Outside the United States, it is sometimes called the “pathfinder prospectus.” this preliminary prospectus is referred to as a red herring because it contains the following warning, generally in red ink:
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. this prospectus is not an of er to sell these securities and we are not soliciting any of er to buy these securities in any jurisdiction where the offer or sale is not permitted.The Securities Act of 1933 makes it illegal in the United States to sell securities to the public without first registering with the SEC. Once the registration statement is filed with SEC, a shorter version of the statement (red herring) is created.
It is a provisional statement that includes all the information about the company apart from the exact offer price and the effective date. Since the registration and marketing process can take several months, providing information on the exact price and effective date is impossible; thus, it generally includes a price range.
Red herring is then sent to potential investors around the country. At this period no written sales literature other than “tombstones ads” and red herring are permitted by SEC. Unlike Europe, in the United States the analyst reports are strictly forbidden before SEC approves the registration.
During the marketing period, investors evaluate the issue. The demand for the offer is estimated and the final issue price is set based on the bids and feedbacks. If this price is not within the preliminary price range in red herring, a revision is made indicating a new price range.
Indeed, since the price range in red herring is prepared prior to getting feedback from potential investors, the i nal price in the United States is ot en outside of the initial price range in the red herring document. Once SEC approves the registration statement, it becomes effective and trading is allowed.