What is a Red Herring?
A red herring is a registration statement filed with the Securities and Exchange Commission (SEC) by a company that intends to make a public equity offering. The red herring is a rough draft of the company's prospectus and includes a description of the company's business, financial condition, strategy, management, litigation and risk factors.
How Does a Red Herring Work?
A red herring receives its name from the prominent disclosure statement in red letters stating that the company is not attempting to sell its securities prior to the SEC's approval.
Information within a red herring changes either because the SEC requires it or the issuer chooses to alter or add to the existing disclosure. After the SEC approves the document, the red herring becomes the final prospectus and can be used to solicit orders from investors.
Why Does a Red Herring Matter?
Underwriters often use red herrings to gauge interest in their offerings. They are often the first look investors get at a new issuer.