Red herring prospectus

A red herring prospectus is a document submitted by a company (issuer) who intends on having a public offering of securities (either stocks or bonds) in the United States. Most frequently associated with an Initial Public Offering (IPO), this registration statement must be filed with the Securities and Exchange Commission(SEC).

Contents

The "red herring statement" contains:
# purpose of the issue;
# proposed offering price range;
# disclosure of any option agreement;
# underwriter's commissions and discounts;
# promotion expenses;
# net proceeds to the issuing company (issuer);
# balance sheet;
# earnings statements for last 3 years, if available;
# names and address of all officers, directors, underwriters and stockholders owning 10% or more of the current outstanding stock;
# copy of the underwriting agreement;
# legal opinion on the issue;
# copies of the articles of incorporation of the issuer.

Prospectus

Since the registration statement 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. Upon the registration becoming effective, a FINAL PROSPECTUS is prepared which includes the final public offering price.

Why it is called so?

The term red herring originates from the tradition whereby young hunting dogs in Britain were trained to follow a scent with the use of a "red" (salted and smoked) herring (see kipper). This pungent fish would be dragged across a trail until the puppy learned to follow the scent.

The reason it is called a red herring is due to a disclosure statement printed in red ink on the cover which explicitly states that the issuing company is not attempting to sell its shares.e.g. "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."

Registration

The minimum period between the filing of a Registration and its effective date is 20 days, called the "cooling-off period." This is the minimum number of days. 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.

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