Risk & Compliance

Make Some Noise

An SEC proposal could clear up confusion surrounding the IPO process.
Kate O'SullivanDecember 7, 2004

The so-called quiet period prior to the public sale of securities could get a little louder. The Securities and Exchange Commission is proposing to lift some restrictions on companies’ pre-IPO communications.

Under a 1933 law, during the period surrounding an initial public offering the company may publicly discuss only information that appears in the prospectus. But the SEC is suggesting that first-time filers be allowed to continue to publish routine business information, such as press releases about new contracts. They could also be permitted to give media interviews.

The proposal would clear up confusion surrounding the IPO process, says John M. Clapp, a securities lawyer and partner with Squire, Sanders & Dempsey LLP in New York. “It’s really a gray area right now as to what you can say and what you can’t,” he contends. In August, for example, Internet search firm Google Inc. faced a possible delay in its highly anticipated IPO after an interview with executives was published in Playboy during Google’s quiet period. The IPO ended up going through as scheduled, after the SEC mandated that the company attach the interview to its prospectus. Customer relationship management applications firm Salesforce.com, however, had no such luck: comments by CEO Marc Benioff — including an interview with the New York Times — delayed the company’s IPO.

The possibility of such a penalty has forced most executives to remain tight-lipped before going public. David Johnson, CFO of Color Kinetics, a Boston-based manufacturer of high-tech lighting systems that went public last summer, says the company strictly monitored all communications with the outside world. “I don’t think it serves any purpose to have companies going through this process totally closemouthed,” he says.

David Arkowitz, finance chief at drug developer Idenix Pharmaceuticals, a July entrant to the public market, agrees. “For small companies, it’s important to drive awareness and understanding of the company, and we were precluded from doing that,” he says.

Although the SEC’s proposal looks promising for companies hoping to increase information flow to potential investors, there is a question of whether businesses will be held liable for the accuracy of any information they publish or share outside the scope of the prospectus. A high degree of liability might mean the quiet period will change very little, says Clapp.

The SEC will solicit comments on the issue until February.

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