Regulation M, which was adopted in 1996, is designed to prevent market manipulation by participants in a securities offering by regulating certain activities. In general, Regulation M restricts distribution participants (underwriters, placement agents and their affiliates), issuers, selling security holders and their affiliates, from bidding for, purchasing, or attempting to induce other to bid for or purchase, certain securities during an applicable restricted period. Regulation M also prohibits any person that has sold short a security that is the subject of a registered offering from purchasing securities in the offering from an underwriter, or broker or dealer participating in the offering if the short sale took place during a specified period prior to the pricing of the registered offering.
Although a large part of Regulation M relates to underwriter and broker dealer conduct and due diligence obligations, it is helpful for issuers and selling security holders to understand the rules as pertains to them. Regulation M consists of six rules. Rule 100 is a definitional rule. Rule 101 covers the activities of underwriters, broker-dealers, and others participating in a distribution. Rule 102 governs the activities of issuers and selling security holders. Rule 103 pertains to Nasdaq passive market making. Rule 104 governs stabilization transactions and certain post-offering activities by the underwriters, and Rule 105 governs short selling in anticipation of a public offering.
This is the first time I am writing about Regulation M.
Regulation M Rules
Rule 100 – Definitions
The pertinent definitions under Regulation M include:
Affiliated Purchaser – an affiliated purchaser is any person acting directly or indirectly, in concert with a distribution participant, issuer, or selling securityholder in connection with the acquisition or distribution of any covered security. This can include separate departments or divisions of each they can satisfy certain conditions intended to demonstrate their separateness from the affiliated distribution participant, issuer or selling securityholder.
Covered Security – means any security that is the subject of a distribution or any security that can be converted, exchanged or exercised into such security.
Distribution – means 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. Considerations in determining a distribution include the amount of securities to be sold and the percentage of outstanding securities, public float and trading volume those securities represent, and the use of underwriters, placement agents, a road show, a prospectus and the like. In the case of shelf offerings, each takedown must be individually examined to determine whether it constitutes a “distribution.” The issuance of securities in a merger can also be a Regulation M “distribution.”
Distribution Participant – means an underwriter, prospective underwriter, broker, dealer, or other person who has agreed to participate or is participating in a distribution. A “prospective underwriter” includes one that has submitted a bid that will likely be accepted or has a reasonable certainty they will be the underwriter or part of the selling group.
Restricted Period – the period during which the trading prohibitions established by Regulation M apply. The length of this period depends on the size of the issuer’s public equity float (i.e., the amount of the issuer’s common equity securities held by non-affiliates), the worldwide reported average daily trading volume (the “ADTV”) of the security and the type of transaction. For any security with an ADTV value of $100,000 that that has a public float value of $25 million or more, the restricted period begins on the later of one business day prior to the determination of the offering price or such time that a person becomes a distribution participant and ends upon such person’s completion of participation in the distribution. For all other securities, the restricted period begins on the later of five business days prior to the determination of the offering price or such time that a person becomes a distribution participant, and ends upon such person’s completion of participation in the distribution. In the case of a distribution involving a merger, acquisition, or exchange offer, the period beginning on the day proxy solicitation or offering materials are first disseminated to security holders, and ending upon the completion of the distribution.
Rule 101 – Activities by Distribution Participants
Rule 101 restricts distribution participants and their affiliated purchasers from bidding for, purchasing, or attempting to induce others to bid for or purchase, covered securities during the applicable restricted period.
The rule has several exceptions, including: (i) research reports; (ii) transactions in connection with the distribution or compliance with Nasdaq passive market making or stabilization activity; (iii) certain basket transactions and odd-lot and odd-lot related transactions; (iv) the exercise of any option, warrant, right, or any conversion rights; (v) unsolicited brokerage transactions and unsolicited principal purchases that are not effected through a broker or dealer, on a securities exchange, or through an inter-dealer quotation system or electronic communications network; (vi) de minimus transactions; (vii) distributions of securities eligible for resale under Rule 144A of the Securities Act solely to persons that are or are reasonably believed to be “qualified institutional buyers” or “QIBs”, in transactions exempt from registration under Securities Act Section 4(a)(2), Rule 144A or Regulation D, and to persons not deemed to be “US persons” for purposes of Regulation S under the Securities Act (Rule 144A/Reg S transactions); (viii) transactions in actively traded securities (ADTV of $1 million+ and public float of $150 million+); (ix) nonconvertible debt, nonconvertible preferred and asset backed securities; and (x) certain securities issued by investment companies.
Rule 102 – Issuer and Selling Security Holder Activities
Rule 102 restricts issuers and selling security holders and their affiliated purchasers from bidding for, purchasing, or attempting to induce others to bid for or purchase, covered securities during the applicable restricted period.
Like Rule 101, there are several exceptions including: (i) odd-lot transactions; (ii) certain transactions by closed-end investment companies; (iii) redemptions by commodity pools or limited partnerships; (iv) the exercise of any option, warrant, right, or any conversion rights; (v) Offers to sell or the solicitation of offers to buy the securities being distributed; (vi) unsolicited brokerage transactions and unsolicited principal purchases that are not effected through a broker or dealer, on a securities exchange, or through an inter-dealer quotation system or electronic communications network; (vii) Rule 144A/Reg S transactions; (viii) transactions subject to employee securities plans; (ix) transactions in actively traded securities (ADTV of $1 million+ and public float of $150 million+); (x) nonconvertible debt, nonconvertible preferred and asset backed securities; and (xi) certain securities issued by investment companies.
Rule 103 – Nasdaq Passive Market Making
Rule 103 permits broker-dealers to engage in market making transactions in covered securities that are Nasdaq securities without violating the provisions of Rule 103, except that the rule does not apply if a stabilizing bid is in effect, or during any at-the-market offering or best efforts offering. The exemption sets forth explicit criteria that must be followed including with respect to pricing limitations, purchasing capacity, displayed size, designation of bids, regulatory notification and prospectus disclosure.
Rule 104 – Stabilization Activity
Rule 104 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. Like Rule 103 this section has detailed and complex parameters.
Rul 105 – Short Sale Restrictions
Rule 105 prohibits any person that has sold short a security that is the subject of a registered offering from purchasing securities in the offering from an underwriter, broker or dealer participating in the offering if the short sale took place during a specified period prior to the pricing of the offered securities (the pre-pricing period). For purposes of the Rule, the pre-pricing period begins on the later of (i) the fifth business day before pricing or (ii) the initial filing of the registration statement, and ends with the pricing of the securities.
Rule 105 has several exceptions including: (i) a bona fide short position during the pre-pricing period that is closed out before pricing; (ii) the purchase of the offered security in an account of a person where such person sold short during the Rule 105 restricted period in a separate account, if decisions regarding securities transactions for each account are made separately and without coordination of trading or cooperation among or between the accounts; and (iii) certain transactions by investment companies. Rule 105 also does not apply to firm commitment offerings.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis, PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The Anthony, Linder & Cacomanolis team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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