Debunking the S-1

Risun Udawatta
Feb 28th, 2019

Everyone, please take your assigned seats — Intro to “How to Read an S-1” is now in session. In today’s class, we’ll be providing a brief overview of the primary IPO regulatory filing (or the “S-1” as it’s known in the securities world) and which sections of this document to focus your attention on. Given the slew of unicorns filing confidentially in recent months, it’s important to be familiar with this document for when these companies file publicly.

2019 may prove to be a banner year for initial public offerings, as more unicorns take steps towards the public markets. Within the last few months, we’ve seen Lyft, Uber, Postmates, and Slack confidentially file their IPO paperwork, along with Peloton, CloudFlare, and CrowdStrike hiring investment bankers as first steps in their IPO processes. As the public waits for these startups to publicly file their respective S-1, below is a brief how-to guide to help you tackle these documents.

What is an S-1?

The S-1 is a Securities and Exchange Commission (SEC) form used by U.S. corporations when they are looking to list their shares on a national exchange, like the New York Stock Exchange or Nasdaq, for the first time. For the nerds out there (no shame in admitting it, we’re nerds too), the S-1 is an initial registration form for issuance of securities to public investors pursuant to the Securities Act of 1933.

As the first public document made available by private companies, the S-1 aims to provide information like that found in annual and quarterly filings for already public companies. Therefore, the SEC requires certain key disclosures in the S-1, which include the following:

Reading through the above requirements can be daunting, but don’t panic! Each section of the registration document is meant to provide key information to prospective investors so that they can make an informed investment decision based on material company disclosures. While the entirety of the S-1 should be reviewed prior to making any investment decisions, some sections contain the most important information.

What Should I Focus On?

The Box

Companies include a summary at the beginning of each S-1 that provides the key highlights of the entire document. We like to call this “The Box,” as it has a border around this section’s content. The Box will typically include information about the company, the company’s industry, competitive strengths, business strategies, risk factors, summary financial data and a summary of the securities to be sold in the IPO. The company provides this up-front overview to establish a company narrative and value proposition in an easy-to-read format, forgoing legalese and other jargon that may put off investors.

Management’s Discussion & Analysis (MD&A)

The S-1 will also include a section called Management’s Discussion & Analysis, most commonly referred to as MD&A. In this section, management will address and provide their thoughts on the company’s financial and operational performance. In other words, its an explanation of the financial statements provided in the registration form (see section below).

Management will usually include operating performance metrics to help frame the financials, and when applicable, break down segment performance and the growth drivers related to each segment. In addition, management may choose to discuss risk factors they see affecting or that may affect the future performance of the company. In certain cases, the management will provide a financial and operating outlook of the company.

Selected Consolidated Financial Data

In this section, the company discloses a condensed income statement, balance sheet and cash flow statement. For many companies, this section will represent the first time the public will have access to detailed financial results. A company’s financial statements should be reviewed in tandem with the MD&A, as the MD&A will provide color on trends and specific line items.  The company will provide a quarterly breakdown of financials for the last two fiscal years, giving investors some history and a view into growth and margin trends from the last couple years.

Description of Capital Stock & Underwriting

The above sections will tell you what the company does, but the S-1’s main purpose is to tell you what the company is selling. In the description of capital stock, the company will give an overview of the outstanding stock classes, including the security that is to be sold to the public. This section is important as it explains the rights, if any, that come with the security, including voting and conversion rights. In tandem with the description of capital stock, the underwriting section, which discloses the investment banks hired to sell shares to institutional investors, shows the offering price, underwriter discounts, number of shares to be sold, and total proceeds.

Phew, we’re almost there! Only 5 minutes left in class. Not all S-1s are created equal, and every company will provide different levels of disclosure and present information differently. The above sections, however, are a good way to quickly understand what a company does, how it generates revenue, what its major costs are, and how it is performing operationally and financially. It’s also important to check for amendments throughout the IPO process, as a company will provide new disclosures, updates to financials, and ultimately the pricing of the shares being offered to the public.

Class, adjourned! 

Still jonesing for more? For related info on IPOs, check out our 2019 IPO Outlook, where we outline companies we think may go public this year (we’re doing pretty well so far).

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