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Shhh. Please Do Not Disturb the Quiet Period

What's so great about quiet periods? Plenty, say the lawyers, bankers and companies they serve.

Everybody loves to talk about initial public offerings, the financing event that's becoming as American as motherhood and apple pie. But relatively few understand the ins and outs of IPOs, particularly the so-called quiet period -- that ill-defined space of time when companies issuing shares to the public must keep their lips zipped about their financial activities.

Mindful that its customers often don't understand the murky rules, news release distributor

PR Newswire

sponsored a panel discussion at Manhattan's

International Toy Building

earlier in the week to clear up the muddle. Given my role in shining the light on



not-so-quiet quiet period, the publicist's group invited me to join the panel, which included securities lawyer Karen Dempsey of

Pillsbury Madison & Sutro

in San Francisco. Dempsey presented such a clear definition of the quiet period -- which I embellished by pointing out how companies routinely violate the rules -- that it seemed instructive to reproduce the list here, with commentary.

As Dempsey explains, there are three distinct phases of a quiet period. The purpose of each phase is to prevent companies from hyping their stocks at a time when investors haven't had an opportunity to digest fully the company's filings with the

Securities and Exchange Commission

. Violation of any of the phases can get a company in hot water with the SEC, a career-limiting event for lawyers, bankers and the executives involved.

Dempsey: 1. Prefiling period.

Generally defined as the time beginning when a company chooses its investment bankers -- in a process known as a bakeoff -- and ending when it files for its IPO. This is a touchy time for private companies. They haven't filed to go public and yet they can't admit publicly that they plan to do so. Never mind that anyone close to the company knows exactly what's going on. If bullish comments or financial projections were to appear in the press during this time, the SEC might suggest that the issuer was attempting to "precondition" the market.

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My take:

This sounds good and fine, but companies routinely worm their way around this. They do it by calling journalists to offer interviews, informing a reporter that "you really ought to do this interview now because


my CEO won't be able to talk anymore, if you know what I mean." Companies also place big ads in newspapers just before filing. Venture capitalists jokingly call these "valuation markers." The more impressive-looking the ad, the higher the valuation. Advice: Conservative companies will behave in the prefiling period as if they'd already filed. And that's probably a good thing, as no prospectus exists publicly to balance a company's bullish statements.

Dempsey: 2. Waiting period.

This is the time from a company's first filing with the SEC to the date the IPO becomes effective. During this time, companies shouldn't give interviews about the performance of the company, though discussing product introductions or partnerships typically is acceptable. The rule of thumb is that a company may conduct ordinary business, so long as it's not touting the stock. If it violates this rule, it is considered to be "gun-jumping," or getting its message out ahead of the regulatory process, which the SEC punishes with a "cooling-off period."

My take:

Companies today are getting so paranoid that during their waiting periods -- also a time when the SEC makes comments on securities filings -- they won't issue


press releases or comments. While prudent, it's silly to scare companies into thinking such restrictions exist. The SEC shouldn't be out to grind the wheels of commerce to a halt. But fears of not completing the precious deal override the desire to promote one's prospects.

Dempsey: 3. Posteffective period.

This is the 25 days following an IPO during which a company is supposed to refrain from making written statements about its business beyond what is in its SEC filings. That prohibition extends to the research analysts working for its underwriters. The notion used to be that investors needed time to receive a written prospectus in the mail, and any other written communications could be perceived as being a nonregistered prospectus.

My take:

This is one of the silliest remnants of old securities law, one that succeeds in keeping information from the public rather than leveling the playing field. For 25 long days, individual investors get next to no information on the company beyond what they read in the prospectus. Meanwhile, analysts and institutional investors received a detailed look during the pre-IPO roadshow.

Nobody needs to wait for prospectuses to arrive in the mail anymore: They're all available on the Web. Moreover, although companies say they're "quiet" for this monthlong period, that doesn't stop them from hyping their IPOs on


the day they go public. And it doesn't stop their cheerful publicists from calling a few days before pricing to arrange interviews for the big day. This isn't preconditioning the market?

Dempsey says there are three reasons why it's important to follow these rules: to avoid being delayed under gun-jumping provisions, to avoid incurring liability for statements made outside the legal protection of a securities filing and because eventually the SEC will criminally prosecute executives who make false statements.

But here's a bolder idea: Eliminate quiet periods -- from beginning to end -- altogether. Allow companies to make oral statements to anyone, including the media, provided the statements are truthful and are covered already in a publicly filed prospectus. It's time to stop "protecting" the average investor and instead let that investor get the same access to information that professionals and company insiders have.

Who'd be the biggest losers if that were to happen? Lawyers, bankers and other professionals making a living adhering to the SEC's screwy rules that companies try their utmost to avoid.

Adam Lashinsky's column appears Tuesdays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at