In a 24-hour news cycle, you can find examples of jumping the gun that happen almost every day, well ahead of proven facts. To investors, jumping the gun refers to the practice of companies that make public statements as an attempt to presell a security to potential investors prior to a declaration of their initial public offering (IPO) from the Securities and Exchange Commission (SEC). To help prevent this, companies must submit to a quiet period.
The phrase “jumping the gun” is a colloquial expression that refers to engaging in actions that are premature or which seem hasty.
In this article, we’ll define the quiet period, give a history of when and why it came into existence, how it has changed over the years, the potential consequences for companies who violate the quiet period and amendments written into the law since the quiet period was established.
What is the Quiet Period?
There are two definitions of quiet period. Businesses that issue an IPO that will allow them to enter the capital market and begin to trade their stock on a major exchange enter the quiet period (also called the waiting period). It starts once the company and the underwriters of the IPO agree to proceed with the offering. During this time, the company files a registration statement with the SEC. The quiet period lasts until the SEC declares that the registration statement is in effect. Statements made within 30 days of the company filing their registration statement may be viewed as an attempt to presell the security and is considered a violation.
The second definition of a quiet period occurs in the four weeks leading up to a company filing its quarterly earnings report. Corporate insiders cannot speak to the public about their business to avoid the appearance, real or perceived, of providing insider information to analysts, journalists, investors and portfolio managers.
How Does the Quiet Period Work?
According to rules published by the SEC, a company cannot release information about its activities and related parties to the public after it has filed for its IPO. “Company” is broadly interpreted by the SEC to include top-level employees such as a chief executive officer (CEO) and chief financial officer (CFO) as well as board members, management and even employees. The guidelines for the quiet period are similar to those used for insider trading. The quiet period remains in place until the SEC has had the opportunity to ensure all the documentation is in order and subsequently approves the registration for the offering.
During the quiet period, key management personnel of the company commonly and legally perform "road shows" that will allow them to present information to prospective investors and the investment community. It allows them to meet due diligence requirements and assess the potential market and share price point for the IPO. To help prevent the possibility of committing a violation during the quiet period, companies are strongly discouraged from engaging in marketing and public relations strategies such as press interviews, participation in conferences and new advertising campaigns.
When Did the Quiet Period Originate?
After the stock market crash of 1929, the government felt pressure to create enforceable guidelines to regulate the purchase and marketing of securities on a federal level, which was previously done by individual states. The first major piece of legislation to emerge was the 1933 Securities Act. For the first time, the sales of securities were regulated by the federal government via the SEC.
One of the primary objectives of the Securities Act ensured that investors would receive pertinent financial information prior to shares going public. The Act required companies to register with the SEC and provide both the commission and potential investors with a registration statement and a prospectus so that all parties would have access to the same relevant information. The prospectus should exist on the SEC website and is most important piece of this legislation. It must include:
- A description of the company’s properties and business
- A description of the security offered
- Information about company management
- Independently certified financial statements
Providing information to investors was important but another key objective of the Securities Act involved banning companies from marketing their securities using actions that misrepresented the security. This is what spawned the quiet period.
Since its inception, the Securities Act has been amended to accommodate changes in the way information disseminates, making it easy for companies to conduct business without running afoul of the provisions in the Securities Act. The most recent amendment occurred through the JOBS Act in 2012. What are some other amendments to the quiet period, which reflect the changes brought about by electronic communication in all its forms? Some of the most notable exceptions are listed here:
- Rule 163A Exception: This is an allowance for the fact that a company may have engaged in certain communications prior to the 30-day period in advance of their pre-filing. Rule 163A exempts those communications provided they do not reference the offering and “reasonable steps” are taken to ensure that the information is not disseminated during the quiet period.
- Rule 135A Safe Harbor: This exemption allows a company to publish what is known as a “tombstone” ad regarding the public offering before the registration statement filing. This notice must meet specific guidelines to ensure it does not constitute an offer.
- Rule 169 Safe Harbor: This exemption allows companies to continue to release communications regarding factual information about their business that has been part of the company’s ordinary course of business. The information must not contain any information about the public offering.
- Section 105(c) of the JOBS Act: This provision, known as the “Test the Waters” initiative, applies to emerging growth companies. The exemption created new processes and disclosures for companies, which are defined as companies with less than $1 billion in total annual gross revenues during its most recently completed fiscal year. Under this exemption, these companies can communicate verbally or in writing with qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) to assess interest in the proposed offering prior to or during the quiet period. The company may not sell the security unless the communication is accompanied by or preceded by a prospectus.
Why Does the Quiet Period Matter?
The SEC acts as a neutral party in evaluating the veracity of a company's filing documents. The quiet period allows the commission to perform this evaluation without undue disruption that public exposure and hype could cause. The quiet period also serves to prevent information leaks that could cause investors to make uninformed decisions regarding the proper valuation and expectations for the company. In this way, the quiet period ensures that all investors have access to the same information and also ensures that the information they receive is accurate before the security goes on sale to the broader market.
What Are the Consequences of Violating the Quiet Period?
If a company makes a statement within 30 days of filing its registration statement which the SEC considers to be an attempt to pre-sell the public offering, they could consider it a “gun-jumping” violation of the Securities Act. Possible consequences include:
- Liability for violating securities laws
- Delayed public offering date
- Requirement to disclose potential securities laws violations in the prospectus
Over the years, investors (particularly small investors) have debated the objectives behind the quiet period and how the SEC chooses to enforce the rules. Like any regulated market, claims may abound that certain parties have been given access to information in violation of the quiet period, such as prior to Facebook's IPO in 2012. This IPO led to over a dozen lawsuits from shareholders that claimed the social network giant, along with its underwriters, deliberately did not disclose information ahead of the listing regarding weaker growth forecasts.
The Bottom Line on the Quiet Period
One of the pillars of the U.S. capitalist economy is the free and fair exchange of information. But that wasn’t always the case. In the early part of the 20th century, securities trading was left to the states to regulate and the standards of what was considered “free and fair exchange” varied widely. After the crash of 1929, the Securities Act of 1933 was the U.S. government’s first major piece of legislation that would attempt to change the way securities were sold, particularly when a company first attempted a listing on an exchange.
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