Preliminary Prospectus

What Is a Preliminary Prospectus?

A preliminary prospectus is a first draft registration statement that a firm documents prior to continuing with a initial public offering (IPO) of their securities. The document, recorded with the Securities and Exchange Commission (SEC), is planned to give appropriate data to prospective shareholders about the company's business, managers, strategic drives, financial statements, and ownership structure. The preliminary prospectus solicits articulations of interest in the new issue.

How a Preliminary Prospectus Works

The SEC expects that companies print their preliminary prospectus with red ink on the left half of the cover. Thus, the document has been nicknamed the "red herring." A preliminary prospectus has an intense disclaimer on the cover page that states that the registration has not yet become effective. The data that the prospectus contains is, accordingly, incomplete and subject to change. Until the registration becomes effective, the securities may not be sold, and the issuer may not acknowledge any offers to buy.

The preliminary prospectus contains data on the company and the planned utilization of proceeds from the offering. The company gives insights concerning the products and services that it offers, the market potential for those offerings, its financial statements, and insights concerning company management and major shareholders. The prospectus likewise contains a legal assessment and data about the risks of the issue.

When the registration statement becomes effective, the company disperses a final prospectus that contains the IPO price reach and issue size. Articulations of interest then convert to orders for the issue at the buyer's option. The base period between a registration statement filing and its effective date is 20 days.

A roadshow can be a crucial backup to a preliminary prospectus, filling in as an instructive resource for the people who may not be know all about the company.

Special Considerations

The preliminary prospectus comes in tandem with the issuer's IPO roadshow. In a roadshow, the company's senior management and the underwriters venture out around the country to present to analysts and fund managers to create energy for the company's securities. Roadshows are critical to the outcome of initial offerings.

A roadshow might be limited to a single country or may incorporate international stops, contingent upon the type, size, and promotion around the company. In 2012, for instance, Facebook began its roadshow in New York City and made stops in Boston, Chicago, Denver, and eight different urban areas. These are generally standard stops for roadshows inside the United States. Underwriters frequently run the roadshows, using their financial and bargain making aptitude.

Facebook started its roadshow show with a video, which differed in many regards from other company introductions. Conversely, with a traditional powerpoint show, Facebook's video had higher production values and incorporated a soundtrack. It made sense of Facebook's business, mission, and thesis about social network and mechanical change for somebody without a foundation in the industry.

After some pushback from investors that the video took up too much time in the show, Facebook dropped it from the second half of its roadshow and on second thought let senior management talk. Combined with a preliminary prospectus, this data assisted Facebook's investors with settling on their last choices.

Features

• A preliminary prospectus is frequently joined by a roadshow, wherein a company attempts to build interest in their offering.
• A preliminary prospectus — otherwise called a red herring — gives potential investors fundamental data with respect to a company or product prior to the Initial Public Offering of said company or product.
• A preliminary prospectus is delivered prior to any official offer becoming effective.
• The data in a preliminary prospectus can incorporate a company's plan, the expected utilization of funds, financial statements, and insights about management.
• The preliminary prospectus goes before the last prospectus, which offers a price reach and issue size for the IPO.