Why Facebook Must Stay Quiet

Like other companies that file to sell publicly listed stock, Facebook must limit its statements to comply with federal rules

While Facebook’s plan to go public seems to be all many investors talk about these days, the company itself is keeping mum. That’s because it’s in the so-called quiet period, mandated by federal rules dating to 1933 that aim to prevent companies from hyping and selling stocks that aren’t worth as much as the sellers claim. It’s one part of the intricate process that will take the social network from its initial filing on Feb. 1 to being publicly traded in several months.

The markets have evolved since the ’30s, but the temptation for companies to puff their feathers for investors is still strong. “We’re watching all the time,” Shelley Parratt, an SEC deputy director, said at a conference in January. Parratt helps run the SEC’s Division of Corporation Finance, which polices the quiet period rules. What companies can and can’t say loosened up in 2005, when the Securities and Exchange Commission overhauled the IPO process for the first time in more than 70 years. Before the changes, companies felt their hands were tied to communicate publicly at all, even halting regular advertising campaigns. “There was a good set of complaints that said the IPO process should be about making sure various types of manipulations don’t occur but shouldn’t be about stopping the business plan of a company dead in its tracks,” says Eric Talley, a law professor at University of California Berkeley.

In 2005, the SEC’s new, more open guidance said companies still couldn’t hype their stocks, but they could continue regular communications with customers, shareholders, and suppliers. The key there is that a company’s communications can’t be new or differ from what it has done before, it can’t make any forward-looking statements, and it can’t talk about the offering specifically.

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