Making Noise in the Quiet Period

By Michael Fox

The IPO market has experienced one of its longest droughts in history, but the tide seems to be finally turning. While the doldrums of the past couple years will inject some new realities into how pre-IPO companies position their story (including the shift from a “growth at all cost” approach of prior years to a clear path to profitability expectation in the current climate), how companies manage the lead up to an initial public offering and the related rules around communication will remain largely unchanged.

As the gates begin to open for new issues, all prospective filers will want to make sure they have taken the necessary steps to establish a clear and compelling impression in the minds of investors before they commence a process, and then be prepared to properly manage their communication from the filing point onward. Failure to do so can have consequences.

In its worst case, missteps in communication can result in a “cooling off period” mandated by the U.S. Securities and Exchange Commission (SEC), which would require the company to push its IPO plans back a few months. That may not sound like a big deal, but the fragile capital markets are always only one disruptive event away from closing up on new offerings, and missing an open window could result in a lengthy delay. But even apart from action on the part of the SEC, it reflects sloppiness on the part of the company and can cause prospective investors to wonder if a company is really ready for the intense scrutiny that being a publicly traded company brings.

What is an IPO quiet period?

The SEC requires that from the time a company begins the IPO process, they operate in a “quiet period.” Beginning that process is generally defined as the point at which they retain investment bankers for that purpose. Like most government regulations, the definition of that term is about as clear as mud, but it generally means that regulators want all relevant information about the company that would be of interest to a potential investor to be contained entirely in one place — the Prospectus (S-1 filing), which the SEC reviews and approves. Any new or material information that the company might provide elsewhere at this time (e.g., in a media interview, press release, social media, or conference presentation) is considered to be a violation. Even confidential employee communications are subject to these guidelines, as we witnessed in 2011 when Groupon was sanctioned (for a second time) by the SEC after an internal memo by CEO Andrew Mason made unapproved financial claims about the company in an effort to defend against public criticism.

What you can say during an IPO quiet period

So does an IPO quiet period mean companies must refrain from speaking at all during this time frame — which can last anywhere from 3-4 months to almost a year, depending on circumstances? No, of course not. Companies couldn’t effectively operate if that were the case. So what can they do, and where are the boundaries?

For starters, companies are allowed to continue “normal course of business” communication. This generally covers basic external marketing and typical internal communication. But it also underscores why it is important for companies to establish a practice of active communication prior to entering the IPO process. If you don’t regularly send out press releases or do media interviews around product announcements, data reports, new hires or other basic company developments, then it is tough to claim those actions as normal course during the IPO quiet period.

More importantly, the SEC is concerned about what you are saying and who is saying it. The primary restrictions are around any substantive commentary about the business, its performance or financial results, future prospects or major developments – such as new customers, updates on litigation, entering new markets, etc. All of that business information needs to be contained in the S-1 and anything that is not should not be discussed publicly. While some companies will publicly acknowledge they are in the IPO process (even if their filing may still be confidential at the time), it is generally frowned upon to comment on the offering itself. And the comments of company executives and board members are particularly scrutinized.

It is critical that companies going through the IPO process educate their executive team and board – and the entire employee base once the fact that they are pursuing an IPO is made public – about the rules and restrictions on communication. Spokespeople who may engage in media interviews or speak at public events need to be coached very carefully on how to answer questions and avoid commenting on topics that will get them in trouble. For a senior executive, that is nearly impossible, so our advice is to refrain from interviews prior to the company’s IPO.

The IPO quiet period and listing day interviews

Following the pricing and listing of the stock, the company remains in a quiet period for another few weeks, but it has become customary for CEOs to participate in listing day interviews. These interviews, generally with top-tier financial outlets, as well as local and trade publications, are a great way to draw attention to the company from a business development standpoint, using the IPO as credibility and a branding moment to educate current and potential customers and investors. But navigating this still-sensitive time period requires skill and preparation. Here are a few tips:

  • Carefully prepare for interviews with a comprehensive Q&A session.
  • Anticipate questions that are typical in IPO interviews (e.g., “Tell me about the roadshow” or “How do you feel about the offering price”) and prepare answers such as, “If we execute our business plan, we are confident the stock price will take care of itself over time.”
  • Develop planned responses for questions that cross the line (e.g., “We’ve stated X in our filing, and we look forward to updating investors and the public in the future.”)
  • Ensure all key messaging and planned responses are aligned with the prospectus.
  • Prepare for media to ask questions about “risk factors” highlighted in the prospectus and develop responses that communicate how the company is mitigating those risks.
  • Consult with company counsel as well as the underwriters and underwriters’ counsel to determine whether the company will pursue listing day interviews prior to when the stock has begun trading.
  • Prepare to give the same interview whether the stock trades up 50% or down 50%.
  • Communicate the company’s long-term growth strategy as outlined in the prospectus, with listing day as the beginning of the next chapter of growth, regardless of where the stock priced or is trading.
  • Limit the total number of interviews and spokespeople to ensure messaging stays tight (the IPO follows a grueling two-week roadshow and the management team will be exhausted).
  • Know your interviewer and make sure they are informed about the company in advance.
  • Stick to the script!

The last thing you want to do in these interviews is create new news. The IPO is the news and it speaks for itself. The interview is simply an opportunity to guide the narrative, inform the story and shine a brighter light on that news.

An IPO is one of the most important and exciting corporate events a company will experience. Becoming a public company should be celebrated loudly and proudly, but it has to be managed within the rules laid out by regulators. Careful advanced planning and experienced execution can help companies achieve maximum brand exposure without stepping out of line before the IPO quiet period expiration.

Ready to start your IPO planning process? We have helped hundreds of companies enter the public markets. Download our comprehensive Insider’s Guide to Going Public for insight into the entire process. If you have additional questions, get in touch.