Startup Legal Talks (20)
A prospectus is the systematic corporate information that a listed company must disclose to restore the true picture of a company. Interpreting a prospectus is the most effective way to understand the core information of a public company. Today we will explain how one should read a prospectus in the United States.
What is a prospectus?
Let's take a look at what a prospectus looks like.
https://www.sec.gov/Archives/edgar/data/1585521/000119312519083351/d642624ds1.htm
Is not already looking dizzy, these hundreds of pages of documents, in addition to being called a prospectus, have another name, called Form S-1, also known as a registration statement (registration statement), in addition to the S-1, the SEC has many different types of forms, the following is a list.
F-1 Registration Statement for Companies Registered for Listing Outside the United States
Form D Notice of Exemption from Registration for Securities Offerings under Rule D
3 Statement of Initial Shareholding
4 Statement of Changes in Shareholdings
5 Annual Report of Changes in Shareholding
S-1 Registration and Listing Statement
POS AM Statement of Correction of Prospectus Information
13D Announcement of Shareholders' Individual or Combined Ownership of 5% or More of the Company's Shares
144 Report of Proposed Sale of Securities
20-F Annual Report or Excess Report of a Public Company Outside the United States
ARS Annual Report of Stockholder
6-K Interim Reports of Companies Listed Outside the United States
10-Q Quarterly Reports
10-K Annual Reports
8-K Interim Report on Significant Events or Company Changes during the Quarterly Reporting Period
11-K Annual Report on Changes in Employee Stock Ownership
DEF 14-A Shareholder Proxy Resolution
S-1 prospectus, the purpose of which is to provide the investing public with more transparency about a newly listed company and to protect the public from fraud. If a public company does not provide all the necessary information or includes some misleading details in the prospectus, it may be at risk of criminal prosecution.
The S-1 contains information about the company's operational development, financial position, shareholding structure, industry outlook, and risk analysis. It also includes financial statements audited by an independent accountant, as well as details such as the number of shares being offered and who is underwriting the IPO.
Once the SEC deems the S-1 filing to be valid, the public company can sell shares to the public, but must file periodic reports with the SEC.
The S-1 is made up of two main parts, the first being the prospectus and the second being other supplemental information. The prospectus is the most important part, so when we say S-1, we are basically referring to the prospectus.
How to find a prospectus
If you want to interpret a public company's prospectus, you need to find the company's Form S-1 first, and the next section will describe how you should find the Form S-1 of a U.S. public company.
First, you need to go to the SEC's website and find Company Filing Search in Filing, then you can enter the name of the company or the stock code of the company you want to get information from in the search box, and you can find the S-1 document in the list of View Filings.
It is worth mentioning that in addition to the S-1 document, we can also see the document named S-1/A in the list of documents. S-1/A is a supplement to the S1 document, and A means Amendment, which is an amendment to supplement the information omitted from the S1 document. If a company delays its IPO, everything that happens in the meantime will be supplemented by the S-1/A document.
In addition, if you use the same search method to search for some non-U.S. domestic companies including some companies we are familiar with such as Chinese stocks, the prospectuses of these non-U.S. domestic companies are obtained from the document called F-1. The content, format, and information required to be disclosed in the F-1 document is exactly the same as the S-1, there is no difference. Only the F-1 says foreign company and the F is actually Foreign.
After finding the prospectus, the first thing you can do is to understand its structure. Once we open the document, from the title page we can view some basic information about the company, including name, address, CEO, etc.
Generally speaking, the second page from the title page will directly tell us the specific time of the offering and related stock information, such as the approximate number of shares to be issued, what the offering price is, how many shares are currently held by existing shareholders, etc. The names of the underwriters are also listed.
After the title page, there will be a table of contents for the prospectus. This is an illustration of the table of contents for the Zoom prospectus, showing exactly what is included in the prospectus.
For targeted company information, this form allows you to map the company information to specific sections of the prospectus.
When reading a prospectus, there are often a number of key points that can be captured for interpretation.
These points include a summary of the prospectus, risk factors, financial condition, management's discussion and analysis, related party transactions, and major and selling shareholders.
First, the summary of a prospectus is the quickest section to gain insight into the industry and the company. It is a thumbnail sketch of the entire company and is often a must-read when reading a prospectus.
The summary of Zoom's prospectus, for example, provides, first, an overview of the entire company's industry; second, it also summarizes information about the shares in the offering, such as the number of shares issued, the type of shares, and the voting rights of the shares, from which it is already clear that Zoom has a dual shareholding structure, as it issues two types of shares, Class A common stock as well as Class B common stock, and grants the two types of The section on Risk Factors lists the risk factors for public and private companies.
The section on risk factors lists the possible risks to the listed company and the industry.
What we need to pay more attention to when reading the section on risk factors are specific risks, as such risks have a great potential to affect the company's growth. For example, Zoom's prospectus mentions that it is continuing to expand its international operations and may face increased business and economic risks in other regions outside the United States. Cross-border operations expose it to risks associated with regulation of international laws and regulations, foreign intellectual property protection, foreign government intervention, antitrust laws, and changes in foreign and political policy that often affect a company's business.
The company will submit financial statements audited by independent professionals in the prospectus. The financial statements and notes describe the company's financial position and performance, including whether the company has made a profit or loss in the most recent year of operation. In the financial statements, we can obtain important information about the company's revenues, cost of revenues, gross profit, operating expenses, and operating losses. By analyzing these data, it is possible to understand how much the company's earnings have increased compared to the previous year. Whether profitability has become stronger, and whether the company has more or less money on hand.
The Management's Discussion and Analysis of Financial Condition and Results of Operations section provides management's interpretation of financial information as well as a detailed income statement. Through this section, company management outlines which metrics are most important to the company and will detail specific strategies, revenue sources, operating costs, and other details that explain how the company has performed in each of the most recent quarters and years. If you are having trouble reading the financial statements, this section will tell you how management feels it is performing and give you some ideas of "trends" in the company's development.
The Related Party Transactions section will disclose any financial transaction or relationship between the company and a "related party" that involves more than $120,000. This can include any director or officer of the company, a shareholder who owns at least 5% of the company, or an immediate family member of any of these parties. This section highlights areas where conflicts of interest may arise or where insiders or other related parties receive special or preferential treatment.
Generally, in the case of loans to directors and officers, or leases of equipment or space to members of management, such transactions may not be competitive or in the best interests of the company. For example, if the Zoom prospectus mentions a loan to the CEO, but also mentions at the same time that the CEO has repaid the principal and interest in full, a related transaction such as this would not be a conflict of interest.
This section on principal and selling shareholders shows who owned the company's stock before it went public and what kind of stock. It includes shares held by officers and directors, other shareholders who own at least 5% of the company's shares, and others who sold their shares. The shareholder table lets you know whose ownership has changed as a result of the offering, and who owns shares with voting rights. If some of the original investors are selling, they may hold some special information about the company.
The prospectus is a written document that provides all the important information about the IPO and the stock offering, and is the main selling tool for the listed company as well as the underwriters. It is also a legal document that protects both the listed company and the underwriters, as it serves as written evidence that investors have been provided with all the important facts listed in the prospectus. As a primary source of company research, the prospectus should be read and understood in a focused manner so as to truly understand the true state of a listed company. Thank you!
