The Securities and Exchange Commission has been a contentious place lately, with a variety of 3-2 rulings. But yesterday there was something that all SEC commissioners could agree on: rolling back the "quiet period."
The quiet period limits communications from a company when it's raising capital from the public. This starts when a company files a registration with the SEC and ends 25 days after the company issues stock. During this time, a company's communications are strictly limited to the prospectus, which is usually a long, legal-type document.
Interestingly enough, there is no such explicit rule in the securities laws. Rather, the quiet period is implied by the tight disclosure restrictions put on companies that file registration statements with the SEC, which are required for a company that raises capital from the public.
The quiet period has its roots in the 1930s, when investors lost huge sums from scam public offerings. To instill confidence in the capitalist system, Congress passed the federal securities laws to ensure that investors get enough information to make their own investment decisions. Thus, a quiet period makes it very difficult for a company to hype its offering.
It seemed to work well -- that is, until the emergence of electronic markets and instant communications. Back in the 1930s, it was very difficult for investors to get information, especially reliable information. But this, of course, is no longer the case. What happens is that information about an offering is widely available. And, even if some of the information is inaccurate, a company cannot correct it.
So, how does this help investors? After all, how many investors actually read a prospectus? True, a prospectus has a tremendous amount of information, but it is often overwhelming and complex for the individual investor.
Rather, institutions and wealthy investors attend road shows, where they can hear views of the company. Is this available to the individual investor? Well, no it's not. And the individual investor might do well to know what the perceived market conditions are following the road show.
What's more, hype is inevitable with some IPOs. This was certainly the case with the Google (NASDAQ:GOOG) offering last year, which generated huge amounts of buzz. Yet Google's management was restrained by the quiet period.
But during the registration period, a Playboy interview with Google's founders hit the newsstands. Violation of the quiet period? It was not clear-cut because the founders gave the interview before the company filed its IPO.
And the Google case may have been the tipping point for the SEC to liberalize communications during corporate offerings. However, the ruling has its nuances. First of all, the new guideline does not apply to "blank check companies, shell companies, and penny-stock issuers." Unfortunately, these companies often engage in hype to promote their offerings (through boiler-room calls and spam emails, among other methods).
For so-called "well-known seasoned issuers," communications are completely open-ended, so long as they do not violate the fraud provisions of the securities laws. These issuers have been reporting to the SEC in a timely fashion for at least one year and have a market cap of at least $700 million or have issued $1 billion in non-convertible securities. In fact, these companies may even be able to advertise their offerings on the Internet or television. Just imagine if Google had done that.
Those companies that are in the process of an IPO will be able to disclose more information to the public (but not as much as a seasoned issuer) by, say, posting webcasts or even granting interviews.
In fact, this is what Morningstar did with its recent IPO. That is, it published its road show -- with slides and a transcript -- in its prospectus. Actually, it's been one of the top IPOs of the year. Maybe in light of this, we'll start seeing more companies webcasting their road shows, helping to level the playing field.
Fool contributor Tom Taulli does not own shares mentioned in this article.
