dividend as well.

An IPO prospectus, on the other hand, is the main legal and marketing document used by any company going public to market its shares to the public. A prospectus comprises all the material financial information about the company going public and its IPO, which investors can use to decide whether or not they will invest in the company.

Usually, the prospectus comprises a description of what the company does, the business strategy and strengths of a company, details about a company’s board of directors, a company’s financial statements for the past three years, details regarding the global market and offer and the key risk factors associated to the company and the IPO. 

What Is the Purpose of IPO Prospectus?

To Help Investors Know the Company’s Current Capital Structure

IPO Investors

If the issuer went public sometime back, they’re mandated to provide an overview of their present capital structure and how the new issue will affect that structure; this is typically known as the solicitation period. For instance, if a company issues derivatives, investors will want to know the amount of debt the company has accrued and its ability to settle these debts. Investors want to see the company’s current capital structure and how their cash will affect this structure and the expected rate of return. 

To Help Investors Understand a Company’s Financials

There is nothing more crucial than numbers when it comes to an IPO. As an investor willing to subscribe to the shares of a company going public, it’s important to understand its financials, and there is no better place to check this data than the company’s IPO prospectus. 

You can use this data to analyze how the company had performed in the past couple of years, focusing on when the economy was at its worst. You can also compare and contrast this financial information with the financial condition of a company’s competitors to see how the it fares. All this information will help you decide whether or not to invest in the company. 

To Help Investors Understand the Risk Associated with The Company

All investment decisions have risk factors linked to them, and this is especially the case for open market investments. Before buying IPO stocks, investors must understand their risk appetite and ensure the IPO they’re investing in aligns with their risk appetite. Since an IPO prospectus isn’t just a marketing document but also a legal one, the company going public is mandated by federal law to list all its risk factors in the prospectus to help investors make decisions. 

To Inform Investors About the Company

A prospectus provides investors with an overview of the company going public since its inception. It offers a rundown of events that have happened over the years, mainly those that help the company grow. It also comprises information regarding a company’s founders, registration and initial service offerings. A prospectus can also include an overview of a company’s business strategy and what the management team or board of directors believes is the company’s competitive advantage. 

The company’s competitive advantage, or USP (unique selling proposition), can help investors decide whether or not they will invest in a company. As an investor, you must dive deep to find information that can help you make a sound decision. After all, your investments should match your ideologies and horizon, and an IPO prospectus can help you gauge this. 

To Inform Investors About the Company’s Management Style

The management style of any company contributes majorly to its success. By reading the IPO prospectus, investors can deduce a company’s management style. It will inform them about the company’s current and past management teams. Investors can also learn about the company’s stockholders; a company endorsed by key industry players is likely to succeed. 

To Inform Investors What the Company Plans to Do with The Cash Acquired

The cash a company going public raises from the IPO is known as IPO proceeds. How the company intends to go about the use of proceeds can inform investors about the company’s future. The use of proceeds information is available in the company’s IPO prospectus. 

As an investor, you can use the IPO prospectus to see if the company’s long-term plans align with your investment decisions and risk appetite. For instance, if the company’s strategy seems too risky, you can decide against subscribing to its IPO shares. 

To List Related-Party Transactions

Double-dealing isn’t something investors are looking forward to when investing in a company. One of the biggest issues with IPOs is that most companies are usually family businesses prior to going public. As a result, most have complicated relationships between founders and their family members. All these dealings must be highlighted in the IPO prospectus. 

To List Industry Data and Other Metrics

Since the performance of a company’s industry greatly influences whether or not a company performs well, it should be listed in the IPO prospectus. Investors can then see a rundown of the industry data and decide whether it can affect the company in the long term.

How Many Shares of Stock IPO Prospectus?

An IPO prospectus is required when a company offers the public new shares they can buy. However, there is no set amount of shares a company can list in its IPO prospectus. The company’s existing shareholders typically determine the number of shares through a vote.

How Do I Know If The IPO Is Successful?

First Day Pop

One of the best success indicators for an IPO is what’s known as the ‘first-day pop.’ What is it? This is the increase between the companies opening and closing share prices. This practice, also knowns as undervaluing shows the extent to which the IPO has been under-priced. Ironically although major news outlets consider IPOs with high ‘pops’ successful, first-day pops are also an indicator that the company has lost capital. For instance, when LinkedIn (one of the subsidiaries under Microsoft) conducted its initial public offering in 2011, it had a first-day pop of close to 110% on Nasdaq. However, had the company’s shares not been undervalued, it could have raised an additional 400 million dollars. 

Although a first-day pop can be detrimental to the company conducting the IPO as it looks to maximize the amount of funds raised, undervaluing provides a couple of benefits. For instance, a high first-day pop can strengthen company-investor relations due to the increase in stock price enjoyed by the investors who bought stock in stock markets during the IPO.

IPO Execution

Overall an IPO is considered successful when it goes as per the issuer’s plan. Unfortunately, a lot of companies run into issues during the IPO process, albeit nonfatal to the IPO. But, these problems can affect a company’s image or, at the very least, diminish investor excitement.

For instance, WeWork’s valuation dropped from a whopping 47 billion dollars to under five billion dollars after its corporate management policies and the likelihood of generating profits in the future were brought into question. As a result, the company cancelled its initial public offering on Nasdaq, and its founder stepped down as chief executive officer. 

Meeting Analyst Forecasts

When a company fails to meet analyst predictions, it’s not affected substantially, but when this happens immediately after the company goes public, there will be a substantial negative effect on the open market. Since failing to meet analyst predictions is one of the worst things that can happen to any company following an IPO when a company meets analyst forecasts for at least eight quarters after going public, the IPO can be deemed a success. 

Offer-To-Current Return

In contrast to other methods in this section, this is a measure of a company’s long-term success. It represents cumulative returns indicated by a jump from the IPO price to the current global market price. Offer-to-current return is most useful in the years after an IPO to gauge how well a company performed during its initial public offering.

Valuation Multiple

Another way to gauge the success of a company’s initial public offering is its valuation multiple. This is gotten from its offer price relative to the valuation multiples of similar companies. For instance, it’s possible to compare companies like Meta (Facebook), Snapchat and Twitter.

A higher valuation multiple indicates more expectations for future growth. As a result, companies or their investors can set specific multiple targets prior to the IPO based on multiples of comparable companies. However, comparing a company to another is often difficult because companies go public at different stages of growth, profitability, etc.

How to Find IPO Prospectus

The easiest way for investors to find a company’s prospectus is by checking EDGAR (Electronic Data Gathering, Analysis, and Retrieval), a free online repository maintained by the SEC (securities and exchanges commission). This repository contains various types of documents, so investors need to enter the company’s name in the search bar. 

Investors can be stunned by going through an entire IPO prospectus, but they don’t need to do this in order to understand the company they want to invest in. But carefully reading the IPO prospectus is important because it offers a wider overview of a company’s business objectives and risk management. Investors should be very skeptical when reading an IPO prospectus because can be an exemption or two that the companies don’t want them to see.

Evaluating an IPO Prospectus

Evaluating an IPO prospectus requires a keen eye for detail and a strategic approach. Beyond the glossy cover, prospective investors need to dig into the fine print and dissect the wealth of information presented. It’s essential to gauge the company’s financial health, paying close attention to revenue trends, profitability, and debt levels. Scrutinizing risk factors is equally crucial; understanding the challenges the company faces and how it plans to address them provides insight into its resilience.

A holistic view of the prospectus involves assessing the management team’s expertise, the clarity of the business model, and the alignment of the use of proceeds with growth strategies. Moreover, seasoned investors often look beyond the prospectus, researching market trends and competitors to contextualize the company’s potential. The prospectus serves as a window into a company’s world, but it’s up to investors to decode the narrative and make an informed decision.

IPO Prospectus Example

The Goldman Sachs Group Inc.

This example discusses the IPO prospectus of financial giant Goldman Sachs Inc. This prospectus relates to an offering of 55.2 million shares in Canada and the US. However, an additional 4.6 million shares will be offered in the Asia/ Pacific region, with a further 9.2 million shares being offered outside the Asia/ Pacific region, Canada and the US. 

Goldman Sachs Inc. is offering 51 million shares to be sold in the IPO. Kamehameha Activities Association and Sumitomo Bank Capital markets are each offering nine million shares. Prior to this offering, there was no public market for common stock. The Goldman Sachs Group, Inc. will list on the NYSE (New York Stock Exchange) under the symbol ‘GS.’

The IPO price: $53.00 per share

The number of shares offered: 51 million offered by Goldman Sachs and 18 million by selling shareholders for a total of 69 million shares. 

Disclaimer: Neither the SEC nor any other regulatory body has approved or disapproved these shares or passed upon the accuracy or adequacy of this IPO prospectus

Final Thought

In conclusion, a prospectus is a document that provides data regarding an upcoming IPO. A prospectus is a one-stop shop for all information regarding a company going public and can offer investors information like the share price, number of shares, company’s financial history and risk. This document is a requirement by regulatory authorities like the SEC (Securities and Exchange Commission) in a bid to protect investor interests.

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