A red herring prospectus, as a first or preliminary prospectus, is a document submitted by a company (issuer) as part of a public offering of securities (either stocks or bonds). Most frequently associated with an initial public offering (IPO), this document, like the previously submitted Form S-1 registration statement, must be filed with the Securities and Exchange Commission (SEC). Show A red herring prospectus is issued to potential investors, but does not have complete particulars on the price of the securities offered and quantum of securities to be issued.[1] The front page of the prospectus displays a bold red disclaimer stating that information in the prospectus is not complete and may be changed, and that the securities may not be sold until the registration statement, filed with the market regulator, is effective.[2] Potential investors may not place buy orders for the security, based solely on the information contained within the preliminary prospectus. Those investors may, however, express an "indication of interest" in the offering, provided that they have received a copy of the red herring at least 72 hours prior to the public sale. After the registration statement becomes effective, and the stock is offered to the public, indications of interest may be converted to purchase orders, at the buyer's discretion. The final prospectus must then be promptly delivered to the buyer. Contents[edit]"Red-herring prospectus" means a prospectus that does not have complete particulars on the price of the securities offered and quantum of securities offered. The red herring statement contains:
Prospectus[edit]Since the registration statement (SEC Form S-1) 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. The Preliminary (or Red Herring) Prospectus is distributed during the quiet period, before the registration statement has become effective with the Securities and Exchange Commission (SEC). Upon the registration becoming effective, a "Final Prospectus" is prepared and distributed which includes the final public offering price and the number of shares issued. Only then, can the public offering of shares be completed. Name[edit]The name "Red Herring" relates to the red lettered disclaimer displayed on the front page of each preliminary prospectus. That disclaimer contains information similar to the following:
The wording can be, and usually is, slightly different with each individual filing. An example is the 2012 Facebook prospectus.[3] Registration[edit]The minimum period between the filing of a Registration and its effective date is 20 days, called the "cooling-off period." 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. References[edit]
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What is allowed during the cooling off period?During this time of review known as the cooling off period no sales may be made and no checks can be accepted from investors. During this time a Registered Representative may accept indications of interest and may send out preliminary prospectuses.
What is meant by indication of interest?An indication of interest (IOI) is a brief letter or notice that expresses a buyer's interest in buying a security in registration or a company's interest in acquiring another company. For investments, the IOI precedes the IPO, and in finance, it precedes the letter of intent (LOI).
What should be included in an indication of interest?An indication of Interest (IOI) is a non-binding letter used to express interest in acquiring the business. The IOI will typically include a value range, due diligence plans, a high-level proposal for deal structure, and expectations for seller transition.
What is the cooling off period for a public offering of securities?Soliciting Investors
Twenty-one days after the S-1 form is filed—a time known as the “cooling off period”—the company and its bank can meet with investors. It is during this period that the bank announces the terms of the IPO and begins taking orders from prospective investors. These orders are not guaranteed.
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