Investing Archives | Page 92 of 221

Aug

2023

A Brief Overview of the Sarbanes-Oxley Act (SOX)

By Ashley Kilroy | Financial Independence, Growing Wealth, invest, Investing | Comments Off

In the wake of several corporate scandals in the early 2000s, the Sarbanes-Oxley Act was passed in 2002 in order to protect investors, shareholders, and employees from companies misrepresenting their financial records or otherwise engaging in deceitful practices.

Read on to better understand the provisions in the Sarbanes-Oxley Act (SOX) and how the protections that it provides to investors.

What Is the Sarbanes-Oxley Act?

To safeguard investors from corporate fraud, Congress passed the Sarbanes-Oxley Act (SOA) of 2002 . The act aimed to improve corporate financial records, making them more robust, reliable, and precise.

When the law passed, then-President George W. Bush said it was “the most-reaching reforms of American business practices since the time of Franklin Delano Roosevelt.”

Names for Congressional sponsors Sen. Paul Sarbanes and Rep. Michael Oxley, the Sarbanes-Oxley Act came in response to a rash of corporate scandals in the early 2000s, including those involving Enron Corporation, WorldCom, Global Crossing, Tyco International, and Adelphia Communications.

In addition to tightening up corporate responsibility and financial reporting regulations, the Sarbanes-Oxley Act formed the Public Company Accounting Oversight Board (PCAOB), which oversees auditing standards and ensures that companies comply with the new law.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

What Prompted the Passage of the Sarbanes-Oxley Act?

In the 2000s, companies such as Enron Corporation, WorldCom, and Global Crossing among several firms caught up in accounting and financial reporting scandals. As investor confidence fell in the wake of the scandal, Congress passed the Sarbanes-Oxley regulations to prevent further fraudulent financial reporting, minimize future scandals, and protect investors.

What’s Included in the Sarbanes-Oxley (SOX) Act?

Although the SOX Act is extensive, there are a few crucial components, including:

Section 302

This section requires senior corporate officers, such as the CEO and CFO, of public companies to file reports with the Security and Exchange Commission (SEC). All companies publicly traded in the U.S. must create a system for their financial reports.

This system should include a traceable, verifiable pathway for the reports’ source data. None of this source data can be tampered with in any way. Additionally, the method and technology which retrieves that data must be reported on as well. If it’s changed, the company has to document the particulars of that change.

Section 404

This section directs the company to disclose the internal protocols in place for financial reporting to the public. The company must discuss shortcomings and efficacy in these evaluations.

Sections 802 and 906

Both sections impose penalties for mishandling documents. That means companies need to have a financial reporting system with preserved, traceable data and clear documentation on how it’s handled.

Section 802 pertains to altering or destroying documents with the intent to affect a legal investigation, which can lead to a prison sentence of up to 20 years. It also enforces proper auditing maintenance requirements. Section 906 forbids certifying misleading or fraudulent reports, which can incur fines up to $5 million and upwards of 20 years imprisonment.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

The Sarbanes-Oxley Act: Penalties

A non-compliant company and its executives could face severe penalties for violating the Sarbanes-Oxley Act. As mentioned in Sections 802 and 906, there are legal ramifications, including fines and prison sentences. For example, 802 imposes a penalty on any individual who knowingly does not preserve financial and audit records. This failure can result in up to 10 years in prison; however, other violations can lead to millions of dollars in fines and up to 20 years imprisonment.

Earlier Legislation

Before the Sarbanes-Oxley Act was in place, there were other laws governing the securities industry, most of which had been put in place during or after the financial crisis that led to the Great Depression.

The Securities Act (1933)

This law required more transparency around securities sold on public exchanges, and banned insider trading.

The Glass-Steagall Act (1933)

Also known as The Banking Act, this legislation forced banks to split up their investment banking and commercial banking operations. It also established the Federal Deposit Insurance Corp.

The Securities Exchange Act (1934)

This act created the SEC, which regulates the securities industry and holds disciplinary powers over publicly traded companies that violate the law, along with associated individuals.

The Trust Indenture Act (1934)

This act created formal agreement standards that bond issuers must uphold in every sale to the public.

The Investment Company Act Act (1934)

This act requires that companies that invest and trade securities must regularly disclose their financial condition and investment policies to investors.

The Investment Advisers Act (1940)

This act requires that investment advisers must register with the SEC and adhere with its regulations.

The Securities Acts Amendments (1975)

These amendments prohibited brokers from self-dealing, aimed to minimize conflicts of interest, and required additional disclosures by institutional investors.

The Takeaway

Regulators have many tools they can use to discourage financial institutions and advisers from unethical activities, and to penalize those who fail to comply with the rules. That said, it’s important for all investors to do their due diligence and research any company with which they want to invest or adviser with whom they want to work.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/vadimguzhva

Aug

2023

What Drove the SPAC Boom in 2020 and 2021?

By Inyoung Hwang | Financial Topics, Growing Wealth, invest, Investing, Terminology | Comments Off

Special Purpose Acquisition Companies (SPACs) were all the rage on Wall Street, particularly during 2020 and 2021. Nearly 250 SPACs went public in 2020 — four times as many as 2019. That momentum carried over into 2021 as well, but in 2022 and 2023, interest has dropped.

In 2022, the Securities and Exchange Commission (SEC) proposed new rules for SPACs that would require more transparency, and protections for investors.

As for what drove the SPAC boom in 2020 and 2021? It was a combination of factors, and SPACs are still very much a part of the financial ecosystem. That’s why it’s important for investors to understand what they are, and what drove their popularity.

SPACs 101

SPACs are shell companies that list on the stock market with the intention of finding an existing private business to buy. Also known as blank-check companies because they have no operating business of their own, SPACs typically have two years to purchase a target.

The current SPAC boom is unsurprising given the long-time dissatisfaction with the traditional IPO model. Private companies, especially tech startups in Silicon Valley, have grumbled for years that the IPO process is expensive, onerous, and time-consuming. Many have been staying private for longer, taking advantage of other avenues for raising capital such as venture capital firms.

Here’s how SPACs work:

1. The first step tends to involve sponsors, generally former industry specialists or executives. They typically pay $25,000 in what’s known as the “promote” or “founder’s shares,” obtaining a 20% stake in the company in return.

2. The SPAC goes public on a stock exchange, listing shares at $10 each and promising to use the proceeds to find a private company to merge with.

3. Once an acquisition is found, shareholders of the SPAC vote on the company merger.

4. SPACs can buy firms valued at five times the money raised in their IPO. Therefore, additional funding is often raised through institutional investors in something known as a “private investment in public equity” or PIPE.

For the private company getting bought, SPACs offer a cheaper, faster route to listing. Below are some potential benefits of SPACs:

• In a regular IPO, investment bankers, who advise companies in going public, alone can eat up 4% to 7% of an IPO’s proceeds in fees.

• The IPO process typically takes 12 to 18 months. In contrast, a SPAC merger generally takes between four to six months.

• Regulators review SPAC mergers, but more forward-looking projections can be used to market the deal as opposed to IPO prospectuses, which require that only historical figures be shared. This can be particularly appealing to more futuristic ventures like those in electric vehicles or space travel.

• The valuation of a SPAC target is typically determined by private negotiations behind closed doors, similar to how a deal in a merger would be struck. This can make SPAC IPO valuations less tied to the whims of public markets.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

[ipo_launch]

SPAC Performance

Critics of SPACs argue that they are much too lucrative for the sponsors, and bypass measures in the traditional IPO process that are designed to protect investors. The flurry of SPAC activity in recent years also had many worried that a bubble was forming.

However, defenders of the structure argue that this most recent wave of SPACs is different. They say that more recent SPACs have had more credible sponsors, who then in turn target higher-quality companies.

An academic paper by professors at Stanford and New York University law schools looked at SPAC acquisitions between January 2019 and June 2020. The study found that companies that went public by SPAC fell by an average of 3% three months after debuting, 12% after six months, and 35% after a year.

Meanwhile, those with higher-quality sponsors returned 32% after three months and 16% after six months.
When it came to companies with higher-quality sponsors that had been public for at least a year, there were only seven and they fell on average by 6%. The professors concluded that, “It is true that a few SPACs sponsored by high-profile funds or individuals have performed well. But these are the exceptions, not the rule.”

Get in on the IPO action at IPO prices.

SoFi Active Investing members can participate in IPO(s) before they trade on an exchange.

How the SPAC Boom Came About

Here’s a table with the number of SPAC IPOs by year and the capital raised. It shows that the number of SPACs that have listed on the stock market have steadily increased in recent years.

Only 13 debuted in 2016, but the number of SPACs in the stock market spiked in 2020, quadrupling from 59 to 248, and more than 600 launched during 2021. The table also shows the money raised through these IPOs also climbed dramatically, but has since fallen again after a blowout year in 2021.

Year	Number of SPAC IPOs	Money Raised by SPACs
2023 (through June 1)	23	$1.8 billion
2022	107	$13.4 billion
2021	630	$162.5 billion
2020	248	$83 billion
2019	59	$13.6 billion
2018	46	$10.8 billion
2017	34	$10 billion
2016	13	$3.5 billion

Source: SPACInsider

Recommended: How Many Companies IPO Per Year?

What Drove the SPAC Boom?

There were several factors that drove the SPAC boom in 2020 and 2021.

1. IPO Dissatisfaction

IPOs have historically been an important step for maturing companies, signaling that a business is ready for public scrutiny, greater regulation, and increased liquidity of its equity.

However, in the past decade, tech IPOs haven’t always kept pace with the number of unicorn companies that have cropped up. Private companies have shunned the traditional listing process by either staying private for longer or seeking alternative routes such as direct listings or SPACs.

2. Booming Markets

Context is important, too: After the volatility in early 2020 caused by the COVID-19 pandemic, financial markets soared. The Federal Reserve’s stimulus measures played a role in keeping the markets buoyant.

In addition, there was an increase in investing during this time for several reasons. All told, it created an optimal window for private companies to enter public markets, giving them better odds of pricing SPAC deals at higher valuations.

3. Rule Changes

Both the New York Stock Exchange and the Nasdaq have tried to loosen their rules on SPACs in recent years in order to attract more such listings. Nasdaq had dominated the SPAC market until 2017, when NYSE had the first blank-check listing on its main market, after getting approved by regulators to ease some requirements. Separately, Nasdaq tried in 2017 to gain permission to lower a number for required shareholders.

4. Famous Sponsors

Well-known sponsors were also a defining feature during the SPAC frenzy. Well-known investors, former politicians, and former athletes have all jumped on the SPAC bandwagon, setting off a flurry of launches.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

SPAC Risks

Despite the combination of factors that helped spark the SPAC trend, the fact remains that most SPACS — like most IPOs — are highly risky endeavors.

In addition, despite the hype around both these paths for going public, the main beneficiaries of SPACs have been those closest to the company itself. Retail investors typically don’t have access to SPAC shares until they’re in the secondary market.

The Takeaway

SPAC activity reached a peak in 2020 and 2021, but some of the conditions that have turned SPACs into a popular IPO alternative had been in place for a while. For example, many private companies had been long unhappy with the traditional IPO model. Additionally, the mood in the stock market at the time had become increasingly ebullient, luring private companies into public listings.

SPACs have a checkered history when it comes to actual performance in the stock market. But some market observers have claimed that having more credible sponsors will lead to better mergers and consequently, better share prices.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0623095

Aug

2023

What Are Sin Stocks? Investing in “Vice” Behaviors

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

“Sin stocks” are stocks that come with some cultural and lifestyle baggage that may not appeal to investors who take an ethical stand on the company their portfolio keeps. Proponents of these types of stocks point to the fact that some studies show that many sin stocks have, historically, performed better than their more “wholesome” market competitors.

Sin stocks are also known as “vice stocks,” and though they may have baggage, it doesn’t mean that some investors don’t think they’re a good fit for their portfolios.

What Are Sin Stocks?

Sin stocks take the definition of “sin” (i.e., an “immoral act”) and apply it to financial securities. The term “sin stock” refers to stock in companies that engage in businesses and markets that cultural forces may deem as unethical.

There’s actually no formal sin stock list, and many individuals and institutions have their own idea of what constitutes a sin stock. This may include different types of investments in one or more of the following categories, which include some of the largest corporate brands in the world.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Gambling

This sector includes big name companies that are involved or in the orbit of the gambling space. They can include casinos, sports betting applications and platforms, entertainment companies, and more.

Alcohol

The adult beverage market includes numerous staples, including the makers or creators of various beers and wines. There are many on the market, including some large beverage conglomerates.

Tobacco

This sector includes companies that traditionally produce cigarettes or other tobacco products. As with the alcohol sector, there are some large conglomerate companies in the space.

Weapons and defense

The weapons and defense market – think firearms and military arsenal providers. It may also include aerospace or even tech companies.

Sex and adult entertainment

This sector includes all sorts of companies, ranging from adult-themed social media networks to publishers and media companies.

Fossil Fuels

This sector includes a host of energy companies that may be involved in the production of coal, oil, or gas.

Recommended: How and Why to Invest in Oil

Pros and Cons of Sin Stocks

Like any stock market category, vice stocks have their upsides and downsides. Here’s a closer look:

Potential Pros of Sin Stocks

• The “shun” factor. With many investors turning up their nose at sin stocks, other investors can wade in and potentially get good value on vice-themed portfolio plays. Stocks that some investors avoid could end up undervalued.

• Sin companies may have less competition. While every business has its own unique identifiers, the stigma of being viewed as a company that profits on vice may thin the competitive playing field. Companies in sectors with less competition allow those companies that do operate in a “vice” sector to have products and services with higher demand and fewer barriers to robust profits.

• Recession resistance. Are sin stocks recession proof? Not completely, but they may perform better than their peers during a downturn. No matter what the economy is doing, for example, people may down a pint at the pub or puff a quality cigar. Even if those habits aren’t for you, you may be able to profit from other people’s habits.

Recommended: Investing During a Recession

Potential Cons of Sin Stocks

• Ethical qualms. There’s evidence that specific sin stock products like cigarettes, liquor and gambling may create health hazards that lead to severe illness and even death. Investors in those sectors may worry about the ethics of profiting on habits that lead to negative physical and mental health consequences.

• Subject to cultural or regulatory shifts. While they may be less prone to recessions, some sin stocks may carry investment risk due to changes in the regulatory or cultural landscape. For example, increased gun control measures could decrease the value of firearms manufacturers while expanded legal betting could increase the value of gambling stocks.

Sin Stocks vs Angel Stocks

Sin stock sectors often sit on the opposite side of the spectrum from environment, social and governance (ESG) stocks, which have risen in prominence over the past 20 years, as investors look for ways to align their portfolio with their values.

Performance-wise, the edge may go to sin stocks, however, which have performed as well or better than ESG stocks. It’s worth keeping in mind that “sin stock” is a subjective term. One person’s sin stock may be another person’s perfectly reasonable stock.

As an extreme example, one of the sins listed by religious historians is sloth. Under that definition, an investor in streaming services may be labeled as a sin stock investor by engaging with companies that contribute to sloth, via long stretches of binge-streaming.

Or, one investor may view defense stocks as a virtuous investment, since these companies build products that help defend the United States from potential enemies. Another investor may view defense stocks as sin securities, since the companies produce tanks, guns and helmets wind up on battlefields where soldiers are killed or wounded.

How to Invest in Sin Stocks

If you invest in broad index funds, you likely already have some exposure to sin stocks, since they’re traded on all the major exchanges. If you’d like more exposure to sin stocks, you can evaluate individual stocks for potential investment, or purchase shares in a thematic ETF in a sector such as gaming or energy more diversification within that field.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

The Takeaway

Sin stocks are shares of companies that operate in sectors that some investors may not be comfortable supporting. They can include stocks of companies that produce products like alcohol or tobacco, or even those that operate in the adult entertainment space, or those that produce fossil fuels.

While some sin stocks have delivered outsized returns for investors, the decision as to whether you should invest in a specific sin stock or sector is a personal one. You’ll want to consider your own ethics and values as well as the performance of the stock and how it could fit into your overall portfolio strategy.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/kupicoo

SOIN0723037

Aug

2023

Determining Your Business Valuation: 7 Valuation Methods

How to Value a Business: Seven Valuation Methods

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Business valuation refers to the process of determining the economic value of a business. There are different business valuation methods that can be used to establish a business’s worth. Understanding how to value a company can be helpful for investors and business owners, but creditors and potential buyers may need to value a company as well.

What Is a Business Valuation?

Business valuation means determining what a business is worth. Again, there are different scenarios where the valuation of a business becomes important. For instance, business owners may be interested in knowing what their business is worth if:

• They hope to sell it to a new owner

• A merger with another business is in the works

• They’re creating an employee stock purchase plan (ESPP)

• They’re working on a succession plan that includes a buy-sell agreement

• They plan to apply for loans or lines of credit using business assets as security

• They need it for tax purposes

• The business is being sued

• It’s required for the division of assets in a divorce proceeding

• Determining an IPO price

•Valuing shares in an equity crowdfunding round

Venture capitalists and angel investors may also be interested in how a company is valued if they’re planning to invest before an IPO.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

How Are Companies Valued?

The business valuation process involves a detailed look at the company and its key financial characteristics. A professional business appraiser or an accountant that holds an Accredited in Business Value designation (ABV) typically completes a business valuation. These professionals have specially trained in calculating the valuation of a business. There are also business valuation software programs available that you can use to estimate your company’s value yourself.

Finding the valuation of a business can involve a number of factors, including:

• Ownership structure

• Company management

• Combined value of company assets

• Combined total of company liabilities

• Cash flow

• Revenues

• Projected earnings

That’s a general explanation of how business valuation works. To understand the valuation of a company at an individual level, it helps to know more about the different business valuation methods that can be used.

7 Business Valuation Methods

There’s more than one way to approach how to value a business. The method chosen reflects the reasons for determining a business valuation in the first place. For example, the methods used for company valuation ahead of an IPO may be very different from the valuation methods used for an existing company.

It can be helpful to use multiple business valuation methods when evaluating the same business. This makes it possible to see how the numbers compare, based on different metrics. Here are some of the most common ways the valuation of a company can be determined.

1. Market Capitalization

Market capitalization is a simplified way to find the valuation of a business, based on its stock share price. To find market capitalization, you’d multiply a company’s stock share price by the number of shares outstanding.

For example, if a company has 100 million shares outstanding priced at $10 each, its market capitalization value is $1 billion. Market cap is a fluid number, as share pricing can change day to day or even hour to hour.

Investors might use a company’s market capitalization when choosing stocks to invest in. For instance, if those interested in adding large-cap companies to your portfolio then they’d look for ones that have a market valuation of $10 billion or more. On the other hand, investors interested in small-cap companies would look for those with a valuation under $2 billion.

2. Asset-Based Valuation

The asset-based valuation method determines the value of a company based on its assets. Specifically, this involves looking at a business’s balance sheet and subtracting total liabilities from total assets. For example, if a company has $10 million worth of assets and $3 million worth of liabilities, its valuation would be $7 million.

This valuation method offers a fair market value of a company or business using assets as the key metric. It’s also referred to as a book value.

Businesses can use asset-based valuation to get an estimate of current value or what the business would be valued at after a liquidation event. Using the liquidation-based approach, the business’s value is measured by any net cash remaining after all assets are sold and liabilities are paid off.

3. Discounted Cash Flow Method

The discounted cash flow method for finding a company valuation estimates the value of an asset today using projected cash flows. Business owners use this business valuation method when they expect cash flow to fluctuate in the future.

A discounted cash flow method for finding the valuation of a business includes four elements:

• Time period for analyzing cash flows

• Cash flow projections

• A discount rate, which represents a projected rate of return from a hypothetical investment

• Estimated future growth

Discounted cash flow can help businesses get a sense of what their business is worth now, based on future cash flows. This can be helpful for businesses that are considering making investments in growth and want to gauge the estimated return on that investment.

4. Earnings Multiplier Business Valuation

With the earnings multiplier method, you’re finding the valuation of a business as measured by its current share price and earnings per share (EPS) ratio. Earnings per share represents the profit per common share compared to the company’s profits as a whole.

To calculate the earnings multiplier, you divide the market value per share by the earnings per share. So if a stock is worth $10 and earnings per share are $2, the earnings multiplier would be 5. That means that it would take five years of earnings at the current rate to get to the stock price. You can compare this data point to other companies in the same industry to get a sense of how its value compares to its peers.

The earnings multiplier method can be helpful for comparing the valuation of a company to its competitors. Essentially, what it tells you is how expensive a company’s stock is relative to the earnings per share it’s reporting.

Businesses can use the earnings multiplier approach to compare a company’s current earnings to projected future earnings. This method for how to value a business may be considered to be more accurate than methods that rely on revenues or assets alone.

5. Return on Investment (ROI) Valuation Method

Return on investment refers to the return an investor can expect from placing their capital into a specific investment vehicle. In terms of business valuation methods, this option bases value on what type of ROI an investor could receive from putting money into the business.

This type of valuation method might be useful for newer businesses that are trying to attract the attention of venture capitalist or angel investors. Using the ROI method, it’s possible to provide investors with a tangible number to use as the basis for estimating what type of return they could get on their money.

The formula for ROI-based valuation is simple:

ROI = (Current value investment – Cost of investment)/ Cost of investment

Similar to market capitalization this can be a very simple way to get an estimate of a company’s value.

6. Times-Revenue Method

The times-revenue method for business valuation helps find the value of a company on a range. This method applies a multiplier to the revenues generated over a set time period. The multiplier chosen depends on the industry the company or business belongs to and/or overall market conditions.

Compared to other valuation methods, the times-revenue method is not as precise since the multiplier used may be different each time the calculations are run. It also looks at revenues, rather than profits, which may paint a truer picture of a company’s value. This method of valuation can, however, be helpful for newer businesses that aren’t generating consistent revenues or profits yet.

7. IPO Valuation Methods

Some of the business valuation methods included so far are best for established businesses that are publicly traded on an exchange. In the case of a private company that’s preparing to launch an IPO, valuation requires additional strategies, since there’s no stock price to use.

When finding the valuation of a business for an IPO, the IPO underwriting team can use several strategies, including:

• Comparing the company to similar companies

• Looking at precedent transactions, such as mergers and acquisitions

• Running financial models, including a discounted cash flow analysis

If you’re interested in IPO investing, it’s helpful to understand how an IPO’s price is set. Pricing matters because if it’s too low, the company may not realize its goals for raising capital. If it’s too high, it may put off investors. Accurate valuation and pricing also comes into play during the IPO lock-up period, in which early stage investors are prohibited from selling their shares initially.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

The Takeaway

Knowing how to value a company matters if you own a business but it can be just as important for retail investors. If you’re a value investor, for instance, your strategy may revolve around finding the hidden gem companies, undervalued by the market as a whole.

Investing is, in many ways, all about value. Again, that’s what makes business valuation so critical to investors and business owners alike. In fact, as an investor, you are a business owner – remember to keep that in mind. And knowing how businesses are valued can help further your understanding of the markets at large.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/SeventyFour

SOIN0723045

Aug

2023

Guide to Reading an S-1 Statement

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

An S-1 statement is a type of registration form that companies, hoping to go public, need to file with regulators in order to issue stocks on public exchanges. It’s an important document, and one that is combed through by many prospective investors prior to an IPO.

For investors who may be interested in IPO investing, learning the ins and outs of an S-1 statement is paramount.

What Is an S-1 Form?

An S-1 statement is the registration form companies must file with the Securities Exchange Commission (SEC) to issue new securities. As such, it’s a necessary document for any company preparing for an initial public offering (IPO) to list on a national exchange, such as the Nasdaq or the New York Stock Exchange.

The form serves as an introduction for companies hoping to raise money from the investing public, in which they essentially lay out their business plan. That includes explaining its current business model, its place in the current competitive landscape, as well as introducing managers and sharing a short prospectus for the stock itself. The form also includes the company’s methodology for formulating the stock price, and disclosures about how the company expects its IPO to impact the stocks of any existing public companies.

Thoroughly reading an S-1 is a great way for investors to research a company directly, rather than gathering information from third-party sources.

Recommended: What Is an IPO? Everything Investors Need to Know

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Where Can You Find S-1 Filings?

The S-1 form, like all SEC forms, is publicly available. You can typically find it by going to the “investor relations” section of a company’s Web site, or by searching on the SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.

The EDGAR system is free and publicly available. It allows you to search by company, or even by form type. So, for example, you could look for all the S-1 registrations for a given period.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

How to Read An S-1: Section Breakdown

There are several different sections of the S-1 form that contain helpful information for analyzing a stock.

The Box

The beginning of the form consists of a section often called “The Box,” which summarizes the major highlights of the document. The Box usually includes the following information about the company:

• Background information

• Industry information

• Competitive strengths

• Business strategies

• Risks

• Financial data

• Description of securities it plans to sell in its IPO

The box is where the company will try to tell its life story, its plan for the future, and why it is a worthwhile investment. It is, in some ways, a pitch to prospective investors. As such, it can be surprisingly non-technical, without some of the financial and legal jargon that can make financial statements so difficult to read.

Management’s Discussion & Analysis (MD&A)

This is where the company explains and offers context around the financial statements that appear in other sections of the S-1 registration.

This usually includes operating performance metrics, as well as how different business segments performed. This is also where management often elaborates on some of the risk factors that affect or will affect the company. Sometimes, a company will also use the MD&A as a place to share their long-term outlook.

Selected Consolidated Financial Data

This is the section where you’ll get to the numbers that matter, where the company shares a condensed statement of its income, balance sheet and cash flow.

Those statements present a quarter-by-quarter illustration of the company’s financials over the previous two years, showing its growth, capital expenditures, and other trends in the business. While those numbers may well tell a story on their own, they may be worth perusing with the commentary and background of the MD&A in mind.

Description of Capital Stock & Underwriting

While the other sections tell you what the company is, what it does, and how it’s doing, this one gets to the main point of the S-1 – what the company is selling, namely, its stock.

This section is where investors can dig in to understand the security that will be making its debut. It includes details of shareholder rights, such as its voting and conversion rights. It also lists the investment banks that the company has hired to sell its IPO shares to large investors.

Description of Capital Stock & Underwriting even gives a preview of the IPO itself, disclosing the stock’s offering price, the number of shares the company plans to sell, and the total proceeds that the company hopes to raise in the IPO.

Recommended: How Are IPO Prices Set?

Executive Compensation

This is the section that discloses how much senior management makes in salary and other compensation, and can give investors a sense of the net worth and motivation of the leadership.

Related Party Transactions

This is where investors get a glimpse into who the company is working with. It’s a chance to connect the dots, and see who’s backing the company. The Related Party section is where a company has to disclose any transaction with a private equity firm, or a family member.

The Footnotes

Seasoned investors are also close readers of the footnotes of an S-1. This is where the most interesting little details are sometimes buried.

The Takeaway

Filing an S-1 is a key part of the IPO process. Reading an SEC S-1 filing can help investors understand what to expect about an IPO. Every company approaches their S-1 registration differently. Each company will provide different degrees of disclosure, and they will use the format of the S-1 to present that information in the way they believe will benefit them.

Reading through the document can feel like a chore, but if you’re at all interested in IPO investing, it’s a worthwhile investment of time. If you feel like you’re in over your head, though, you may want to speak with a financial professional to try and get caught up.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/insta_photos

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0723039

A Brief Overview of the Sarbanes-Oxley Act (SOX)

What Is the Sarbanes-Oxley Act?

What Prompted the Passage of the Sarbanes-Oxley Act?

What’s Included in the Sarbanes-Oxley (SOX) Act?

Section 302

Section 404

Sections 802 and 906

The Sarbanes-Oxley Act: Penalties

Earlier Legislation

The Securities Act (1933)

The Glass-Steagall Act (1933)

The Securities Exchange Act (1934)

The Trust Indenture Act (1934)

The Investment Company Act Act (1934)

The Investment Advisers Act (1940)

The Securities Acts Amendments (1975)

The Takeaway

What Drove the SPAC Boom in 2020 and 2021?

SPACs 101

SPAC Performance

Get in on the IPO action at IPO prices.

SoFi Active Investing members can participate in IPO(s) before they trade on an exchange.

How the SPAC Boom Came About

What Drove the SPAC Boom?

1. IPO Dissatisfaction

2. Booming Markets

3. Rule Changes

4. Famous Sponsors

SPAC Risks

The Takeaway

What Are Sin Stocks? Investing in “Vice” Behaviors

What Are Sin Stocks?

Gambling

Alcohol

Tobacco

Weapons and defense

Sex and adult entertainment

Fossil Fuels

Pros and Cons of Sin Stocks

Potential Pros of Sin Stocks

Potential Cons of Sin Stocks

Sin Stocks vs Angel Stocks

How to Invest in Sin Stocks

The Takeaway

How to Value a Business: Seven Valuation Methods

What Is a Business Valuation?

How Are Companies Valued?

7 Business Valuation Methods

1. Market Capitalization

2. Asset-Based Valuation

3. Discounted Cash Flow Method

4. Earnings Multiplier Business Valuation

5. Return on Investment (ROI) Valuation Method

6. Times-Revenue Method

7. IPO Valuation Methods

The Takeaway

Guide to Reading an S-1 Statement

What Is an S-1 Form?

Where Can You Find S-1 Filings?

How to Read An S-1: Section Breakdown

The Box

Management’s Discussion & Analysis (MD&A)

Selected Consolidated Financial Data

Description of Capital Stock & Underwriting

Executive Compensation

Related Party Transactions

The Footnotes

The Takeaway

CATEGORIES

JOIN THE COMMUNITY

Student Loan Refinancing

Personal Loans

Online Investments

Other

Student Loan
Refinancing

Personal
Loans

Online
Investments