Updated July 26, 2023
Definition of Red Herring Example
An initial prospectus filed by a company with the regulator, usually in connection with its initial public offering (IPO), is known as a red herring.
The red herring prospectus contains information related to a company’s operations. Such a prospectus is issued to potential investors. A red herring prospectus does not include information about the price, the number of securities to be issued, and the amount of issue. The following article provides an outline for Red Herring Example.
Examples of Red Herring Prospectus
Examples of Red Herrings are as follows:
Example #1
Extract of Red Herring Prospectus of a Beverage Company.
The promoter of Thomas Ltd.: Mr. Thomas Stovell
Public issue of [x] equity shares of the face value of $10 each of Thomas Ltd. for cash for $ [x] per equity share, including a share premium of $ [x] per equity share aggregating $ [x]. The issue shall constitute [x]% of our company’s fully diluted post-issue paid-up capital.
- Risks: Since this is the first public issue of the issuer, there is no formal market for equity shares.
- Overview: Our country’s Aggregate soft drinks market saw aggregate sales of 16,000 million liters in 2018, amounting to $20 billion. The leading soft drink segments are carbonated soft drinks, bottled water, and juices. They account for 90% of the total volumes sold. The remaining 10% comprises ready-to-drink tea, coffee, concentrates, sports, and energy drinks. There are two distribution channels – off-trade and on-trade. Those sales at grocery stores, hypermarkets, and supermarkets are known as off-trade sales. Those sales through restaurants, bars, clubs, etc., are on-trade.
- Summary of Business: Thomas Ltd. is a fruit juice manufacturing company primarily focusing on mango and strawberry fruit. The company mainly offers two drinks – Mango Delight and True Strawberry. These are available in PET bottles, tetra packs, and tin cans. The company enjoys a 7% market share in the mango fruit segment and a 4% market share in the strawberry fruit segment. They have a wide distribution network with 567 distributors spread throughout the country.
Example #2
Extract of Red Herring Prospectus of a Bank (Equity Shares)
- The promoter of Safe Trust Bank: Safe Trust Financial Holdings Limited & Financial Literacy Trust
- General Risk: Investments in equity products involve a degree of risk, and investors should not invest any funds in the issue unless they can afford to risk losing their investment.
- Industry Overview: Household savings have seen a rising trend in the country. It has increased from 18% of GDP in FY2008-09 to 25% in FY18-19. As a result, the GDP of our country has grown by 6.8% CAGR in the last 10 years. As per government estimates, it will grow 7.1% in FY19-20.
- Summary of Business: Safe Trust Bank is a commercial bank focusing on serving the under-banked segment in the country. The bank has a banking license permits it to offer banking services throughout the country. The bank was incorporated on 21st January 2015 and commenced its operations on 15th April 2017. The asset products include retail and Small and Medium Enterprise (SME) loans. Other products include Internet banking, mobile banking, debit cards, credit cards, and third-party insurance/mutual fund product distribution. As of 31st March 2019, the deposits and Gross Advances stood at $6,063 million. The net interest margin (NIM) stood at 4.32%.
Example #3
Extract of Red Herring Prospectus of a Hotel Company.
Stevens Hotel Ltd. was incorporated as Graham Hotels Pvt. Ltd. on 5th January 2015.
- General Risks: We advise investors to carefully read the risk factors enumerated in this offer before making investment decisions.
- Book Running Lead Managers: Coulthard Financial, Beehive Capital, Morgan Strauss Capital.
- Industry Overview: The country has increased Chain-affiliated hotel rooms at 11% CAGR in the last 10 years. Hotels can be divided into luxury, upscale, upper-midscale, and midscale economies.
- The growth rates related to these are given:
| Type | Last 10 years, CAGR Growth |
| Luxury-upper Upscale | 10% |
| Upscale | 8% |
| Upper Midscale | 12% |
| Midscale-economy | 13% |
- Key Impact Factors: It includes domestic tourism, foreign tourist arrivals, access infrastructure, leisure travel, and business travel.
- Summary of Business: Stevels Hotel Ltd. owns and develops high-end hotels. The hotel has been primarily located in big cities. Competitive strengths include strategic location, experienced management, and customer satisfaction. There are 1,890 hotel rooms located in 17 properties throughout the country. The average room rent is $210 per night, and the average occupancy over the last 5 years has been 79.13%.
Example #4
Extract of Red Herring Prospectus of a Life Insurance Company
- Overview: Our country’s global life insurance premium share is just 1%. This indicates that the country has tremendous scope for this sector to grow, as life insurance still has low penetration. The life insurance industry in the country has grown at a 7% CAGR in the last 10 years. Experts expect the demand for ULIPs (Unit Linked Insurance Plans) to increase in the years ahead. Digitization is a key trend in the insurance sector with growing internet and mobile penetration.
- Summary of Business: The key managerial personnel includes Steve Smith, Mathew George, and Sydney Davenport. Life Safe Ltd. was the most profitable private insurer amongst all private insurers in our country in 2018. The net worth recorded is $1.2 billion. The solvency ratio is 178% above the mandated 150%. The Profit after tax (PAT) 2018 was $240 million, and the return on equity (ROE) was 20%. They have focused on creating a multi-channel distribution platform. As a result, dividends paid have increased 12% CAGR in the last 5 years. However, past dividends are not an indicator of future dividends.
Conclusion – Red Herring Example
Red herring prospectus serves the valuable purpose of providing information to potential investors. Though it is a very lengthy document, it gives a wealth of information about the operations and financials of a company. Thus, an investor can read the red herring prospectus to make an informed decision as regards whether to invest in a company.
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