Preliminary prospectus
Also known as: red herring
A preliminary prospectus, or red herring, is the disclosure document circulated during a new issue's SEC registration period. It describes the offering but omits the final offering price and effective date, and no sales can be made from it.
A preliminary prospectus is the draft disclosure document an issuer distributes while a new securities issue is in registration with the SEC — the cooling-off period between filing the registration statement and the registration's effective date. It is nicknamed the red herring for the red-ink warning on its cover stating that the registration has not yet become effective.
The document contains most of the information investors need to evaluate the offering: the issuer's business, financial statements, management, planned use of proceeds, and risk factors. What it lacks are the final terms — chiefly the public offering price and the effective date, which are set just before the offering goes live.
During the cooling-off period, the red herring is the primary tool for gauging demand. Broker-dealers may send it to prospective investors and collect indications of interest, which are non-binding expressions of intent — not orders. No sales may be made, no payment may be accepted, and the preliminary prospectus cannot be marked up or accompanied by promotional material. Once registration is effective, sales are made using the final prospectus.
The IPO process is well-tested territory on the Series 6, Series 7, and Series 66 exams. Know what the red herring includes and omits, that indications of interest are not binding, and that accepting orders or money during the cooling-off period is prohibited.
Key takeaways
- The preliminary prospectus (red herring) circulates during the cooling-off period, before registration is effective.
- It omits the final public offering price and the effective date.
- It is used to gather non-binding indications of interest — no sales or payments are permitted.
- Its name comes from the red warning language on the cover page.
- The Series 6, Series 7, and Series 66 exams test the red herring's role in the IPO registration process.