Before a company’s initial public offering (IPO), the quiet period is an embargo on promotional publicity mandated by the U.S. Securities and Exchange Commission (SEC). This quiet period prohibits management teams or their marketing agents from making forecasts or expressing any opinions about the value of their company. For publicly-traded stocks, the four weeks leading up to the end of a business quarter are also recognized as a quiet period.
Key Takeaways
- A quiet period is a crucial time where a company’s management and marketing teams are restricted from sharing opinions or extra information about the firm.
- This period aims to maintain objectivity and prevent the appearance of a company providing insider information to a select group of investors.
- In the context of an IPO, the quiet period spans from the time a company files registration paperwork with U.S. regulators until 40 days after the stock starts trading.
- For publicly-traded companies, the quiet period refers to the four weeks leading up to the end of the business quarter.
- The JOBS Act has introduced new rules for emerging growth companies (EGCs), somewhat relaxing quiet period restrictions for these entities.
The Importance of Quiet Periods
During quiet periods, corporate insiders are forbidden from discussing their business with the public to avoid tipping certain analysts, journalists, investors, and portfolio managers, thus maintaining a fair playing field. The silent stage helps ensure that every investor has access to identical information simultaneously, enhancing market integrity. SEC representatives can delay an IPO if this period is violated, underlining its significant impact as vast sums can be involved.
Navigating the Quiet Period Process
Upon filing for the registration of new securities with the SEC, a company’s executive team, investment bankers, and legal advisors commence a series of presentations known as a roadshow, where potential institutional investors can ask questions and gather critical investment data. During this time, the management team is closely bound by rules against releasing new information that is not already included in the registration statement.
The quiet period begins upon the effective launch of the registration statement and spans 40 days for analysts tied to the managing underwriters of the offering and 25 days for other underwriter analysts involved in the IPO. It additionally encompasses 15 days before or after the IPO lockup period expiration, termination, or waiver.
Emerging Growth Companies (EGCs)
The JOBS Act created a new category termed Emerging Growth Companies (EGCs) and offered different regulations regarding their quiet periods. These rules eliminated the traditional research quiet periods allowing research analysts to issue reports after the initial earnings release, though within 25 days of the IPO. EGCs are defined as companies with under $1 billion in revenue in their last fiscal year.
The term quiet period thus has dual significance in business: one, for an IPO, and two, the climax of a business quarter.
Examples of Quiet Period Violations
Facebook IPO Violation
Over the years, interpreting and enforcing quiet periods have stirred debates and even legal consequences. When it appears quiet periods are ignored to select gains, legal actions often follow. An example is the Facebook IPO in 2012 when shareholders accused the company of violating the quiet period by sharing information beneficial only to a selected group. This led to several lawsuits against Facebook and its underwriters, claiming that the public and small investors were disadvantaged.
WeWork IPO Incident
In a more recent episode in 2019, WeWork faced scrutiny over a potential quiet period violation during its initial public offering. According to the prospectus filed with the SEC, then-CEO Adam Neumann conducted selective interviews during the quiet period, contravening the regulations. The fallout from this situation partly influenced the abandonment of WeWork’s IPO, signaling how heavily these norms are enforced and honored in the market.
Quiet periods are pivotal, designed to enhance trust and equity in financial markets by maintaining a consistent information-distribution protocol.
Related Terms: Insider Trading, Stock Market, Public Companies, Emerging Growth Companies (EGC), Registration Statement, JOBS Act.
References
- U.S. Securities and Exchange Commission. “The JOBS Act After One Year: A Review of the New IPO Playbook”.
- Reuters. “SEC reviews ‘quiet period’ IPO rule after Facebook mess”.
- Reuters. “WeWork faces U.S. SEC inquiry over possible rule violations: Bloomberg”.
