No other tools in the IPO investing arena are as important as the Red Herring Prospectus, or also known as the S-1 filing. The Red Herring Prospectus has critical information that basically airs the IPO's dirty laundry (if any) and also tells the investor exactly what he or she needs to know. The Red Herring Prospectus is the IPO holy grail. I'll show you in this article what are the "must know" components of this document.

Face it, if your thinking about investing in IPOs, you are of a small segment of the investing public. This minority in the US financial system are among the few that have the potential to watch their investments scream the second the market opens. Bottom line is, you are a different breed of investor.

When a private company decides to enter the public market, it must (according to Securities & Exchange Commission rules) file what is called the Red Herring Prospectus. From "Use of Proceeds," underwriters, earnings to risk factors, the Red Herring Prospectus is flush with essential IPO attributes.

Over the past 3 years, using the method I am about to disclose, I have been able to record IPO profits exceeding 3000%. Point is, I know it works, and I know it works well!

What I look for in the Red Herring Prospectus:

1. Use of Proceeds: This is the most important piece of information in this document! This basically tells the investor if the company debuting, will take the funds it raises from the offering and either put it towards "growth" like future acquisitions, research & development or towards "greed" by paying off shareholders.

As a potential investor you want the "Use of Proceeds" section of the Red Herring Prospectus to read like the first example I just gave. This means the company is serious about growing and they have the shareholder in mind. The second example is what I do not look for when evaluating IPOs.

2. Underwriters: I keep a list of only the best underwriters on my desk, and if an IPO doesn't have any, well then I move on to another. Underwriters are the managers of the IPO deal. Just like any manager in any profession, a good manager will allow for success. A good manager has "been there" and "seen that" many times and they know what to expect along the way.

Personally, I follow a group of 5 underwriters:

Goldman Sachs
Credit Suisse
Deutsche Bank
JP Morgan &
Morgan Stanley

Together and separate, these underwriters are equally responsible for the gains I've picked up in my career.

3. Earnings: This is the most straight forward component in the IPO selection process and can be found in the "Summary" section of the Red Herring Prospectus. Simply put, it is what it is. If a company doesn't display solid earnings, year after year, it goes in the same garbage pail as the IPO with the knock off underwriter.

Together, these 3 parts of the Red Herring Prospectus will make or break the performance of the IPO. As you remove 1, 2 or all of the components, I just listed, your potential for big profits potentially flies right out the window. Stick with them and you could possibly be the next owner of a 300% gaining IPO!