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 (IPO). 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.

A red herring prospectus may refer to the first prospectus filed with the 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. That is, the information 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 becomes effective. The red herring does not state a price or issue size.

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 15 days. The SEC does not approve the securities but simply ensures that all relevant information is disclosed in the registration statement.

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 "too" favorably. This view may be adjusted after the SEC has requested revisions before final approval.

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 or service, financial statements, details regarding pertinent management personnel and current major shareholders, pending litigation, and other pertinent details.

• A red herring is a preliminary prospectus filed with the SEC, usually in connection with 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 filed with the SEC but is not yet effective.
• Information in a red herring is subject to change and the SEC merely ensures all proper information is disclosed.

Facebook Inc. filed a red herring, which was essentially a Form S-1 with a disclosure. The “red” bold 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 sell these securities until the registration statement filed 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.”