Red-Herring Prospectus means a prospectus, which does not have complete particulars on the price of the securities offered and Quantum of securities offered.
A prospectus discloses information about the issuing company and its new offering is distributed to investors.
The reason for preparing Red-Herring prospectus is.,
- First thing to attract people without disclosing much information about the deal.
- The “red herring” is a reference to a legal disclosure printed in red.
- Informing to readers that the SEC has not yet reviewed and approved the document
- Securities may not be sold or may offers to buy, be accepted prior to the time the Registration statement becomes effective.
To brief it up, Red Herring Prospectus is a prospectus, which does not have details of either price or number of shares being offered, or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the Other hand, an issuer can state the issue size and the number of shares are determined later.
An Red-Herring prospectous for an FPO can be filed with the RoC without the price band and the issuer, in such case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue.
In the case of book-built issues, it is a process of price discovery and the price cannot be determined until the bidding process is completed. Hence, such details are not shown in the Red-Herring prospectus filed with RoC in terms of the provisions of the Companies Act. Only on completion of the bidding process, the details of the final price are included in the offer document. The Offer document filed thereafter with RoC is called a prospectus.
The front page of the prospectus displays a bold red disclaimer stating that information in the prospectus is not complete and may be changed, and that the securities may not be sold until the registration statement, filed with the market regulator is effective.
The red-herring statement contains:
- Purpose of the issue
- Disclosure of any option agreement
- Underwriters commissions and discounts
- Promotion expenses
- Net proceeds to the issuing company(issuer)
- Balance sheet
- Earnings statements for last 3 years, if available
- Names and address of all officers, directors, underwriters and stockholders owning 10% or more of the current outstanding stock,
- Copy of the underwriting agreement
- Legal opinion on the issue
- Copies of the articles of incorporation of the issuer.