What is a period of silence?
Before a company’s Initial Public Offering (IPO), the period of silence is an embargo imposed by the SEC on promotional advertising. This prohibits management teams or their marketing agents from forecasting or expressing any opinion about the value of your company.
For publicly traded stocks, the four weeks before the close of a trading quarter is also known as a quiet period. Once again, corporate whistleblowers are prohibited from speaking to the public about their business to prevent certain analysts, journalists, investors and portfolio managers from gaining an unfair advantage, often to avoid the emergence of inside information, whether real or perceived.
- A period of silence is a specified period of time when a company’s management and marketing teams cannot share opinions or additional information about the company.
- The purpose of the silence period is to preserve objectivity and avoid the emergence of a company providing inside information to selected investors.
- With an IPO, the period of silence extends from the time a company files registration paperwork with US regulators to 40 days after the stock begins trading.
- For publicly traded companies, the lull is a reference to the four weeks before the end of the business quarter.
Understand the quiet period
After a company registers the registry of newly issued securities (stocks and bonds) with the SEC, its management team, investment bankers, and lawyers go on a tour. During a series of presentations, potential institutional investors will ask questions about the company to compile investment studies. Management teams should not offer any new information that is not contained in the registration statement. But it still offers some level of information gathering.
The period of silence begins when the registration statement becomes effective and lasts for 40 days after the shares start trading. Its purpose is to create a level playing field for all investors by ensuring that everyone has access to the same information at the same time.
It is not uncommon for the SEC to delay an initial public offering if a period of silence has been violated; Stakeholders take the process seriously as there is a lot of money at stake.
The term lull has two references in business, one related to an initial public offering (IPO) and another at the end of a corporation’s business quarter.
Example of violation of period of silence
Debating the goals of quiet periods and enforcement of the SEC is common in financial markets. When quiet periods are deemed to have been violated and ultimately benefited selected parties, legal action is usually taken.
In a recent example, shareholders alleged wrongdoing regarding the quiet period surrounding Facebook’s IPO in 2012, arguing that certain information that should have been kept secret may have been selectively shared, unfairly benefiting certain parties. Facebook’s IPO sparked more than a dozen lawsuits from shareholders accusing the social media company and its insurers of hiding their weakened growth forecasts before listing. Small investors complained they were at an informational disadvantage after the insurers’ research analyst reportedly passed new and useful earnings estimates only to large investors.