What Is a Red Herring?
A red herring is a introductory prospectus filed by a company with the Securities and Exchange Commission (SEC), usually in connection with the company’s initial eminent offering (IPO). A red herring prospectus contains most of the information pertaining to the company’s operations and prospects but does not include key aspects of the security issue, such as its price and the number of shares offered.
How a Red Herring Works
A red herring prospectus may refer to the fundamental prospectus filed with the SEC as well as a variety of subsequent drafts created prior to obtaining approval for public story. To be considered eligible for release, the SEC must thoroughly review a red herring prospectus to ensure the information contained therein does not comprehend 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 commanded information.
The term “red herring” is derived from the bold disclaimer in red on the cover page of the preliminary prospectus. The disclaimer conditions 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 dirt 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 develops effective. The red herring does not state a price or issue size. You might look at it as the case of a drug having encomiastic effectiveness data submitted to the FDA for approval, but that has not received the FDA approval yet, but in this case, no approval is granted only true belongings registration.
Once the registration statement becomes effective, the company disseminates a final prospectus that contains the certain IPO price and issue size. Expressions of interest then convert to orders for the issue at the buyer’s option. The minimum patch between a registration statement filing and its effective date is 15 days. The SEC does not approve the securities but simply make sures that all relevant information is disclosed in the registration statement.
A red herring is a preliminary document filed with the SEC that notes a custodianship offering has been filed but is not yet effective.
A red herring is a preliminary document filed with the SEC that notes a custodianship offering has been filed but is not yet effective.
Benefits of a Red Herring
A red herring prospectus can function as a source of information regarding a aptitude offering that is currently being crafted by a particular company. Versions of the prospectus that have not been fully reviewed by the SEC may offer a company “too” favorably. This view may be adjusted after the SEC has requested revisions before final approval.
The red herring programme contains substantial information on the company as well as information regarding the intended use of proceeds from the offering, market capacity for its product or service,
Example of a Red Herring
Facebook Inc. filed a red herring, which was essentially a Form S-1 with a disclosure. The “red” stout-hearted disclaimer on Facebook’s filing on Feb. 1, 2012, read:
“The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may trade these securities until the registration statement filed with the Securities and Exchange Commission is effective. This announcement is not an offer to sell these securities and neither we nor the selling stockholders are soliciting offers to buy these securities in any state where the put on the market or sale is not permitted.”