Dan Primack

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It's time to kill the IPO quiet period

September 6, 2011: 5:00 AM ET

Like most regulation, the rules were designed to protect investors.  Now they're just keeping them in the dark.

FORTUNE -- In June, Groupon chairman Eric Lefkosky defended his money-losing company by predicting that it would become "wildly profitable." His comment sparked a Wall Street brushfire, because it arguably violated "quiet period" rules that prevent private companies from discussing themselves while in registration to go public. The reaction was to be expected. Back in 2004, Salesforce.com (CRM) was forced to delay its IPO after cooperating with a New York Times profile of the company and its founder, Marc Benioff. Just a few months later, Google took SEC heat after its founders gave an interview to Playboy that was published after Google had submitted its IPO paperwork.

But the restrictions were ridiculous seven years ago and remain ridiculous today. Neither Groupon nor any other IPO candidate should be forced to deal with antiquated investor-protection rules that defy common sense and ultimately protect one set of investors at the expense of another.

It's worth noting that the pre-IPO "quiet period" doesn't actually exist, at least not officially. The phrase is entirely absent from the SEC's reams of regulations. Instead, it's legal shorthand for a series of securities laws drawn up in the 1930s, when information-starved investors kept getting fleeced by snake-oil salesmen. Basically, let the IPO registration speak for itself.

The SEC tried loosening things up a bit in 2005  -- partially in response to the Google (GOOG) fiasco -- but the changes were largely cosmetic. Companies suddenly were allowed to talk with the media, but only if their statements tracked almost exactly with the offering documents. "When I have conversations with CEOs who want to make public statements, I first want to know if they're trying to sell their product, which is allowed, or if they're really trying to sell their company, which isn't," says corporate attorney Mark Bettencourt.

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Keeping your mouth shut may work for many IPO candidates, but it seems to be failing a high-profile issuer like Groupon. The company has become a media punching bag since registration, getting attacked for everything from its accounting practices to its vendor relationships to its long-term viability.

It's the kind of drumbeat that could scare off potential investors or dissuade new users from signing up -- hurting both the company and its product. Groupon certainly deserves some of the knocks -- particularly for an accounting gimmick that underplayed marketing expenses -- but the company also has been forced to remain silent in the face of more specious critiques. The only exceptions came when Groupon amended its registration statement to disavow Lefkosky's "wildly profitable" quote, a leaked memo to company employees, and a sarcastic corporate blog post about quiet periods.

The irony, however, is that while Groupon cannot easily defend itself in public, it will soon be able to do so in front of a select, private audience of institutional investors who may participate in the IPO.

Companies going public typically produce an electronic road show, in which the CEO and other company executives make a presentation about the company and then take questions from prospective investors. It is available to the public online until the stock begins trading. In these sessions CEOs are instructed to keep referring to the IPO prospectus and not speak too much off the cuff.

What follows are private meetings with the money managers. Transcripts are rarely kept, and some sources say that a comment like Lefkosky's would not be unusual. Neither would an answer to a question that the CEO declined to address during the electronic road show. Even if CEOs stick to the script, hedge fund managers can watch body language and other nonverbal cues that the public never sees.

It's time for the SEC to let companies communicate more freely with everyone, not just the chosen few. Today's investors have easy access to all sorts of information -- including SEC filings -- and are unlikely to be suckered by just a few optimistic syllables uttered to a reporter. It's too loud a world to keep these companies so quiet.

This article is from the September 26, 2011 issue of Fortune.


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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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