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.