|
Answer:
Dear
Albert,
Red
herring is one of those fascinating bits of Wall Street
slang. It refers to a preliminary prospectus and the
fact that some portions of the cover page of the preliminary
prospectus are printed in red ink.
About
the preliminary prospectus
So,
knowing that much takes us to the term, "prospectus."
A
prospectus is a written document. A preliminary prospectus
is the first document released by an underwriter of
a new issue to "prospective" investors.
This
prospectus is drawn up before the selling price
has been set for the new security and before
the issuer's registration statement has been approved
for accuracy and completeness by the SEC.
The
prospectus contains key information about the security
offering, including the company's various lines of
business, its operations and its financial condition
as well as details about management and any litigation.
This
disclosure statement cannot be used to sell securities...in
other words, a broker cannot show it to you in order
to get a buy order. That's because the statement has
yet to be accepted by the SEC. Until it is accepted,
it cannot be considered to have met all legal requirements.
And, in order to make that perfectly clear, a red
cautionary blurb is printed on the cover -- usually
on the side of the cover.
The
SEC may, and in fact often does, send the statement
back to the underwriter, requesting additional information
and clarification. Once all the information required
by law is included, the SEC may accept the statement.
When that happens, the "red herring" portion comes
off and the statement turns into a "final prospectus."
Then it can legally be used to solicit orders from
the investing public.
Caution
The
two most important points to keep in mind about a
red herring are:
-
It does not contain all the information that
will appear in the final or "statutory prospectus."
- Parts
of the document may be changed before the final
prospectus is actually issued.
The
Standard Red Herring Statement
Just
to give you an idea, here's how a typical red herring
reads: "A registration statement in relation to these
securities has been filed with the Securities and
Exchange Commission, but has not yet become effective.
Information contained herein is subject to completion
or amendment. These securities may not be sold nor
may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus
shall not constitute an offer to sell or the solicitation
of an offer to buy nor shall there be any sale of
these securities in any state in which such an offer,
solicitation, or sale would be lawful prior to the
registration or qualification under the securities
laws of any such state."
Hope
this helps. Please write in again if you have more
questions.
|
