How to read an S-1

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Takeaway
  • Form S-1 is a document that companies must file with the Securities and Exchange Commission before going public in the US.
  • An S-1 includes details about a company’s history, managers, finances, potential risks, and more.
  • People who want to invest in a company that’s going public may want to take a close look at its S-1 and do their own due diligence.
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You may have read about a company “filing an S-1” and wondered what that means. In a nutshell, the Form-S1 is a document a company must file with the Securities and Exchange Commission (SEC) when it plans to go public (aka list its shares on a stock exchange).

An S-1 includes important information about a company’s background and finances. Anyone potentially interested in investing in the company during its initial public offering (IPO) or soon after may want to pay close attention. Reviewing the S-1 gives you specific details about how profitable the company has been, its assets and liabilities, what it plans to do in the future, the risks it could face, and more. All of this can help you make an informed decision about whether its shares are a good investment.

Keep in mind that the S-1 is not exhaustive. If you’re planning to invest in a newly public company, it may be wise to dig deeper and do your own research. And of course, no matter how much research you do, no one can really predict how a stock will perform. Understanding the nuances of an S-1 can be challenging, but we’ll go over some of the key details.

What is an S-1?

Companies that want to go public in the US are required to file a detailed form called an S-1 with the Securities and Exchange Commission. The purpose of the form, also called a registration statement, is to give the investing public more transparency into newly public companies and protect them from fraud. Companies that don’t provide all the required information or include misleading details can face criminal charges.

An S-1 contains information about a company’s history, managers, business operations, and potential risks. It also includes financial statements audited by independent accountants, as well as details on how many shares are being offered and who is underwriting the IPO, among other things.

Once the SEC deems the S-1 “effective,” the company can sell stock to the public and must comply with the agency’s requirements for filing regular reports.

What is a prospectus?

A prospectus is the first and most detailed part of an S-1. It includes all the key information that companies are required to provide about their business, finances, and offering. The second part of the S-1 is optional and includes details like when the company’s fiscal year will begin.

Here are some of the key sections to pay attention to in a prospectus:

Summary

This section goes into detail about what the company does. It may spell out how many customers the company has, when it was founded, where it operates, how it makes money, and the market opportunities its leaders see.

Risk factors

This section lays out risks that the company and industry could face. For example, companies may note that customers could turn to competing products, that regulations could reduce profits, that negative publicity could harm the company’s reputation, and more. It’s important for investors to be aware of these risks, as they could cause the share price to drop or even result in a company going out of business. Keep in mind, new risks could arise that aren’t mentioned in the prospectus.

Management’s discussion and analysis

This is where company leaders talk about the points they consider significant, such as important sources of revenue and key strategies. It could make sense to consider this together with financial statements and risk factors.

Management and executive compensation

The management section gives background on the company’s executives and board of directors, including their roles, ages, and career history. Keep in mind that these bios are meant to make leaders look good, so you may want to do your own research, too. The executive compensation section shows how top management will be paid, including base salary and any bonus targets or stock awards.

Financials

Companies are required to submit financial statements that have been audited by an independent professional. Here are some critical financial details to take note of:

  • Revenue: This is how much money the company made from selling its products or services over the last few years.
  • Cost and expenses: The company should break down its total expenses, as well as what it spends on different areas, such as operating expenses, marketing, or research. A subset called “cost of revenue” refers to all the costs of making, marketing, and distributing the company’s products and services. These numbers can help investors evaluate whether the company is spending too little or too much in certain areas.
  • Net income: This is a company’s profit, or how much it earned after subtracting all expenses. If this number is negative, that means the company is experiencing losses.
  • Capitalization: This shows a company’s capital structure, including cash, debt, and equity (different classes of stock plus retained earnings).

Principal and selling stockholders

This portion shows who owns shares in the company, and what kind, before it goes public. It goes through the shares held by officers and directors, by other shareholders who own at least 5% of the company, and by others selling their shares. You may want to take special note of who owns shares that come with voting rights.

Use of proceeds

In this section, the company estimates how much it will net in the initial public offering and notes how it plans to use the money it raises. The description may be pretty general, giving managers broad leeway on how to use the funds and noting that they’ll go toward operating expenses and “general corporate purposes.” Or it may mention some specific objectives, like paying off tax obligations or acquiring other companies or technologies.

Dividend policy

This is where the company notes whether it has ever paid dividends to shareholders and whether it plans to in the future. If you’re considering investing, it may be an important consideration whether you’ll be making income from the stock. Keep in mind that companies can change their plans when it comes to dividends down the line.

Related party transactions

This will disclose any financial deals or relationships involving more than $120,000 between the company and a “related party.” This can include any of the company’s directors or officers, a shareholder that owns at least 5% of the company, or an immediate family member of any of the above.

Example of an S-1 filing

The United Parcel Service (UPS) filed an S-1 in July 1999 (it was later amended several times). The summary section noted that it was the largest package delivery company in the world, with 330,000 employees delivering more than 3 billion packages in over 200 countries the previous year. The company laid out that it planned to grow by expanding abroad, cross-selling services to existing customers, acquiring other companies, and more. It also noted risks it could face, including competition from postal services, employee strikes, worsening economic conditions in international markets, and growth in fuel prices, among other things. The financial statements showed that UPS had total revenue of $24.8 billion and net income of $1.7 billion in 1998.

On the day the company went public in November 1999, its share price closed at around $68.125 (or $40.02 adjusted for dividends). The IPO was successful, and the company’s market capitalization grew by $20B to reach $81B. By March 2023, more than two decades later, the company’s shares were trading above $180, and it had a market capitalization of $158B.

Where can I find S-1 filings?

You can find S-1 forms on the Securities and Exchange Commission’s online database, called Electronic Data Gathering, Analysis, and Retrieval system, or EDGAR for short. You can search the database for filings from all U.S. companies using their name, ticker symbol, file number, state, and more. You can also search for the latest S-1 filings processed on the SEC website. You may also be able to find a company’s S-1 on its website, perhaps in a section called “investor relations.”

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This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.

Commission-free trading of stocks, ETFs and options refers to $0 commissions for Robinhood Financial self-directed individual cash or margin brokerage accounts that trade U.S. listed securities and certain OTC securities electronically. Keep in mind, other fees such as trading (non-commission) fees, Gold subscription fees, wire transfer fees, and paper statement fees may apply to your brokerage account. Check out Robinhood Financial’s Fee Schedule for details.

Brokerage services are offered through Robinhood Financial LLC, (RHF) a registered broker dealer (member SIPC) and clearing services through Robinhood Securities, LLC, (RHS) a registered broker dealer (member SIPC). Cryptocurrency services are offered through Robinhood Crypto, LLC (RHC) (NMLS ID: 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. The Robinhood spending account is offered through Robinhood Money, LLC (RHY) (NMLS ID: 1990968), a licensed money transmitter. A list of our licenses has more information. The Robinhood Cash Card is a prepaid card issued by Sutton Bank, Member FDIC, pursuant to a license from Mastercard®. Mastercard and the circles design are registered trademarks of Mastercard International Incorporated. RHF, RHY, RHC and RHS are affiliated entities and wholly owned subsidiaries of Robinhood Markets, Inc. RHF, RHY, RHC and RHS are not banks. Products offered by RHF are not FDIC insured and involve risk, including possible loss of principal. RHC is not a member of FINRA and accounts are not FDIC insured or protected by SIPC. RHY is not a member of FINRA, and products are not subject to SIPC protection, but funds held in the Robinhood spending account and Robinhood Cash Card account may be eligible for FDIC pass-through insurance (review the Robinhood Cash Card Agreement and the Robinhood Spending Account Agreement).

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