The IPO Prospectus: How to Read the Fine Print

by John Deysher

As a mutual fund manager, one of the ways I gauge market sentiment is the height of the stack of IPO red herrings (preliminary prospectuses) in my in basket. This past summer, my basket was overflowing.

An IPO or “initial public offering” is the first sale of stock to the public by the company or existing shareholders. This year, every conceivable type of company is coming public, which coincides with most major market indexes trading near multi-year highs during the summer, although in the past month the indexes have retreated markedly.

How does an investor sift through the rubble to get to the few gems?

You need to start with the prospectus, a formal written document to sell shares—it is the only way a new issue may be sold. Your broker must send you one—make sure you read it!

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John Deysher is president and portfolio manager of the Pinnacle Value Fund, a diversified, SEC-registered mutual fund specializing in the securities of small and micro-cap firms. He is a CFA charterholder and has managed equity portfolios for over 25 years. He lives and works in New York City and may be reached at


Robert from Wisconsin posted over 2 years ago:

In the past IPO's seem to have been distributed to favored customers rather than open to any investor. Is that an accurate account or just my experience with ny brokers/

Steve from Illinois posted over 2 years ago:

I have heard that is an accurate account.
But I believe there are many variables involved.

Harold from North Carolina posted over 2 years ago:

My understanding is that one has to already have a maximum value of assets before being allowed to participate in an IPO.

Ken from New Mexico posted over 2 years ago:

I use TD Ameritrade. (I'm not endorsing this or any brokerage.) It appears to have a link for purchase of IPOs but I haven't used it. Other on-line brokerages may offer a similar service. I'd check with your brokerage.

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