Company spokespersons are sometimes speechless during an IPO because they don't know what to say. The quandary stems from a feeling that the rules governing an IPO's quiet period are antiquated.
Road shows, for example, often don't happen until months after a company files its S1 with with SEC. In days of old, revenue streams remained largely intact within this period. But overnight Internet successes are changing that. Now, in the time between filing the S1 and meeting with potential investors, a company's revenue can triple.
The race to stay competitive against other wannabe IPOers could entice a company spokesman to mention good fiscal news. But stating a recent upswing is a clear violation of SEC law because it is not written in the S1, the forerunner to the company's prospectus.
What do you, as an investor relations professional, advise your CEO to say?
It's a dicey call - one fraught with worry. If your spokesman mentions a revenue upswing not stated in the prospectus, the SEC could find out and shelve your IPO for as long as it sees fit, allowing potential investors to take their money elsewhere. But if the mention is not made, the golden chance to outshine your IPO competitors is missed.
Avoiding all this hand-wringing was the topic of a recent seminar titled "The Not-So-Quiet Period: What to Say When You Can't Say Anything," hosted by Michelle Savage, director of investor relations for PR Newswire. The meeting spoke to some of the reasons why the SEC has yet to update the rules governing the quiet period and hinted at ways to beat the system.
Guests to the event were: Carol Ruth, president of the Ruth Group, a financial communications agency focusing on the capital markets; Ed Belak, managing director of investment banking for Joesphthal; Adam Lashinsky, columnist for TheStreet.com and breaker of the Webvan fiasco, the company that had its IPO shelved for a few weeks by the SEC for stating financial information not disclosed in its prospectus; Glenn Faulkner, VP of global sales for the Nasdaq Market Group; and Karen Dempsey, security lawyer and partner at Pillsbury Madison & Sutro law firm.
Below are excerpted answers to questions surrounding the IPO's quiet period.
What was the original purpose behind a quiet period?
Ruth: It was to protect people and make sure that the information out there was all the same and accurate.
Dempsey: The period is broken into three distinct pieces. The first is the pre-filing period, which is three to six weeks prior to filing with the SEC, to get ready for it. The next period is the waiting period, where the SEC okay's your S1 and you wait until your stock is priced. The last period is call the post-effective period. [Once] you go public, there's a 25-day period in which selling shares still requires the delivery of the prospectus.
Why is this system outdated?
Dempsey: There's no such thing as a quiet filing anymore...Everything is filed via Edgar; it immediately gets picked up on the Web. The minute you file for an initial public offering, everybody knows about it. So from that period on, up until you price, you make oral offers to sell shares. That's part of the road show.
Why won't the SEC adapt the rules governing the quiet period to reflect today's business pace?
Lashinsky: They [the SEC] do understand what's going on [with the market]. They have known about some of the shenanigans that have gone on in the IPO process for years, and they've stood by and done nothing about it...There is a feeling in the investment banking and in the professional legal community that there are a lot of people at the SEC who have a chip on their shoulder...The SEC is badly understaffed, badly underfunded and some of them are pissed off about this. I think they get a kick out of going after some of the fat cats, especially in Silicon Valley.
What is it that IR pros fear (and the SEC looks for) when a representative speaks publicly about the company during the quiet period?
Ruth: The concern is that if they put their client with the media, that somehow the client's going to step over the line, that the reporter's going to write a story by talking to other people.
When is the best time to have a spokesperson talk?
Dempsey: They can do it after [the company has been] declared effective. (Meaning, the stock is publicly trading, but the company is still quiet.) The SEC no longer has the penalty of not declaring you effective. It's a crazy answer. [But,] it's almost perfunctory that they go on whatever show it is right after pricing, because at that point the leverage of the SEC [is gone and they] can not take away declaring you effective.
Is there a creative way to speak before the effective date without fearing reproach from the SEC?
Ruth: I had a client once, he didn't want to do a road show. [But], he had just put out this vesting book. We sent the book to the reviewers in all the cities around the country that [was] on the investment banking tour. The lawyers wanted to look at the letters and everything [that went out], but approved everything.
Is there a main area the SEC looks at to see if a company is violating the quiet period?
Dempsey: Your Web site. You've got to look at your Web sites. [In one case] the SEC read [the client's] and said they were offering these three other products that aren't described in the prospectus.
Is shelving an IPO the worst punishment the SEC can do to your company?
Dempsey: We're actually going to see the SEC come in against somebody and start enforcing some civil or criminal penalties, because this [breaking quiet period rules] is really an area that [it] has gotten excited about...As a matter of course, when you file with the SEC, they automatically do a search of everything [to match your past activities with the new ones].
Is there any move to redefine the quiet period?
Roland: It's called the "aircraft carrier proposal." It would narrow the quiet period, which is roughly four to eight months, to one month. It would also allow free marketing by companies and underwriters to investors and the public at large; allow both oral and written materials to be disseminated and would require the written materials to be posted and filed with the SEC so that the whole public could see them. Companies support this. I think it's a widely popular proposal.
(Renu Aldrich, 212/282-1929.)
The Haunting
Emerging from a quiet period with even a few SEC scratches can haunt your company in the future, according to Jason Mandell, Jesse Odell, founders of Launchpod, a firm specializing in communications for start-up ventures. If your firm wishes to do a follow-on (the process where more stock is re-issued and another quiet period ensues) the SEC might remember your bad behavior from the first quiet period and possibly scrutinize your actions more thoroughly this time.
It's best to be conservative during the original IPO, only stating hard news about your company's activities. An effort to get extra ink (e.g., trying to get your CEO featured in a lifestyle magazine) could be construed by the SEC as a ploy to pump your stock...and it could cost your company plenty in the long run.
(LaunchPod, 415/283-3256)