IPO Quiet Period Expirations

Summary - In a world where it can be more important to “be first” than “be right”, investors have to make sure that the news they hear about a particular stock offering is accurate. This is particularly true when companies (usually emerging growth companies) issue an initial public offering (IPO) or when a publicly traded company is getting ready to file their quarterly earnings report. During times like these, companies are subject to a quiet period in which companies cannot comment publicly about their company. Also during this time, investment bankers and underwriters cannot release any analyst coverage including buy or sell recommendations.

At the end of the quiet period, an event known as the quiet period expiration, there is sometimes a significant change in trading volume and the stock price. This is why quiet period expirations give investors a chance to profit from the difference between the proposed IPO price and the actual IPO price. The same is true at the end of a company’s fiscal quarter. When a company releases its earnings report, it is generally a time of significant price movement. By prohibiting analysts from releasing their coverage of a particular stock until the quiet period ends, all investors will have access to the information at the same time.

In both cases, the quiet period and quiet period expirations are known events that are done to protect ordinary investors by preventing companies from engaging in any activities that may be perceived as insider trading. The penalties for violating the quiet period include the likelihood that a company’s IPO can be delayed.

Introduction

Two corporate-initiated events that can cause significant stock price movement are an initial public offering (IPO) and the period of time immediately preceding the end of a business quarter. The reason for this is that both events trigger the release of analyst reports. To be fair, analyst coverage of a company and/or sector is ongoing. In fact, many investment bankers and institutional investors have dedicated analysts for specific companies or asset classes. However, these are times when institutional investors and individual investors pay particular attention for information that may guide their view of the direction a particular security is taking.

Because of the potential for increased volatility during these times, companies are required to engage in quiet periods to prevent information from leaking to some investors at the expense of others, thus leveling the playing field for all investors. However, when the quiet period ends, an event known as the quiet period expiration, there is generally a surge of information from analysts. For many traders, this can be an ideal time to set trades based on the perceived direction of the securities being analyzed.

In this article, we’ll review what the quiet period expiration is and how it can be used for trading. We’ll also take a look at how the quiet period expiration is different from the lock-up period expiration and the consequences that companies can be subject to for violating the quiet period.

What are quiet period expirations?

Quiet period expirations are the dates upon which a company’s registration for an Initial Public Offering (IPO) has been approved by the Securities & Exchange Commission (SEC). Once a quiet period expires, analyst coverage will be released to the public. This quiet period expiration can take place in as little as 10 days, but in many cases investment bankers will still require a quiet period of 25 days to coincide with their obligation to fulfill their legal requirement to deliver a prospectus. The prospectus delivery, which is required to be made available on the SEC website, includes:

• A description of the company’s properties and business
• A description of the security being offered
• Information regarding the company’s management
• Independently certified financial statements

Since the stock will already have started trading, the expiring of an IPO quiet period can trigger a significant change in the stock price.

A quiet period expiration also takes place at the end of a business quarter. During the four weeks prior to the end of the quarter, a quiet period is imposed. During this time period, corporate insiders cannot speak to the public about their business to avoid the appearance, real or perceived, of providing insider information to analysts, journalists, investors, and portfolio managers. Since companies post the end of their fiscal quarters, it’s easy for investors to know when the company is in the quiet period and when the quiet period expiration takes place. It also means that, at any given time, there are a number of companies that are entering and exiting a quiet period.

To better understand the significance of quiet period expirations, it will be helpful to review what is meant by the quiet period.

 What is the quiet period?

There are two quiet periods for a business. One type of quiet period occurs in the last four weeks of a business quarter. This is the time when a company is preparing to file its earnings report. During this time, corporate insiders (owners, manager, even employees) are prohibited from speaking publicly about their company. This is done to prevent the appearance of providing insider information to third parties such as analysts or investment management firms.

The other quiet period occurs when a business issues an initial public offering (IPO). After the company and the underwriters of the IPO agree to an offering price and file a registration statement with the Securities & Exchange Commission (SEC), the company enters a quiet period (also known as the waiting period). During the waiting period, the company cannot release information regarding its activities.

The guidelines for the quiet period are similar to those used for insider trading. The quiet period remains in place until the SEC has had the opportunity to ensure all the documentation is in order and subsequently approves the registration for the offering. In some cases, this can be as short as 10 days. In other instances, it can be as long as 25 days. However, statements made within 30 days of the company filing their registration statement that may be viewed as an attempt to presell the security is considered a violation.

During the quiet period, it is a common and legal practice for key management personnel of the company to perform "road shows" that will allow them to present information to prospective investors and the investment community. This is done to meet due diligence requirements and assess the potential market and share price point, for the IPO. To help prevent the possibility of a company committing a violation of the quiet period, companies are strongly discouraged from engaging in marketing and public relations strategies such as press interviews, participation in conferences, and new advertising campaigns.

The quiet period traces its origins back to the 1933 Securities Act. A provision of this act was the banning of companies from using potentially fraudulent actions to market their securities in a way that could be misrepresented. The quiet period ensures companies fulfill this requirement. The quiet period is also referred to as a “gun jumping” provision because it prevents investors from jumping the gun and trading on misleading information.

How to trade on quiet period expirations

The reason why investors look to conduct trading around quiet period expirations is because of the opportunity for significant price movement. When a company files an IPO with the SEC, a recommended IPO price has been established. During the quiet period, the underwriters of the IPO are allowed to do what are called “road shows” in which they attempt to gauge the interest of prospective buyers. It is also done to assess if the IPO price is accurate.

In many cases, an IPO price is based on a similar company that is already being publicly traded. However, there are times when an IPO is priced outside of its targeted range. This can lead to outsize price action if analysts ratings support a higher or lower offering price.

Here are some general guidelines for investors when trading on quiet period expirations:

1. A strong story can be a positive or a negative. If a company has a highly anticipated IPO, shares may trade above their proposed price almost immediately. This can make it difficult for analysts to give the stock a “buy” rating. This could lead to the share price decreasing to the new price target.
2. On the contrary, even companies with a strong story may not be able to generate sufficient demand at their IPO price and begin trading down after the IPO deadline. This may occur when the market is already down. However, companies will do their best to time an IPO for favorable market conditions.
3. Another opportunity for investors is for companies that are not widely known. It may be difficult for investors to find information on the company prior to the IPO going public. In this case, investors will want to pay close attention to analysts' recommendations because they may have caused significant price movement.

How is a quiet period expiration different from a lock-up period expiration?

Both the quiet period and lock-up period are imposed to help manage stock price movement. However, there are significant differences between the two. First, the quiet period is a rule established by the Securities & Exchange Commission (SEC). This means that companies can face serious consequences for violating the quiet period. The lock-up period is not required by any regulatory body (however, it has become a de facto standard). The other distinction is when the events occur in relation to the IPO process. A quiet period happens before the initial public offering is approved by the SEC. The lock-up period happens immediately after the IPO receives approval. In the case of the quiet period, the purpose is to ensure that all investors have access to the same information to ensure orderly demand. The purpose of the lock-up period is to ensure that company insiders cannot dump their shares which would cause significant downward pressure on the stock price.

What are the consequences of violating the quiet period?

In general, if a company makes a statement within 30 days of filing their registration statement that the SEC considers to be an attempt to pre-sell the public offering, they could deem it a violation of the Securities Act. Possible consequences of violating the quiet period include:

• Liability for violating securities laws
• A delayed public offering date
• A requirement to disclose potential securities laws violations in the prospectus

The spirit of the quiet period has not changed since its inception. However, Wall Street is dealing with things that couldn’t have been imagined back then. For that reason, the rules that designate what is or is not a violation of the quiet period have changed, particularly with regard to electronic communication. This has opened up the quiet period to additional as the definition of “free and fair communication” continues to evolve.

The bottom line on quiet period expiration

One of the principles of sound investing is the exchange of information in a manner that is both free and fair. Prior to the stock market crash of 1929, information about companies was the realm of insiders and stock prices were subject to manipulation. Since 1933, the Securities Act has imposed quiet periods upon companies both for a period of time after they have registered for an initial public offering (IPO) and at the end of their fiscal quarter. When the quiet period expiration date is reached, investment bankers are permitted to release their analyst coverage of a particular stock which includes their “buy”, “sell” or “hold” ratings. This can be a profitable time for traders who can exploit a difference between the current share price and the IPO price. The IPO market is typically strongest in an expanding economy and weakest in an economy that is contracting.

When quiet period expirations occur at the end of a business quarter, it coincides with the release of their earnings report. Although the report is not typically issued for several weeks after the quarter ends, analysts are free to release their guidance about a stock or security. This is why the “earnings season” is one of the most closely watched events for investors.

A quiet period expiration is similar to a lock-up period expiration as they both are events that investors can use to predict future market activity. In the case of a quiet period expiration, the event preceding it (i.e. the quiet period) is mandated by the SEC. The lock-up period is not required by any regulatory agency but has become a de facto standard.