Quick Answer
Three tests, three different facts. The IPO-related transactions rule turns on Securities Act registration plus an issuer non-reporting immediately before filing. The new issue definition turns on an initial public offering of an equity security under a registration statement or offering circular, minus ten exclusions. A Regulation M distribution turns on magnitude plus special selling efforts, registered or not.
An offering can sit inside one of these regimes and outside the other two. Nothing in this unit lets you decide all three from a single fact about the deal, so read the stem for the fact each test actually asks about.
What Makes a Security Subject to an Initial Public Offering?
The IPO-related transactions rule joins its two parts with "and", so a security is subject to an initial public offering only where both hold:
- The offering of the security is registered under the Securities Act.
- The issuer of the security, immediately prior to filing the registration statement with respect to such offering, was not subject to the Exchange Act reporting requirements for registered securities and for issuers with an effective registration statement.
Exam Tip: Gotchas
- The reporting test is measured at one moment, not over the offering. The rule asks what the issuer's status was immediately prior to filing the registration statement for that offering, so an issuer that becomes a reporting company later still meets the test.
- An unregistered offering is never subject to an initial public offering here. Registration is the first half of a conjunctive test, so a private placement fails it however large the deal or however new the issuer.
Which Offerings Count as a New Issue?
The new issue allocation rule takes "new issue" from the new issue purchase restriction rule, which defines it as any initial public offering of an equity security as the Exchange Act defines that term, made pursuant to a registration statement or offering circular. Ten lettered categories are then carved out.
| Excluded category | What it covers |
|---|---|
| Certain exempt offerings | Offerings under the Securities Act exemptions for non-issuer transactions, for transactions not involving a public offering, or for accredited-investor sales; the limited offering exemption where the securities are restricted securities; the qualified institutional buyer resale safe harbor; a since-rescinded Regulation D exemption; the private placement exemption; and Regulation S or other offerings made outside the United States, unless those securities are also registered for sale in the United States in connection with a concurrent United States initial public offering of an equity security |
| Exempted securities | Offerings of exempted securities as the Exchange Act and its rules define them |
| Commodity pools | Securities of a commodity pool operated by a commodity pool operator as the Commodity Exchange Act defines one |
| Corporate actions | Rights offerings, exchange offers, or offerings made pursuant to a merger or acquisition |
| Asset-backed securities | Offerings of investment grade asset-backed securities |
| Convertibles | Offerings of convertible securities |
| Preferred | Offerings of preferred securities |
| Registered funds | Offerings of an investment company registered under the Investment Company Act |
| Pre-existing foreign market | Securities in ordinary share form, or American depositary receipts registered on Form F-6, that have a pre-existing market outside the United States |
| Named entity types | A special purpose acquisition company subject to Commission rules, a business development company as the Investment Company Act defines one, a direct participation program as FINRA's rules define one, or a real estate investment trust as the Internal Revenue Code defines one |
Exam Tip: Gotchas
- An offering circular is an alternative route into the new issue definition, not a synonym for registration. A qualifying offering made under an offering circular is a new issue even though it would fail the registration half of the initial public offering test.
- Convertible and preferred offerings are excluded by name. The exclusion is written on the security type, so it applies even where the offering is a first sale to the public by a non-reporting issuer.
What Is a Distribution Under Regulation M?
Regulation M's definitions set a distribution as an offering of securities, whether or not subject to registration under the Securities Act, that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods. Registration decides nothing here.
The parties and the securities are defined off that offering:
- A covered security is any security that is the subject of a distribution, or any reference security. The alternative uptick rule uses the same words for a different set, where a covered security is any national market system (NMS) stock, so the term does not travel between the two rules.
- A reference security is a security into which the subject security may be converted, exchanged or exercised, or which, under the terms of the subject security, may in whole or in significant part determine the value of the subject security.
- A distribution participant is an underwriter, prospective underwriter, broker, dealer, or other person who has agreed to participate or is participating in a distribution.
- A selling security holder is any person on whose behalf a distribution is made, other than an issuer.
- An independent bid is a bid by a person who is not a distribution participant, issuer, selling security holder, or affiliated purchaser.
- An at-the-market offering is an offering of securities at other than a fixed price.
- A business day is a 24 hour period determined with reference to the principal market for the securities to be distributed, and that includes a complete trading session for that market.
An underwriter is a person who has agreed with an issuer or selling security holder to purchase securities for distribution, to distribute securities for or on behalf of that issuer or selling security holder, or to manage or supervise a distribution for or on behalf of that person.
A prospective underwriter is a person who has submitted a bid to the issuer or selling security holder and knows or is reasonably certain that the bid will be accepted. It also reaches a person who has reached, or is reasonably certain to reach, an understanding with the issuer, selling security holder or managing underwriter that the person will become an underwriter.
Either branch applies whether or not the terms and conditions of the underwriting have been agreed upon.
Exam Tip: Gotchas
- A prospective underwriter is already inside Regulation M. The definition reaches a firm that has only reached an understanding, so a desk that treats itself as unrestricted until the underwriting agreement is signed has misread the trigger.
- A selling security holder is defined by exclusion of the issuer. The issuer is covered by the same prohibition on its own terms, so nothing falls between the two definitions.
Who Is an Affiliated Purchaser?
The definition has three branches, and the third carries a conditional escape.
| Branch | Who it reaches |
|---|---|
| First | A person acting, directly or indirectly, in concert with a distribution participant, issuer, or selling security holder in connection with the acquisition or distribution of any covered security |
| Second | An affiliate, which may be a separately identifiable department or division of a distribution participant, issuer or selling security holder, that directly or indirectly controls that person's purchases of any covered security, whose purchases that person controls, or whose purchases are under common control with that person's |
| Third | An affiliate, which may be a separately identifiable department or division, of a distribution participant, issuer or selling security holder that regularly purchases securities for its own account or for the account of others, or that recommends or exercises investment discretion with respect to the purchase or sale of securities |
The third branch does not apply where all of the following conditions are satisfied:
- The distribution participant, issuer or selling security holder maintains and enforces written policies and procedures reasonably designed to prevent the flow of information to or from the affiliate that might result in a violation of Regulation M's distribution participant rule, its issuer and selling security holder rule or its stabilization rule, and obtains an annual, independent assessment of the operation of those policies and procedures.
- The affiliate has no officers (or persons performing similar functions) or employees, other than clerical, ministerial or support personnel, in common with the distribution participant, issuer or selling security holder that direct, effect, or recommend transactions in securities.
- The affiliate does not, during the applicable restricted period, act as a market maker, other than as a specialist in compliance with the rules of a national securities exchange, or engage, as a broker or a dealer, in solicited transactions or proprietary trading, in covered securities.
Exam Tip: Gotchas
- The information-barrier escape belongs to the third branch alone. A firm inside the first or second branch stays an affiliated purchaser however good its policies and procedures are.
- Written procedures are only half of the first condition. The firm must also obtain an annual, independent assessment of how those procedures actually operate.
How Does Regulation M Measure Volume, Float and Market?
Four measurements decide which timetable and which exception apply: average daily trading volume (ADTV), the reference period, the principal market, and public float value.
Average daily trading volume, the reference period and the principal market each have an alternative measuring point where there is no registration statement, or where the distribution sells securities on a delayed basis under the shelf registration rule.
Public float value has no alternative measuring point. It is determined in the manner set forth on the front page of Form 10-K, even where the issuer is not required to file that form.
| Measurement | Primary window | Alternative measuring point |
|---|---|---|
| Average daily trading volume (ADTV) | Worldwide average daily trading volume during the two full calendar months immediately preceding, or any 60 consecutive calendar days ending within the 10 calendar days preceding, the filing of the registration statement | The same two measures taken preceding the determination of the offering price |
| Reference period | The two full calendar months immediately preceding the filing of the registration statement | The two full calendar months immediately preceding the determination of the offering price |
| Principal market | The single securities market with the largest aggregate reported trading volume for the class of securities during the 12 full calendar months immediately preceding the filing of the registration statement | The 12 full calendar months immediately preceding the determination of the offering price |
| Public float value | Determined in the manner set forth on the front page of Form 10-K, even where the issuer is not required to file that form, relating to the aggregate market value of common equity securities held by non-affiliates of the issuer | Same |
In determining aggregate trading volume for the principal market, the trading volume of depositary shares representing the security is included, and is multiplied by the multiple or fraction of the security the depositary share represents. A depositary share is a security, evidenced by a depositary receipt, that represents another security, or a multiple or fraction of it, deposited with a depositary.
Exam Tip: Gotchas
- Average daily trading volume is worldwide, and the principal market is not. Volume is measured across markets everywhere, while the principal market test picks the single market with the largest aggregate reported volume.
- The two calendar-month window and the 60-day window are alternatives, not a sequence. Either may be used, and the 60 consecutive calendar days must end within the 10 calendar days preceding the measuring event.
Does Regulation M Displace the Antifraud Rules?
No. Regulation M opens with a preliminary note stating that any transaction or series of transactions, whether or not effected pursuant to the provisions of Regulation M, remain subject to the antifraud and antimanipulation provisions of the securities laws, including, without limitation the Securities Act antifraud provision and the Exchange Act's statutory manipulation prohibition, antifraud statute and broker-dealer manipulative practices prohibition.
The list is open. A transaction that satisfies every condition of a Regulation M exception can still be attacked as manipulative on other grounds.
Exam Tip: Gotchas
- Compliance with a Regulation M exception is not a defence to manipulation. The preliminary note keeps the antifraud and antimanipulation provisions live over every transaction, including one effected under Regulation M itself.
What Should You Check on Exam Day?
- Confirm both halves of the initial public offering test: Securities Act registration, and an issuer that was not a reporting company immediately prior to filing that offering's registration statement.
- Confirm the offering is an initial public offering of an equity security made under a registration statement or offering circular before calling it a new issue, then run the ten exclusions.
- Ask whether the offering has magnitude plus special selling efforts before calling it a distribution; registration is irrelevant to that test.
- For a third-branch affiliate, check written procedures, the annual independent assessment, no shared securities staff, no market making other than as an exchange specialist, and no solicited transactions or proprietary trading, as a broker or dealer, in covered securities.
- Read which measuring event a figure hangs on: the filing of the registration statement, or the determination of the offering price.