Red Herring (Securities) Definition
A “red herring” is a preliminary prospectus or registration statement filed with the Security and Exchange Commission of the United States (SEC) by a company as part of a public offering of securities. A red herring prospectus is generally associated with a company’s initial public offering.
A Little More on What is the Red Herring Prospectus
A prospectus is used to inform potential investors of the terms of any investment in a company seeking to sell securities. A red herring prospectus includes the information related to the company’s operation and financial status. It doesn’t mention the price and number of the shares are to be offered. All the subsequent drafts of the prospectus are also known as the red herring prospectus until it gets approval for public release.
The SEC reviews the drafts to ensure the information provided in the proposed prospectus is correct and accurate. It seeks to make sure there’s no information in the draft that is false or could cause confusion for the potential investor.
The SEC may also direct the company to include some mandatory information in the prospectus that is missing in the draft.
A red herring prospectus comes with a disclaimer stating that it is a registration statement filed with the Security and Exchange Commission and the statement is not yet effective. The disclaimer asserts the information provided in the prospectus may be subject to change and the information is not complete. It also states that the underlying securities can be sold only after the registration becomes effective.
This disclaimer is printed on the cover page of the preliminary prospectus in red bold letters, the name red herring is derived from this requirement.
A company can include more information in the subsequent drafts either to comply with the directions of the SEC or pursuant to their own efforts to make it complete.
The red herring is the first impression investors get of a new company. The prospectus includes all the pertinent information about a company, such as the market potential of its products and services. It also details how the company intends to use the funds raised from the offering. A red herring prospectus must also include information about the management and current major shareholders. And it reports any pending litigation of the company.
The SEC does not actually approve a prospectus; rather, they seek to ensure all the relevant information are provided in it and the information is true and correct.
20 days is the minimum period between the filing date of the registration statement and the date when it becomes effective. After the registration statement becomes effective, the final prospectus is published with the final number of shares offered and its price. The trading begins only after the registration statement becomes effective and the final prospectus is distributed among the prospective investors.
References for Red Herring Prospectus
Academic Research on Red Herring
Role of social desirability in personality testing for personnel selection: The red herring., Ones, D. S., Viswesvaran, C., & Reiss, A. D. (1996). Journal of Applied Psychology, 81(6), 660. This is a meta-analysis of the social desirability literature to examine the desirable social functions as a suppressor, a mediator and also as a predictor for a variety of criteria. When the impacts of social desirability are removed from the Big Five dimensions of personality, the criterion-related validity of personality constructs for forecasting job performance is left intact.
Task differences as moderators of aptitude test validity in selection: A red herring., Schmidt, F. L., Hunter, J. E., & Pearlman, K. (1981). Journal of Applied Psychology, 66(2), 166. This paper examines traditional beliefs that between-job task differences make aptitude tests valid for a section of jibs and not for others using two studies that have a summed up sample size of 400,000 Ss. It concludes that the belief that tasks are essential moderators of test validities can be traced to behaviorist assumptions and that these assumptions are false.
Correlation and studies of habitat selection: problem, red herring or opportunity?, Fieberg, J., Matthiopoulos, J., Hebblewhite, M., Boyce, M. S., & Frair, J. L. (2010). Philosophical Transactions of the Royal Society B: Biological Sciences, 365(1550), 2233-2244. This article presents some analytical techniques used to deal with correlated data in terms of resource selection. These techniques can be applied to a variety of correlated data problems although they can be challenging to implement and use. This article also reviews emerging approaches of studying habitat selection which use fine-scale temporal data and naturally accounts for autocorrelation through modeling animal movement between telemetry locations.
New modes of governance, the Open Method of Co-ordination and other fashionable red herring, Idema, T., & Kelemen, D. R. (2006). Perspectives on European Politics and society, 7(1), 108-123. This paper challenges the views of the Open Method of Co-ordination (OMC) and other new modes of governance and argues that the present significance and likely future impacts of these modes of management have been widely exaggerated. The paper rejects any claims that the OMC and other new methods of governance guarantee to promote the legitimacy of EU policy-making.
Red herring detectors and speech perception: In defense of selective adaptation, Samuel, A. G. (1986). Cognitive psychology, 18(4), 452-499. This study discusses various reasons as to why the selective adaptation paradigm was abandoned and also provides theoretical and empirical justifications for rejecting these reasons. It also performs a practical and theoretical analysis which indicate that the selective adaptation paradigm can be compelling in investigating the perception of complex acoustic stimuli such as speech.
Q-Word As Red Herring: Why Disparate Impact Liability Does Not Induce Hiring Quotas, Ayres, I., & Siegelman, P. (1995). Tex. L. Rev., 74, 1487. This paper explains that disagreement on what employment discrimination law should do goes on to this day, but there has been a surprising agreement on the mechanism by which Title VII works. It explains that by making employers liable for the failures to hire based on race, this law raises the price of this discriminatory activity and reduces it than it would be if the employers were allowed to hire whomever they wished.
Green economy, red herring, Spash, C. L. (2012). Environmental values, 21(2), 95-99. This article explains various activities mainly from United Nations related institutions to present several agendas that might be welcomed by those who are environmentally concerned. It states that in the Green Economy, the poor are assured of environmental riches, they are told that recycled materials and renewable energy can be exploited without the environmental impacts and also that technology will find an alternative for the finite resources.
The Red Herring technique: A methodological response to the problem of demand characteristics, Laney, C., Kaasa, S. O., Morris, E. K., Berkowitz, S. R., Bernstein, D. M., & Loftus, E. F. (2008). Psychological Research, 72(4), 362-375. This paper develops an innovative procedure designed to decrease the influence of demand characteristics through the provision of an alternate magnet for the natural suspicions of subjects. It interviews a subset of subjects to analyze their subjective experiences of the procedure and any relevant demand.
Culture and Mediation: A Red Herring, Savage, C. A. (1996). Am. UJ Gender & L., 5, 269. This article explains that to explore the effect of culture on the mediation process in a meaningful way, it is essential to develop an accurate and useful theoretical framework for characterizing cultural diversity, for examining the objectives of the mediation process and for identifying how this framework can be applied in the mediation process to fulfill the objectives of mediation.
Process invariance: Another red herring, Thorngate, W. (1975). Process invariance: Another red herring. Personality and Social Psychology Bulletin, 1(3), 485-488. This paper critically investigates the widespread assumption that invariant processes govern social behavior. It reviews evidence which suggests that the processes vary considerably and unpredictably. The article also discusses the theoretical implications.