Capital Markets

When Loose Lips Delay IPOs

Webvan's "quiet period" violation has other companies sitting up and taking notice.
George DonnellyDecember 1, 1999

Nothing like spanking an unruly child in front of class to get the attention of the other children.

Webvan Group, a heavily capitalized online grocery store with little revenue but abundant ambition, pulled back its initial public offering in early October after the Securities and Exchange Commission found the dot-com had stepped over the line in following “quiet period” restrictions against touting its stock just before an IPO. Now everyone else is really paying attention.

Webvan may have stepped over the line, but the line is less than clearly drawn, say those who have gone through the IPO gauntlet. “The rules aren’t real clear,” says Patricia Cole, CFO of, a Web directory that went public in August.

“You don’t know you’ve done something wrong until after you’ve done it. CFOs are technically oriented, and if someone sends us the rules, we’ll follow the rules,” she says. Recognizing that “the line between communications that are permissible and those that are not… is not always easy to perceive,” the SEC is proposing new regulations that liberalize communications.

While the Securities Act of 1933 prohibits companies from promoting their stock outside SEC-filed documents, including the prospectus, common practice– usually in the form of extreme caution–has taken the place of hard and fast regulations. The quiet period is roughly defined as the time a company begins filing its S-1 to 25 days after the IPO launch.

Securities lawyers advise companies to avoid any communication that may be perceived as an attempt to sell the stock, including press releases and ads, says Alan Koslow, CFO of, and a securities lawyer for 10 years. Koslow took ShopNow, a massive electronic shopping network, public in September.

A tricky area, says Koslow, is that the SEC allows firms to carry on with communications that it would make during its ordinary course of business. How do you distinguish between what’s ordinary and what isn’t, especially in the superhyped world of Internet offerings? At Looksmart, Cole says, “promoting the company and talking about the product is in the normal course of business.”

So Looksmart, like so many others, actually deviated from the normal business practice and played it safe. “We were very careful about what we said,” Cole notes. “We were continuously referring people back to the S-1. We couldn’t give out futurist statements, and we had to go over our Web site and make sure it was consistent with our S-1.”

Koslow says ShopNow refrained from publicizing a deal, and decided against running ads in investor-oriented publications like Barron’s and the Wall Street Journal, lest it be perceived that ShopNow was trying to hype the value of its stock.

Where did Webvan go astray? Around the time of its scheduled IPO, it was featured in Forbes, which quoted George Shaheen, the company’s brand-new CEO, who had jumped from Andersen Consulting in August. Shaheen’s comments, basically about “reinventing the grocery business,” may be construed as hype, but are hardly a serious deviation from the subtext of the company’s prospectus.

If Webvan sinned, it did so behind doors that are traditionally closed but were open, thanks to the blessing of the Internet. A reporter from, listening in on a road-show presentation via conference call, noted that Webvan had disclosed additional information relating to the company’s business model that was not in the prospectus.

The story has a happy ending. Webvan went public November 5, a month after its IPO was put on ice. Shares closed at $24.87, well above the $15 opening price.

Less Quiet in the Future?

Quiet-period regulations making the prospectus the central source of investor information were enacted in 1933. Acknowledging that times have changed, the SEC embedded quiet-period reform in the massive “aircraft carrier” proposal the agency released in November 1998 to overhaul the securities registration process.

The SEC wants to make the quiet period more defined–and much less quiet. Depending on company size, certain prefiling restrictions would be removed. Most companies that are already public would not have to abide by communication restrictions. Freshly minted IPOs would have to observe a 30-day quiet period before filing the S-1, during which communications would be restricted to “factual business communication” or regularly released, forward- looking information. But after a freshly minted IPO files its prospectus, it would be allowed to engage in what is termed “free writing,” so long as that material is filed with the SEC. The “aircraft carrier” remains under review.