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How to Make Money Off Of the Quiet Period

On Oct. 7, Webvan delayed its IPO, agreeing with the SEC to have a cooling-off period. Rumors were that the company violated the so-called "quiet period," which prevents companies from making statements that tend to hype an offering.

But yesterday, the company refiled its prospectus. Interestingly enough, the new prospectus has a Risk Factor that warns "you should rely only on the information set forth in this prospectus and not rely on recent publicity or on projections."

The SEC had problems with the following: a) loss projections were leaked to the press ($302 million in losses on $518.2 million in revenues in 2001) and b), the CEO of Webvan, George Shaheen, gave an interview to Forbes, which tended to -- well -- hype the IPO.

Actually, the quiet period is somewhat of a mystery. Ask attorneys what it means and you get many answers. Perhaps the biggest problem is that it is rarely enforced -- that is, until recently.

Then again, when the quiet period was crafted, the Net did not exist. Of course, with the Net, there has been a surge in publicity surrounding IPOs. And publicity translates into sizeable first-day gains for IPOs.

Underwriters have been very smart in generating publicity by announcing blockbuster deals prior to the IPO. Examples include PlanetRx.com, which got an investment from Express Scripts, one of the largest pharmacy benefit-management companies.

There was also MP3.com, which announced investments from Cox Media. Such deals make it easier to sell the IPO during the roadshow (the road show is when executives give presentations to institutional investors around the country).

Another popular strategy is for the CEO to do a CNBC or CNN interview on the day of the IPO. Some companies even place banner ad buys on IPO sites.

So, finally, the SEC stepped in. And, they decided to strike at a high-profile IPO, Webvan. The company has Goldman Sachs as the underwriter. The venture capitalists included SOFTBANK, Sequoia and Benchmark. The founder is Louis Borders, the founder of Borders Group.

The company made some high-profile moves before its IPO, as well. Perhaps the biggest was hiring George Shaheen as its CEO. He was the CEO of Andersen Consulting.

Basically, the SEC is setting an example. It is warning companies to keep a low-profile.

So, we are likely not to see any more CNBC spots; no interviews with BusinessWeek. Actually, I would not be surprised if companies forgo the pre-IPO blockbuster announcements.

In other words, there will be lots of silence before IPOs. And all things being equal, this should reduce the first day premiums.

But this presents a very interesting investment opportunity. Here's how it works: The IPO comes out, but there is not as much publicity. The stock are trends down. Why? Because the quiet period lasts 25 days after the IPO. So the silence will last this long. But once this expires, the hype will be unleashed, as the company will announce major deals. What's more, the research departments of the underwriters will also release their research reports, which will add lots of firepower to the stock.

In a way, the first-day pop will be pushed to the point after the quiet period expires, which gives investors time to buy the stock (which is normally not the case with IPOs).

Of course, this is only a theory. But underwriters never want to antagonize the SEC. So I think it's reasonable that underwriters will become much more conservative and thus give investors a new investment strategy.


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