A preliminary prospectus is known as a
- golden parachute.
- red herring.
- blue sky.
- green shoe.
Answer b) Red Herring
Answer Explanation
A preliminary prospectus is a common financial term for a preliminary prospectus. Despite containing essential information about a company and its securities offering, a red herring is not complete enough to be considered a prospectus for the final offering.
In order to go public and offer securities to the public through an Initial Public Offering (IPO) or follow-on offering, a company must register with the relevant securities regulatory authority, such as the Securities and Exchange Commission (SEC). During the registration process, the company submits to the regulatory authority a preliminary prospectus or red herring.
Investors can gain preliminary information about a company’s financials, business model, risk factors, and other pertinent details by reading the red herring. A red herring usually omits or leaves blank certain critical details, such as the offering price and number of shares available. In the final prospectus, released just before the securities are offered for sale, these missing details will be filled in.
An old practice called “red herring” involved issuers printing the warning “Caution: The information in this prospectus is incomplete and may be changed” in red ink on the front cover of the prospectus, making it stand out and resembling a red herring fish, which was often used to distract scent hounds during training.
Why the other options are not correct
a. Golden Parachute
As part of a change of control, such as a merger or acquisition, a golden parachute provides a lucrative financial package or benefits to top executives or key employees. As a result of a corporate change, this benefit provides financial security to executives who may lose their jobs or positions. It does not relate to a preliminary prospectus, which is why it is incorrect.
c. Blue sky:
A blue sky law is a state securities law or regulation that is designed to protect investors from fraudulent securities offerings. Blue sky laws require companies offering securities within a state’s jurisdiction to comply with certain registration and disclosure requirements. The blue sky law does not necessarily refer to a preliminary prospectus, although it is relevant to securities offerings.
d. Green Shoe:
The term “green shoe” refers to an over-allotment option provided to underwriters during an initial public offering. Underwriters can exercise the green shoe option to purchase additional shares at the offering price if demand for the IPO exceeds the expected level. Although this option helps stabilize the stock price and meet market demand, it is not the right word for a preliminary prospectus.
Conclusion
The preliminary prospectus in the financial world is regarded as a red herring. An offering letter is a document filed by a company during the securities registration process that provides potential investors with essential information about the company and its offerings. A red herring refers to the practice of printing a warning in red ink on the front cover to indicate that information is incomplete and may change.
Other options (a) Golden Parachute, (c) Blue Sky, and (d) Green Shoe do not accurately describe a preliminary prospectus. Investors, regulators, and companies that conduct public offerings and fundraising activities need to be familiar with the terminology and concepts associated with securities offerings.