The Role of a Greensheet in IPO Investing

Just as in any type of trading on the stock market, investing in Initial Public Offerings is not without risks. Weighing the pros and cons of an IPO investment can be greatly assisted by checking out the S-1 form lodged with the Securities and Exchange Commission as a requirement for going public. By doing this investors not only get a good idea of the future prospects of the company, but also of what would be a fair price to pay for the stock.

Another valuable tool for IPO investing is the company’s greensheet – an informative document summarizing the main components of the prospectus of a new issue. This document, which is prepared by an underwriter and lists the advantages and disadvantages of a new issue, is not available to the general public, being created with the purpose of assisting brokers and the underwriter’s sales team in their quest to market the IPO. The greensheet also assists brokers and salespeople who are familiar with their customer base to narrow down who they aim to approach first with an IPO offer. This often results in the big-money investors snapping up the worthwhile deals first.

Although legally a greensheet should not contain any information that is not available in the company’s prospectus, bearing in mind that this is a document intended for internal use, it is likely to contain a comparison of the IPO to other stock market listed companies. To cover themselves should the document fall into the hands of someone not employed by the underwriting firm, a disclosure statement will appear on the greensheet, detailing the purpose of the document, including the distribution restrictions and limitations on its information.

While the SEC S-1 form and the greensheet will give a potential stock market investor a reasonable idea of how the company making the IPO stands financially, and even what its future prospects are, it is essential to read the company prospectus which is filed with the SEC. The prospectus will include details on the company’s risks and opportunities, as well as what the money raised by the IPO will be used for. If it is to be used to pay outstanding debt, there would be a need for extra caution, but if it is for projects such as expanding into new markets, or research on new products, it may be worth considering.