What is a red herring prospectus?

Red herring prospectus is a document that a company files with the US Securities and Exchange Commission (SEC). It normally contains information about the firm and its planned initial public offering (IPO). It is a preliminary document, so key details are usually absent.

Key takeaways:

Where have you heard about a red herring prospectus?

As a potential investor, you may want to use a red herring prospectus to gauge the health and prospects of a company that you are considering buying assets in.

How a red herring prospectus works

A red herring prospectus can refer to the initial prospectus filed with the SEC, as well as subsequent drafts created before obtaining approval for public release. To be considered eligible, the SEC must review a red herring prospectus to ensure the information contained therein doesn't include any intentional or incidental falsehoods or statements that are in violation of any laws. Only after the SEC's thorough review is completed, and the prospectus is deemed eligible for release, it can be made public.

What you need to know about a red herring prospectus

This type of preliminary document is filed with the SEC. It takes its name from a traditional disclaimer on the front, written in red, which states that the prospectus has not yet been approved by the SEC and details are subject to change. The SEC will review the document to make sure it contains no inaccurate or misleading information, and all key details are present. Once the document has been approved, the company will then distribute its final prospectus, with specific figures on price and issue size.