What is the purpose of a preliminary prospectus?

What is the purpose of a preliminary prospectus?

• A. To finalize the company's business strategy
• B. To provide information to the public
• C. To solicit indications of interest before final preparation
• D. To issue the final version of the prospectus

Answer: (C)

The purpose of a preliminary prospectus is to solicit indications of interest before final preparation. This document, often referred to as a "red herring" prospectus, serves as a key communication tool during the initial stages of an offering. It provides potential investors with essential information about the company and the securities being offered, although it does not contain the final pricing or exact details that will be included in the final prospectus. The preliminary prospectus aims to gauge interest from potential investors, allowing the company and underwriters to assess demand and make adjustments to the offering as necessary before the public launch. This exploratory phase is critical for setting the tone and expectations for the eventual offering, ensuring that all parties are well-informed before committing to the investment.