Registration Statements: Form S-1

The Rules

Companies planning an initial public offering are required to file an S-1, or registration statement, with the SEC in advance of any stock sale. The form includes a detailed company description and financial results, as well as discussions on a broad range of topics, from management salaries to what the company will do with the stock sale proceeds. Leading up to the actual offering, companies often file several amendments, called S-1/A forms, to their original S-1. Always skip straight to the latest version, because these amendments include all of the original information in the S-1, plus new details.

The S-1 is split into several chapters, including:

• Risk factors
• Use of proceeds
• Dividend policy
• Selected historical financial data
• Management’s discussion and analysis of the offering
• Principal and selling shareholders

What to Look For

S-1 forms can be hundreds of pages long. Fortunately, you don’t have to read every page, but there are some sections you shouldn’t miss. In addition to the company description and detailed financial discussions, here’s what to look out for:

Who is underwriting the offering? Underwriters are the investment banks that help the company sell its shares to the public. Those banks are listed in the opening pages of the S-1, and it’s good to know that the underwriter (there may be more than one) is a big name. There are no guarantees here – the underwriter makes big bucks no matter what the stock does – but if Goldman Sachs is behind the IPO, at least you know there are serious players behind the deal. Top underwriters have the clout to bring in a wide population of investors for the company’s offering. “The most established underwriters can attract a diversified base of investors, which can add some stability to the shares,” says Reena Aggarwal, Robert E. McDonough Professor of Business at Georgetown University’s McDonough School of Business.

How will the company spend the IPO proceeds? An IPO can raise hundreds of millions—even billions—of dollars. So what’s the plan for all that cash? Check the “Use of Proceeds” section to find out. Discount retailer Dollar General (which was taken private in 2007 and is now going public again) plans to use the cash raised in its recent stock offering to pay down its $1.8 billion in debt, which will boost its cash flow by sharply reducing its interest payments. Alternatively, a firm might use the cash to fund an acquisition—in which case, you’ll want to dig deeper into the merits of the deal.

What are the risk factors? The section on risk factors can run for a dozen pages or more and include very specific concerns about industry competition, pending litigation or the health of key suppliers, as well as more general issues such as global climate change or geopolitical stability. Morningstar IPO Strategist Bill Buhr recommends paying close attention to the first few risk factors on the list. “Usually, those are the risks directly related to a company’s business,” he says.

Hyatt Hotels notes high up in its risk section that poor performance by third-party owners and franchisees could hurt its brand. Interesting. Further down, the firm notes that new brands or marketing programs may not be successful. Duh.

How much are they paying themselves? Check out the management discussion section, which includes data about executive compensation. Aggarwal likes to see holdings of stock options and restricted stock tied to the long-term performance of the company. “Make sure the executives’ compensation is rewarding them for long-term performance,” she says.

What’s missing? Sometimes S-1 forms are missing key information. For example, the S-1s for Dollar General and Dole failed to provide estimates of how much money the firms’ IPOs were expected to raise. You’ll need to look for such information in S-1A forms, which companies file to supplement their S-1 filings.