Quick Answer
Regulation M bars distribution participants, issuers, selling security holders and affiliated purchasers from bidding for or buying a covered security, or attempting to induce anyone to do so, during the restricted period, subject to exceptions. Stabilizing and passive market making are bounded exceptions; the issuer repurchase safe harbor and trading plan defense are conditional.
Regime, prohibition, exception.
Which One-Liners Win Points?
- An initial public offering is a registered offering by an issuer not reporting immediately before filing; a new issue is an IPO of equity under a registration statement or offering circular, less ten exclusions; a distribution is magnitude plus special selling efforts, registered or not.
- Outside a merger, acquisition or exchange offer, the restricted period runs from the later of one or five business days before pricing, or when the person joins, to its completion of participation.
- Regulation M's short sale rule bars any person from buying in a firm commitment offering of equity for cash from a participating underwriter, broker or dealer after shorting the subject security in the shorter of five business days before pricing or filing to pricing, absent one of three exceptions. The short sale stays lawful.
- No member or associated person may execute or cause an off-exchange trade in a security subject to an IPO until the listing exchange disseminates an opening transaction, and no member may accept a market order to buy a new issue before secondary trading begins.
- Spinning bars a new issue allocation, absent a carve-out, to an account in which an executive officer or director of a public or covered non-public company, or a person they materially support, has a beneficial interest, in any of three investment banking situations.
- Three spinning triggers: the company is a current investment banking client or paid for such services in the past 12 months; the allocator knows or has reason to know the firm expects that business within 3 months; or the allocation is conditioned on future business.
- Recouping a representative's credit on a flip, an initial sale of new issue shares purchased in the offering within 30 days after the offering date, is barred unless the managing underwriter assessed a penalty bid on the entire syndicate.
- Stabilizing is allowed only to prevent or retard a decline, never in an at-the-market offering, and never above the lower of the offering price or the principal market's stabilizing bid.
- Passive market making covers Nasdaq securities, never while a stabilizing bid is in effect or in an at-the-market or best efforts offering.
- The issuer repurchase safe harbor is tested daily on one broker, time, price and volume; missing one removes all that day's repurchases, with no presumption of violation.
- Regulation D exempts the transaction from registration, never from the antifraud or civil liability provisions.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| One-business-day restricted period | Average daily trading volume (ADTV) value $100,000 or more and public float $25 million or more |
| Actively-traded security | ADTV value $1 million or more and public float $150 million or more, not issued by the distribution participant or affiliate |
| Passive market maker daily net purchases | Greater of 30% of its own ADTV or 200 shares |
| Repurchase volume | 25% of ADTV, or one weekly block as the day's only repurchase; 100% after a market-wide trading suspension |
| Trading plan cooling-off | Director or officer: later of 90 days or two business days after results, capped at 120 days; other non-issuers 30 days |
| Regulation D | Limited offering ceiling $10,000,000, less sales under that exemption or in violation of registration within the 12 months before and during the offering |
Which Gotchas Trip Students Up?
- A prospective underwriter is inside Regulation M, whether or not underwriting terms are agreed.
- The pre-trading market order ban spares limit orders.
- The "on the basis of" test is awareness, not use, and changing a plan's amount, price or timing adopts a new plan.
One-Breath Recap
Regulation M bars distribution participants, issuers, selling security holders and affiliated purchasers from bidding for or buying covered securities, or attempting to induce anyone to do so, during a restricted period starting, outside mergers, acquisitions and exchange offers, one or five business days before pricing, or on joining if later, subject to exceptions. Anyone shorting the subject security after filing and within five business days before pricing may not buy in a firm commitment equity offering for cash, absent an exception. Stabilizing may only prevent or retard a decline, never exceeding the lower of the offering price or the principal market's stabilizing bid, and recouping a representative's flip credit needs a syndicate-wide penalty bid. The issuer repurchase safe harbor requires all four daily conditions, and trading plans protect only if adopted before awareness of material nonpublic information.
Need more than the recap? Read the full IPOs, Secondary Offerings and Safe Harbor unit.