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Red Herring Prospectus

Guide to Understanding the Red Herring Prospectus

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Red Herring Prospectus

Red Herring Prospectus — SEC IPO Filing

The red herring can be thought of as the preliminary first draft that precedes the final prospectus.

Companies attempting to raise capital by issuing new equity securities to the public market must receive regulatory approval from the Securities and Exchange Commission (SEC).

Before a company can undergo an initial public offering (IPO) — i.e. the first time that the company’s equity is offered to the market — its final prospectus must first be approved.

Often called the S-1 filing, the final prospectus contains all the necessary information about a public company’s proposed IPO so that investors can make better-informed decisions.

SEC regulators often request additional material to be included in the prospectus, which ensures that the document provides as much transparency as possible.

But prior to the release of the official prospectus, a document referred to as the “red herring prospectus” is circulated with institutional investors in the early stages of the IPO process.

The red herring, also known as the preliminary prospectus, provides potential investors — mostly institutional investors — with the details surrounding a company’s upcoming IPO.

A company’s red herring prospectus provides investors with insight into the general background of the company, its business model, its past financial results, and management’s future growth projections.

Red Herring Prospectus vs. Final Prospectus (S-1)

Compared to the final prospectus (S-1), the red herring prospectus contains less information because the document is intended to be amendable.

Most notably, the issuance price of each share and the total number of shares offered are missing.

The red herring prospectus is shared among a select number of institutional investors who will provide feedback to the company and its team of advisors specializing in the equity capital markets.

The support of these institutional investors is frequently necessary to the company (and can shape the final prospectus), so changes are usually made in order to cater to their specific interests.

Since the red herring is a preliminary document, there is still sufficient time for changes to be made based on any feedback received from investors and the SEC.

Since the final prospectus incorporates any such feedback, the final prospectus formally filed with the SEC for confirmation is more detailed and complete.

Before the final prospectus filing (S-1), the red herring is shared among institutional investors during the quiet period of the “road show”, i.e. the period during which a company sets up meetings with investors to gauge their interest and their thoughts around the proposed offering’s terms.

That said, the general purpose of the red herring preliminary prospectus is to “test the waters” and make adjustments as needed.

Once the company files its final prospectus — assuming the SEC has given its stamp of approval — the company can proceed with “going public” via the IPO and issue new equity securities to the public markets.

Sections of the Red Herring Prospectus

The structure of the red herring prospectus is virtually identical to that of the final prospectus, but the distinction is the latter is more in-depth and considered to be the “official” filing.

The table below describes the main sections of the preliminary prospectus.

Key Sections Description
Prospectus Summary
  • A broad overview of the company’s proposed initial public offering (IPO), focusing on the most important takeaways, i.e. the context of the equity offering.
History
  • The origins of the company and its mission statement are stated here.
Business Model
  • The products or services the company offers customers and the types of end markets served are discussed here.
Management Team
  • The management team’s background is presented so that investors are aware of the leadership in charge of the company (and why these executives are qualified to be in their positions).
Financial Statements
  • The company’s financials, namely the income statement, balance sheet, and cash flow statement, are shown here to summarize the company’s past performance.
Risk Factors
  • Risk factors represent the potential threats to the company that could hamper its financial performance, such as a saturated, highly competitive market or developing industry trends led by disruptive startups.
Use of Proceeds
  • The company is typically raising capital for specific purposes and must explain where the newly raised funds will be spent — for example, the capital could be used to fund ongoing operations, capital expenditures, expansion into new markets, or to engage in M&A.
Capitalization
  • The capitalization section outlines the company’s current cap table, which frequently consists of early-stage investors such as venture capital firms and growth equity shops.
  • While the company’s existing capital structure is portrayed, the dilutive impact post-IPO can be tricky to estimate since there are usually pieces of information that are still missing / to be determined (i.e. the share price and the number of new shares issued).
Dividend Policy
  • The dividend policy section will summarize the company’s current dividend policy and future plans for issuing dividends to shareholders, which can influence the type of investors participating in the offering.
Voting Rights
  • The voting rights section outlines the expected classes of shares issued by the company or how it intends the classes to be structured post-IPO, i.e. the voting rights attached to each class of shares.

Red Herring Example — Facebook (FB) Preliminary Filing

An example of a red herring prospectus can be viewed by clicking on the linked button below.

Facebook (FB) Red Herring

This example prospectus was filed in 2012 by Facebook (NASDAQ: FB), the social networking conglomerate now doing business under the name “Meta Platforms”.

The red text in the screenshot below emphasizes that the preliminary prospectus is subject to change and the terms are not fixed, i.e. there is still room for improvements based upon feedback from potential investors or required adjustments per SEC guidance.

Red Herring Prospectus Example

Moreover, the text above the red text states the following:

Facebook Example

“The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting offers to buy these securities in any state where the offer or sale is not permitted.”

– Facebook, Preliminary Prospectus

The table of contents found within Facebook’s red herring is as follows.

  • Prospectus Summary
  • Risk Factors
  • Special Note Regarding Forward-Looking Statements
  • Industry Data and User Metrics
  • Use of Proceeds
  • Dividend Policy
  • Capitalization
  • Dilution
  • Selected Consolidated Financial Data
  • Management’s Discussion and Analysis of Financial Condition and Results of Operations
  • Letter from Mark Zuckerberg
  • Business
  • Management
  • Executive Compensation
  • Related Party Transactions
  • Principal and Selling Stockholders
  • Description of Capital Stock
  • Shares Eligible for Future Sale
  • Material U.S. Federal Tax Considerations for Non-U.S. Holders of Class A Common Stock
  • Underwriting
  • Legal Matters
  • Experts
  • Where You Can Find Additional Information
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