What is a Preliminary Prospectus?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 August 2019
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In the broadest sense, a preliminary prospectus is a document that is a first draft of document that includes provisions for making changes at a later date. The main function of this type of document is to provide basic information that is relevant to an upcoming business transaction, including data relating to the company that is executing the transaction, how it is organized, who is in charge, and how the company envisions the implementation of the proposed action. At the same time, the preliminary nature of the document leaves the door open for refining the data included, when and as needed.

Sometimes referred to as a preliminary statement, one of the most common uses of a preliminary prospectus has to do with the creation of an initial public offering. In this scenario, a company creates a statement regarding plans to make such an offering, and files it with the appropriate governmental agency or commission. Governmental regulations dictate the type of information that must be included in this preliminary statement, but most nations would require background on the history, operating structure, and financial stability of the business to be included. As part of the format, text must be included to indicate that parts of the document may be changed at a later date.


For example, a business operating in the United States would submit a preliminary prospectus to the Securities & Exchange Commission for review before making any type of public offering. Because the Commission requires has traditionally required that red ink be used for parts of the text, this has earned this type of prospectus the nickname of ”red herring.” The nickname has come to be used to identify anything that is not in its final form, and is still subject to change.

It is also common for a preliminary prospectus to include information about how the activity will be activity will be carried out. In the case of an initial public offering, this will include details about how many shares will be offered, the initial public offering price, and how the company will manage the distribution of the shares as they are sold. The idea behind the inclusion of this type of detail is to determine if the initiative has been well-planned, and appears to be in compliance with current regulations.

While the preliminary prospectus does leave open the possibility of the addition or amendment of the document at a later date, most companies will seek to make the document as close to the final draft as possible. For this reason, even the preliminary prospectus may be a highly detailed document that makes the intentions of the issuer very obvious, as well as structuring the strategy that will be used to achieve the desired goal. In the event that a prospectus does not contain what the regulatory agency considers essential data, the prospectus is rejected, and must be amended and resubmitted before the offering can move forward.


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