Which statement is TRUE regarding the use of a red herring preliminary prospectus

A red herring prospectus, as a first or preliminary prospectus, is a document submitted by a company (issuer) as part of a public offering of securities (either stocks or bonds). Most frequently associated with an initial public offering (IPO), this document, like the previously submitted Form S-1 registration statement, must be filed with the Securities and Exchange Commission (SEC).

A red herring prospectus is issued to potential investors, but does not have complete particulars on the price of the securities offered and quantum of securities to be issued.[1] The front page of the prospectus displays a bold red disclaimer stating that information in the prospectus is not complete and may be changed, and that the securities may not be sold until the registration statement, filed with the market regulator, is effective.[2] Potential investors may not place buy orders for the security, based solely on the information contained within the preliminary prospectus. Those investors may, however, express an "indication of interest" in the offering, provided that they have received a copy of the red herring at least 72 hours prior to the public sale. After the registration statement becomes effective, and the stock is offered to the public, indications of interest may be converted to purchase orders, at the buyer's discretion. The final prospectus must then be promptly delivered to the buyer.

Contents[edit]

"Red-herring prospectus" means a prospectus that does not have complete particulars on the price of the securities offered and quantum of securities offered. The red herring statement contains:

1. purpose of the issue;
2. disclosure of any option agreement;
3. underwriter's commissions and discounts;
4. promotion expenses;
5. net proceeds to the issuing company (issuer);
6. balance sheet;
7. earnings statements for last 3 years, if available;
8. names and address of all officers, directors, underwriters and stockholders owning 10% or more of the current outstanding stock;
9. copy of the underwriting agreement;
10. legal opinion on the issue;
11. copies of the articles of incorporation of the issuer.

Prospectus[edit]

Since the registration statement (SEC Form S-1) is a very lengthy and complex document, the Securities Act of 1933 requires the preparation of a shorter document, known as a prospectus, for investors to read. The Preliminary (or Red Herring) Prospectus is distributed during the quiet period, before the registration statement has become effective with the Securities and Exchange Commission (SEC). Upon the registration becoming effective, a "Final Prospectus" is prepared and distributed which includes the final public offering price and the number of shares issued. Only then, can the public offering of shares be completed.

Name[edit]

The name "Red Herring" relates to the red lettered disclaimer displayed on the front page of each preliminary prospectus. That disclaimer contains information similar to the following:

A Registration Statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. Information contained herein is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective.

The wording can be, and usually is, slightly different with each individual filing. An example is the 2012 Facebook prospectus.[3]

Registration[edit]

The minimum period between the filing of a Registration and its effective date is 20 days, called the "cooling-off period." The SEC can deem the registration "deficient" in which case registration does not become effective until the deficiencies are corrected. The SEC does not approve the securities registered with it, does not pass on the investment merits, nor guarantee the accuracy of the statements within the registration statement or prospectus. The SEC merely attempts to make certain that all pertinent information is disclosed.

References[edit]

1. ^ What is a Red Herring Prospectus?
2. ^ The S.E.C. and a Free Securities Market p. 3
3. ^ Facebook red herring

External links[edit]

• Red herring prospectus

What Is a 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.

How a Red Herring Works

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 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 might look at it as the case of a drug having good 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 effective registration.

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 is a preliminary document filed with the SEC that notes a security 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 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.

Key Takeaways

• 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.

Example of a Red Herring

Facebook Inc. (META), now Meta, 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.

Which of the following can be found in an initial public offering preliminary prospectus?

Which statement is true regarding commercial paper A commercial paper may be sold without a prospectus?

Which of the following is true regarding Rule 147 intrastate offerings quizlet?

Which statement is true about new registered stock offerings quizlet?

Which offering of securities under Regulation is subject to purchase limitations quizlet?