Pilot Fishing

What Is Pilot Fishing?

Pilot fishing is a type of pre-marketing of an initial public offering (IPO) that involves testing out initial investor sentiment to receive feedback on how the market may respond to an actual issue. Pilot fishing has led to some controversy because it could undermine the role of investment bankers, who provide advice to clients about the price at which the IPO should be launched. "Pilot fishing" is mainly a term in the U.K.

Pilot Fishing Explained

Pilot fishing can be beneficial to all parties. The company that is contemplating going public can gauge interest levels from sophisticated investors for the company's shares and get a better sense of whether the timing is right. Underwriters can learn which of their clients are committed and begin thinking about an appropriate price of the IPO shares. Prospective investors can gain early access to management and start their work in independent valuation of the firm. However, the practice, critics say, could give investors undue influence over pricing of the IPO.

Pilot fishing is practiced in the U.K. and parts of Europe, but Securities and Exchange Commission (SEC) regulations about what can and cannot occur during the IPO approval process prevent this type of activity from happening in the U.S. on a formal basis. Informally, underwriters operating in a gray area could choose to meet with a handful of institutional investors to achieve some pilot fishing-like due diligence.

The Pilot Fishing Process

Pilot fishing takes place during the drafting phase of the prospectus and around the same time as the issuer's presentation to the underwriters' independent research analysts. Because details have not been finalized at this point, the issuer must be very careful about its statements and written representations.

Pilot fishing may also coincide with issuing a "red herring," which is a preliminary prospectus filed by a company with the Securities and Exchange Commission (SEC), usually in connection with the company's planned initial public offering. A red herring prospectus contains most of the information pertaining to the company's operations and prospects but does not include key details of the security issue, such as its price and the number of shares offered. The term "red herring" is derived from the bold disclaimer in red on the cover page of the preliminary prospectus. The disclaimer states that a registration statement relating to the securities being offered has been filed with the SEC but has not yet become effective. 

Financial projections are typically omitted from pilot fishing material. A small number of investors are invited to serve as a sounding board, and they are typically asked to sign confidentiality agreements before the meetings. After the round of meetings concludes, the underwriters and issuers integrate their findings with prospective investors and complete their work to get ready for the public launch.