When a company is in the process of going public — getting ready for an initial public offering, or IPO — it is required to enter a so-called “quiet period.” During the quiet period, company executives, board members, management, and employees cannot publicly promote the company or its stock. Investment bankers and underwriters also cannot put out buy or sell recommendations.
In effect, the company and its personnel are required to stay quiet for a period of time surrounding the IPO filing.
Key Points
• A quiet period is a period of time when a company going public cannot publicly promote itself or its stock.
• The purpose of a quiet period is to allow the SEC to review the company’s registration without bias or interruption.
• During the quiet period, companies can discuss information already in the prospectus but should avoid generating public interest.
• Quiet periods are not only limited to IPOs but also observed by companies around the end of a quarter.
• Violating the quiet period can result in consequences such as delayed IPO, liability for violating the Securities Act, or disclosure of the violation in the prospectus.
What Is the Point of a Quiet Period?
While companies always have to comply with the federal securities laws — impending IPO or not — the time around an initial public offering is a special time for any company and comes with special rules and restrictions.
It starts when the company files the registration statement (called an S-1) with the Securities and Exchange Commission (SEC), including a recommended offering price for the security, and lasts for 30 days. The S-1 contains:
• a description of the company’s properties and business
• a description of the security being offered
• information about company management
• financial statements certified by independent accountants
During this time, the SEC looks over all the documentation and approves the registration. The quiet period allows the SEC to complete the review process without bias or interruption, and ensures that the company doesn’t attempt to hype, manipulate, or pre-sell their stock.
Companies are allowed to discuss information already in the prospectus during the quiet period, and oftentimes they will go on a “road show” to present this information to big, institutional investors and get a sense for the potential market. Activities generally avoided during the quiet period are advertising campaigns, conferences, and press interviews — basically, anything that might generate public interest in a company or its securities.
Quiet Periods Not Connected to an IPO
While the IPO quiet period by far gets the most attention, it is not the only time that the SEC reins in the communications of companies and their executives. Typically around the end of a quarter, when a company knows the results it will likely release in its quarterly earnings report to investors, the company observes a quiet period to avoid tipping anyone off or trying to get ahead of them in any way.
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How Do Companies Violate the Quiet Period?
While the general investing public is supposed to rely on the information contained in S-1s and other official company communications when deciding whether or not to buy the stock, the irony is that public attention to the company is typically very high right before an IPO. All this attention comes at a time when the company itself is supposed to be in its quiet period.
In the past, some companies have run into issues with their senior executives talking to the media during the quiet period. In some cases, the interviews were conducted earlier but published during that time — but either way, it can appear to be a violation of the terms.
What Happens When Quiet Periods Are Violated?
There are no set penalties for violating a quiet period, which is also called “gun-jumping.” If the SEC deems a statement made by a company is in violation of the quiet period, consequences can include:
• A delayed IPO
• Liability for violating the Securities Act
• Requirement to disclose the violation in the company’s prospectus
Delaying the IPO process allows all potential investors to get back on the same page with equal access to information disclosed by the company.
The SEC is also empowered to exact more severe punishments, like civil or even criminal penalties, but typically only pursue these in extreme cases.
What Investors Can Do During a Quiet Period
Quiet periods can be a good time to assess whether you’re interested in investing in a company’s IPO. IPOs have the potential to be lucrative investments, but can also turn out to be extremely volatile and may lose value. There is no guarantee.
Seasoned investors may try to profit at the end of the quiet period, called the quiet period expiration. At this time the stock price and trading volume may see drastic movement up or down, as a flood of information gets released from analysts.
Unbiased prospectus information about recent filings can be viewed on the SEC website. Reading the prospectus can help an investor judge for themself whether a company’s mission, team, and financials look like a sound investment to them.
The Takeaway
The quiet period before an IPO is a time for founders, executives, and employees of a company to stay off the radar, as their official registration forms and other existing info about the company speaks for itself. This allows potential investors to make decisions based on the same information, with no pre-IPO investing hype or manipulation.
Companies may violate quiet periods intentionally or unintentionally, but there are no set penalties for doing so. The SEC may ask that certain measures are taken, however.
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