Definition
A Red Herring Filing, also known as a Red Herring Prospectus, is a preliminary prospectus filed by a company with the Securities and Exchange Commission (SEC) as part of its initial public offering (IPO) process. It contains important information about the company, including its operations, management, financial condition, and shares that will be issued. However, it does not disclose crucial details like the price and number of shares to be issued.
Phonetic
The phonetics of the keyword “Red Herring Filing” is: /ɹɛd ‘hɛrɪŋ ‘faɪlɪŋ/.
Key Takeaways
- Preparation for IPO: A Red Herring document is used in preparation for an Initial Public Offering (IPO). It contains detailed information about the company’s operations, financial state, business model, and plans for the future. It is designed to provide potential investors with everything they need to make an informed decision about investing in the company.
- Preliminary Prospectus: The Red Herring filing is technically known as a preliminary prospectus. It is not the final prospectus and can be subject to changes in terms of pricing and the number of shares to be offered. The U.S. Securities and Exchange Commission (SEC) uses the Red Herring document to review the legitimacy of the issuer’s intentions and to mitigate potential risks to investors.
- Named After a Red Herring: The term “Red Herring” is derived from a red border and a warning statement that was initially required on the cover of the preliminary prospectus in red ink, stating that the information contained within was not complete and may be changed. These documents were thus casually referred to as “Red Herrings” among lawyers and investment bankers, hence the name.
Importance
The term “Red Herring Filing” is pivotal in business and finance as it represents a preliminary prospectus filed by a company with the Securities and Exchange Commission (SEC), usually in connection with the company’s initial public offering (IPO). This document contains critical information about the company, including details about the company’s operations, management, financial condition, and shares to be issued. However, it doesn’t include key details like the number of shares to be issued or the price range for the offering, thus coined as a “red herring” filing. It serves as a valuable tool for investors, enabling them to evaluate and assess the viability of investing in the company, notwithstanding its incomplete nature. It also alerts the market about the company’s intention to go public, thereby supporting the promotion efforts of underwriters and the company.
Explanation
A Red Herring Filing serves a critical role in the initial public offering (IPO) process by providing crucial information to potential investors. The primary purpose of this filing is to impart information about the company’s business operations, financial condition, and intended use of public funds, before the securities are made available for purchase on the open market. The red herring document, which is officially referred to as a preliminary prospectus, falls under the filing requirements of the Securities and Exchange Commission (SEC).
Additionally, a Red Herring Filing is beneficial in building interest and excitement among potential investors during the pre-IPO “road show” or “book-building” stage. Here, underwriters and company executives present the red herring document to potential investors to gauge the investment interest. While it includes valuable financial data such as balance sheets and income statements, it does not provide the number of shares to be issued or the price range. These will be included later in the final prospectus, once the SEC’s review process is complete and the IPO price has been determined. Hence, the Red Herring Filing acts as a fundamental tool in ensuring transparency, reducing information asymmetry, and establishing investor confidence.
Examples
1. Facebook’s IPO in 2012: In 2011, when Facebook filed for its initial public offering (IPO), it first issued a red herring document with the U.S. Securities and Exchange Commission. This document revealed important financial information about the company, such as its revenue and net income, but didn’t provide all the details, such as the IPO price or the number of shares which were to be sold. Those details were revealed closer to the actual date of the IPO.
2. General Motors Company IPO in 2010: Following bankruptcy in 2009, General Motors (GM) filed for an IPO a year later, issuing a red herring prospectus. This revealed the company’s intention to be public again as well as some financial information, but didn’t provide all details like the price at which shares would be sold or the total number of shares to be issued. These details were provided only weeks before the actual IPO.
3. Uber’s IPO in 2019: Before Uber went public, it released a red herring document with preliminary information. The document gave investors some information regarding the financial performance of the company, its operations and potential risk factors. However, full details like the price per share and the total number of shares that would be made available were not included till shortly before the actual launch of the IPO.
Frequently Asked Questions(FAQ)
What is a Red Herring Filing?
A Red Herring Filing, often referred to as a Red Herring Prospectus, is a preliminary document filed by a company with the Securities and Exchange Commission (SEC) as part of the initial public offering (IPO) process. It contains information about the company’s operations, financial health, management, and the securities being issued.
Why is it called a Red Herring?
The term Red Herring is a reference to the red warning label on the cover of the preliminary prospectus indicating that the information contained within may be incomplete or subject to change.
What kind of information can be found in the Red Herring Filing?
The Red Herring Filing includes crucial details about the company, such as its financial status, ownership structure, business strategy, and risk factors. It also provides an initial price range for the securities being sold.
Is the information in a Red Herring Filing final?
No, the information in a Red Herring Filing is not final. It is a preliminary document that may be updated or altered before the final prospectus is released on completion of the SEC review process.
Can potential investors rely wholly on a Red Herring Filing?
While a Red Herring Filing provides investors with a preliminarily understanding of the company and its offerings, they should not solely rely on it when making a final investment decision since the information can change before the final prospectus is issued.
Where can I find a company’s Red Herring Filing?
Companies’ Red Herring Filings are typically available through the SEC’s online database, EDGAR (Electronic Data Gathering, Analysis and Retrieval system). They can also be obtained directly from the company, often from their website or investor relations department.
Related Finance Terms
- Securities and Exchange Commission (SEC): The regulatory body tasked with overseeing and enforcing federal securities laws, among which are the laws governing red herring filings.
- Initial Public Offering (IPO): The process by which a private corporation can go public by selling a portion of its shares to institutional and retail investors. The red herring document is a key part of this process.
- Due Diligence: The research conducted by investors, brokers, or underwriters before entering into an agreement or a financial transaction with an entity. This often includes the analysis of a red herring filing to fully understand the associated risks.
- Prospectus: A legal document that provides additional details about a company’s financial health, risks, and other relevant factors. The red herring can be considered a preliminary, or initial, version of this document.
- Underwriter: A financial specialist that plays a key role in the IPO process, helping to determine the initial offer price of the securities being sold, buying those securities from the issuer, and then selling them to investors. Underwriters study the red herring filing to fully understand the financial standing of the entity.
