A stocks quiet period is not as scary as it sounds! It prohibits management teams or company owners from making forecasts or expressing opinions about the value of their company before an IPO.
The quiet period of a publicly traded stock is the 4 weeks before the close of the business quarter or IPO, where corporate insider are not allowed to speak to the public about company affairs to avoid tipping off investors about upcoming earnings reports or SEC registrations.
The quiet period is also upheld prior to a company’s Initial Public Offering or IPO. Quiet periods are SEC (Securities and Exchange Commission) mandated “waiting periods” that companies have to comply when filing registration statements with the SEC. The “waiting period” is over when the SEC staff declare the registration statement “effective”.
Limited information can be shared with the public during the quiet period, and failure to comply is generally referred to as “gun-jumping”.
How does the quiet period affect your investments?
Because the quiet period is just a regulation to stop insider knowledge getting to the wider public, it is not going to affect your investment.
No one will receive inside knowledge if all regulations are upheld. The main purpose of the quiet period is to stop the release of information before it is verified.
Unless a company does not comply with the SEC-mandated regulations you have nothing to worry about. If a company does break this regulation, you will be protected by various financial conduct boards such as the FCA, FSCS, and many more. You are also able to file personal lawsuits against the company as a shareholder.
The reason the SEC wants to keep the public from knowing inside information of the company affairs is because the business owners can influence investors on false pretences. A statement from a lead board member can cause a shift in share price, so the SEC need to make sure anything the company is submitting is correct before releasing the information to the public.
Consequences of violating the Quiet Period
Companies that make statements within this 4 week period are considered to be attempting to pre-sell the public offering, they could deem it as gun-jumping which is a violation of the Securities Act in America leading them to the following consequences:
- Liability for violating securities law leading to a possible 10 years in prison.
- A delayed public offering date costing the company potential millions in revenue.
- The company owners would need to disclose the violations in all future company prospectus’s.
Many companies have been the object of investigation by the SEC for not complying with regulations. One of the more common cases stated is the IPO of Facebook.
In 2012, more than a dozen lawsuits were filed from shareholders that claimed Facebook alongside its underwriters deliberately did not submit information to the SEC prior to listing growth forecasts that were much weaker than projected. Nerd Wallet do a fantastic case study regarding the drama of the Facebook IPO.
How does the Quiet Period Work?
When a company registers to issue new securities (stocks/bonds) with the SEC, the management team, lawyers, and bankers have to go on a “roadshow”. This roadshow is where potential institutional investors will ask questions about the company, learn about growth plans, and gather general investment research. The management teams must not disclose any information that is not already on the registration statement.
The quiet period begins as soon as the registration statement is made and finishes once the statement has been made effective by the SEC, it lasts 4 weeks after the stock begins trading.
It ensures a level playing field for investors because everyone has access to the same information at the same time.
The guidelines set out by the SEC are as follows:
The company cannot make announcements or discuss the following topics:
- New deals or wins signed in the current quarter, mergers are an example of this.
- Management changes.
- Progress against company goals, or success/failure to meet expectations.
- Major product announcements or service updates.
- Any major company sell-offs are purchases such as acquisitions of other companies or sales of current sections of the business
New Companies IPO & the Quiet Period
The quiet period is a small introduction of a company into the capital market. During this time the company is subject to a large amount of public exposure and excitement must be minimised.
Any major hype regarding the new company can potentially interfere with SEC efforts to evaluate its filings, because of an overexcited market, managers might be tempted to release inside opinions and figures which would cause investors to buy based on unverified & illegal information.
The SEC tries to create a level playing field as I have described, however some investors will jump the gun and buy. Just remember that during the quiet period everyone has the same information, so invest on your terms, not the overexcited market.
When did the quiet period become mandatory?
After the 1929 market crash, pressure was put on the US Government to outline enforceable guidelines to regulate the purchase and marketing of companies on the stock market. This is a federal wide regulation system, previously it was done by each state.
The first piece of legislation was the 1933 Securities Act. For the first time, the sale of company securities would be regulated by the federal government assisted by the Securities and Exchange Commission (SEC).
The objective was to provide basic information about a company prior to shares being available publicly. The registration statement required companies to fill outa prospectus with this information available:
- A description of the security being offered.
- A description of the company’s business activity.
- Information about the company’s management team.
- Independently certified financial statements.
You can find every company’s prospectus on the SEC website. Here is Apple Inc.
On top of providing information to investors, the SEC used this legislation to help prevent fraudulent actions or the misrepresentation of financial security.
Many amendments have been made since its inception in 1933, some of the more common amendments stated are:
- Rule 163A Exception: This is an allowance for company owners who may have engaged in insider communications with the public in the 30 day period of their pre-filing. Rule 163A allows for exemptions of those communications provided they did not reference the IPO in question, and ‘reasonable steps’ were taken to ensure the information is not disseminated during the quiet period.
- Rule 135A Safe Harbour: This allows the company to publish what is know as a “Tombstone” ad regarding the IPO before filing the registration statement. The notice must meet specific guidelines, but it is mainly used for ceremonial matters within the company.
- Section 105(c) of the JOBS Act: This is to allow smaller companies to “Test the Waters”, this only applies to emerging growth companies which are defined as companies with less than $1 Billion in total annual revenue during their last full fiscal year. These companies can communicate in private with Qualified Institutional Buyers (Vanguard) and Institutional Accredited Investors (Warren Buffett) to assess interest of the proposed IPO. It allows companies to gage market demand.
The Quiet Periods Bottom Line
The free exchange of information in todays economy is a great thing, but you must understand how much fraudulent activity would take place without the regulations outlined in this article.
The SEC has a broad power to enforce these regulations and high ranking officers are not the only ones that are subject to prosecution. Members of the board, bankers, lawyers and any other team member privileged to inside information is liable to fines or prison time.
During the quiet period, my advice is to study the financial statements, listen to analysts predictions, and think about the future of these companies. Do you expect them to do well in todays economy? Or is the industry they operate in to crowded? These are the questions you need to ask. But most importantly, don’t follow the herd, do you own research and make your own decisions.