Red-herring prospectus is a preliminary prospectus. It is the preliminary registration of a company that has to be filed with the Securities and Exchange Commission stating the issue (IPO) and prospects of the company.
Red Herring for IPO
The red herring prospectus does not have the particulars of the public offering price and quantum of the securities offered. By issuing red-herring prospectus it enables its potential customers become aware of the essential facts concerning the issue of the company. Since the red herring is a preliminary prospectus containing information of the company, its financial aspects and investment risks may be revised several times before it is called the final prospectus.
This preliminary registration statement describes the issue (IPO) and prospects of the company which has to be filed with the Securities and Exchange Commission (SEC). The issue price and size need not be stated in the red herring.
Contents in Red Herring
In the Red herring prospectus the company accepts responsibility and confirms that this preliminary prospectus contains all information with regard to the company and the Issue. It also states that the company shall sell its shares only after the registration is approved by the SEC.
Importance of Red Herring for Mutual Funds
Before making an investment in mutual funds the investor must carefully go through the information in the Red herring prospectus. The company would mention its risks and uncertainties in this preliminary prospectus.
Red herring prospectus acts as a guide and provides necessary information on the investment. It enables the investor to know certain facts about the company like its history, the management and promoters of the company, the objects and prospects, the financial performance etc. All this would help the investors gain comfort to invest and take a right decision.
Analysts stress to go through the red herring prospectus as this would give you a direct understanding on the fundamentals of the company you are planning to invest.
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