Commentary: There's No "Quiet Period" For Bigwigs

Before an IPO, institutions get road shows -- while small investors get shut out

You might say it was a Willy Loman moment for initial public offerings. The extroverted chairman of Inc. (CRM ), a San Francisco software company, was a tad overfriendly to the press. So in early May, the Securities & Exchange Commission put the brakes on the company's IPO. The SEC charged that Salesforce had violated "quiet period" rules by cooperating with The New York Times for a fairly innocuous profile. The company finally went public in June, about a month later than had been scheduled originally. The SEC declined comment. But the hullabaloo thrust an old issue into new light.

Investors are realizing that something is inherently wrong with the way companies are brought to the public market. A lot has to do with the quiet period, typically the time from when a company files to go public until 40 days after an IPO, during which a company is not allowed to do or say anything that might be considered hyping its stock. But it turns out that the quiet period is often anything but. In fact, its main purpose seems to be to give fat-cat players an edge over ordinary investors. How? In the runup to their IPOs, companies stage road shows, where big investors get to hear and question company management and its bankers. Meanwhile, because of regulations affecting the quiet period, the company often refuses to talk to the press or address any questions average investors might have.

Information is often given to pros at road shows that average investors don't have a prayer of receiving. Says Jay R. Ritter, a finance professor at the University of Florida: "There's a sleight of hand. Companies can say certain things that they're not allowed to write down." For instance, they often discuss analysts' forecasts of their earnings with road-show audiences but don't publish them.

The SEC is looking into the IPO process, says an agency spokesman. In 1998 it crafted a broad proposal dubbed the "Aircraft Carrier" because of its complexity and size, that would, among many things, allow a company to communicate more with investors before an IPO than now. On July 10, Alan Beller, the SEC's director of corporate finance, said in a speech that the agency was looking into allowing companies to say more, especially if they put it in writing. But experts say the SEC has been been dragging its feet on the proposal. And the agency's recent actions over point in the opposite direction.

The rules governing IPOs say a company and its underwriters may discuss publicly only what has already been disclosed in public filings. The limits date from 1933. Back then, there was good reason for them: The stock market was like the Wild West, with stock manipulators running rampant. But experts say the Depression-era rules are confusing. What's more, in this age of technology, where information flows much more freely, they are antiquated. These days, it's simple to stage a Webcast or conference call to include investors of all stripes. It would have been hard to do that over, say, the telegraph. Also, today's financial press is more sophisticated and less likely to push stocks.

Securities lawyers say many companies and underwriters are happy to keep ordinary investors out of road shows and to avoid the press. "They don't want to expose themselves to investor lawsuits by inadvertently mentioning something not in the prospectus or alluding to future performance that ends up not being met," says Paul N. Edwards, head of the securities practice at Cleveland law firm McDonald Hopkins. Companies and institutional investors also worry the shows will be dumbed down if the public is allowed in.

To avoid that, Menlow and others argue that ordinary investors, although still not admitted to road shows, should be allowed to listen to them through Webcasts or conference calls. Experts also suggest that compliance officers and securities lawyers play a bigger role to help "steer" management in its presentation -- especially in addressing pointed questions from assertive bankers. That, however, could limit the goods-getting. Or the quiet period could be dumped altogether. "In Europe, there's no quiet period, and it doesn't seem to affect the IPO process negatively," says Ritter.

Failing that, the quiet period could be renamed to reflect what it really is. Some suggestions: the "insider-advantage period" or the "put-the-screws-to-the-small-investor period." Just a thought.

By Marcia Vickers

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