Investor Assistance (800) 732-0330 www.investor.gov

INVESTOR BULLETIN

Investing in an IPO

The SEC’s Office of Investor Education and Advocacy is 

issuing this Investor Bulletin to provide investors with 

information they should consider when investing in the 

shares of a new public company. 

What is an IPO?

Historically, an initial public offering, or IPO, has 

referred to the first time a company offers its shares of 

capital stock to the general public. Under the federal 

securities laws, a company may not lawfully offer or sell 

shares unless the transaction has been registered with 

the SEC or an exemption applies. 

To register an offering, a company files a registration 

statement with the SEC, typically using Form S-1. 

Some offerings may involve other registration statement 

forms. An important part of this registration statement 

is the “prospectus” that will be used by the company to 

solicit investors. The prospectus is the offering document 

describing the company, the IPO terms and other 

information that an investor may use when deciding 

whether to invest. It is important to read the prospectus 

because it provides information regarding the terms 

of the securities being offered as well as disclosure 

regarding the company’s business, financial condition, 

management and other matters that are key to 

deciding whether the offering is a good investment.

Registration statements for IPOs are subject to review 

by the SEC’s staff to monitor compliance with applicable 

disclosure requirements. In such reviews, the staff 

concentrates on disclosures that appear to conflict with 

SEC rules or the applicable accounting standards and 

on disclosure that appears to be materially deficient in 

explanation or clarity. The staff’s review often results in 

revisions to the prospectus. However, the review process 

is not a guarantee that a company’s disclosure is complete 

or accurate, and the staff does not evaluate the merits 

of any IPO or determine whether an investment is 

appropriate for any investor. Rather, responsibility for 

complete and accurate disclosure lies with the company 

and others involved in the preparation of the company’s 

registration statement and prospectus.

Once any staff comments have been addressed, the staff 

will issue an order declaring the registration statement 

effective, which means the company may proceed to 

consummate its IPO. Although the staff will not 

declare a registration statement effective if the staff 

has reason to believe that the disclosure is incomplete 

or inaccurate in any material respect, the SEC’s 

declaration of effectiveness does not represent an 

approval of the merits of the IPO or an indication 

that the information disclosed is complete or accurate.
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The underwriters of the IPO typically will have obtained 

“indications of interest” from prospective investors prior 

to effectiveness and will use this information to 

recommend a price for the shares to the issuer, who 

ultimately determines the price of the IPO. Underwriters 

are the investment banks that manage and sell the IPO 

for the company. 

An IPO helps to establish a trading market for the 

company’s shares. In conjunction with an IPO, a 

company usually applies to list its shares on an 

established stock exchange, such as the New York Stock 

Exchange or NASDAQ. Any planned exchange listing 

will typically be disclosed in the prospectus for the 

IPO. The new public company will also be required on 

a going-forward basis to disclose certain information to 

the public, including its quarterly and annual financial 

statements on Forms 10-Q and 10-K.

How do I invest in an IPO?

An IPO gives the investing public an opportunity to 

own and participate in the growth of a formerly private 

company. By their nature, however, IPOs can be risky 

and speculative investments.

n There are two ways the general public can invest in 

a new public company. First, if you are a client of 

an underwriter involved in the IPO, you may be 

offered the opportunity to directly participate in 

the IPO. In this instance, you will be able to 

purchase the shares at the offering price. It is often 

the case that underwriters and dealers will distribute 

most of the shares in the IPO to their institutional 

and high net-worth clients, such as mutual funds, 

hedge funds, pension funds, insurance companies 

and high net-worth individuals. For the typical 

investor, being able to directly buy in a popular 

IPO is a unique opportunity.

n The other way, which is more common in the case 

of individual investors, is to purchase the shares 

when they are resold in the public market in the 

days following the IPO. An investor could place an 

order with his or her broker to purchase shares in 

this manner. 

How do I learn about the company?

A company undertaking an IPO discloses required 

information in the registration statement, typically on 

Form S-1. Form S-1 and its amendments, which are 

denoted as S-1/A, are filed with the SEC and publicly 

available through the SEC’s EDGAR database at www.

sec.gov/edgar/searchedgar/webusers.htm. Comment 

letters issued by the staff during the course of an IPO 

filing review are also made available on EDGAR, but 

they are not posted until at least 20 business days after 

the registration statement is declared effective. 

Most of a Form S-1 is comprised of the prospectus, 

which contains important information about the 

company. A new public company typically has no prior 

reporting history, and the information that can inform 

a decision to invest often can only be found in the 

prospectus, although, if it has sold securities in reliance 

on an exemption, the company may have filed one or 

more notices on Form D. 

Being well informed is critical in deciding whether 

to invest.  Therefore, it is important to review the 

prospectus and ask questions when researching an 

IPO.  Whenever possible, verifying the information 

you are given against independent sources is also 

recommended.  If you buy directly in an IPO you will 

receive a copy of the prospectus before your broker 

confirms your sale, but you can also read the prospectus 

before then by reviewing the prospectus included in the 

company’s  most recent registration statement on 
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EDGAR. When you read a prospectus, you should 

check to make sure you are referring to the company’s 

most recent filing, because the contents of the 

prospectus may be revised during the course of the 

registration process.  In addition to reading the 

prospectus, be sure to ask questions if the information 

is not clear.

After a company’s IPO registration statement has been 

declared effective, the company will typically file a final 

prospectus—usually identified as a 424B3 or 424B4 

filing in the EDGAR database. The final prospectus 

generally includes information related to the final 

offering price that is not available at the time the 

preliminary prospectus is distributed.

Highlighted below are some of the sections of an IPO 

prospectus that an investor should consider. Of course, 

other or additional sections may contain information 

that is important to an investment decision in the 

context of a particular IPO.

n Prospectus Summary briefly summarizes 

information that is disclosed in greater detail 

throughout the prospectus, including the company’s 

business, strategy, plans for using the funds raised 

in the IPO and financial condition, as well as the 

terms of the IPO itself. 

n Risk Factors identifies risks that the company’s 

management feels could significantly impact the 

company’s business, operations or performance, 

or an investment in the securities being offered. 

n Use of Proceeds specifies what the company 

plans to do with the money it raises in the offering.

n Dividend Policy describes the company’s history 

of paying, and possibly its plans to pay, dividends 

to shareholders. 

n Dilution illustrates the usually significant disparity 

between the price that investors are paying for 

shares in the company’s IPO to both (1) the book 

value of such shares and (2) the average price paid 

by existing shareholders that include founders, 

officers and early investors.

n Selected Financial Data discloses certain key 

financial and other data in a summarized column 

format. The information and presentation can 

highlight significant trends in the company’s 

financial condition and results of operations. 

Companies are generally required to disclose 

selected financial data for the prior five years. 

However, if the company is an “emerging growth 

company” (as described in a section below), this 

disclosure can be limited to the prior two years. 

“Smaller reporting companies” (generally those 

expected to have less than $75 million in publicly 

held common stock following the IPO) are not 

required to provide selected financial data.

n Management’s Discussion and Analysis gives 

management an opportunity to discuss in narrative 

form management’s perspective on the company’s 

financial condition, changes in financial condition 

and results of operations. This narrative section 

should provide investors with information to help 

them understand how and why the company’s 

financial results have changed over the time period 

covered by the financial statements and factors that 

management thinks might affect the company’s 

future financial condition or operating results.

n Business describes the company’s lines of business, 

its principal products or services and their markets, 

any significant suppliers and customers on whom 

the company’s business depends, and its competitive 

landscape and principal methods of competition, 

among other matters. This section may also provide 
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information regarding the relative contribution 

to the company’s financial results from different 

significant lines of business or operations in foreign 

countries. In addition, Legal Proceedings, which is 

usually located at the end of Business, discloses the 

significant litigation involving the company.

n Management offers biographical information 

regarding the directors and executive officers of 

the company.

n Financial Statements and Notes provides 

standardized financial reports on the company’s 

financial condition and performance. Emerging 

growth companies and smaller reporting companies 

are required to include two years of audited financial 

statements in their IPO prospectuses (compared to 

three years for other companies conducting IPOs). 

In addition, immediately prior to the financial 

statements is the auditor’s opinion that sets forth 

the independent auditor’s opinion of the financial 

statements it audited.

What else should I consider?

Following are some things to consider when making an 

investment decision involving shares of a new public 

company. 

Offering price

The company and the underwriters make the decision 

on where to set the offering price. The factors they will 

consider in setting the price, as well as the terms of the 

underwriting agreement between the company and the 

underwriters, are discussed in the prospectus, usually 

under the caption Underwriting or Plan of Distribution. 

It is important to understand that the offering price is 

determined by a mix of market conditions, analysis and 

negotiation. Competing interests affect the determination 

of the offering price. 

From the perspective of the company offering its shares 

in the IPO, the higher the offering price, the more 

capital the company can raise. The underwriters also 

have an interest in a high price not only to meet the 

company’s objectives, but also because their compensation 

is typically a percentage of the offering price.

At the same time, the underwriters are responsible for 

selling the IPO and will want a price that is attractive 

to the client-investors to whom they will be selling. 

Underpricing an IPO creates a discount for the initial 

investors, increases the demand for the IPO and helps 

the underwriters sell all of the available shares. Underpricing may also affect how much, if at all, the stock’s 

price rises on its first trading day. If there is a large 

increase, or “bump,” from the offering price during the 

initial trading, the underwriter’s client-investors may be 

satisfied because the value of their investment will have 

increased. However, the company may be unsatisfied in 

that case, as it might have been able to sell its shares at a 

higher initial offering price and thereby raise more capital. 

Informing these competing interests are valuation 

analyses of the company’s business and the “order 

book.” Valuation analyses, which can be conducted by 

underwriters or potential investors, attempt to value a 

company based on its revenues, customers, financial 

results and other metrics. The “order book” is the 

compilation of indications of interest that the underwriters have obtained from the client-investors they 

solicited regarding the IPO. The order book lists how 

many shares each client-investor would like to purchase 

and at what price.

All of the foregoing factor into the determination of 

the offering price. Whether you have an opportunity 

to participate directly in an IPO or are buying shares 

in the open market, it is important to realize that the 

offering price reflects a negotiated estimate as to the 

value of the company. The offering price may bear 
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little relationship to the trading price of the securities, 

and it is not uncommon for the closing price of the 

shares shortly after the IPO to be well above or below 

the offering price.

In addition, purchasing shares in the market immediately 

following an IPO can be risky. Underwriters can 

support the trading price of the new issue in its first few 

days of trading with certain trading activities, including 

purchasing shares of the company. This is often done to 

keep the trading price from falling too far below the 

offering price. Once this support ends, the stock price 

may decline significantly below the offering price.

Selling shareholders

Existing shareholders can sell their shares in the IPO if 

their shares are included in and registered as part of the 

offering. Most large IPOs include only new shares that 

the company sells in order to raise capital. However, in 

some cases, shares held by existing shareholders are 

included in the IPO and the shareholders are called 

“selling shareholders.” The proceeds from the sales by 

selling shareholders do not go to the company and 

instead go to the selling shareholders.

The cover page of the prospectus details how many 

shares are being sold by selling shareholders, if any. 

The company will also disclose the number of shares 

each selling shareholder currently owns, plans to sell in 

the offering, and will retain following the offering 

under Principal and Selling Shareholders or a similarly 

captioned section. Selling shareholders may include, in 

addition to early investors seeking liquidity on their 

investment, the company’s founders and management. 

Companies must disclose any position, office or other 

material relationship each selling shareholder has had 

with the company within the past three years. It may 

be worthwhile to discern the relationships the selling 

shareholders have had with the company and what 

proportion of their respective holdings is being sold.

Limited trading volume 

The trading price of a new issue may be affected by 

a limited supply of shares in the market immediately 

following an IPO. The shares being traded on the first 

day are generally only shares that were sold in the IPO. 

All other outstanding shares, such as those held by 

founders, early investors and employees that have not 

been included in the IPO, may often not be sold in the 

public market so soon after the IPO, either because 

they are “restricted securities” under the federal securities 

laws that can only be resold without registration under 

certain circumstances, or because the existing shareholders have entered into a “lock-up agreement” in 

which they agree not to sell their shares for a certain 

period of time, typically 180 days. 

Moreover, underwriter policies that discourage 

“flipping” also limit the number of shares sold in the 

IPO that may trade on the public market in the first 

few days or weeks of trading. “Flipping” is the term 

used to describe the act of immediately reselling the 

shares acquired in an IPO through the open market. 

Underwriters may discourage flipping by refusing to 

allocate IPO shares to customers who have flipped 

shares in the past, but the practice of flipping, alone, 

is not prohibited under the federal securities laws.

These restrictions, lock-up arrangements and underwriter flipping policies all serve to limit the number 

of shares that trade in the public market immediately 

following an IPO. The resulting limited trading 

volume, particularly in the case of a highly soughtafter IPO, can operate to drive the trading price of 

an issue steeply up because of the limited supply to 

meet the high demand.

Market overhang

The number of shares that are outstanding but cannot 

be traded at the time of the IPO is sometimes referred 

to as the “market overhang.” The share price after an 
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IPO may decline over time as shares that were previously 

restricted become available for sale. In addition, when 

lock-up agreements expire, the share price may decline 

significantly if a large number of shares become available 

for sale all at once. Early investors and shareholders in 

a company often view an IPO as an exit strategy—a 

way to realize a profit on their investment by being 

able to sell shares to the public. The lock-up expirations 

give these early investors the opportunity to sell their 

shares to the extent they weren’t able to do so as 

selling shareholders in the IPO.

An investor can discover the extent of a company’s 

market overhang in the IPO prospectus. A company 

must discuss the shares that it has agreed to register for 

sale or that will be available for sale without registration 

following the IPO. This disclosure can typically be found 

under Shares Eligible for Future Sale or a similar caption.

Dual-class common stock

An increasing number of companies engaging in IPOs 

have created separate classes of common stock with one 

class having greater voting power than the class being 

sold in the IPO. This dual-class common stock structure 

is often used by companies that are family-controlled 

or will continue to be led by their founders, with the 

“super-voting” common stock held by the founders or 

controlling family. With this structure, the holder of 

the super-voting common stock has a much greater 

percentage of the voting rights in the company than his 

or her equity stake would otherwise provide and can 

control the company without owning a majority of its 

shares. Generally, the super-voting common stock 

converts to the lesser-voting class of common stock 

when sold by its initial holder. While many successful 

companies maintain a dual-class common stock 

structure, investors should be aware that such a 

structure may make it more difficult, if not impossible, 

for public shareholders to exert any influence or 

control over corporate matters.

Investors in new public companies can determine 

whether a company maintains a dual-class common stock 

structure and the rights they will have as shareholders 

by reviewing the first page of the prospectus as well as 

the section entitled Description of Capital Stock.

Stage of the company

An IPO is a significant milestone for a company, 

and high-profile IPOs frequently include companies 

that have exhibited recent tremendous growth and 

development. However, companies at different stages 

of development engage in IPOs for various reasons. 

Often, a company is seeking to access the capital markets 

in order to fund future growth and expansion. In other 

instances, a large and mature business may be returning 

to the public market after a successful reorganization 

under bankruptcy. It is important to keep in mind 

that an IPO does not always represent an opportunity 

to invest at an early stage with a fast-growing company.

Emerging growth companies

One thing to keep in mind before investing in an IPO 

is that many disclosure and other requirements that 

now apply to public companies are phased in over time 

for what are called “emerging growth companies.” 

Emerging growth companies generally have less than $1 

billion in revenue. A company will remain an emerging 

growth company for up to five years after becoming a 

public company, unless its revenue exceeds $1 billion or 

it exceeds certain other thresholds.

n Emerging growth companies may elect to have the 

same extended periods of compliance that may be 

available for private companies to implement any 

new or revised accounting standards. This means 

that other public companies may have to implement 

new or revised accounting standards before emerging 

growth companies do. Emerging growth companies 

will have to disclose whether or not they are electing 
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to take advantage of the extended compliance 

periods. When you compare an emerging growth 

company’s financial statements to those of other 

companies, you should keep this potential difference 

in mind. 

n Emerging growth companies are not required to 

have their auditors annually assess their internal 

controls over financial reporting. Other public 

companies that are not emerging growth companies 

have up to two years after their IPO before they are 

required to have their auditors assess their internal 

controls, and smaller reporting companies are 

exempt from this requirement. After the IPO, 

management of emerging growth companies will 

have to assess the effectiveness of internal controls, 

like other public companies, but a separate auditor’s 

assessment of such controls is not required.

n Emerging growth companies do not have to disclose 

as much about executive compensation as other 

public companies.

n Emerging growth companies do not have to 

conduct shareholder advisory votes on executive 

compensation arrangements, such as “say-on-pay” 

and “say-on-golden parachutes” votes. 

n Brokers and dealers, including underwriters who 

are participating in an emerging growth company’s 

IPO, are allowed to provide research reports regarding 

emerging growth companies prior to, during and 

after the IPO registration process. These research 

reports may not present all the information 

required in a prospectus filed with the SEC and are 

not subject to the stricter liability standards for a 

prospectus. Investors should keep in mind that 

brokers and dealers participating in the offering 

may face a conflict of interest between their 

obligation to provide their research clients with a 

balanced research report on a company and their 

desire to facilitate a successful offering on behalf 

of the company, which is their investment banking 

client or potential client.

n A research report can provide useful information, 

but as a general matter, you should never rely solely 

on a research report. You should also do your own 

research—such as reading the prospectus—to 

determine whether a particular investment is 

appropriate in light of your own financial 

circumstances.

Additional Information

For information on how to search for company 

documents, such as prospectuses and registration 

statements, in the SEC’s EDGAR database, visit 

investor.gov/researching-managing-investments/

researching-investments/using-edgar-researchingpublic-companies and www.sec.gov/investor/pubs/

edgarguide.htm. 

For our investor alert about Pre-IPO Investment 

Scams, visit www.investor.gov/news-alerts/investoralerts/investor-alert-pre-ipo-investment-scamsupdated. 

For information about Analyzing Analyst Recommendations, visit www.sec.gov/investor/pubs/

analysts.htm. 

For information about being able to directly 

participate in an IPO, visit www.sec.gov/answers/

ipodiff.htm and www.sec.gov/answers/ipoelig.htm. 

For more information about IPO lock-up agreements, 

visit www.sec.gov/answers/lockup.htm. 
For more information about IPO and post-IPO

pricing disparities, visit www.sec.gov/answers/

ipopricing.htm. 

For our investor bulletin about Say-on-Pay and 

Golden Parachute Votes, visit www.investor.gov/

news-alerts/investor-bulletins/say-pay-goldenparachute-votes.

For our investor bulletin on How to Read a 10-K, 

which summarizes information that companies 

provide in annual reports on Form 10-K, visit 

www.investor.gov/news-alerts/investor-bulletins/

how-read-10-k. 

For additional educational information for investors, 

see the SEC’s Office of Investor Education and 

Advocacy’s website for investors, www.investor.gov.

The Office of Investor Education and Advocacy has 

provided this information as a service to investors. 

It is neither a legal interpretation nor a statement of 

SEC policy. If you have questions concerning the 

meaning or application of a particular law or rule, 

please consult with an attorney who specializes in 

securities law.

SEC Pub. No. 133 (2/13)