The Prospectus

Another document you should become familiar with is the offering prospectus. This document is intended to disclose everything you need to know about a company going public, including financial statements, a discussion of the risks of investing, the nature of the business in which the company engages, and its management.

The prospectus is especially important to you if you are considering buying shares in a corporation going public for the first time. That is called an initial public offering (IPO). Read this document carefully, and compare IPO prospectus documents for several companies before deciding whether or not one is a good deal. Be aware, too, that when you invest in an IPO, dilution will occur. That means that the book value per share will drop. The more shares sold, the lower the book value per share for all shareholders. Make comparisons to determine the degree of dilution. By comparing, you will find that some stock prices are more inflated than others, meaning you take greater risks investing in highly diluted IPOs. In some carefully crafted deals, new shareholders can suffer very high dilution immediately, while existing shareholders' share value rises, because as a new investor, you would be asked to pay a per-share price higher than existing shareholders' current share value. This would not be a good deal.

Also check the section of the prospectus called "use of proceeds" or "use of offering proceeds." The prospectus discloses how much of the money being raised will be paid in commissions to the underwriters of the offering; for transfer payments to previous owners (in other words, when new shareholders buy out previous shareholders), and other fees not going directly into corporate management. Calculate the percentage of the total offering going to fees and expenses, dividends, and buy-outs of previous shareholders. Compare between IPOs to determine which are the higher-cost deals. Disclosure is required, but you have to read the disclosures to find out how proceeds will be used. You might discover, for example, that the corporation intends to pay off old debts or reward its executive officers or preferred shareholders with high dividends.

Take the one action that most investors and would-be investors don't take. Read the prospectus. You may even contact the corporation and ask for the more detailed 10K, a report that is filed with the SEC each year. Remember, the prospectus and the 10K alone don't tell the whole story. You are ultimately responsible for comparative fundamental analysis; developing information for decision making, and determining how much risk you want to assume. Also remember that the SEC may audit a company's books, but it does not audit the prospectus or the offering terms.

As you read the prospectus, pause at the cover and carefully read the warning the company is required to place there. It has meaning and importance, and should be remembered by every investor thinking about investing in an IPO.

An investment in the securities offered hereby involves a high degree of risk. These securities have not been approved or disapproved by the Securities and Exchange Commission nor has the commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.