After a company issues an IPO, insiders and underwriters involved in the IPO are prevented from issuing any research reports or earnings estimates on the company for a set period of time as a result of SEC regulations. This period of time is often referred to as a quiet period. Following the end of a company's quiet period, brokerages that served as underwriters often initiate research coverage on the company. More about quiet period expirations.
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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).
In this article, we’ll review what the quiet period is, the significance of the quiet period expiration, including how investors can use the quiet period expiration to plan their trades. We’ll also explain 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 is the Significance of the Quiet Period?
The quiet period is a legally mandated period of time that precedes and follows a company’s initial public offering (IPO). During this time the company cannot promote its stock by releasing information that it has not already filed with regulators.
The quiet period traces its origins back to the 1933 Securities Act. A provision of this act was banning companies from misrepresenting its stock by using potentially fraudulent actions to market their securities. The quiet period ensures companies fulfill this requirement.
The guidelines for the quiet period are similar to the guidelines 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. The SEC may view statements made within 30 days of the company filing their registration statement as an attempt to presell the security. This would violate the quiet period.
During the quiet period, it is a common and legal practice for key management personnel of the company to perform “road shows.” These events allow companies to present information to prospective investors and the investment community. It also lets companies 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, the SEC strongly discourages companies from engaging in marketing and public relations strategies such as press interviews, participation in conferences, and new advertising campaigns.
In addition to the quiet period that occurs around the time of an IPO, there is another quiet period that takes place 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) cannot speak publicly about their company. This prevents the appearance of providing insider information to third parties such as analysts or investment management firms.
What Happens After a Quiet Period Expires?
The quiet period expiration can occur 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 during the last four weeks of a business quarter. 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. . At the end of this quiet period analysts will release their coverage to the public.
How Investors Can Trade on Quiet Period Expirations
Investors look to trade around quiet period expirations because of the opportunity for significant price movement. When a company files an IPO with the SEC, the agency establishes a recommended IPO price. As mentioned above, during the quiet period, the underwriters of the IPO can perform “road shows” in which they attempt to gauge the interest of prospective buyers.
These road shows also help to assess if the IPO price is accurate. In many cases, an IPO price falls into a target range that is similar to other publicly traded companies. However, there are times when the SEC will price an IPO is 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 who trade on quiet period expirations:
- 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.
- 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.
- 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 cause significant price movement.
How is a Quiet Period Expiration Different From a Lock-Up Period Expiration?
A lock-up period is a contractual agreement that prevents inside investors from selling their shares immediately after a company goes public. The typical lock-up period runs for about 180 days. Both the quiet period and lock-up period help manage stock price movement. However, there are significant differences between the two.
First, the Securities & Exchange Commission (SEC) sets the quiet period. 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 SEC approves the initial public offering. 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 for 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. Analysts can release their guidance once the quiet period expires. This is frequently several weeks before the company reports earnings. 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.