August 28, 2012
It’s about time that someone took a hard second look at the so-called “quiet period,” the rule that companies can’t comment publicly on their companies’ prospects, beyond what is contained in the S-1 filing with the Securities and Exchange Commission, ahead of their initial public stock offering.
Yesterday came the news that SEC chair Mary Schapiro has asked her staff to review that “quiet period” rule in light of the way technology has transformed both communication and trading in recent years. Schapiro clearly still thinks that the quiet period serves a useful purpose, preventing a company’s management from whipping up excessive hype about a pending IPO. The rules ensure that "comprehensive information about the company is widely and readily available to all investors," Schapiro told Rep. Darrell Issa, a Republican from California, in a letter that revealed the ongoing review of the quiet period policies.
The catalyst for this long-overdue measure is – what else? – the Facebook IPO, that black mark on the financial markets from earlier this year. As the deal was analyzed after its messy execution, it became clear that some favored clients had obtained access to research about Facebook that wasn’t more generally available. Anyone familiar with how financial markets function can hardly be surprised by the fact that some clients are more equal than others in the eyes of investment banks. Still, this particular kind of inequity ensures that those least able to withstand a loss or least likely to themselves possess the kind of analytical skills required to evaluate a company’s prospects are also the least likely to obtain this kind of preferential treatment.
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But the quiet period, as it exists today, has become a headache for everyone, and it’s time to think more about what it set out to accomplish than about the letter of the rule itself. The goal is to prevent a company from making lavish claims about its own future prospects that may differ from those that it is able or willing to put down on paper (or cyber-paper) and file with the SEC. The latter statements are reviewed over and over again by lawyers, who rein in their clients’ natural exuberance while pushing them to disclose risk factors. That’s why no investor should ever get excited about an IPO unless and until they have read the S-1 filing.
The problem is that the quiet period becomes an excuse for some companies to avoid addressing legitimate questions of concern, including elaborating on points they raise in the S-1 but don’t discuss in tremendous detail. Ask a CEO about a comment in an S-1 that seems to indicate some vulnerability and your unwelcome question is likely to be met with a shrug. “Sorry; we can’t discuss that while we’re in the quiet period.” That’s exactly when these questions need to be addressed, however, as the Facebook fiasco demonstrated.
The harsh reality is that companies find ways to get their message out to the people they feel are most vital to the success of their IPO. The most of savvy of them use back door channels. The clumsiest, like Groupon CEO Andrew Mason, insert their foot in their mouth. Mason sent out unaudited and incomplete financial statements to employees in an e-mail that then was leaked to the general public, in hopes of persuading the world as a whole that the company was outperforming its rivals and experiencing “unprecedented growth.”
Mason’s misstep was clearly the kind that the SEC rules were crafted to address. But back in 2004, Google nearly was forced to postpone its own IPO after its two founders gave an interview to Playboy magazine. (It may still be the first time that a Playboy article ever made its way into an SEC IPO filing.…) That’s absurd, as is the fact that on one memorable occasion, I couldn’t confirm the birthplace of a company’s CEO – and was told that the quiet period was to blame for this fact.
Companies and their underwriters are most cautious with the general public and less wary when it comes to dealing with institutional investors – the kinds of folks who have extensive resources of their own to analyze and research a company about to go public. If it’s OK to communicate with selected clients about a pending deal, it should be OK to summarize the gist of those discussions and release them to the public – particularly when they may transform a potential investor’s point of view on a pending IPO.
Clearly, the quiet period as it exists today often is used as a pretext, brandished by anyone not wanting to answer a tough question from a potential investor or a reporter. When it is in the interests of the company to promote its deal or the interests of the underwriters to maintain good relationships with their top clients, those rules are quietly set to one side.
Crack down on hype and self-promotion, by all means – clever underwriters already are adept at making an IPO prospectus look like a marketing document. But it is in the interest of all investors, not just the favored few, to have analytical information from third parties – such as that provided by Facebook’s underwriters – made generally available in the runup to an IPO. Let’s hope the SEC’s review is followed by such changes that actually help average investors.