The following article is from the current issue of Barrons.
April 29, 1999
Shh! Companies Hide Behind 'Quiet Period'
By Howard Gold
How many times have you read something like this in a business or financial
story?
A Waterhouse spokeswoman declined comment, citing the "quiet period"
surrounding the initial public offering of its parent's global
discount-brokerage business.
That was from last week's Wall Street Journal, and
it's so routine reporters might as well have a macro
that plugs it into their stories automatically.
It's received wisdom that securities laws forbid managements from saying
anything to the media or anyone else while their company has an offering in
registration. And most reporters just nod their heads and sheepishly accept
management's protestations that its hands are tied.
With so many individual investors snapping up shares in hot new Internet
IPOs, the need for information by the public during the registration period has
become even more vital.
And that's just the time these companies are clamming up.
But guess what? They don't have to.
Oh, sure, companies are restricted in what they can say while they're in
registration. Under the Securities Act of 1933, issuers can offer securities only
through a written prospectus. They cannot make rosy projections about their
businesses in an effort to sell securities.
These laws, recall, were passed in response to the overheated market of the
late 1920s, when stock promoters made huge profits flogging worthless
securities, insider trading was rampant and information about publicly traded
companies was hard to come by. The securities laws of the 1930s tried to
level the playing field by mandating accurate, uniform disclosure.
That's where the so-called "quiet period" comes in. From the time a company
begins seriously considering a securities offering, through the actual filing of a
prospectus, until the Securities and Exchange Commission's staff declares that
offering effective, a company cannot sell securities or "condition the market"
for such a sale.
But that doesn't mean they can't say anything.
"There really is a quiet period, but people interpret it to be broader in scope
than it really is," says Anita Klein, senior counsel to the director of the SEC's
division of corporate finance.
In a much-ignored set of guidelines published in 1971, the SEC "as a matter of
policy encourage[d] the flow of factual information to the shareholders and the
investing public" during the registration period. It then went on to spell out
what companies in registration could and could not do.
According to the guidelines, issuers should continue to advertise; send out
regular shareholder reports and proxy statements; hold scheduled shareholder
meetings; issue press releases about business developments, and -- here's my
favorite -- "answer unsolicited telephone inquiries from stockholders, financial
analysts, the press and others concerning factual information."
That's the key -- it must be factual information -- not "forecasts, projections
or predictions" or "opinions concerning values" beyond what's published in the
offering prospectus.
Sounds pretty straightforward, right? They can talk but they can't tout.
Can you spell l-a-w-y-e-r?
Since guidelines don't have the force of law and since the registration period
can be so tricky -- especially for newer companies -- securities attorneys
generally err on the side of caution.
"The advice most of us would give would be, your statements have to be
consistent with [the prospectus]," says Jeremy W. Dickens, a partner in the
Capital Markets Practice Group of Weil, Gotshal & Manges in New York.
"I would likely tell them to tone down the volume of the press releases," he
adds. "I would not counsel to engage in discussion with financial and other
press."
I'm sure Dickens is a fine lawyer who's just protecting his clients, lest they say
the wrong thing and screw up a lucrative offering. But where does that leave
the rest of us?
Investors are entitled to more information during the registration period,
especially when big institutions are treated to private road shows in which they
get up close and personal with management and ask questions beyond what's
in the dry-as-dust prospectus. Though road shows, too, are subject to
restrictions, it sure smacks of selective disclosure -- a concern the SEC
acknowledges.
Recognizing the problem -- especially when the Internet permits instantaneous,
ubiquitous disclosure -- the SEC has proposed a massive overhaul of the
offering process. These proposals, which run hundreds of pages, have been
dubbed "the aircraft carrier" -- presumably because the documentation is so
voluminous you have to get out in the middle of the ocean to turn the pages.
The proposals essentially free large, seasoned companies (or seasoned
companies of any size that sell securities to sophisticated investors) from most
of the current restrictions. As long as they file a prospectus, they can offer
securities any time they wish -- without SEC review. They could also
communicate freely with investors and the public.
For the rest -- probably the bulk of today's high-profile IPOs -- the SEC staff
proposes that communications be limited in the 30 days before an offering is
filed. In other words, make the quiet period official -- but only for younger
companies in the first stage of the offering process.
Once the prospectus is filed, there could be "open dialogue between the
registrant and its potential investors." The proposals even suggest that
companies in registration may use e-mail to answer investors' questions,
sponsor chat rooms or message boards and conduct electronic road shows.
(A definite blow to the rubber-chicken circuit!)
That still sounds a bit restrictive to me in an age of instant communication, but
it's a huge step forward. The SEC is accepting comments now, and the final
rules are probably at least a year away.
But in the meantime, we in the financial media have the responsibility to pry as
much information from these managements as we can -- because for better or
worse we're the only way the investing public can get it. We can't just let them
off the hook.
So, if companies in registration say they can't talk because of the quiet period,
I'd suggest reading the corporate attorney those 1971 guidelines I cited before
(it's SEC release # 5180, by the way). If they stonewall, continuing to cite
"SEC regulations" blah blah blah, I'd just print something like the following:
A company spokesperson declined comment, on advise of counsel.
Because you see, you just can't blame the government for everything.
Howard R. Gold is editor of Barron's Online. "Fighting the Tape" appears
monthly, usually on Thursday.
What do you think? Please e-mail comments to:
howard.gold@news.barrons.com |
