Stabilizing Bids

Stabilizing is the one activity in this unit where a firm may deliberately support a price. Everything about it is bounded: the purpose, the level, the number of bids, who gets priority, who is told, and what is written down.

What Is Stabilizing, and When Is It Permitted?

Regulation M's definitions set stabilize or stabilizing as the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing, or maintaining the price of a security. The purpose is what makes a bid a stabilizing bid.

Regulation M's stabilization rule then makes it unlawful for any person, directly or indirectly, to stabilize, to effect any syndicate covering transaction, or to impose a penalty bid, in connection with an offering of any security, in contravention of the provisions of the section.

It adds a second sentence with its own standard. No stabilizing shall be effected at a price that the person stabilizing knows or has reason to know is in contravention of the section, or is the result of activity that is fraudulent, manipulative, or deceptive under the securities laws or any rule thereunder.

Two limits then frame every stabilizing bid:

• Purpose: stabilizing is prohibited except for the purpose of preventing or retarding a decline in the market price of a security.
• At-the-market offerings: stabilizing is prohibited in an at-the-market offering, which is an offering of securities at other than a fixed price.

Exam Tip: Gotchas

• The purpose limit does not freeze the bid. A stabilizing bid may be increased within the rule's ceilings; what the purpose limit forbids is stabilizing for any purpose other than preventing or retarding a decline.
• The knowledge standard reaches beyond actual knowledge. A price the person has reason to know is contrary to the section, or the product of manipulative activity, is prohibited.

What Is the Maximum Stabilizing Price?

One sentence overrides the rest of the level provisions. Notwithstanding the other provisions on stabilizing levels, no stabilizing shall be made at a price higher than the lower of:

• The offering price; or
• The stabilizing bid for the security in the principal market, or, if the principal market is closed, the stabilizing bid in the principal market at its previous close.

The second limb is the principal market's stabilizing bid, not its last sale and not its highest bid. When the principal market is closed, the comparison uses that market's stabilizing bid as it stood at the previous close.

Exam Tip: Gotchas

• The ceiling is a "lower of" test, not a choice. A stabilizing bid at the offering price still breaches the rule where the principal market's stabilizing bid is lower.
• The closed-market limb keeps naming the stabilizing bid. Substituting the previous close's last sale or best bid misstates the ceiling.

How May Stabilizing Be Initiated?

The rule sets three initiation situations that turn on whether the principal market is open and whether quotations have opened in the market where stabilizing will begin, and the ceiling above applies on top of every one of them.

Two further situations sit outside the table:

• No bona fide market. If no bona fide market for the security being distributed exists at the time stabilizing is initiated, no stabilizing shall be initiated at a price in excess of the offering price.
• Before the offering price is determined. If stabilizing is initiated before the offering price is determined, it may be continued after that determination at the price at which stabilizing then could be initiated.

Exam Tip: Gotchas

• The two-condition test fails as a unit. Where the trading condition or the asked-price condition is missing, the permitted price drops to the highest current independent bid.
• The "no bona fide market" rule caps at the offering price, not at a bid. With no market there is no independent bid to measure against.
• The knows-or-has-reason-to-know qualifier attaches to one limb only. It governs the most recent independent transaction since the principal market's close, not the previous-close comparison.

How Is a Stabilizing Bid Maintained, Increased, Reduced or Adjusted?

Exam Tip: Gotchas

• Maintaining and resuming are different acts with different rules. A live bid may be maintained irrespective of market changes; a discontinued one may not be resumed above the price at which it then could be initiated.
• The ex-dividend reduction is mandatory. The rule says the bid shall be reduced by an amount equal to the value of the dividend, right or distribution.

Who Gets Priority, and How Many Bids Are Allowed?

Two structural limits sit alongside the price limits:

• Priority. To the extent permitted or required by the market where stabilizing occurs, any person stabilizing shall grant priority to any independent bid at the same price, irrespective of the size of that independent bid at the time it is entered.
• Control of stabilizing. No sole distributor or syndicate or group stabilizing the price of a security, or any member or members of that syndicate or group, shall maintain more than one stabilizing bid in any one market at the same price at the same time.

Exam Tip: Gotchas

• Priority is granted irrespective of size, where the market permits or requires it. A one-hundred-share independent bid at the same price outranks a much larger stabilizing bid.
• The one-bid limit is per market, per price, per moment. Two syndicate members quoting the same stabilizing price in the same market at once breach it, even though each posts a single bid.

Who Must Be Told About a Stabilizing Bid, Syndicate Covering Transaction or Penalty Bid?

Three disclosure duties run in different directions.

• Any person displaying or transmitting a bid that the person knows is for the purpose of stabilizing shall provide prior notice to the market on which the stabilizing will be effected, and shall disclose its purpose to the person with whom the bid is entered.
• Any person effecting a syndicate covering transaction or imposing a penalty bid shall provide prior notice to the self-regulatory organization (SRO) with direct authority over the principal market in the United States for that security.
• Any person subject to the section who sells to, or purchases for the account of, any person a security where the price may be or has been stabilized shall send that purchaser, at or before the completion of the transaction, a prospectus, offering circular, confirmation, or other document containing a statement similar to the stabilization statement prescribed by the Commission's disclosure requirements for an offering document.

Exam Tip: Gotchas

• The stabilizing bid carries two notices, not one. Prior notice goes to the market, and the purpose is disclosed to the person with whom the bid is entered.
• The purchaser disclosure is due at or before completion of the transaction. It reaches a security whose price may be stabilized, not only one that has been.

What Records Must Be Kept, and by Whom?

The stabilization rule sends recordkeeping and notification to the stabilizing records rule: a person subject to the stabilization rule shall keep the information and make the notification that rule requires.

That rule applies to any person who effects any purchase of a security subject to the stabilization rule for the purpose of, or who participates in a syndicate or group that engages in, stabilizing; or who effects a purchase that is a syndicate covering transaction; or who imposes a penalty bid, in a security in any of three situations:

• One with respect to which a Securities Act registration statement has been, or is to be, filed.
• One being, or to be, offered under an exemption from registration under Regulation A.
• One being, or to be, otherwise offered, if the aggregate offering price of the securities being offered exceeds $5,000,000.

The rule defines two terms.

A manager is the person stabilizing, effecting syndicate covering transactions or imposing a penalty bid for its sole account or for the account of a syndicate or group in which it is a participant.

That person must also, by contract or otherwise, do one of four things: deal with the issuer, organize the selling effort, receive some benefit from the underwriting that is not shared by other underwriters, or represent any other underwriters in such matters as maintaining the records of the distribution and arranging for allotments of the securities offered.

An exempted security is an exempted security as the Exchange Act defines one, including securities issued, or guaranteed both as to principal and interest, by the International Bank for Reconstruction and Development.

A person subject to the rule who acts as a manager and stabilizes, effects syndicate covering transactions or imposes a penalty bid must promptly record and maintain the following separately retrievable information for not less than three years, the first two years in an easily accessible place:

• The name and class of any security stabilized, or in which syndicate covering transactions have been effected or a penalty bid has been imposed.
• The price, date, and time at which each stabilizing purchase or syndicate covering transaction was effected by the manager or by any participant in the syndicate or group, and whether any penalties were assessed.
• The names and the addresses of the members of the syndicate or group.
• Their respective commitments, or, in the case of a standby or contingent underwriting, the percentage participation of each member.
• The dates when any penalty bid was in effect.

A proviso excuses a separate file. Where the information is in a record required to be made under the records to be made rule or the records retention rule, or is otherwise preserved, it need not be maintained in a separate file if the person can sort promptly and retrieve the information as if it had been kept in a separate file, and preserves it for the same periods.

The manager owes two notifications to its own syndicate. It must promptly furnish to each of the members the name and class of any security being stabilized and the date and time at which the first stabilizing purchase was effected by the manager or by any participant. It must also promptly notify each of the members of the date and time when stabilizing was terminated.

The traffic runs the other way too. A person who has a participation in a syndicate account but who is not a manager of that account, and who effects one or more stabilizing purchases or syndicate covering transactions for its sole account or for a syndicate or group, owes the manager two notices.

The first is due within three business days following that purchase, and gives the manager the price, date, and time at which it was effected. The participant shall in addition notify the manager of the date and time when it was terminated.

The manager shall maintain those notifications in a separate file, together with the information above, for not less than three years, the first two years in an easily accessible place.

Exam Tip: Gotchas

• The recordkeeping rule reaches unregistered offerings above a dollar threshold. An offering that is neither registered nor under Regulation A is covered once its aggregate offering price exceeds $5,000,000.
• The participant's notice deadline is three business days; the manager's are "promptly". The rule uses two different clocks for the two directions of reporting.
• The separate-file proviso is conditional on prompt retrieval and preservation, not on intent. The person must be able to sort promptly and retrieve the information as if it had been kept in a separate file, and must preserve it for the same periods.

When Is Offshore Stabilizing Not a Violation, and Which Securities Are Excepted?

Stabilizing to facilitate an offering of a security in the United States shall not be deemed to be in violation of the section if all three of the following conditions are satisfied:

• No stabilizing is made in the United States.
• Stabilizing outside the United States is made in a jurisdiction with statutory or regulatory provisions governing stabilizing that are comparable to the section.
• No stabilizing is made at a price above the offering price in the United States, except as the foreign-currency provision permits.

The section also does not apply to two classes of securities. The first is exempted securities as the Exchange Act defines them.

The second is transactions in securities eligible for resale under the qualified institutional buyer resale safe harbor, where those securities are sold in the United States solely to qualified institutional buyers (QIBs), or to purchasers the seller and any person acting for the seller reasonably believes are QIBs, in a transaction exempt from registration.

Sales to persons that two named provisions of Regulation S deem not to be United States persons also keep the exception, during a qualifying distribution.

A reasonable belief about the buyer is not enough on its own. The sale must also be exempt from registration under one of three named exemptions: the private offering exemption, the resale safe harbor itself, or Regulation D.

Exam Tip: Gotchas

• The offshore relief is conjunctive. Failing any one of the three conditions removes it, and the third is measured against the United States offering price.

What Should You Check on Exam Day?

• Test the purpose first: stabilizing is permitted only to prevent or retard a decline, and never in an at-the-market offering.
• Apply the ceiling before any initiation price: the lower of the offering price or the principal market's stabilizing bid.
• On an initiation question, check whether the principal market is open, and whether both the trading and asked-price conditions hold.
• Where the market permits or requires it, give priority to an independent bid at the same price regardless of its size, and keep one stabilizing bid per market per price at a time.
• For records, ask who is the manager; a non-manager participant notifies the manager within three business days.