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What You Should Know When Investing in Initial Public Offerings

What You Should Know When Investing in Initial Public Offerings


You should consider the industry the company is operating in when deciding to invest. Is the industry growing and is it attractive to today’s investors? This doesn’t determine a company’s success or failure but; it could give some indication as to a new issue’s immediate trading activity and interest. 


An investor should ask about the management team of any new company. Have they managed a public company before and what were the results? Do they have prior experience in the company’s industry and were they successful?  


What is the current valuation (i.e., market capitalization of the company prior to the offering) and what will it be once the company is trading?  How do these valuations compare with other public companies in the same industry? 

Use of Proceeds

What is the use of proceeds of the offering? Are the funds going to marketing, innovation, research or capital required to build the business?  Are the proceeds going to pay down prior debt that was acquired because of past failures? 

Is debt being repaid to insiders or affiliates rather than the new capital being used to develop future plans? 

Future Capital Requirements

Most companies that decide to go public are also taking this step to not only raise the initial capital, but are also planning on using the vehicle as a means to continue to raise capital. Investors should inquire as to the company’s plans and estimated time for future raises. 

Such activity usually hinders a company’s stock price performance and adds to possible future dilution. This is not necessarily a negative but is a consideration when deciding to make an IPO investment.  


Look at the “Risks” section of the prospectus so you can properly understand what particular items and challenges this new public company may face. You will see many risks that appear in almost every offering. The risks that are specific to the company you are considering should be more carefully reviewed and understood.  

Type of Offering

Companies can go public using many different types of offerings, firm-commitment, best efforts, or direct offering (DRO). The type of offering can have an effect on the strength and support a company could have upon an initial public offering. 


Does the company have an experienced managing underwriter or is it a Reg A offering being done by the company? What is the underwriter’s experience in bringing companies public and do they have the proper relationships to bring other broker/dealers and financial institutions in to participate in the offering? 

Trading Market

Where does the issue intend to be traded? Is it on a National  Market such as Nasdaq or the NYSE or is it going to be traded on the over-the-counter market? This could have a significant effect on the trading and liquidity of the transaction.  


Look to see what accounting firm a company is using to prepare its financials and whether the financials are audited. Investors and bankers are depending upon the information provided and prepared by the company’s independent accountants. Although all accounting firms preparing public documents need to be qualified, the experience and reputation of the firms vary significantly. Also, look at the law firm representing the company. 

An experienced law firm should give investors some comfort as to the disclosures the company is making.  

You should review the prospectus and SEC filings before investing in any Initial  Public Offering.  

What You Should Know When Investing in Initial Public Offerings 2

This document is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities in the company. Any such offer or solicitation will be made only by means of the Company’s prospectus and in accordance with the terms of all applicable securities and other laws. None of the information affixed hereto constitutes a recommendation. Accordingly, this document does not constitute investment advice or counsel, or solicitation for investment in any security. 

This information does not constitute or form part of, and should not be construed as any offer for sale or subscription of, or any invitation to offer to buy or subscribe for, any securities, nor should it or any part of it form the basis of, or be relied on in any connection with, any contact or commitment whatsoever.