Red Herring


DEFINITION of 'Red Herring'

A preliminary prospectus filed by a company with the Securities and Exchange Commission (SEC), usually in connection with the company's initial public offering. A red herring prospectus contains most of the information pertaining to the company's operations and prospects, but does not include key details of the issue such as its price and the number of shares offered. The term "red herring" is derived from the bold disclaimer in red on the cover page of the preliminary prospectus . The disclaimer states that a registration statement relating to the securities being offered has been filed with the SEC but has not yet become effective, the information contained in the prospectus is incomplete and may be changed, the securities may not be sold and offers to buy may not be accepted before the registration statement becomes effective. No price or issue size is stated in the red herring.


The red herring prospectus contains substantial information on the company, including use of proceeds from the offering, market potential for its product/service, financial statements, details of officers, directors and major shareholders, pending litigation, etc.

The red herring prospectus is used to solicit expressions of interest in the issue. Once the registration statement becomes effective, a final prospectus that contains the final IPO price and issue size is disseminated. Expressions of interest are then converted to orders for the issue at the buyer's option.

The minimum period between the time a registration statement is filed and its effective date is 20 days. Note that the SEC does not approve the securities but simply ensures that all relevant information is disclosed in the registration statement.

  1. New Issue

    A reference to a security that has been registered, issued and ...
  2. Final Prospectus

    1. The final version of a prospectus for a public offering of ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  4. IPO Lock-Up

    A contractual caveat referring to a period of time after a company ...
  5. Greenshoe Option

    A provision contained in an underwriting agreement that gives ...
  6. Gun Jumping

    1. The illegal practice of soliciting orders to buy a new issue ...
Related Articles
  1. Investing Basics

    5 Tips For Investing In IPOs

    Thinking of investing in IPOs? Here are five things to remember before jumping into these murky waters.
  2. Investing Basics

    A Look At Primary And Secondary Markets

    Knowing how the primary and secondary markets work is key to understanding how stocks trade.
  3. Investing Basics

    The Road To Creating An IPO

    Through an Initial Public Offering, or IPO, a company raises capital by issuing shares of stock, or equity in a public market. Generally, this refers to when a company issues stock for the first ...
  4. Fundamental Analysis

    Interpreting A Company's IPO Prospectus Report

    Learn to decipher the secret language of the IPO prospectus report - it can tell you a lot about a company's future.
  5. Mutual Funds & ETFs

    Investing In IPO ETFs

    Learn the history, rules and risks of investing in IPO exchange-traded funds.
  6. Investing

    How An IPO Is Valued

    The initial valuation of an IPO can determine the success or failure of a specific stock - but how is that price determined?
  7. Mutual Funds & ETFs

    Digging Deeper: The Mutual Fund Prospectus

    The legal jargon of this document can be daunting. Find out how to get to the important stuff.
  8. Investing Basics

    IPO Lock-Ups Stop Insider Selling

    Ownership plays a key role when companies go public. Find out how.
  9. Options & Futures

    Greenshoe Options: An IPO's Best Friend

    Find out how companies can save or boost their public offering price with these options.
  10. Retirement

    IPO Basics Tutorial

    What's an IPO, and how did everybody get so rich off them during the dotcom boom? We give you the scoop.
  1. Is a financial advisor allowed to pay a referral fee?

    A financial advisor is allowed to pay a referral fee to a third party for soliciting clients. However, the Securities and ... Read Full Answer >>
  2. How often do mutual funds report their holdings?

    The Securities and Exchange Commission (SEC) requires mutual funds to report complete lists of their holdings on a quarterly ... Read Full Answer >>
  3. Do financial advisors need to be approved by FINRA?

    The term "financial advisor" can refer to a couple of different roles. It most often refers to a broker-dealer or an investment ... Read Full Answer >>
  4. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  5. What are the disclosure requirements for a private placement?

    The U.S. Securities and Exchange Commission (SEC) has set forth disclosure requirements for private placements, including ... Read Full Answer >>
  6. What role does the Inspector General play with the Securities and Exchange Commission?

    The inspector general of the U.S. Securities and Exchange Commission (SEC) oversees, audits and conducts investigations of ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!