In order to tackle some of the shortcomings discovered by operators in applying the Book Building process, to deepen the capital market and make fixed income securities issuing process faster, the Securities and Exchange Commission (SEC) has introduced a new rule that will facilitate price discovery and marketing ahead of the opening of offers.
The rule requires that while no securities shall be sold or offered for sale prior to the approval of the SEC, the issuing house will be allowed to circulate a preliminary prospectus, called Red Herring for the purpose of price discovery.
According to the rule “No report, recommendation, or sale literature shall be circulated between the period of filing and approval of an offer. The issuing house may, however, in an offer, requiring price discovery process, file and circulate a preliminary prospectus (Red Herring) which shall be boldly written in red lettering on the title page. On the cover page shall be boldly inscribed in red “this document is for guidance purposes for price discovery process only.
SEC had in 2009 introduced Book Building process, which has assisted in effective marketing of offers, especially bonds. Book building is a process of price and demand discovery by which an issuing house/book runner, attempts to determine at what price a public offer should be made, based on demand from qualified institutional and high net worth investors. It has proven to be successful as many of the bond issues are done using this method.