Recently, a prominent US company refused to give Lex factual details of one of its products, saying it was prohibited from commenting because it was contemplating selling shares. The company in question eventually relented, but the episode highlights how businesses hide behind the US rule known as the “quiet period” to avoid talking to the public.
Adopted by the Securities and Exchange Commission after the 1929 crash, the quiet period seeks to protect retail investors and prevent companies from ramping up their prospects right before a public offering. Managers may not say anything that differs from or goes beyond the prospectus for a pending offering, so many companies won’t say anything at all. Rules are more flexible for institutional investors, which leads to a two-tier system where institutional investors attend detailed roadshows and small investors rely on CNBC talking heads.
The SEC revised its rules in 2005 to allow companies involved in follow-on offerings to communicate with the public and all companies to release factual business information. The regulators also encouraged companies to file an electronic version of their roadshows so all investors could see them. But complaints continue to erupt. During Blackstone’s closely watched IPO, the company refused to explain its fiendishly complex tax structure, saying it couldn’t go beyond the prospectus. Many analysts don’t issue research reports right before high-profile offerings because they work for banks involved in selling the securities. Poorly informed small investors continue to pile into risky IPOs based on gossip and momentum.
The SEC insists that companies are not as hamstrung as they claim, but until they put the onus on companies to talk rather than hide, nothing is likely to change. In the UK, the Financial Services Authority’s rules are more flexible. Companies can explain themselves although they do have to amend their prospectuses if they reveal a material change, such as a pending acquisition. Surely this is a better way.