The scope of permissible analyst communications during emerging growth company IPOs



March 05, 2015

Securities Law Alert

Author(s): Daniel McAvoy

In light of the recent settlements between FINRA and a number of its members regarding bank research analyst communications, we are issuing this Securities Law Alert to refresh and discuss the scope of permissible analyst communications as they pertain to IPOs of emerging growth companies.

As discussed in our previous Securities Law Alerts, the Jumpstart Our Business Startups Act, or JOBS Act, was signed into law on April 5, 2012 with the goal to increase job creation and economic growth by providing access for emerging growth companies to the capital markets. The JOBS Act amended the Securities Act of 1933 (“Securities Act”) and Securities Exchange Act of 1934 (“Exchange Act”) to, among other things, lessen the restrictions on analyst communications and allow for investment bankers and research analysts to communicate more freely during representations of emerging growth companies. The applicable amendments are discussed below.

Participate in communications

Section 15D of the Exchange Act was amended to prohibit the Securities and Exchange Commission (“SEC”) from implementing or maintaining any rule or regulation that prevents research analysts from, in connection with an IPO of an emerging growth company, attending meetings with issuer management that are also attended by investment banking personnel. During such meetings, analysts are allowed to, for example, introduce themselves, explain and outline their research, and ask follow-up questions. In contrast, NYSE Rule 472 prohibits research analysts from engaging in any communication to solicit investment banking business with a current or prospective client in the presence of investment banking personnel (a “pitch meeting”). On August 22, 2012, the SEC issued a set of FAQs designed to provide guidance on the provisions of the JOBS Act that ease restrictions on analyst coverage, clarifying that analysts may attend pitch meetings but they are not allowed to engage in efforts to solicit investment banking business during such meetings.[1]On the other hand, NYSE and NASD rules continue to prohibit analysts from participating in roadshows or otherwise engaging in communications with customers about an IPO in the presence of investment bankers or the company’s management.

Arranging of communications

Section 15D of the Exchange Act was further amended to prohibit the SEC from adopting or maintaining any rule or regulation that, in connection with an IPO of an emerging growth company, restricts which persons associated with a dealer or broker may arrange for communications between an analyst and a potential investor. The August 2012 SEC FAQ provided clarifications on the difference between investment banking personnel “arranging” for communication between analysts and investors and “directing” research analysts to communicate with prospective clients or engage in other sales efforts. Permissible “arranging” would include an investment banker, for example, sending an analyst a list of clients to contact and arranging a call between an analyst and a client so long as the investment banker does not participate in such call and the communications are subject to the analyst’s other appropriate controls. Along the same lines, an analyst may forward a list of potential clients with whom she intends to communicate to investment bankers as a means to facilitate scheduling. Furthermore, the SEC staff does not view this arranging activity, without more, to be a sales or marketing effort that would violate NASD Rule 2711(c)(6) or NYSE Rule 472(b)(6)(ii).

Testing the waters

The JOBS Act also amended Section 5 of the Securities Act to allow for emerging growth companies, or any person authorized to act on behalf of such companies, to “test the waters,” either prior to filing a registration statement or after such registration statement has been filed, by communicating with qualified institutional buyers (“QIBs”) and accredited investors. An example of permissible communications when testing the waters would be asking customers for nonbinding indications of interest including how many shares the customer might seek to purchase or inquiring as to their price constraints. Issuers other than emerging growth companies and persons acting on their behalf may not engage in communications with QIBs or accredited investors as such communications falls under the general prohibition to solicit offers to sell or buy securities and would constitute impermissible “gun jumping.”

Quiet periods

Lastly, Section 105(d) of the JOBS Act prohibits the SEC from implementing or maintaining any rule or regulation that imposes quiet periods during which analysts are prevented from publishing or distributing research reports or from making public appearances, with respect to the securities of an emerging growth company, within (1) any period following the IPO date or (2) prior to the expiration date of any lock-up agreements. In comparison, NASD rule 2711 and NYSE Rule 472 impose a 40-day quiet period following an IPO during which a member is prohibited from publishing a report.

It should be noted that the JOBS Act, or any of the applicable amendments, did not create an exception that allows analysts to engage in efforts to solicit investment bank business or to promise favorable research in relation to an IPO of an emerging growth company. Please also note, as has been discussed in previous Securities Law Alerts, that the JOBS Act does not amend or modify the Global Settlement and that, as a result, the parties to that court order continue to be required to maintain appropriate firewalls between analysts and investment banking personnel.
















  1. For a more detailed discussion regarding the SEC FAQ, please see our August 28, 2012 Securities Law Alert.







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