Red Herring

What Is a Red Herring?

A red herring is a preliminary prospectus recorded by a company with the Securities and Exchange Commission (SEC), usually regarding the company's initial public offering (IPO). A red herring prospectus contains most of the information relating to the company's operations and prospects however does exclude key details of the security issue, such as its price and the number of shares offered.

How a Red Herring Works

A red herring prospectus might allude to the first prospectus recorded with the SEC as well as different subsequent drafts made prior to getting endorsement for public release. To be considered eligible for release, the SEC must completely survey a red herring prospectus to ensure the information contained in that does exclude any purposeful or incidental falsehoods or statements that are in violation of any laws or regulations. The SEC may also note any inability to disclose required information.

The term "red herring" is derived from the striking disclaimer in red on the cover page of the preliminary prospectus. The disclaimer states that a registration statement connecting with the securities being offered has been documented with the SEC however has not yet become effective. That is, the information contained in the prospectus is incomplete and might be changed. Thus, 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. You could view at it as the case of a medication having great effectiveness data submitted to the FDA for endorsement, yet that has not received the FDA endorsement yet, yet in this case, no endorsement is conceded, just effective registration.

When the registration statement becomes effective, the company disseminates a last prospectus that contains the last IPO price and issue size. Expressions 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 15 days. The SEC does not endorse the securities but rather simply ensures that all significant information is disclosed in the registration statement.

A red herring is a preliminary document recorded with the SEC that notes a security offering has been recorded yet is not yet effective.

Benefits of a Red Herring

A red herring prospectus can function as a source of information with respect to a potential offering that is currently being made by a specific company. Versions of the prospectus that poor person been completely checked on by the SEC might present a company "as well" well. This view might be adjusted after the SEC has requested revisions before definite endorsement.

The red herring prospectus contains substantial information on the company as well as information in regards to the planned use of proceeds from the offering, market potential for its product or service, financial statements, details in regards to relevant management personnel and current major shareholders, pending litigation, and other appropriate details.

Illustration of a Red Herring

Facebook Inc. (META), presently Meta, documented a red herring, which was essentially a Form S-1 with a disclosure. The "red" striking disclaimer on Facebook's filing on Feb. 1, 2012, read:

The information in this prospectus is not complete and might be changed. Neither we nor the selling stockholders might sell these securities until the registration statement recorded with the Securities and Exchange Commission is effective. This prospectus 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 offer or sale is not permitted.

Highlights

• Information in a red herring is subject to change and the SEC only ensures all legitimate information is disclosed.
• A red herring is a preliminary prospectus documented with the SEC, usually regarding an IPO — excludes key details of the issue, such as price and number of shares offered.
• The document states that a registration statement has been recorded with the SEC however is not yet effective.