Most issuers establish a “quiet period” (also called a “blackout” period) prior to the release of potentially sensitive information and material non-public information, such as quarterly earnings announcements. During this period, they will refrain from offering securities, particularly in registered offerings or to retail investors.
An issuer may impose a blackout period if it is aware of other information that, once announced, may have a significant effect on its stock price or credit spreads. These events could include an acquisition, a disposition, or the entry of an order or judgment by a court or a regulator, etc. During the blackout period, the issuer may be deemed to be in possession of material nonpublic information about the recently completed quarter, for example, that might affect an investor’s decision regarding an investment in the issuer’s securities.
Usually, the issuer’s treasury group (or the group that is responsible for funding), together with counsel supporting that group’s functions, determines the terms of its blackout policy, which may also be discussed with and approved by the issuer’s board of directors or other senior management. Generally, the treasury group and its counsel are the stakeholders that are most familiar with the issuer’s funding plans, and therefore can communicate with all of the relevant business groups about the blackout policy.
Traditional Blackout Periods
In the United States, there is no bright line rule regarding the length of an issuer’s blackout period. Some bank and bank holding company issuers adopt a blackout policy that, for example, commences two days before the quarter-end and ends at the commencement of trading on the day following the issuance of the earnings release. Over time, however, many issuers have reviewed their blackout policy and determined that, given the relatively easy access to current information, it may be appropriate to end the blackout period immediately following the earnings release. There is some variation in practice in this area.
Refinements to Blackout Periods
Some issuers that frequently access the public markets usually have formulated more detailed blackout policies that distinguish among the types of securities offered.
For example, many issuers will adopt an abbreviated blackout policy in respect of certain structured products, whether in the form of notes, certificates of deposit, or “certificates” and warrants, in which the payout on the instrument depends on the performance of a reference asset. For example, for structured securities, they may impose a blackout that begins two days prior to the date of the earnings release and ends either after earnings are announced, or on the business day following the release.
The risk of offering securities outside of the traditional blackout period is that the issuer may be deemed to be in possession of material nonpublic information about the recently completed quarter that would affect an investor’s decision whether to purchase the structured securities. However, many market participants take the view that this risk is mitigated with respect to structured securities because:
- Investors in structured securities will focus principally on the return on the securities, which is linked to an external reference asset. As a result, information about the issuer’s business, operations, capital structure and financial condition is not typically as material to an investor in these products as it would be for an investor in other securities of the issuer where the value is driven by the issuer’s performance, except to the extent that such information materially increases the likelihood that the issuer would be unable to meet its obligations as they come due. For example, if the issuer had reason to believe that the rating of its debt securities would be reduced due to the information in its upcoming earnings release, that information would likely be more material, since structured securities are priced in part based on the relevant issuer’s credit rating. However, if the information in its earnings release is more typical in nature, and consistent with analyst and market expectations, this information is much less likely to have an impact on the value of the issuer’s structured securities.
- The risk is further mitigated with respect to structured securities that have shorter maturities. The issuer’s ratings usually have less impact on the pricing of shorter term notes.
- Generally, structured securities do not have a large secondary trading market in which their pricing varies to a significant extent based upon news announced by the issuer. Usually, the market for structured securities is largely illiquid, and depends upon the willingness of the issuer’s affiliated broker-dealer to make a market in these securities. Accordingly, the issuer’s news announcements do not tend to have as great an impact on the prices of structured securities in the secondary market as they do for the issuer’s more liquid securities.
Pricing and Settlement
Typically, an issuer also will specify in its blackout policy the issuer’s approach to the launching, pricing and closing of an offering of its securities. Some issuers prohibit the pricing and closing of securities during the blackout period, even if the marketing of the securities occurred prior to the commencement of the blackout.
Other issuers adopt more nuanced policies. If the issuer has a bifurcated blackout policy with a shorter period applicable to structured securities, the issuer might consider adopting some guidance or setting parameters as to the steps that occur around the relevant period.
For example, will the issuer permit the marketing of structured securities, provided that the securities price and close after the blackout period? Will the issuer permit securities offerings to straddle the blackout period (i.e., trade date prior to blackout with close after blackout)? Or will that be permitted only with a reconfirmation of trade terms? Will the issuer permit any settlement during the blackout period?
Under U.S. securities laws, the most relevant point in time during the offering is the pricing date, and not the closing date. In connection with its Securities Offering Reform rules, which became effective in December 2005, the SEC set forth its analysis that the critical time for determining the accuracy of a prospectus is the time at which a contract to purchase the securities is formed; that is, the pricing date. After the pricing date, the investor has already made its investment decision, and accordingly, it is not appropriate to base an insider trading claim on information that came to the issuer’s attention after that time. As a result, in the United States, the focus is typically on the information that is available on the date of pricing. Accordingly, some issuers of structured notes into the United States permit structured notes to close (settle) even during the shortened blackout period, because the investors have made their investment decisions prior to that time.
Blackout Period Discretion and Unusual Circumstances
A blackout period should not be immutably set in stone. Even after determining and documenting a blackout policy, the issuer should have the ability to instruct the business units to halt the marketing or issuance of securities at any time as needed. For example, the issuer may identify a concern regarding material non-public information, or it may plan to make a significant news announcement. The issuer and its underwriters will need to exercise caution in implementing a blackout period of this kind - they do not want to signal to the market in this manner that (good or bad) news is about to come forth.