For example, when a company decides to go public, it can’t immediately offer stock to investors however it wishes. Instead, it needs to follow certain securities laws in order to avoid gun jumping. When undergoing an IPO, companies need to follow rules such as Section 5 of the Securities Act of 1933, which involves registering and getting approval for the IPO from the Securities and Exchange Commission (SEC).
How Gun Jumping Works
Gun jumping works by companies or investors getting an unapproved headstart on an activity such as investing in an IPO. Instead of companies being able to sell stock or merge whenever and however they want, government authorities such as the SEC and Federal Trade Commission (FTC) have rules in place that need to be followed. With IPOs, for instance, the SEC has several rules around how companies go about offering and selling securities before, during, and after the filing period. For example, during the period between filing with the SEC and the agency declaring the filing to be effective, an issuer can only make certain types of offers to sell securities and can’t actually complete the sale without that being gun jumping. If a company does jump the gun, it can face a wide range of consequences, depending on how the relevant agency interprets the gun jumping. For example, the SEC might implement a “cooling-off period,” which delays the IPO and can damage the company’s ability to optimize when it goes public. The rules, however, have evolved over time to give leeway in certain situations. In 2012, the Jumpstart Our Business Startups Act (JOBS Act) allowed emerging-growth companies (EGCs) essentially to test the waters on institutional investors’ interest in buying their stock, before or after a company filed a registration statement with the SEC. Without that rule, these companies might have been considered to be engaging in gun jumping. In 2019, the SEC’s Rule 163B extended this ability to test the waters to all companies who want to get a sense of whether qualified institutional buyers and institutional accredited investors are interested in their stock.
What Investing Would Be Like Without Gun-Jumping Rules
If there were no rules against gun jumping, that could lead to consequences like some investors getting an unfair advantage over those with less inside information. Also, having the so-called “quiet period” leading up to an IPO can give the SEC time to review filings.In addition to stock trading, gun-jumping rules can also apply to mergers. Similarly to how the SEC wants time to review IPO filings, authorities generally want to be able to review mergers before the companies actually combine. Without gun-jumping rules in place for mergers, companies might engage in anti-competitive behavior. For example, companies that start to merge before receiving official approval might start to coordinate on prices, where both companies start to charge consumers more before the merger actually goes through.
What Gun Jumping Means for Individuals
Generally speaking, gun jumping applies more to companies and institutional investors, so it might not be something that individuals encounter often. However, these rules can help create a more level playing field for the benefit of individuals. If you are in a situation, however, where gun jumping might be an issue, such as if you have access to non-public information, you may need to avoid acting on that information and consult with legal counsel to ensure you follow the rules properly. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning! RIN 3235-AM23: Solicitations of Interest Prior to a Registered Public Offering,” Page 1.
