Quiet Period: An Overview for IPOs and Public Companies
A “quiet period” is a set time when a company cannot release nonpublic information. The goal is to reduce the risk of fraud, such as insider trading.
Companies are subject to quiet period regulations during the IPO process. The rules also apply to publicly traded companies four weeks before their quarterly earnings reports.
So why is a quiet period so important? Let’s take a look…
Quiet Period During the IPO Process
A company is required to undergo a quiet period before its IPO. The purpose of this is to ensure that private information doesn’t leak.
Employees at all levels of the company must comply with this rule. A quiet period applies to written and verbal communication, so many firms discourage press conferences and interviews.
So… what’s considered private information?
Information that’s not contained in the company’s registration statement (Form S-1) is nonpublic. The information is also considered material if it could influence the IPO or stock price.
Regulations for quiet periods are meant to prevent investors from gaining an unfair advantage by accessing relevant information prior to its public release.
Before a quiet period takes place, a company and the underwriters of its IPO file a Form S-1 with the Securities and Exchange Commission (SEC).
Once the documents are filed, the SEC reviews them and verifies the accuracy of the information. After the SEC has completed its review, the documents become available to the public. You can find this information on the SEC website.
Companies restrict communication to the public during a quiet period. After a company goes public, the quiet period can last anywhere from 10 to 40 days. This lets the stock “settle down” in the market without being influenced by new information.
A quiet period is important because IPO pricing can be unstable in the first few weeks. After a stock has traded for some time, it often settles into a trading range.
If you’re interested in learning more about the IPO process, check out this step-by-step guide to going public.
Quiet Periods for Public Companies
The quiet period occurs four weeks before the end of each quarter for companies that have already gone public. Thus, public companies’ quiet periods occur before they file their quarterly earnings reports.
During this period, the firm cannot speak publicly about any private information. This is because earnings reports can have a big impact on a stock’s price. The SEC wants to ensure that every investor has an equal opportunity.
Earnings reports that deviate from market analysts’ projections can cause a dramatic rise or decline in a stock’s price. Firms that exceed expectations usually see their stock perform well. And firms that don’t match analysts’ expectations tend to see their stock underperform.
Now that we’ve defined what a quiet period is, let’s talk about how it’s done…
What Is Standard Practice for a Quiet Period?
Several factors determine how a company discloses information. The amount of communication that companies have during a quiet period is up to them.
Some feel comfortable talking to the public, making sure to avoid off-limits topics. But others may not want to say anything at all. A firm can choose to go completely silent during a quiet period.
Remember: Companies can’t share any nonpublic information during a quiet period – but otherwise, they are free to decide how much information they want to provide, if any at all.
What Are the Penalties for Violating a Quiet Period?
Violating the SEC’s restrictions during a quiet period is often referred to as “gun-jumping.” The SEC’s penalties for gun-jumping may include…
- A delayed public offering date
- Liability for violating securities laws
- A requirement that the company include securities law violations in its prospectus
- A “cooling-off period,” or an extension of the quiet period.
In addition, shareholders can resort to legal action if a company fails to abide by the quiet period. A lawsuit can be brought against the company within a year of its IPO. In the event of a successful lawsuit, the issuer may have to rescind the contract and repurchase shares at the original price.
Companies must understand the rules of the quiet period, and they should take steps to ensure that employees at all levels of the business are aware of the restrictions. Educating and complying during a quiet period are crucial to avoiding violations from the SEC.
If IPO investing interests you, check out our IPO calendar. It’s updated daily to give you the latest news on upcoming and filed IPOs. Also, feel free to sign up for the free Liberty Through Wealth e-letter. It’s packed with investing tips and tricks.
About Aimee Bohn
Aimee Bohn graduated from the College of Business and Economics at Towson University. Her background in marketing research helps her uncover valuable trends. Researching IPOs and other trends has been her primary focus over the past year. When Aimee isn’t writing for Investment U, you can usually find her doing graphic design or traveling with friends.