Tag Archives: going public

SEC Securities: The Quiet Period


During a Quiet Period, a publicly-listed company cannot make any announcements about anything that could cause a normal investor to change their position on the company’s stock. The SEC interprets this rule broadly, even including board members, management, and employees talking about the company. Normally, that means the company does not discuss any of the following:

  • New deals or wins signed in that current quarter. Announcements about previously-sold implementations going live are allowed, but must be explicitly described as such
  • Management changes
  • Progress against company goals
  • Major product or service announcements
  • Major partnership announcements

Why it Matters

The quiet period precedes the introduction of a company into the capital market. During that time, the amount of public exposure and hype must be minimized to hinder any potential interference with SEC efforts to evaluate its filings and the release of any information which may cause investors to “jump the gun” on valuations and expectations for the company. The SEC’s intention is to create a level playing field for all investors in the capital market, ensuring that all have the same information about the company when it goes out for sale on the market.

Activities During the Quiet Period

The federal securities laws do not define the term “quiet period,” which is also referred to as the “waiting period.” However, a quiet period extends from the time a company files a registration statement with the SEC until SEC staff declare the registration statement “effective.” During that period, the federal securities laws limit what information a company and related parties can release to the public. The failure to comply with these restrictions generally is referred to as “gun-jumping.

On June 29, 2005, the Commission voted to adopt modifications to the registration, communications, and offering processes under the Securities Act of 1933. Among many other provisions, the rules update and liberalize permitted offering activity and communications to allow more information to reach investors by revising the “gun-jumping” provisions under the Securities Act. The cumulative effects of these rules are as follows:

  • Well-known seasoned issuers are permitted to engage at any time in oral and written communications, including use at any time of a new type of written communication called a “free writing prospectus,” subject to enumerated conditions (including, in some cases, filing with the Commission).
  • All reporting issuers are, at any time, permitted to continue to publish regularly released factual business information and forward-looking information.
  • 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.
  • Communications by issuers more than 30 days before filing a registration statement will be permitted so long as they do not reference a securities offering that is the subject of a registration statement.
  • All issuers and other offering participants will be permitted to use a free writing prospectus after the filing of the registration statement, subject to enumerated conditions (including, in some cases, filing with the Commission). Offering participants, other than the issuer, will be liable for a free writing prospectus only if they use, refer to, or participate in the planning and use of the free writing prospectus by another offering participant who uses it. Issuers will have liability for any issuer information contained in any other offering participant’s free writing prospectus as well as any free writing prospectus they prepare, use, or refer to.
  • The exclusions from the definition of prospectus are expanded to allow a broader category of routine communications regarding issuers, offerings, and procedural matters, such as communications about the schedule for an offering or about account-opening procedures.
  • The exemptions for research reports are expanded.

A number of these rules include conditions of eligibility. Most of the rules, for example, are not available to blank check companies, penny stock issuers, or shell companies.

The rules address the treatment under the Securities Act of electronic communications, including electronic road shows and information located on or hyper-linked to an issuer’s website. The rules define written communication as any communication that is written, printed, a radio or television broadcast, or a graphic communication. The definition of graphic communication and, thus, electronic road show excludes communications that are carried live and in real-time to a live audience, regardless of the means of transmission. Electronic road shows for initial public offerings of common equity or convertible equity securities will have to make a bona fide electronic road show readily available to an unrestricted audience to avoid filing the electronic road show with the Commission. No other road shows will be subject to filing.

Research Reports

The newly public company is subject to a “quiet period,” of 40 days after the registration becomes effective, which restricts insiders and affiliated underwriters from issuing earnings forecasts and research reports regarding the firm for a specified period following the initial public offering (IPO). As soon as this quiet period ends, the analysts of managing underwriters typically initiate research coverage with favorable recommendations, and the market responds positively even though this information is predictable.
The general purpose behind the quiet period is to give investors enough time to do their due diligence and allow market forces to establish a fair value without influence from the firm’s management or affiliated analysts who may try to hype the stock. In other words, everything that is relevant should be included in the written prospectus.

Immediately upon expiration of the quiet period, analysts affiliated with investment banks that participated as the lead underwriter or as a co-manager in the deal typically initiate favorable research coverage.

© 2012 by Sonfield & Sonfield, 770 South Post Oak Lane, Houston, Texas 77056-1937.  Reproduced with permission here.

To insure that we comply with U.S. Treasury Department Circular 230. We inform you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Posted by on August 20, 2012 in BLOG, Business, Public markets


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Securities in America, what’s changing

stock market

stock market (Photo credit: 401K)

Every since the Jump-start Our Businesses Start-ups, or JOBS Act, was signed into law this last week, there have been a number of items of interest coming out in the press.

Community Banks and Second Markets Holdings Inc.

The article just released today in the Houston Business Journal entitled, “A stock market for Houston, other community banks?” brought out some great points, but missed the biggest one – this is not a new issue.  The federal government enacted laws, and continues to enact laws and taxes, that severely hamper the transfer of shares, restricted or otherwise. provides a great service – Rhodes Holdings LLC and its parent are members of their service.  Recently they were in the news since many Facebook shares were traded over their service, or more properly, in their market.  We got involved with their market as they were liquidating many of the mortgage and bond packages caused by the 2007 – 2008 financial melt down.

Now that the JOBS Act will introduce a whole new set of investors to investing in start-ups with a plan and gumption enough to take advantage of the markets / PPM portals that will inevitably pop up, Second Markets stands out as a top end portal.


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Accounting issues: Business vs. Asset and Performance Awards (LBB Newsletter)

The following is an excerpt from the LBB & Associates Ltd. March 2012 issue of LBB Briefs

Business or asset – you can’t always rely on first impressions

When it comes to deciding whether something is a business or a group of assets, you can’t always rely on your instincts. Some acquired groups don’t look like businesses in the traditional sense, but still meet the accounting definition. Some examples include certain types of outsourcing arrangements, licensing arrangements, and property acquisitions.

So, why does it matter?

For starters, the accounting for transaction costs, in-process research and development (“IPR&D”), excess purchase price (goodwill), and contingent consideration differs significantly depending on whether a business or a group of assets has been purchased. There are other implications as well, including the accounting for disposals. And, SEC rules require financial statements for acquired businesses-but not assets-that are significant.

Indicators that it’s a “business”

Here’s the official definition: a business is an integrated set of activities and assets that is capable of producing outputs and providing a return to investors. What does that mean? While this is not all encompassing, here is an overview as a point of reference:

Business versus asset: preliminary indicators

Business combination

Asset acquisition

· Key business process acquired

· No processes acquired or only administrative processes acquired

· A market participant could manage the assets to provide a return to its owners

· A market participant could not manage the assets to provide a return to its owners without combining them with other assets

· Key elements are missing but can be easily replicated

· Key elements are missing and cannot be easily replicated or obtained

· Key employees hired

· No employees hired

· Able to produce “Day 1” outputs

· Not able to create economic benefits

· Presence of goodwill

· No goodwill present

Performance awards-are you on the same page?

Compensation committees have a lot to keep track of these days: say on pay, claw-back requirements, and more. On top of all that, there’s the age-old challenge of linking executives’ pay to their performance. Here, flexibility is often desired to tailor performance goals to individuals. But when it comes to equity-based awards, performance metrics that lack sufficient objectivity can throw a wrench into the accounting treatment.

The key question: is there a “mutual understanding”?

One of the requirements for establishing a “grant date” for an equity-based performance award is that the company and employee have a mutual understanding of the key terms and conditions. Why is grant date important? It’s the date that fair value becomes “fixed” for an equity award.

A mutual understanding is typically established through a written agreement that outlines the performance metrics that the employee needs to achieve. Performance metrics take a variety of forms, including financial metrics (for example, revenue or EPS targets), operating metrics, or specific actions of the company or employee.

To establish a grant date, performance metrics need to be clear and objectively determinable. Said another way, both parties need to understand how to measure whether the metric was achieved.

When performance metrics lack objectivity

Some performance metrics are not well-defined or lack objectivity. Some examples:

  • An award tied to an employee’s performance evaluation, when the evaluation process is highly subjective
  • A metric that is defined upfront, but the compensation committee has the discretion to adjust the metric or even claw back the award-and it’s not clear when or how that discretion will be used

These types of provisions require special attention and may indicate there’s not yet a mutual understanding or a grant date. If there’s no grant date, the fair value (and expense to be recorded) is not fixed until the terms and conditions are known and the discretion is removed. This might not occur until the end of the service period. Until then, the award is typically subject to variable (that is, mark-to-market) accounting.

LBB & Associates Ltd., LLP is an AICPA, PCAOB, and CPAB registered public accounting firm with a concentration in audits of smaller reporting companies.  LBB is also active in SEC reporting consulting and acquisition due diligence efforts with smaller reporting companies.


© 2012 by LBB & Associates Ltd., used by permission by Rhodes Holdings LLC, all rights reserved.


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Calendar of SEC Holidays & Filing Deadlines

This is an excellent resource for public company professionals or management:

Calendar of SEC Holidays & Filing Deadlines

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Posted by on March 26, 2012 in BLOG, Public markets


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OTC Link LLC Gains FINRA Membership

This is a press release put out by OTC Markets, but we think that it is important enough to let ever

NEW YORK – March 8, 2012 – OTC Markets Group Inc. (the “Company”), announced today that its wholly owned subsidiary, OTC Link LLC (“OTC Link”), has been approved as a broker-dealer member of FINRA™. OTC Link next plans to register with the SEC as an Alternative Trading System (“ATS”). As a broker-dealer and an ATS, OTC Link will operate the Company’s OTC Link inter-dealer quotation and messaging system. The Company anticipates that OTC Link will begin operating as an ATS late in the second quarter of 2012.

“We worked diligently with FINRA to ensure that FINRA membership, and OTC Link’s anticipated future status as an ATS, will not require us to make any fundamental changes to the current OTC Link network model or the trading process for our broker-dealer subscribers,” said Michael Modeski, President of OTC Link.   “We are pleased to report that the OTC Link trading system will continue to provide fully attributable quote and message services to our network of subscribers.  The current trade reporting process will not change, and we will not automatically execute orders or act as a matching engine.”

“OTC Markets Group’s mission is to operate open, transparent and connected marketplaces that link broker-dealers and provide investors with the information they need to intelligently trade any OTC security at the best possible price,” said R. Cromwell Coulson, President and Chief Executive Officer of OTC Markets Group. “OTC Link’s FINRA membership will allow our inter-dealer quotation and messaging system to continue that mission, serving our broker-dealer subscribers as a regulated entity without altering their user experience.”

OTC Markets Group will announce its status as an ATS upon completion of the SEC’s formal ATS registration process.

To view this release, visit:

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Posted by on March 9, 2012 in BLOG


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February OTC Markets' Newletter

For those of you interested in the micro-capitalization companies and the process by which they are brought to market, follow OTC Markets’ monthly newsletter will be a treasure trove of information.

OTC Markets’ February 2012 newsletter

Also, the part of the article that I found very interesting was an article in Traders’ Magazine about a FINRA proposal that OTC Markets is fighting.

Traders’ Magazine article – FINRA dealt setback in OTC Plan


© 2012 by Rhodes Holdings LLC, all rights reserved. Links are used in this BLOG posting as opposed to any use of their copyrighted material, so that we maintain the integrity of the articles linked to.


Posted by on February 14, 2012 in BLOG


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Why go public?

…and its advantages and disadvantages…


Being a “publicly traded” company means that the company has registered its securities with federal (U.S. Securities & Exchange Commission, “SEC”) and state authorities to provide consistent disclosure to the public.  These securities may be sold or traded through a stock exchange (e.g. NYSE, NASDAQ, or AMEX) or quotation service.  The stock exchanges consist of a group of licensed “broker-dealers,” licensed by a financial regulatory body called FINRA, that make a market in the stocks traded on the exchange and interact through intermediaries called “market makers” that provide an efficient way of exchanging shares, even when immediate buyers or sellers are not present.  Basically, being public provides an efficient and transparent means of trading ownership units.


As with most business endeavors, there are advantages and disadvantages with being publicly traded.  When the Sarbanes – Oxley Act of 2002 (“SOX”) was enacted to combat large scale fraud in public markets (in response to the Enron scandal), the costs associated with being public have risen and most business people have come to believe that going public was not the ultimate goal of every business – private equity and hedge funds’ rise allow huge private or leveraged buyouts to replace “going public” as the penultimate event in an emerging company’s lifetime.  Still, “going public” is an exercise that can bring benefits, including:


  • Increased capital liquidity
  • Increased financial transparency
  • Increased prestige / image through publicity


Even then, the disadvantages are great and many times overwhelm the advantages:


  • Perceived loss of control
  • Increased complexity of reporting
  • Increased fiduciary responsibilities and management liability
  • Increased business management costs


The advantages are almost mirror images of the disadvantages, and the characteristics that tip the scales in favor of the decision to go public can differ wildly from company to company, but may include:


  • Being in an industry that the investing public is interested in investing in currently
  • Having financial systems, both personnel and computer applications wise, in place already
  • Having a revenue base large enough or with high enough growth rate to support added costs
  • Having a sound management control system in place to control operations
  • Having professionals in place with experience being publicly traded


Of course this is just a sampling.  Here are some of the reasons to go public:


  1. Current shareholders want to diversify their holdings, thus offering or being able to sell a portion of their holdings in a liquid marketplace.  Theoretically, an efficient market for the company’s shares will increase the price of the shares, given thriving operations.
  2. There is higher access to capital and more financing alternatives, due to the transparency provided by public reporting requirements.
  3. Being able to provide publicly traded stock options and other stock related compensation allows publicly traded companies to attract and retain high caliber professionals and management.
  4. In almost every instance, there is an arbitrage, or price differential favoring public companies, between public and private multiples (as in multiples of revenue or earnings, such as P/E).  In mergers or acquisitions, this can allow a publicly traded company to purchase other operations less expensively than growing its own operations.


Two sides of the business

As the management or controlling interests of a publicly traded company, you actually have two different companies – the operational component and the publicly traded shares.  The publicly traded shares’ parameters, having nothing to do with the operations, will make the shares more or less valuable based solely on themselves; for example:


  • Shares are highly liquid (liquidity), evidenced by a high number of trades per day[1], then shareholders are more likely to be able to liquidate their shares without negatively affecting the share price.  Normally, averaging over 100 trades per day qualifies for high liquidity in the micro-cap range.
  • A share price that would provide impetus for “retail investors”, non-professional traders without any SEC or FINRA licenses, to purchase shares (usually I think of the retail bands as $0.01 to $0.50, which normally catches the casual trader, and then $2.00[2] to $25.00).
  • A company’s shares that have share price volatility with strong liquidity (as defined above) is very attractive to “day traders”.
  • A large number of shareholders with over 100 share blocks.  Usually 3,000 or more shareholders is considered a large shareholder base.


Every publicly traded company can use its shares as a currency in order to accomplish many things, but let’s focus on using those shares to build either the operations, maybe through acquisitions, hiring professional managers, paying professionals / consultants with shares[3], or securing financing through selling large blocks of shares in exchange for cash.  Those same company can enhance it’s stock by paying for awareness campaigns, employing broker dealers to support its share price, or media campaigns.


An interesting phenomenon happens when a company’s publicly traded shares are doing well, defined as the “daily dollar volume” increasing, and the operations are absolutely putrid.  This might happen due to current shareholders coming to a point of liquidity and working in conjunction with an awareness campaign or selling shares into a market that had pent up demand for the shares.


Wrapping it up…


So, to answer the question, “why would you want to go public”, we have many answers, but most if not all of them have their negative consequences.


  1. Your company has another currency, your publicly traded shares, to build your operations.
  2. Your company is considered more prestigious and has more exposure in the media.
  3. Your company provides investors the ability to invest with “an exit” through liquidity and transparency.
  4. You are looking to diversity your holdings in your company and don’t want to sell the whole company.


Copyright © 2010 by Rhodes Holdings LLC
Originally published by Pub Articles on September 14th, 2010 (their website version)


[1]Many people would think that “number of shares traded per day” or “daily dollar volume” (which is number of shares traded multiplied by the share price at which they were traded) would be important, but if a company is traded below a penny, the number of shares per trade will necessarily go up without being a good gauge of the liquidity.

[2]Licensed stock brokers cannot legally recommend “penny stocks”, defined archaically as those stocks whose shares trade below $2.00.

[3]Unsettling to some investors, a company can immediately pay “non restricted” shares to consultants under an “S8” employee stock option plan.

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Posted by on September 14, 2010 in BLOG


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