The markets have evolved since the ’30s, but the temptation for companies to puff their feathers for investors is still strong. “We’re watching all the time,” Shelley Parratt, an SEC deputy director, said at a conference in January. Parratt helps run the SEC’s Division of Corporation Finance, which polices the quiet period rules. What companies can and can’t say loosened up in 2005, when the Securities and Exchange Commission overhauled the IPO process for the first time in more than 70 years. Before the changes, companies felt their hands were tied to communicate publicly at all, even halting regular advertising campaigns. “There was a good set of complaints that said the IPO process should be about making sure various types of manipulations don’t occur but shouldn’t be about stopping the business plan of a company dead in its tracks,” says Eric Talley, a law professor at University of California Berkeley.
In 2005, the SEC’s new, more open guidance said companies still couldn’t hype their stocks, but they could continue regular communications with customers, shareholders, and suppliers. The key there is that a company’s communications can’t be new or differ from what it has done before, it can’t make any forward-looking statements, and it can’t talk about the offering specifically.
If a company starts talking when it shouldn’t, it’s “gun jumping,” as industry parlance has it. The ramifications can be costly—the SEC can delay approving an IPO, and shareholders can possibly sue a company over public comments if there are material misstatements, says Onnig Dombalagian, a law professor at Tulane University. After Google’s (GOOG) founders gave an interview to Playboy during the company’s IPO, the SEC forced the company to include the interview as an exhibit to its final filing.
Since the 2005 reforms are fairly recent, and the IPO market has been cool during much of that time, lawyers are still quite conservative about how they interpret the relaxed rules, Talley says. They advise their clients to keep extra quiet, which can prove to be particularly hard for tech companies, where “part of the culture is to have a little bit of public swagger,” and showmanship is part of the business plan, he says.
Previously, during the road shows when companies pitch to investors, they distribute what is known as the “red herring” prospectus, a reference to the red cover text cautioning possible investors that these securities aren’t yet for sale. “The overhaul completely upended what you can use,” Dombalagian says. Companies can use other marketing documents, so long as they don’t contradict what’s in the formal SEC filings and they provide links to the red herring, which lists out all of the risk factors and other cautions related to the offering, he says. “When you do speak about the offering or when you do provide additional sales materials, having the prospectus there throws some cold water on the sales.”