Tetra Images / Getty Images The quiet period begins after the business and underwriters file to register for an IPO. It lasts until 40 days after the stock starts trading. During that time, the company must not share any information that isn’t in the papers and forms it has filed with the SEC, nor release any new information about the business. Those who are thinking about investing should only have access to what is in the registration forms. Releasing new information would be against the rules of the quiet period. Any information shared during that time could be seen as insider information. Alternate definition: The quiet period can also refer to the four weeks before the close of the business quarter when a company that is traded publicly files its quarterly earnings report. When used in this context, the same concept applies: Company executives are not allowed to speak to the public about the business. The rule avoids giving analysts, journalists, certain registered investment advisors, private investors, and portfolio managers an unfair advantage. In both cases, the term refers to a period of time when sharing new information about a company is limited. Both types of quiet periods are designed to reduce the chances that fraud or insider trading will happen. Alternate names: waiting period, cooling-off period
How Does the Quiet Period on Wall Street Work?
The quiet period on Wall Street was started by the Securities and Exchange Commission (SEC). It is meant to limit insider trading, level the playing field for all investors, and prevent companies from falsely raising the value of their stock through fraudulent marketing tactics. Steps for an IPO, and what information can and cannot be released to the public, were put in place by the Securities Act of 1933. These rules received an update in 2005 to incorporate electronic means of communication. For an IPO, a company must release a prospectus with information that will matter to investors who are thinking about buying its stock. This report will describe these items:
The security being offered. The company’s business and properties. The company’s management, such as the board, founder, and executives. The financial state of the company, with all statements checked by an independent accountant.
The quiet period gives the SEC time to look through the company’s forms and make sure that what is there is correct and truthful. By stopping the release of new statements, it also ensures that all investors will have access to the same information. To prevent some investors from getting new information, the company’s communication with the public is limited during the quiet period. This includes written, verbal, and electronic communication. This rule applies to all ranks within the company, including:
FoundersExecutives and board members, including CEO and CFOMembers of the management teamOther workers
What Are the Penalties?
Violating the terms of the quiet period is known in the field as “gun-jumping.” Though there are no strict rules in the code about how to penalize a company that “jumps the gun” and breaks the code of silence, the SEC has imposed various penalties, including:
Legal and financial liability for breaking securities laws.Stopping the IPO while the SEC decides whether inappropriate information has been shared, which can result in a delayed public offering date.Having the company note in the prospectus that securities laws were broken.
What are Some Notable Happenings?
Securities laws about the quiet period are often changed and updated. These changes are meant to create a level playing field for investors and limit fraud. They also allow smaller and newer businesses to keep growing.
The Securities Act of 1933
After the stock market crash of 1929, the federal government passed the Securities Act of 1933. This law was meant to regulate the ways stocks were sold. Its goal was to ensure that trading, particularly during a public offering, was fair for all investors by:
Requiring that investors have access to information about the finances and other major parts of the businesses being publicly traded.Prohibiting fraud.Stopping false statements about any securities being sold.
This law started the rule that companies preparing an IPO had to release public information about themselves. These documents would then be checked by the SEC before shares of that company could be traded.
Amendments in 2005
In 2005, the SEC voted to revise the “gun-jumping” rules of the Securities Act. These changes were meant to allow more communication to reach investors before an IPO. They made exceptions for certain:
Research reports.Communications that were made before filing the registration statement.Regularly released business information not meant for use by investors.
JOBS Act of 2012
The Jumpstart Our Business Startups (JOBS) Act of 2012 created a new category of companies known as “emerging growth companies” (EGCs). It also laid out new IPO rules for these companies. The JOBS Act stated that EGCs and their underwriters could communicate (orally or in writing) with qualified institutional buyers (QIBs) to assess the level of interest in the IPO. That could happen both before and during the quiet period. This new rule is known as “Testing the Waters.” During this period, EGCs are still subject to the federal anti-fraud laws. The SEC may request copies of any materials or written statements used for testing the waters.
