What is a Booster Shot?
A booster shot is a recommendation report issued by an underwriter for a stock shortly after its initial public offering (IPO), a secondary offering or lock-up period. The underwriter and its client, the company selling stock to the public for the first time, want the stock to be healthy, obviously, so a booster shot in the form of a positive research report is injected, following a mandated "quiet period." Booster shots may also be given after secondary offerings of the stock or lock-up periods as a means to promote awareness of the positive attributes of a company by the underwriter(s) and/or broker-dealers marketing the stock to investors.
- A booster shot is an equity research report issued after an IPO, secondary offering, or lock-up period to help promote and market a stock.
- Booster shots came under scrutiny in the wake of highly publicized IPO scandals of the 1990’s and 2000’s.
- Rule changes in response to these scandals imposed new standards on equity research including mandatory quiet periods during which research reports could not be released following an IPO.
- Quiet periods have since been relaxed by new rules and federal law to encourage emerging growth companies.
Understanding Booster Shots
Booster shots came under heavy scrutiny during the rash of scandals involving corruption and conflicts of interests in IPOs during the Dotcom bubble. In a scheme dubbed “laddering,” underwriting investment banks and initial investors colluded to boost secondary market share prices of IPOs in initial trading at the expense of retail investors in the market. Issuing booster shot reports to further hype the new stock was also usually part of these schemes.
SEC investigations and settlements in the wake of the public revelation of these schemes led to hundreds of millions in fines for the perpetrators and the eventual adoption of new rules against these practices. NASD Rule 2711 and Incorporated NYSE Rule 472 were adopted to restore public trust among investors in the objectivity and validity of research analysts’ reports. Rule 472 set standards regarding factual information versus opinion and other matters related to the content of reports. Rule 2711 set standards regarding report publication and the conduct of analysts, including a quiet period prohibiting release of reports for a specified period after an IPO.
Currently, Financial Industry Regulatory Authority (FINRA) Rule 2241 governs the rules for publication and distribution of equity research reports. Until 2015, the quiet period, or the period during which no analyst research reports could be issued to investors, was 40 days and 25 days for the lead underwriter and other participating underwriters, respectively, for IPOs; 10 days for a secondary offerings, and 15 days for lock-up expirations. The rationale behind the quiet period is to prevent company management or underwriters of a deal from making material statements or expressing opinions that are not already contained in the registration filings for the stock offerings. Such chatter could compromise the goal of fairness to all investors, a majority of whom would not be privy to this type of inside commentary.
The JOBS Act of 2012, a piece of Obama-era legislation designed to promote faster employment growth, created a class of companies called emerging growth companies (EGC) that could benefit from an expedited path (i.e., less stringent requirements) to public listings. No quiet periods are imposed on EGC listings, which means that booster shots can be given right away. In response, FINRA updated Rule 2241 to bring it closer to this new class of listings. The revised rule reduces the IPO quiet periods of 40 days and 25 days for lead and non-lead underwriters to 10 days, the 10-day period for secondary offerings to three days, and eliminates altogether the quiet period for lock-up agreements.