Nevertheless, the lock-up is an agreement, not a hard-and-fast securities rule. It can, and has been, shortened with the approval of an IPO’s investment banker.
This is what happened to Rosetta Stone, which went public in mid-April and immediately became a high flyer. About 117 days into its 180-day lock-up period, Rosetta filed for a 4.08-million-share follow-on offering.
Worth noting: Insiders were offering almost all of the shares.
A week later, the IPO imploded.
Romancing the Stone
On April 15, Rosetta Stone priced its IPO of 6.25 million shares at $18 each, the company and insiders offered 3.125 million shares each. The IPO got off to a fast start the next morning, opening at $25, UP 38.9 percent from its initial offering price. Subsequently, it sold as high as $32.97 on July 31, UP 83.2 percent from its offering price.
On July 30, Rosetta filed an 8-K statement with the U.S. Securities and Exchange Commission to announce its financial results for the second quarter and the six months ended June 30, 2009. It also issued guidance for the third quarter and full-year 2009.
“We are very pleased with Rosetta Stone’s second-quarter performance. Despite the ongoing challenges in the global economic environment, customers continued to recognize the value of our language learning solutions,” said Tom Adams, president and chief executive officer, in the company’s 8-K filing with the SEC. “We had solid execution across all lines of our business, which enabled the company to deliver better-than-expected revenue and adjusted EBITDA that was well above our expectations.”
The predictable happened. The stock soared.
On Friday, July 31, it closed at $30.67, UP 18 percent from $25.99, its close on Wednesday, July 29.
When Tinkering Goes Haywire
On Monday, Aug. 10, Rosetta filed an S-1 statement for a follow-on offering to sell 4.08 million shares. Of those, 4.04 million shares would be offered by insiders.
The stock closed that day at $29.91 per share.
The news of the filing caused hardly a ripple in the stock’s price. By Friday, Aug. 14, the IPO closed at $28.35. And the insiders went back to the filing window to increase the follow-on offering’s size to 4.31 million shares.
Worth noting: Insiders now planned to sell 4.27 million shares — up from 4.04 million.
But something was about to rain on Rosetta’s parade.
On Monday, Aug. 17, Rosetta filed another 8-K statement amendment with the SEC, reducing guidance for the third quarter and fiscal year.
This revision came less than three weeks after its first guidance issued on July 30.
The predictable happened. The stock tanked.
On Monday, Aug. 17, it closed at $20.63, DOWN 27.2 percent from $28.35, its previous close on Friday, Aug. 14.
The most significant dates in the life cycle of an IPO are its pricing date and the expiration date of its quiet period. The latter date is when the issuer and its underwriters can talk about the company and its stock.
The quiet period is a rule — not an agreement. It is part of the Securities Act of 1933. Basically, it prohibits a company from going public and its underwriters from promoting the IPO while the offering is in registration; the quiet period is in effect up to 45 days after an IPO’s pricing date.
The Rosetta Stone IPO’s quiet period ended on or about May 27. Its underwriters issued favorable research reports supported by “buy” and “strong buy” recommendations for the stock.
When Rosetta’s follow-on offering was filed on Aug. 10, another quiet period began.
The underwriters had to suspend their research coverage, their “buy” and “strong buy” recommendations and to refrain from commenting on the company.
At press time, no SEC amendment had been filed to withdraw the follow-on offering. Until that happens, the company and its underwriters remain in the quiet period.
Now the question is: “What will they have to say when the quiet period is lifted?”
Worth noting: The stock closed on Friday, Aug. 21, at $20.87, DOWN 36.7 percent from $32.97, its intraday high set on Friday, July 31.
We will not publish “The IPO Buzz” for the week of Aug. 31, but will resume on Sept. 7, which is Labor Day.