Gun jumping is a strategy that involves attempting to trade securities using information that has not been released to the general public. Most often, the term is applied to attempts to secure orders for a new security issue before it has been properly registered with the regulatory agency that oversees investment transactions within that country of origin. In many nations, the practice of gun jumping is illegal.
In order to make sure that investors have access to all the information necessary to make an informed decision on the purchase of investments, many countries require that companies headquartered within their boundaries to submit a prospectus to a regulatory agency that oversees the investment process within each individual country. The agency is usually charged with the task of verifying that the company can legally issue those shares of stock, and that those shares have adequate backing from the assets of the issuing company. If the details in the prospectus and the investigation by the regulatory agency are sufficient to support the legal issue of the shares, the new issue is approved by the regulator and is considered registered. If the issuer attempts to solicit orders on those shares before the regulatory agency has granted registration, then gun jumping has taken place.
It is important to note that there is a difference between advance advertising of the impending offer of the new issue, and the act of soliciting buyers of those shares of stock in advance of the public offering. Many companies will publicize their intention to create and release new shares, often by means of a press release, as well as advance notification to individuals and other entities that already have an interest in the company. As long as that publicity does not include any attempt to entice investors to attempt to purchase shares until the issue is approved by proper authority, and the initial public offering takes place, gun jumping has not occurred.
Penalties for gun jumping vary from one country to another. In some cases, a regulatory agency may delay the proposed initial public offering if there is evidence of that the issuing company has engaged in gun jumping. Along with this IPO lock-up, there may also be fines imposed against the issuing company. Until recompense for the gun jumping has been rendered, the public offering of shares cannot proceed.
Taking action against gun jumping helps investors in two important ways. First, requiring that no shares are purchased in advance of the IPO assures that all investors have equal opportunity to consider the purchase of the shares. In addition, this approach also allows potential investors to have all relevant information regarding the stock issue, the issuing company, and any other important details at hand before they commit to a purchase.
