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When a security is offered to the public for the first time, the underwriter prepares a preliminary prospectus, called a red herring.
While the name may refer to the parts of the document printed in red ink, the implication is that the document has been written to present the company in the best possible light. The reference is to the rather distinctive odor of the fish in question, which, the story goes, fleeing fugitives sometimes used to throw bloodhounds off their scent.
Although the preliminary prospectus contains important information about the company, its offerings, financial projections, and investment risk, it is customarily revised before the final version is issued.
A proposed prospectus that has been filed with the Securities and Exchange Commission (SEC) but not approved by it.Its purpose is to determine the extent of public interest in an issue while it is being reviewed by the SEC. Called a red herring because of the red ink around the border of the front page.