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The U.S. Securities and Exchange Commission has ended its investigation of Google’s initial public offering without filing charges arising from an interview with Google’s founders that appeared in Playboy magazine during the so-called pre-IPO “quiet period.” Now, the commission plans to update its rules on the quiet period, loosening restrictions against pre-IPO communications while still outlawing statements that hype rather than inform. Navigating between the two remains a delicate art. The quiet period limits communications by company executives just before an offering. The period begins when a company makes a registration filing with the Securities and Exchange Commission and ends when the agency approves the registration statement, a move that occurs after a company’s stock begins to trade on an exchange. Google’s iconoclastic founders — Larry Page and Sergey Brin — ruffled feathers when an interview appeared in Playboy days before the company was scheduled to go public. The SEC, which ended its investigation of Google 11 days ago, ordered the company last year to include the contents of the interview in an amended prospectus but, without elaborating, took no further action. Other companies have not been as fortunate. Clouding the issue is the oddity of the rule in an environment where regulators and investor advocates want companies to provide more financial information. The quiet period restricts company representatives and underwriters from releasing information about a company’s prospects outside of filings made to the SEC. “These rules go back to 1933,” said Jeffrey Vetter of Fenwick & West’s Silicon Valley office. “The concern was that companies would hype themselves and sell to unsuspecting investors.” The drawback was that the prohibition had the side effect of blocking information investors would find valuable before deciding to put their money into a company. “The problem was the rules are not entirely clear,” added Vetter. “You run the risk of any type of communication prior to the IPO” falling under regulatory scrutiny even if it is only tangentially related to the public offering. The proposed rules will clarify matters, according to lawyers. The 1933 Exchange Act imposed restrictions on pre-IPO communications to curtail companies from pumping up their public offerings. “There is a general theory that you can’t condition the market” for a stock offering, said Alan Paley of Debevoise & Plimpton. Yet companies were permitted to continue to put out releases and other communications in the normal course of business. What distinguished typical communications from extraordinary ones that could foster suspicion from regulators remained a gray area, Paley said. “A lot of times, it’s a judgment call,” said Vetter. “We didn’t have a lot of hard-and-fast rules. The SEC would adjust in hindsight.” Paley said, “There was a gray area where securities lawyers were never 100 percent certain” of the legality of a communication. Salesforce.com ran into trouble last year when its CEO appeared in a New York Times article profiling the company but was careful not to mention the IPO. The SEC imposed a “cooling-off period” delaying the public offering. “The consequences are dire” if a company fails to comply, said Heather Badami of Bryan Cave’s Washington, D.C., office. A delay or a recision allowing investors to sue to force the company to buy back its shares due to an infraction during the quiet period can cost millions. COMPLICATING MATTERS Two things have complicated matters until now, attorneys said. First, lawyers could not be sure when the quiet period began. “The rules were never very clear,” said Badami. “If you’re an issuer, you don’t want to hear that you’re not really sure.” The lack of clarity led lawyers to provide conservative advice, even if it meant curtailing legitimate advertising blitzes for new product lines. “CEOs hated that,” Badami said, and “lawyers were accused of hamstringing the business.” Second, the spread of communications over the Internet made the rules outdated, several attorneys said. The decades-old rules, designed when companies made four annual disclosures in the form of quarterly reports, preceded modern-day public relations. Companies now issue many releases in addition to holding “road shows” and other public appearances by top executives, said Stuart Stein of Hogan & Hartson. These communications then spread through the Internet instantaneously, said Stein. After an earlier effort to update the rules in 1998 came to nothing, the SEC proposed new rules in October. The comment period ends Jan. 31. ‘A SHARP LINE’ The new rules have “drawn a sharp line for a safe harbor,” said Justin Bastian of the Palo Alto, Calif., office of San Francisco’s Morrison & Foerster. Under the proposed rules, the prefiling period will begin 30 days before the filing of a registration statement. Any communications made during this time will be permitted as long as the company does not indicate that it will be conducting a public offering in the near future. “The important thing is now there is a bright line,” said Bastian. During the 30-day period and continuing through the final approval of the registration statement, a company will have the ability to produce information in the ordinary course of business. This is where companies have run into problems before. “If a company generally engaged in advertising” in a certain publication or format, then new ads consistent with past behavior will likely pass scrutiny, said Paley. Problems arise when companies look to new outlets or begin to advertise in ways they have not done before, he said. Even with the new rules, “companies should still be circumspect,” warned Vetter. This can be a problem in the highly competitive technology industry where young companies vie for attention and investment dollars, he said.

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