What Is a Red Herring?
Let me explain what a red herring is in straightforward terms. It's a preliminary prospectus that a company files with the Securities and Exchange Commission (SEC), typically when they're gearing up for an initial public offering (IPO). This document gives you most of the details about the company's operations and future prospects, but it leaves out crucial elements of the security issue, like the price and the number of shares being offered.
How a Red Herring Works
You should know that a red herring prospectus can refer to the initial filing with the SEC or any subsequent drafts made before getting the green light for public release. For it to be eligible, the SEC has to review it thoroughly to make sure there are no intentional or accidental falsehoods, no statements breaking laws or regulations, and no missing required information.
The name 'red herring' comes from the bold red disclaimer on the cover page of this preliminary prospectus. That disclaimer tells you that a registration statement for the securities has been filed with the SEC but isn't effective yet. What this means is the information inside is incomplete and could change, so you can't sell the securities or accept offers to buy until the registration becomes effective. It doesn't include a price or issue size. Think of it like submitting effectiveness data for a drug to the FDA—it's under review, but no approval is given; here, it's just about the registration becoming effective.
Once that registration statement is effective, the company sends out a final prospectus with the actual IPO price and issue size. At that point, any expressions of interest can turn into actual orders if the buyer chooses. There's a minimum 15-day period between filing and the effective date. Remember, the SEC doesn't approve the securities themselves; they just ensure all relevant information is disclosed in the registration statement.
Important Note
Here's something key: a red herring is essentially a preliminary document filed with the SEC indicating that a security offering has been filed but isn't effective yet.
Benefits of a Red Herring
From my perspective, a red herring prospectus serves as a useful source of information about a potential offering that a company is putting together. Early versions that haven't been fully reviewed by the SEC might paint the company in an overly positive light, but that can get adjusted once the SEC requests revisions before final approval.
This prospectus includes substantial details on the company, such as how they plan to use the proceeds from the offering, the market potential for their products or services, financial statements, information on key management personnel and major shareholders, any pending litigation, and other relevant facts.
Key Takeaways
- A red herring is a preliminary prospectus filed with the SEC, usually for an IPO—it excludes key details like 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 ensures all proper information is disclosed without approving the securities.
Example of a Red Herring
Take Facebook Inc., now known as Meta (META), as an example. They filed a red herring, which was basically a Form S-1 with a disclosure. On their filing dated February 1, 2012, the bold red disclaimer 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.'
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