What Is an Offering Circular?

An offering circular is a type of prospectus provided for a new security listing. It is delivered to individuals and brokerage houses who are interested in potentially purchasing the newly issued securities. It is often slightly abbreviated from the final, long-form prospectus, but is still required to contain specific information.

An offering circular should not be confused with a red herring or preliminary prospectus. The red herring is issued during the IPO process and is intended to generate interest in the new issue. It lacks many of the specifics regarding the new issue. The offering circular, on the other hand, is a more complete document and should be viewed before making a final decision about an investment.

Key Takeaways

  • An offering circular is a formal written offer to sell newly issued securities that provides essential information to prospective investors.
  • It is a condensed prospectus that must nonetheless include accurate data related to the issuer's finances, risk factors, usage of the proceeds from the issue, and other pertinent information.
  • The offering circular, while abbreviated, should not be confused with the more informal "red herring" document, which is intended as a marketing device rather than a regulatory document.

Understanding Offering Circulars

An offering circular allows investors to access information regarding a new issue. It provides them with very important information about the security such as financial information about the issuer, the objective of the fund or purpose of the funds being raised, and other terms of the security issuance. The offering circular is a legal document and is a requirement for many, but not all, new issues.

Offering circulars are required to contain certain pieces of information that are meant to be helpful to a prospective investor in deciding whether or not the investment is suitable for their interests. This information includes items such as the issuer of the security, the objective of the mutual fund or the purpose of the stock issue, the terms of the issue, and any additional information that could be helpful to a prospective buyer.

Offering Circular vs. Red Herring

It is important to distinguish it from the red herring, or preliminary prospectus, which lacks significant details about the new issue. The red herring is a promotional item passed out to potential investors early on in the IPO process to solicit indications of interest and does not include the crucial information that an investor should review before purchasing a security. However, this important information is included in the offering circular.

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. That is, the information contained in the prospectus is incomplete and may be changed. Thus, the securities may not be sold and offer to buy may not be accepted before the registration statement becomes effective. The red herring does not state a price or issue size.