What is Red Herring
A red herring is 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 security issue, such as its price and the number of shares offered.
BREAKING DOWN Red Herring
A red herring prospectus may refer to the first prospectus filed with the Securities and Exchange Commission (SEC) as well as a variety of subsequent drafts created prior to obtaining approval for public release. To be considered eligible for release, the SEC must thoroughly review a red herring prospectus to ensure the information contained therein does not include any intentional or incidental falsehoods or statements that are in violation of any laws or regulations. The SEC may also note any failure to disclose required information.
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. The red herring does not state a price or issue size.
Purpose of the Red Herring Prospectus
The red herring prospectus contains substantial information on the company as well as information regarding the intended use of proceeds from the offering; market potential for its product/service; financial statements; details regarding pertinent management personnel and current major shareholders; pending litigation; and other pertinent details. The red herring prospectus solicits expressions of interest in the prospective issue.
Once the registration statement becomes effective, the company disseminates a final prospectus that contains the final IPO price and issue size. Expressions of interest then convert to orders for the issue at the buyer's option. The minimum period between a registration statement filing and its effective date is 20 days. The SEC does not approve the securities but simply ensures that all relevant information is disclosed in the registration statement.
Value of a Red Herring Prospectus to Investors
A red herring prospectus can function as a source of information regarding a potential offering that is currently being crafted by a particular company. Versions of the prospectus that have not been fully reviewed by the SEC may present a company in a particularly favorably light. This view may be adjusted after the SEC has requested revisions before final approval.