Why the SEC quiet period needs to change

Despite the public perception, the SEC quiet period isn’t a great boon for reporters and analysts.

I hate that some companies use the vague quiet period rules to duck important questions about their business.

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But more importantly, I hate the feeling of unfairness. My goal isn’t to beat up on companies when I know they can’t fight back. My goal is to present the most complete picture to potential investors.

What the public knows about the quiet period is very different from reality. Anyone who thinks companies don’t talk to reporters and analysts during the quiet period doesn’t know the business.

Responsible commentators will make the effort to contact a company they’re writing about, quiet period or not.

When I’m writing something controversial, I contact the company I’m writing about. I will discuss the themes I’m writing about and give them an opportunity to respond. In some cases, such discussions have changed my perception and the resulting story. In a few cases, I’ve decided not to write the story I had planned.

As an analyst, I don’t tell you when I’ve talked to a company and what they told me because I don’t want them to get burned by the SEC.

I’m not the only one talking to companies — there are plenty of other writers who have background conversations. There have been times that the exact points a company’s PR team made to me showed up in another publication, and the timing has been so close that it was unlikely to be a coincidence.

I would prefer to be able to tell you who I talked to and what they said. If I’m signing my name to something, it’s because I believe it’s sound analysis. And I’d happily take the stage to defend it.

Companies take very different approaches to the quiet period. Groupon co-founder and chairman, Eric Lefkofsky,  told Bloomberg that the company would be “wildly profitable.” CEO Andrew Mason sent an extremely detailed email to employees outlining the company’s financial situation, including unaudited and incomplete financial results.

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Other companies will only point to already published information and will not engage in any conversation.

The SEC’s summary of the quiet period doesn’t provide a lot of guidance. One of the bullets is:

Non-reporting issuers are, at any time, permitted to continue to publish factual business information that is regularly released and intended for use by persons other than in their capacity as investors or potential investors.

There’s a lot of information that you could publish about the state of your business so it seems like a big loophole. But at the same time, investors use every scrap of information they get, so it’s hard to say they wouldn’t use it. If you read it that way, the fact that deal companies publish how many units were sold could be a quiet period violation because investors could use that information to project revenues.

To a large degree, the whole quiet period process is a charade. Companies find ways to get their message out, whether it’s attributed to them or not.

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The quiet period hails from a time when there were far fewer news outlets. We now have three dedicated cable business channels and thousands of business blogs. Any investor looking for critical information on a company can do a quick Google search and find it.

A wider range of financial instruments is now available that lets investors play both sides of a company. Excessive bearishness by commentators can distort the picture and cost investors money.

So let’s end the charade. Ideally, the rules would provide a middle ground between where we are today and a free-for-all.

I believe the actions by Lefkofsky and Mason shouldn’t be allowed. But if that can’t be done, I’d rather have the free-for-all. If a company says they’re going to be wildly profitable and they’re not, there are plenty of news outlets and analysts that will pick them apart. Companies should be able to defend themselves against criticism at a time when some investors are beginning to form their opinions.

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There’s another part of the quiet period I’d like to see changed. Shortly before the IPO, companies go on a roadshow where they pitch professional money managers on their business. Currently, the rules require that a video of the pitch be put online. But those who are invited to be in the room for the live roadshow have the opportunity for a Q&A with management. That Q&A isn’t available online. This gives institutional investors a significant advantage over retail investors. Either the Q&A should be made available to everyone or it shouldn’t happen.

Rocky Agrawal is an analyst focused on the intersection of local, social, and mobile. He is a principal analyst at reDesign mobile. Previously, he launched local and mobile products for Microsoft and AOL. He blogs at http://blog.agrawals.org and tweets at @rakeshlobster.

[Top image credit: Michal Kowalski/Shutterstock]