Key Takeaways:

  • Making the right stock market predictions is risky, especially with new company listings. 

  • How does the stock market work? How do you read the stock market? Which stock do you invest in?

  • One key tool for assessing new stock offerings is the prospectus.

  • This blog is your guide to reading a prospectus, increasing your investment IQ. Ready to get started? See exciting new Tokenized IPOs and create your secure trading account today.

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By: Marko M. Hafez, President

So your a friend of a friend of a third uncle twice removed has a hot tip about some company that’s about to go on the stock market - say, the Snapchat IPO or Airbnb IPO, or an exciting new company going public through a Tokenized IPO / Security Token Offering (STO) using the blockchain.

“Everybody wants in,” he says. “You’ll be rich,” he says.

Do you buy in? Do you pass? Do you have any clue what you’re doing?

As tokenized IPOs make it easier for more companies to go public on the stock market (and easier for investors to buy in, even internationally), you’ll have more opportunities than ever to participate.

For me, the things I want to know before buying into a new stock offering are:

  1. Who’s leading the company?

  2. What do they sell, and is the product ready to go?

  3. Do they have any signed customers?

  4. Do they have revenue?

  5. What is their competitive advantage?

  6. What are its future growth projections?

There are, of course, a lot more factors to consider - these are just the ones I personally zero in on. Regardless of what information you’re looking for, the key to finding it is the stock’s prospectus.

Not sure what that is or what to do with it? No worries. By the end of this blog, you’ll be a prospectus pro.

What is a prospectus?

“A prospectus is a formal company disclosure document that is required by and filed with the [financial/securities regulator] that provides full details about an investment offering for sale to the public. A prospectus is filed for stock, bond, and mutual fund offerings. A prospectus is used to help investors make a more informed investment decision.” - Investopedia

The prospectus includes documentation like 3rd-party audits and valuations, is reviewed and approved by the broker, regulator/securities commission, and the listing stock exchange before opening up to investors, and is a requirement for every company planning to go public, whether through a legacy or a Tokenized IPO.

What’s in a prospectus?

Let’s walk you through the sections of a typical prospectus, what they mean, and how they can help you decide whether (and how much) to invest. Not every prospectus is organized or formatted in the same way, but they will always have the following information.

Description of the Business

Understand the business before you invest! This section is the company’s basic dating profile, providing fundamental information like:

  • Revenue streams

  • Business segments (unique products/services)

  • Corporate assets (real estate, intellectual property, equipment, etc.)

  • Company history

What I look for: Evidence that the company is well established with a history of success, or if it’s new, that it has the ingredients in place to support profitable growth.

Offering Details

How valuable is each share? What do shareholders get? Whether the IPO will be tokenized on the blockchain or use legacy processes, the prospectus will always include detailed information on the offering including:

  • Number of shares offered (including over-allotment provisions)

  • Cost per share

  • Share classes (including voting rights, dividends, and other details)

  • Total raise/gross proceeds (price per share multiplied by the number of shares)

  • Plans for use of the proceeds

What I look for: A sound business case that the company will be able to achieve its goals with the amount of money raised. Things like voting rights and dividends are nice perks, but don’t make or break my decisions. 

Risks

What could sink this company and de-value your investment? This section gives investors insight into:

  • Industry overview 

  • Competitors

  • Regulation

  • Dependencies (mission-critical technologies, business partners, or other resources)

What I look for: Signs that the company has a strong competitive position or first-mover advantage over rivals, reliability and stability of make-or-break resources, and whether it has the regulatory freedom to pursue profitable growth.

Financial Health 

What’s a better indicator of success, lots of hype or sound financials? The prospectus will show you:

  • Financial highlights

  • Cash flow

  • Revenues and net profits

  • Debt

  • Balance sheet

What I look for: Ideally, the company already has a positive revenue stream. For new companies with less history, I like to see that they’re comfortably financed.

And remember, when you’re ready to start looking at tokenized IPOs / STOs on the stock exchange, you’ll need to create an account with Blockstation.

Valuation

What is the company actually worth? Often called “Offering Statistics,” this section will include:

  • Current value of the company

  • 3rd-party reports valuation/audit reports

What I look for: Evidence that the valuation makes sense, based on what I know of the industry and how the company plans to make money. It’s easy to look up typical calculations for company valuation based on industry, usually a multiple of revenue (for instance, in the tech industry, Valuation = annual revenue x 4).

Management and Key Stakeholders

The company may look great, but do you have faith in its management team to handle growth and increase the stock value over time? The prospectus will tell you the management team’s:

  • Names

  • Roles

  • Biographies/track record

  • Conflicts of interest

  • Compensation

  • Share ownership (i.e., how much skin they have in the game)

What I look for: Signs that the management team has the skills and experience to effectively scale the company. I also like to see large, well-financed shareholders as evidence that the company has solid backing.

Put your prospectus IQ to work

With exciting new IPOs are on the way as tokenization and blockchain technology makes going public more accessible to a larger number of companies, prospective investors like you will have more opportunities than ever - which means your newfound prospectus literacy will come in handy.

Visit blockstation.com/listing to learn more about upcoming Tokenized IPOs through Blockstation.

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This content is for informational purposes only. You should not construe this content as legal, tax, investment, financial, or other advice, nor as a solicitation, recommendation, endorsement, or offer by Blockstation or any associated third party to buy or sell any securities or other financial instruments in any jurisdiction in which such solicitation or offer would be unlawful under the applicable securities laws. All Content is information of a general nature and does not address the circumstances of any particular individual or entity, nor does it constitute professional and/or financial advice, nor does it constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. Blockstation is not a fiduciary by virtue of any person’s use of or access to content. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of the content before making any decisions based on such content.