5 reasons to read Prospectuses

For a tech company, or for any other industry for that matter, heading down the golden road of an IPO, a lot of technicalities come into play and it generally becomes a time of housekeeping in preparation to launching (and hopefully skyrocketing) on the public exchange. Part of the “necessary evils” of the legal paperwork for companies hoping to list in the States is to file their prospectus with the SEC to give their potential investors more details of the business and its future direction.It’s a chore of sorts for companies but an absolute gem for entrepreneurs and here are 5 reasons why I think you should read them:

1. Learn exactly what the company does -- Often, before a company goes public, there would be quite a buzz on what they plan to do and commentaries following their progress. These are mostly made by industry watchers and may or may not be all that accurate. The prospectus of a firm headed for IPO would typically splash out its mission statement / strategy / strengths in the first couple of pages. Generally I would say that these documents are excellent reads for entrepreneurs are in early stage / business plan writing stage also.
   
   
2. Get an good summary of what the industry looks like -- Firms which hit the IPO stage must have been doing something right to land where they are. Having deep industry understanding and insight would be one of those things that the founders/management possessed and reading about how they write about it gives you a quick headsup on how the industry and market as a whole is faring.
   
   
3. Get a feel of possible pitfalls along the way -- With the good also comes the bad: the firm is also legally obligated to disclose the possible risks that they face in their expansion plans. Similar to their long-honed industry insights, these pitfalls they raise may be important ones that you should be aware of if you have a startup and plan to move into this same field. Chances are the firm planning to IPO may have hit and learnt some of these lessons the hard way and/or spend a good amount of money and resources to identify their potential blind spots when moving forward. Reading their brief points gives you that almost instantly and for free.
   
   
4. Learn more about the important financial and legal concepts -- Have to admit that this is my weak spot so being able to thumb through the financial reporting section helps give an idea of the margins / volume the firm in question has. Bulk of it may be legalese and finance-ese but going through and learning how to understand these are important not only to entrepreneurs but also investors.
   
   
5. Understand corporate structure and other important details a growing company faces -- A tad obscure and may not be spelt out in plain but for some interesting cases (eg: Baidu's IPO) you can learn more about how the firm is structured to cope with regulatory / tax issues. Similarly, some companies like to have the founders expound a little on their growth story so it makes for a good inspirational and informational read on the trials and tribulations a firm faces in its journey from startup to IPO.
   

Just for information, some of the ones I'm trying to go through now are: Google, Baidu and Shutterfly.

Can definitely find more interesting ones on the SEC Filings and Forms website.

Have fun!


(This post was inspired by golden advice from Coen who is right when he says we don't read up enough these days and recommended Google's Prospectus as a first reading.)