Your Rights and Responsibilities as a Raymond James Client

Knowing What You Are Reading When You Read A Prospectus

If consideration is being given to purchasing stock in an initial public offering or secondary offering, the prospectus is one of the most important documents for investors.

If the prospectus is for a mutual fund, investors should closely examine sections related to:

• Risks – What types of investment risk are inherent to the investment? For example, is it a lower-quality issue or one from a smaller, less proven company? Does the investment present any structural risks, such as reliance on an insurance company’s backing? What is the risk that the fund may not meet its stated objective?
• Expenses – Examine items such as sales charges and internal administrative expenses to determine the costs of owning shares in the investment. Are these costs reasonable in relation to the fund’s asset size and investment objective?
• Management experience – Study the management team. What are the members’ backgrounds? How long have they been in their positions? Do they have extensive experience managing money within the fund’s stated objective?

When reading a prospectus for an initial public offering or a secondary offering, investors should carefully consider:

• Company’s business model – A potential investor should be comfortable with the issuer’s business model, including the company’s actual products or services provided, strengths and weaknesses within its industry, the diversity of the company’s customer base, the competitive landscape and strategies for future growth.
• Offering composition – Determine if the offering is 100% primary stock (coming from the issuing company) or if there are any selling shareholders. If there is a selling shareholder component, analyze the shareholders’ stock positions before and after the offering and determine the reason for the shareholders’ desire to liquidate.
• Financial statements and management’s discussion – Develop a general understanding of the trends in the company’s top and bottom line. Review the company’s capital structure and accounting methods. Check for any pending legal matters.
• Risk factors – Potential investors should review this section of the prospectus very closely. Understand each point in-depth and determine whether the risk of the offering conflicts with your own risk tolerance profile.
• Use of proceeds – Determine the use of the proceeds from the offering. There should be a defined use that will improve the issuing company’s fundamental story in some way, whether it is through funding an acquisition or future growth, improving the capital structure or another reason.
• Management – Learn about the issuer’s management team. Focus on their experience within the industry, their compensation structure, the level of insider ownership and other incentives they have.
• Board of directors – Research the company’s board of directors for experience and how they are compensated. Determine the number of outsiders on the board.
• Underwriters and accountants/auditors – Determine the experience and reputation of both the underwriters of the offering and the company’s accountants/auditors.

Before investing in a public offering, or any offering for that matter, read the prospectus carefully and don’t be afraid to ask your financial advisor questions.

The information in this section also appears in the brochure entitled: “Your rights and responsibilities as a Raymond James client.”