Gun jumping, or more commonly referred to as "jumping the gun" refers to selectively using undisclosed financial information in two popular methods:
- The illegal practice of soliciting orders to buy a new issue before registration of the initial public offering (IPO) has been approved by the Securities and Exchange Commission (SEC).
- Trading securities based on information that has not yet been disclosed to the public.
Breaking Down Gun Jumping
The theory behind gun-jumping is that investors should make decisions based on the full disclosure in the prospectus, not on the information disseminated by the company that has not been approved by the SEC. If a company is found guilty of "jumping the gun," the IPO will be delayed.
To build market integrity, trust, and confidence; regulators and market advocates discourage the use of private and undisclosed information. In theory, all market participants should be on equal footing and have the same ability to utilize information. When certain classes of investors, notably those on the "inside" or in a position of privilege, enjoy the benefits of jumping the gun, it erodes the public's trust in financial institutions. This can greatly slow economic growth and lead to other related social disruption.
Preventing Gun Jumping
Many rules and regulations are in place to prohibit or otherwise discourage financial actors from jumping the gun, but the incentives can be far too enticing not to bend the rules. Some of these rules may be explicit, such as laws against insider-trading; others are more subtle, such as the implicit public relations blowback an individual or entity may experience for using private information for personal gain.
In financial analysis and investing, benefiting from private information by jumping the gun and being early to a trend based on the mosaic theory are two different things. The former goes against the idea of fair and equitable markets; the latter, which occurs when public information is pieced together to form a new and viable investment opportunity fits the spirit of competitive business inquiry.