What Is a Red Herring Prospectus?
A red herring is the preliminary prospectus circulated to investors during an IPO roadshow, before the offering has been priced. It contains everything the final prospectus will contain except the terms that depend on the market: no fixed price, an indicative range, and an estimated share count.
The name comes from a legend printed on the cover — traditionally in red ink — stating that the registration statement has been filed but has not yet become effective, and that the securities may not be sold until it does.
Why is it called a red herring?
Literally because of the red ink.
Regulation S-K requires a preliminary prospectus to carry a cautionary statement on its cover explaining that the registration statement is not yet effective, that the information is subject to completion or amendment, and that the document does not constitute an offer to sell in any jurisdiction where that would be unlawful. Printers set that legend in red to make it unmissable against the black body text.
The name has nothing to do with the idiomatic "red herring" meaning a misleading distraction, which comes from a much older story about dragging cured fish across a scent trail. The financial term is descriptive of the physical document, and it stuck long after most prospectuses stopped being printed at all.
See Glossary.
What is in a red herring, and what isn't?
Everything substantive is there: the business description, risk factors, MD&A, audited financial statements, management and compensation, related party transactions, principal stockholders, description of capital stock, and the underwriting arrangements.
What's missing is anything that depends on the market:
| Item | In the red herring | In the final prospectus |
|---|---|---|
| Offer price | An indicative range | A single number |
| Shares offered | An estimate | Final |
| Underwriting discount | Usually a placeholder | Stated per share and in aggregate |
| Net proceeds | Estimated at the range midpoint | Actual |
| Dilution and capitalisation | Calculated at the midpoint | Calculated at the real price |
| The red-ink legend | Present | Removed |
This is permitted under Rule 430A of the Securities Act, which allows a registration statement to be declared effective while omitting pricing information, on the basis that it will be supplied in the final prospectus filed shortly afterwards.
See S-1 vs. 424B4.
When is a red herring used?
During the roadshow — the marketing period, typically one to two weeks, in which management presents to institutional investors and the underwriters collect indications of interest.
The red herring is the document investors read while deciding whether and at what price they want shares. It is the basis on which the book is built.
Its existence is a consequence of how the Securities Act structures an offering. During the period between filing and effectiveness, offers may be made but sales may not be completed. The preliminary prospectus is the permitted vehicle for making those offers.
See The IPO process: step by step.
Where does the price range come from?
The range does not appear in the original registration statement. It's added in an amendment — an S-1/A — shortly before marketing begins, once the underwriters have a working view of value from comparable companies and early soundings.
The range is a marketing instrument as much as a valuation. Setting it conservatively creates room for an upward revision, which is itself a positive signal to the market. Setting it aggressively risks a visible cut.
Revisions to the range are the single most informative public signal on a live deal. Moved up, and the book is covered comfortably. Moved down, and it isn't. Both appear in amended filings, timestamped and public, before the stock trades.
See How is an IPO priced? · IPO bookbuilding.
Can a company say anything it likes in a red herring?
No, and the constraints are tighter than people expect.
During the registration process, communications about the offering are restricted. The preliminary prospectus is the permitted document; promotional statements outside it can constitute impermissible offering activity, informally called gun-jumping. This is why companies go noticeably quiet in the weeks before an IPO, and why management interviews dry up.
Certain additional written materials — free writing prospectuses — may be used alongside the statutory prospectus if filed with the SEC. Emerging growth companies may also hold testing-the-waters meetings with qualified institutional buyers and institutional accredited investors.
The SEC notes that the securities laws do not actually define a single "quiet period," despite the term's universal use. What exists is a set of distinct restrictions operating at different stages.
See The IPO quiet period · Testing the waters.
Is a red herring legally binding?
It is not an offer that can be accepted, and nothing in it commits the company to a price or to proceeding at all. Deals are repriced, downsized, postponed, and withdrawn after a red herring has circulated.
But it is not a document without consequence. It forms part of the registration statement, and Section 11 of the Securities Act imposes liability for material misstatements or omissions in a registration statement. The absence of a price does not reduce the standard applied to everything else in it.
See Section 11 liability · Withdrawn and postponed IPOs.
Should you read the red herring or the final prospectus?
Following a live deal: the red herring and its amendments. That's where the story is still developing, and where range revisions appear.
Evaluating a company that has already listed: the final prospectus, because it's complete and it's what governs.
Researching how a deal was received: both, read against each other. The gap between the last preliminary version and the final one is the market's contribution to the document.
Quick answers
Is a red herring the same as an S-1? The red herring is the preliminary prospectus, which is Part I of the registration statement. The S-1 is the complete filing.
Why are pricing terms left out? Rule 430A permits it, so that effectiveness and pricing can happen close together rather than requiring the company to guess a price weeks in advance.
Where can I find a red herring? On EDGAR, as part of the S-1 or S-1/A filings, or filed separately under Rule 424 in some deals.
Is it still printed in red? Rarely printed at all. The legend survives as a formatting convention.
Does every offering have one? Every registered offering marketed to investors before pricing uses a preliminary prospectus. The term "red herring" is most commonly applied to IPOs.
Can the final price be outside the indicated range? Yes, in either direction, and it regularly is.
Related
What is a prospectus? · What is an S-1? · What is Form 424B4? · S-1 vs. 424B4 · The IPO quiet period · How to read an IPO prospectus
Sources
- Securities Act of 1933, Sections 5 and 10; Rule 430A; Rule 424
- Regulation S-K Item 501 — prospectus cover page requirements, including the preliminary prospectus legend
- SEC guidance on communications during the registration process
- JOBS Act of 2012 — testing the waters
- Issuer registration statements on EDGAR