Quiet Period

Reeling from the Stock Market Crash on Tuesday, October 29, 1929, the U.S. Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934 to restore confidence in U.S. financial markets.

The 1934 Act contained a quiet period provision that restricted the information released about an initial public offering (IPO) to the prospectus that is filed with and approved by the Securities and Exchange Commission (SEC). the process of developing the final prospectus starts with the preliminary prospectus or “red herring.”

The term “red herring” came into use because offthe attentiondrawing statement on the first page of the preliminary prospectus in red stating that the company is not attempting to sell the stock therein discussed before the final prospectus is approved by the SEC. The quiet period was initially 5 days prior to the IPO offer date and 25 days postoffering. In 2002, the postoffering period was lengthened to 30 days.

During this time, those parties with an economic interest in the IPO who have creditable information sources were prohibited from making IPO-related information available that was not part of the public information in the SEC-approved prospectus. the intent of the quiet period was clear: to eliminate prelaunch hype. Such prelaunch restrictions got to be called “gun-jumping rules” as it was believed that discussing the IPO during this period was inappropriate.

In 2005, the SEC brought the quiet period to an end by eliminating restrictions on disclosure of any information that was outside the official prospectus. This was surprising because the SEC had been very vigilant and often erred on the side of strict interpretation in order to guard the sanctity of the quiet period.

Just consider the brouhaha over Google’s Playboy interview where Sergey Brin and Larry Page said a “few” nice things regarding the then about to be launched Google IPO. the SEC started muttering about imposing a “cooling of ” period that would delay Google’s debut or perhaps require Google to buy back shares.

In 2007, some 2 years after the SEC eliminated the quiet period, has the IPO crowd pumped up the volume? Surprisingly, no! According to Lynn Cowan, “Among the changes adopted by the SEC in June 2005 is a provision that allows companies more flexibility in speaking publicly to the media before an initial public offering.

In practice, however, very few companies opt to grant interviews with their executives ahead of a deal because they still risk liability for any false statements. ‘the feeling is, why take the chance that someone will misunderstand you? You will still find that CEOs are very cautious about talking to the media’ ahead of an IPO,’ says Brian Lane, a lawyer at Gibson, Dunn & Crutcher LLP and a former SEC corporation-finance division director.” (Wall StreeftJournal, January 29, 2007, online.wsj.com).

So a self-imposed version of the quiet period seems to still exist from management’s perspective. But the story continues: Bradley et al. (2003) found that at the close of the quiet period, 76% of the analysts immediately initiated coverage with “buy” recommendations in their general as well as tombstone placements.

Further, this hype seemed to work as the 5-day abnormal returns for these securities was 4.1% compared to a benchmark of firms with no such coverage for which the abnormal return was only 0.1%. Given these abnormal returns, it is indeed surprising that management remains reticent. Perhaps, they feel that the analyst’s hype is sufi cient and so they do not need to take the risk of saying anything.

Quiet Period
Quiet Period