Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What is another name for a preliminary prospectus?

1. Red herring

2. Blue sky document

3. Final offering statement

4. Initial investment plan

The correct answer is: Red herring

A preliminary prospectus is often referred to as a "red herring" because it is a document that provides potential investors with key information about an upcoming offering, but it does not include the final details of the offering. The term "red herring" comes from the notice in bold red lettering that is included on the cover page of the document, indicating that it is not a definitive prospectus and that some details may change prior to the actual offering. This document serves primarily as a marketing tool for underwriters and issuers to gauge investor interest and provide preliminary financial details and descriptions of the business. It is crucial for investors to review this information to consider the investment before the final offering statement is released, which contains all confirmed details. In contrast to the preliminary prospectus, the other terms listed carry different meanings within the investment context. A "blue sky document" pertains to state-level regulatory compliance documentation, the "final offering statement" refers to the definitive prospectus that contains detailed and finalized information, and an "initial investment plan" does not have a specific legal or formal application in the context of securities offerings.