A quiet period refers to, essentially, a blackout of information time period for communications from publicly traded companies, a practice that is required by the Securities and Exchange Commission (SEC) in the United States.
So-called “quiet periods” actually exist in reference to two situations for companies that issue public stock shares. The first type of quiet period is one that is applied during the time frame when a company is going public, offering shares for the first time in an initial public offering (IPO).
The second situation when a quiet period is enforced applies to all the companies whose stock shares are already being publicly traded. Specifically, it pertains to the time periods when publicly traded companies’ quarterly earnings reports are published.
A “quiet period” refers to, essentially, a blackout of information time period enforced in regard to communications from publicly-traded companies.
The Securities and Exchange Commission (SEC) enforces quiet periods in relation to both IPOs and the release of quarterly earnings reports.
The purpose of quiet period regulations is to help ensure that all potential investors have equal access to information about a publicly-traded company, and that no investor obtains an unfair advantage by receiving relevant information prior to its release to the general public.
Quiet Periods with IPOs
In reference to an IPO, the quiet period is designated as that period of time between the date when a company files its IPO registration with the SEC and the date on which the IPO actually occurs, the date when investors can first purchase the company’s public stock offering. Technically, the quiet period is enforced through a period of 40 days beyond the IPO date.
During that time frame, the company going public is prohibited from disseminating any information that is (a) not contained in the company’s registration filing with the SEC – which is available publicly on the SEC’s website – and (b) that might reasonably be expected to impact the IPO or the price that the stock initially trades at.
The 40 days past the IPO date rule is basically to allow the stock to get established in the financial markets and for its price to naturally “settle down.” IPOs are often accompanied by extreme volatility and severe price swings up and/or down when a stock first begins trading. After the stock has been trading for a period of several weeks, investors on both sides of supply and demand have usually reached a consensus on the stock’s reasonable value and established a moderately sized trading range for the stock.
The purpose of the quiet period is threefold:
1. First, it gives the SEC ample time to review the company’s prospectus filing and verify that the information contained in it is accurate.
2. It helps ensure a level playing field for all potential investors in the new stock issue.
3. It prevents companies from inflating, or “pumping up,” the price of their stock in an attempt to maximize their financial gains from the IPO.
Any communication of additional information, not contained in its prospectus, by the company during the quiet period is basically considered to be a violation of insider trading laws, and can, therefore, carry severe repercussions for the company and for the individuals responsible for communicating the information.
The quiet period prohibition applies to anyone connected with the company – that includes founders, members of the company’s board of directors, and all company employees. It additionally applies to anyone connected with the IPO.
For example, employees of the investment bank that is managing the IPO for the company would also be subject to the quiet period prohibition, as would employees of an accounting firm that the company hired to certify its financial statements for the IPO.
Earnings Reports Quiet Periods
The second type of quiet period is one enforced around the time when a publicly traded company releases its quarterly earnings reports. Earnings reports often have a substantial impact on a stock’s market price when they are initially released. Large deviations from the earnings projections of market analysts can cause a sharp rise or dramatic decline in a stock’s price.
Thus, the SEC again has a vested interest in trying to assure a level playing field, that no investors have an advantage, or be at a disadvantage, due to advance information about earnings reports leaking out to some people early.
The earnings report quiet period is applied to the time frame that covers the four-week period that precedes the end of a company’s fiscal quarter and extends to the actual date and time of the earnings report being released (most companies release their earnings reports within a month or two of the end of the quarter).
Again, the quiet period prohibition is essentially enforced against anyone who works for the company or who is connected to the company in a manner that may provide them access to inside information – that is, material, non-public information.
The SEC has laid down very specific rules regarding the dissemination of information contained in quarterly earnings reports. A company must adequately publicize its upcoming earnings report and the accompanying analyst meeting or conference call to discuss the report by doing all of the following:
Issue a press release regarding the earnings report through PR Newswire
Copy the press release to the SEC via Form 8-k
Publish information about the earnings report release and discussion conference call on its company website
Additionally, when an analyst meeting or conference call is held where company executives discuss the earnings report, the meeting must be broadcast via the internet and/or by conference call, with access freely available to any and all interested parties.
Because of the earnings report quiet period regulations, company CEOs and board members often simply do not grant any interviews to financial journalists or market analysts during the quiet period. It is important to avoid even the possible appearance of communicating insider information, and absolute silence is the practice most likely to ensure compliance with quiet period regulations.
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