Preliminary Prospectus

What Is a Preliminary Prospectus?

A preliminary prospectus is a first draft registration statement that a firm files prior to proceeding with an initial public offering (IPO) of their securities. The document, filed with the Securities and Exchange Commission (SEC), is intended to provide pertinent information to prospective shareholders about the company's business, managers, strategic initiatives, financial statements, and ownership structure. The preliminary prospectus solicits expressions of interest in the new issue.

How a Preliminary Prospectus Works

The SEC requires that companies print their preliminary prospectus with red ink on the left side of the cover. As a result, the document has been nicknamed the "red herring." A preliminary prospectus has a bold disclaimer on the cover page that states that the registration has not yet become effective. The information that the prospectus contains is, therefore, incomplete and subject to change. Until the registration becomes effective, the securities may not be sold, and the issuer may not accept any offers to buy.

The preliminary prospectus contains information on the company and the intended use of proceeds from the offering. The company provides details about the products and services that it offers, the market potential for those offerings, its financial statements, and details about company management and major shareholders. The prospectus also contains a legal opinion and information about the risks of the issue.

Once the registration statement becomes effective, the company disseminates a final prospectus that contains the IPO price range and issue size. Expressions of interest then convert to orders for the issue at the buyer's option. The minimum period between a registration statement filing and its effective date is 20 days.

A roadshow can be a vital accompaniment to a preliminary prospectus, serving as an educational resource for those who may not be familiar with the company. 

Special Considerations 

The preliminary prospectus comes in tandem with the issuer’s IPO roadshow. In a roadshow, the company’s senior management and the underwriters travel around the country to present to analysts and fund managers to generate excitement for the company’s securities. Roadshows are critical to the success of initial offerings.

A roadshow may be limited to a single country or may include international stops, depending on the type, size, and hype around the company. In 2012, for example, Facebook started its roadshow in New York City and made stops in Boston, Chicago, Denver, and eight other cities. These are relatively standard stops for roadshows within the United States. Underwriters often run the roadshows, utilizing their financial and deal-making expertise.

Facebook began its roadshow presentation with a video, which differed in many respects from other company presentations. In contrast with a traditional powerpoint presentation, Facebook’s video had higher production values and included a soundtrack. It explained Facebook’s business, mission, and thesis about social connectivity and technological change for someone without a background in the industry.

After some pushback from investors that the video took up too much time in the presentation, Facebook dropped it from the second half of its roadshow and instead let senior management speak. Combined with a preliminary prospectus, this information helped Facebook’s investors make their final decisions.