Red Herring Prospectus (Red Herring Filing)

What it is

A red herring prospectus is a preliminary registration document filed with the U.S. Securities and Exchange Commission (SEC) as part of an initial public offering (IPO). It provides potential investors with material information about the company while omitting final details such as the offering price and number of shares. The name comes from a prominent red disclaimer on the cover indicating the information is incomplete and the offering is not yet effective.

Purpose and role in the IPO process

• Signals that a company has filed a registration statement with the SEC and is preparing an offering.
• Provides transparency to investors while the SEC reviews the filing for adequate disclosure.
• Allows underwriters and the company to solicit non-binding indications of interest (bookbuilding) before the registration becomes effective.
• Once the SEC completes its review and the registration is declared effective, the company issues a final prospectus that includes price, share count and instructions for placing orders.

Note: SEC review focuses on disclosure quality and completeness; it does not constitute approval or endorsement of the securities as investments. Timelines for review and effectiveness vary.

Typical contents

A red herring contains substantial information about the company, such as:
* Business description and market opportunity
* Use of proceeds from the offering
* Financial statements and key metrics
* Backgrounds of principal management and directors
* Major existing shareholders
* Material risks and pending litigation

It deliberately omits final offering terms (price and share count) until the registration is effective.

Advantages and limitations

Advantages:
* Provides investors with a detailed view of the company’s operations, finances and risks before the IPO.
* Helps underwriters gauge investor demand and price the offering.

Limitations:
* Information is preliminary and may change after SEC review; early drafts can present the company in a more favorable light until revised.
* Does not authorize sales of the securities — transactions can occur only after the registration is effective and a final prospectus is issued.

Example: Facebook (Meta)

Facebook (now Meta) filed a Form S-1 red herring ahead of its 2012 IPO. The filing featured the standard red disclaimer stating the prospectus was incomplete, could change, and was not an offer to sell securities until the SEC registration was effective. This filing provided investors with the company’s business details and financials while reserving final offering terms for the effective registration.

Key takeaways

• A red herring is a preliminary prospectus filed during the IPO process that omits final offering terms.
• Its purpose is to disclose material company information and solicit investor interest while the SEC reviews the registration.
• The SEC reviews the document for disclosure adequacy but does not endorse the securities.
• Final sale terms appear only in the prospectus issued after the SEC declares the registration effective.