Self Help

When a company offers its stock to the public, it must make the offer by issuing a publication called a prospectus. Deadly as it is in appearance, it is not as dreary as it once was. The Securities and Exchange Commission, the federal regulatory board having control over such matters, has been reborn to some degree. In recent times prospectuses have been liberated to the extent that they can now include such far-out things as corporate logos, touches of color, four-color photographs, and other graphic devices. There was even one that had a little patch you could scratch and, if you did, out would leak the aroma of natural gas—this so you could experience the company’s product. Where this liberation is headed cannot be foretold. We might even get centerfolds offering tactile as well as visual pleasures. Or maybe even product samples.

The prospectus is designed as a combination marketing tool and insurance policy. Because management and the underwriters (the people who buy the securities from the company for resale - at a boosted price, of course - to the public) have some responsibilities for what is said, you can be sure the lawyers who write the prospectuses are super-careful in what they say and how they say it. Civil and criminal penalties attach to its content, and those penalties help to ensure forthrightness. But can you imagine lawyers writing sales literature? Or literature of any kind?

Although some corporate executives regard the prospectus only as a marketing tool and feel it quickly gets out of date, you can always initiate your search for investment opportunities with a prospectus. Not only do you get as full a story as possible (which is reinforced by those civil and criminal penalties), but at the point the company issues the prospectus no one else in the investment community has an edge on you - you will know as much about that company as the next guy. So start with a prospectus and follow a company from that point.

Lastly, you should never buy any shares on the initial offering. The offering price is set by the underwriters in collaboration with management. The management wants to give up as little of the company as it has to get as much money as it can. The underwriters want an easy and sure sale so they want to bring the stock out at an attractive price which will sweep us off our feet and pry us loose of our grubby dollars. But not too low a level - that might offend their management contacts. Out of that confrontation between management and the underwriters comes a negotiated price, usually close to “value,” but still a negotiated, best-guess price.