For investors living in the era of “fake news,” it probably isn’t hard to imagine the chaos which might ensue if there weren’t any rules regarding the marketing of IPOs.
The SEC regulates the sale of securities to ensure that it is done fairly and investors receive accurate information. One of the ways it does this is by restricting the type of communication a company is allowed to do during the time leading up to and following an IPO.
When a company decides to issue an Initial Public Offering (IPO) there are numerous legal and financial steps they go through in preparation.
These include preparing a prospectus and filing an IPO registration statement with the Securities and Exchange Commission. The prospectus is a publicly available document which includes:
• A description of the company’s business and assets
• Information about the company’s management team
• A description of the security being offered in the IPO
• Independently certified financial statements
The quiet period is a time when 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.
It starts when the company files the registration statement, including a recommended offering price for the security, and lasts for 30 days.
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 and get a sense for the potential market. Activities generally avoided during the quiet period are advertising campaigns, conferences, and press interviews.
Some companies are now choosing to confidentially file for IPOs and only release information a few weeks before the sale. The confidential filing had only been allowed for companies with revenue under $1 billion since the 2012 JOBS Act and was extended to all companies in 2017.
This option allows businesses to avoid negative media attention, and if there are any changes in the stock market between the time they file and their planned IPO date, they can adjust their plans accordingly—and without scrutiny.
A study conducted at The Wharton School of The University of Pennsylvania showed that media coverage during a quiet period can result in negative outcomes for investors, so the confidential filing process could potentially help improve those outcomes.
Another quiet period takes place each quarter, during the month before a company files its quarterly earnings report. Similar to the pre-IPO quiet period, executives and management must be careful not to publicly say anything which could be perceived as insider information.
History of the Quiet Period
The quiet period was enacted in 1933 as part of the Securities Act. Prior to the 1929 stock market crash, the Federal Government didn’t regulate the sales or marketing of securities.
This was handled by each individual state. The goal of the Securities Act was to prevent fraudulent activity and marketing hype, as well as to ensure that potential investors across the nation were all presented with the same materials prior to an IPO.
The Securities and Exchange Commission (SEC) became the central regulating party. Companies were now required to register with the SEC and put together a prospectus document outlining the company’s team, assets, finances, and the security being offered in the IPO.
Since the SEC must act as a neutral party when vetting a company’s registration materials, the quiet period allows them to perform this task unbiased. It also gives investors the chance to assess the prospectus and IPO pricing in order to make informed purchasing decisions.
A few amendments have been made to the Securities Act regarding the quiet period since the 1930s. These include the recognition that companies may have made public statements prior to filing their registration, and clarifications about the type of marketing and communications a company is still allowed to do.
In the early 2000s the SEC modernized the rules of the quiet period to include clarifications about digital and online communications.
Other recent changes have made the rules more lax, such as permitting the solicitation of accredited investors. Perhaps one day the quiet period may no longer be enforced, but for now it is still an important part of the IPO process.
Violation of the Quiet Period
Violation of the quiet period is 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
What to 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. Seasoned investors look to profit at the end of the quiet period, called the quiet period expiration.
At this time the stock price and trading volume can see drastic movement up or down, since a flood of information gets released from analysts.
Unbiased prospectus information about recent filings can be viewed on the SEC website. It’s a good idea to read the prospectus so you can judge for yourself whether a company’s mission, team, and financials look like a sound investment.
One of the keys to building a successful long term portfolio is diversification. By mixing investments from higher and low risk, new and established companies, you can likely reduce the risk of a single investment having an outsized effect on your performance.
IPOs have the potential to be lucrative investments, but can also turn out to be extremely volatile and could lose value. A good way for new investors to add recent IPO stocks to their portfolios is through an IPO ETF.
ETFs include multiple stocks and are generally rebalanced over time, so investors can hope to gain access to growing companies while diversifying their risk.
Don’t Keep a Lid on Your Investments
If you have questions or want to discuss your investment strategies and portfolio, the SoFi Invest team is here to help. Investing in IPOs can be risky and takes time.
If you’re looking for an efficient way to add some of the newest IPO stocks to your portfolio, let SoFi do the heavy lifting using the Automated Investing platform.
Or, if you love doing your own IPO homework, the SoFi Active Investing platform can give you access to stocks of newly public companies.
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