What does it mean if a prospectus is described as a "red herring"?

• A. It is finalized and approved for distribution
• B. It is initial and subject to comment before finalization
• C. It is fully transparent with all necessary details
• D. It contains an exhaustive listing of investor risks

Answer: (B)

When a prospectus is referred to as a "red herring," it indicates that it is a preliminary version that has not yet been finalized or approved for public distribution. This document typically includes most of the information that would appear in the final prospectus, but it may not contain all the necessary details or be complete, as it is still subject to regulatory review and potential comments before it can be officially issued.

The term "red herring" arises from the prominent red bar printed on the cover page of this type of prospectus, signaling to potential investors that the document is not the final offering and that they should not rely solely on it for investment decisions. This helps to manage expectations as well as to inform investors that they should await further documentation that will provide finalized information.

In contrast, a finalized prospectus would be fully approved for distribution, and a truly transparent document would include all necessary details and disclosures—attributes that are not characteristic of a red herring.