Legal Definitions - gun jumping

Gun jumping is a legal term that describes unlawful activities undertaken by a company or companies involved in a significant transaction, such as an Initial Public Offering (IPO) or a merger, before receiving the necessary regulatory approvals.

The concept of gun jumping applies in two main areas of law:

• Securities Regulation, which governs how companies raise money from the public.
• Anti-trust Regulation, which aims to prevent monopolies and promote fair competition.

Gun Jumping in Securities Regulation

In the context of securities regulation, gun jumping refers to specific communications or actions by a company that is preparing to sell its shares to the public (an Initial Public Offering or IPO). These actions are prohibited by law because they could improperly influence investors or "condition the market" for the sale of securities before the company has provided all legally required information through official channels.

Securities laws divide the IPO process into three distinct periods, each with different rules about what a company can say or do:

• Pre-filing Period: This is the time before a company officially files its registration statement with the Securities and Exchange Commission (SEC). During this period, the company is strictly prohibited from making any public statements or engaging in activities that might generate interest in its upcoming stock offering. The goal is to prevent hype or misleading information from influencing potential investors before they have access to the comprehensive, vetted information in the registration statement.
• Waiting Period: Once the company files its registration statement (often called an S-1 form), it enters the waiting period. During this time, the SEC reviews the filing, and the company can begin to gauge investor interest. While oral offers to sell shares are generally permitted, most written communications about the offering must meet strict content requirements and be part of a preliminary prospectus. This ensures that investors receive balanced and complete information.
• Post-effective Period: This period begins after the SEC declares the registration statement "effective," meaning it has completed its review and the company can officially sell its shares. At this point, the company can sell its securities without the previous restrictions, provided it delivers the final prospectus to investors.

Here are some examples of gun jumping in securities regulation:

• Example 1 (Pre-filing Period): A tech startup's CEO gives an exclusive interview to a major business publication, enthusiastically discussing the company's "groundbreaking technology" and hinting at an "imminent public offering that will revolutionize the industry," all before the company has filed any registration documents with the SEC. This could be considered gun jumping because the CEO is attempting to generate excitement and demand for the stock before the legal process has even begun, potentially influencing investors without providing the required disclosures.

• Example 2 (Waiting Period): During the waiting period for its IPO, a fashion retailer's marketing team creates and distributes a glossy brochure to potential investors. This brochure contains detailed financial projections for the next five years, including aggressive revenue growth targets, which are not included in the preliminary prospectus filed with the SEC. This would be gun jumping because it's a written offer of securities that goes beyond the legally permitted content for this stage, potentially misleading investors with unaudited or overly optimistic figures.

• Example 3 (Waiting Period): An investment bank, acting as an underwriter for a company's IPO, sends an email to its high-net-worth clients offering them the opportunity to "reserve shares" in the upcoming offering. The email includes a link to a webpage with a brief description of the company but does not include or link to the preliminary prospectus. This is gun jumping because written offers to sell securities during the waiting period must be accompanied by or include a preliminary prospectus, ensuring investors receive comprehensive information before making a decision.

Gun Jumping in Anti-trust Regulation

In the context of anti-trust regulation, gun jumping refers to actions taken by companies that are planning to merge or be acquired by another company, but have not yet received final approval from anti-trust regulators. These actions are prohibited because they could prematurely integrate the companies' operations or reduce competition before the merger is legally finalized, potentially harming consumers or other businesses.

Anti-trust laws, such as the Hart-Scott-Rodino Act, require a waiting period during which merging companies must notify regulators and cannot take certain actions that would give the acquiring company control over the target company's competitive decisions. This waiting period allows regulators to review the proposed merger for potential anti-competitive effects.

Here are some examples of gun jumping in anti-trust regulation:

• Example 1: Two major competing airlines announce their intention to merge. Before receiving regulatory approval, their respective sales teams begin coordinating on future ticket pricing strategies for routes where they currently compete. They also agree to stop offering certain promotional discounts to avoid undercutting each other. This constitutes gun jumping because they are acting as a single entity and reducing competition before the merger is legally complete, potentially leading to higher prices for consumers.

• Example 2: A large pharmaceutical company is in the process of acquiring a smaller biotech firm. While awaiting anti-trust clearance, the acquiring company's executives instruct the biotech firm to halt research and development on a promising new drug that directly competes with one of the acquiring company's existing products. This is gun jumping because the acquiring company is exercising control over the target's competitive decisions and potentially stifling innovation before the merger is approved, which could harm future competition in the market.

• Example 3: Two national coffee shop chains, planning to merge, decide to close several of their overlapping locations in key cities and lay off staff at those stores, all before the merger has received final approval from anti-trust authorities. This action is gun jumping because it represents a significant integration of operations and a reduction in market presence and competition before the legal waiting period has concluded, potentially limiting consumer choice prematurely.