Regulation M

Under Rule 100(b), restricted period means the following. For any security with an ADTV value of one hundred thousand dollars or more of an issuer whose common equity securities have a public float value of twenty-five million dollars or more, the restricted period is the period beginning 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 ending upon such person's completion of participation in the distribution. For all other securities, the restricted period is the period beginning 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 ending upon such person's completion of participation in the distribution. In the case of a distribution involving a merger, acquisition, or exchange offer, the restricted period is 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.

Offering price means the price at which the security is to be or is being distributed. Public float value shall be determined in the manner set forth on the front page of Form 10-K, even if the issuer of such securities is not required to file Form 10-K, relating to the aggregate market value of common equity securities held by non-affiliates of the issuer.

Business day refers to a twenty-four 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. Principal market means the single securities market with the largest aggregate reported trading volume for the class of securities during the twelve full calendar months immediately preceding the filing of the registration statement, or, if there is no registration statement or if the distribution involves the sale of securities on a delayed basis pursuant to Rule 415 under the Securities Act of 1933, during the twelve full calendar months immediately preceding the determination of the offering price.

Securities acquired in the distribution for investment by any person participating in a distribution, or any affiliated purchaser of such person, shall be deemed to be distributed. A person shall be deemed to have completed its participation in a distribution as follows. An issuer or selling security holder completes participation when the distribution is completed. An underwriter completes participation when such person's participation has been distributed, including all other securities of the same class that are acquired in connection with the distribution, and any stabilization arrangements and trading restrictions in connection with the distribution have been terminated. An underwriter's participation will not be deemed to have been completed if a syndicate overallotment option is exercised in an amount that exceeds the net syndicate short position at the time of such exercise. Any other person participating in the distribution shall be deemed to have completed its participation when such person's participation has been distributed.

The Persons Regulation M Covers

Under Rule 100(b), a distribution means an offering of securities, whether or not subject to registration under the Securities Act of 1933, that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods. A distribution participant means an underwriter, prospective underwriter, broker, dealer, or other person who has agreed to participate or is participating in a distribution. An underwriter means 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 such issuer or selling security holder, or to manage or supervise a distribution of securities for or on behalf of such issuer or selling security holder. A selling security holder means any person on whose behalf a distribution is made, other than an issuer.

A covered security means any security that is the subject of a distribution, or any reference security. A reference security means a security into which a security that is the subject of a distribution 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.

An affiliated purchaser includes 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. An affiliated purchaser also includes 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 the purchases of any covered security by a distribution participant, issuer, or selling security holder, whose purchases are controlled by any such person, or whose purchases are under common control with any such person. A third category is 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. This third category does not apply to the affiliate if three 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 Rules 101, 102 and 104, and obtains an annual, independent assessment of the operation of such 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.

An at-the-market offering means an offering of securities at other than a fixed price. A passive market maker means a market maker that effects bids or purchases in accordance with the provisions of Rule 103.

Under Rule 100(a), 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, Section 17(a) of the Securities Act of 1933 and Sections 9, 10(b) and 15(c) of the Securities Exchange Act of 1934.

Rule 101: Distribution Participants

Under Rule 101(a), in connection with a distribution of securities, it shall be unlawful for a distribution participant or an affiliated purchaser of such person, directly or indirectly, to bid for, purchase, or attempt to induce any person to bid for or purchase, a covered security during the applicable restricted period. If a distribution participant or affiliated purchaser is the issuer or selling security holder of the securities subject to the distribution, such person is subject to the provisions of Rule 102, rather than Rule 101.

Rule 101(b) lists activities that are excepted from the prohibition of Rule 101(a). The excepted activities are the following.

Research. The publication or dissemination of any information, opinion, or recommendation, if the conditions of Rule 138, Rule 139, or Rule 139b are met.

Transactions complying with certain other sections. Transactions complying with Rule 103 or Rule 104.

Odd-lot transactions. Transactions in odd-lots, or transactions to offset odd-lots in connection with an odd-lot tender offer conducted pursuant to Rule 13e-4(h)(5).

Exercises of securities. The exercise of any option, warrant, right, or any conversion privilege set forth in the instrument governing a security.

Unsolicited transactions. Unsolicited brokerage transactions, or unsolicited purchases that are not effected from or through a broker or dealer, on a securities exchange, or through an inter-dealer quotation system or electronic communications network.

Basket transactions. Bids or purchases, in the ordinary course of business, in connection with a basket of twenty or more securities in which a covered security does not comprise more than 5 percent of the value of the basket purchased, and adjustments to such a basket in the ordinary course of business as a result of a change in the composition of a standardized index.

De minimis transactions. Purchases during the restricted period, other than by a passive market maker, that total less than 2 percent of the ADTV of the security being purchased, or unaccepted bids, provided that the person making such bid or purchase has maintained and enforces written policies and procedures reasonably designed to achieve compliance with the other provisions of Rule 101.

Transactions in connection with a distribution. Transactions among distribution participants in connection with a distribution, and purchases of securities from an issuer or selling security holder in connection with a distribution, that are not effected on a securities exchange, or through an inter-dealer quotation system or electronic communications network.

Offers to sell or the solicitation of offers to buy. Offers to sell or the solicitation of offers to buy the securities being distributed, including securities acquired in stabilizing, or securities offered as principal by the person making such offer or solicitation.

Transactions in Rule 144A securities. Transactions in securities eligible for resale under Rule 144A(d)(3), or any reference security, if the Rule 144A securities are sold in the United States solely to qualified institutional buyers, or to purchasers that the seller and any person acting on behalf of the seller reasonably believes are qualified institutional buyers, in transactions exempt from registration under section 4(2) of the Securities Act of 1933 or Rule 144A or Rule 500 et seq., or to persons not deemed to be U.S. persons for purposes of Rule 902(o)(2) or Rule 902(o)(7), during a distribution qualifying under Rule 101(b)(10)(i).

Under Rule 101(c), Rule 101(a) does not apply to the following securities. Securities that have an ADTV value of at least one million dollars and are issued by an issuer whose common equity securities have a public float value of at least one hundred fifty million dollars are excepted, provided that such securities are not issued by the distribution participant or an affiliate of the distribution participant. Nonconvertible debt securities and nonconvertible preferred securities of issuers for which the probability of default, estimated as of the sixth business day immediately preceding the determination of the offering price and over the horizon of twelve full calendar months from such day, is 0.055 percent or less, as determined and documented, in writing, by the distribution participant acting as the lead manager, or in a similar capacity, of a distribution, as derived from a structural credit risk model, are excepted. Asset-backed securities that are offered pursuant to an effective shelf registration statement filed on Form SF-3 are excepted. Exempted securities as defined in section 3(a)(12) of the Securities Exchange Act of 1934 are excepted. Face-amount certificates issued by a face-amount certificate company, or redeemable securities issued by an open-end management investment company or a unit investment trust, are excepted. Any terms used in Rule 101(c)(4) that are defined in the Investment Company Act of 1940 shall have the meanings specified in such Act.

The SEC removed references to credit ratings from Regulation M in Release No. 34-97657, titled Removal of References to Credit Ratings from Regulation M, effective August 21, 2023. The release removed the investment grade exception from Rules 101 and 102 and added the probability of default exception described above. In Release No. 34-97657, the Commission is adding a definition for the term structural credit risk model in Rule 100(b), and section 939A(b) of the Dodd-Frank Act requires the Commission, among other things, to remove any reference to or requirement of reliance on credit ratings. In Staff Legal Bulletin No. 9, Frequently Asked Questions About Regulation M, revised November 22, 2019, shares issued by exchange traded funds, known as ETFs, are eligible for the exceptions in Rules 101(c)(4) and 102(d)(4). Shares issued by ETFs relying on Rule 6c-11 of the Investment Company Act of 1940, and by ETFs that are exempt from the definitions of redeemable security in section 2(a)(32) and open-end company in section 5(a)(1) of the Investment Company Act of 1940 pursuant to the terms of their exemptive orders under the Investment Company Act of 1940, are eligible for these exceptions. In Staff Legal Bulletin No. 9, as a practical matter, the absence of public information regarding the debt security's trading history generally would prevent reliance on the actively-traded securities exception for most debt issues.

Rule 102: Issuers and Selling Security Holders

Under Rule 102(a), in connection with a distribution of securities effected by or on behalf of an issuer or selling security holder, it shall be unlawful for such person, or any affiliated purchaser of such person, directly or indirectly, to bid for, purchase, or attempt to induce any person to bid for or purchase, a covered security during the applicable restricted period. If an affiliated purchaser is a distribution participant, such affiliated purchaser may comply with Rule 101, rather than Rule 102.

Rule 102(b) lists activities that are excepted from Rule 102(a). The excepted activities are the following.

Odd-lot transactions. Transactions in odd-lots, or transactions to offset odd-lots in connection with an odd-lot tender offer conducted pursuant to Rule 13e-4(h)(5).

Closed-end investment company transactions. Transactions complying with Rule 23c-3, or periodic tender offers of securities, at net asset value, conducted pursuant to Rule 13e-4 by a closed-end investment company that engages in a continuous offering of its securities pursuant to Rule 415, provided that such securities are not traded on a securities exchange or through an inter-dealer quotation system or electronic communications network.

Redemptions by commodity pools or limited partnerships. Redemptions by commodity pools or limited partnerships, at a price based on net asset value, which are effected in accordance with the terms and conditions of the instruments governing the securities, provided that such securities are not traded on a securities exchange, or through an inter-dealer quotation system or electronic communications network.

Exercises of securities. The exercise of any option, warrant, right, or any conversion privilege set forth in the instrument governing a security.

Offers to sell or the solicitation of offers to buy. Offers to sell or the solicitation of offers to buy the securities being distributed.

Unsolicited purchases. Unsolicited purchases that are not effected from or through a broker or dealer, on a securities exchange, or through an inter-dealer quotation system or electronic communications network.

Transactions in Rule 144A securities. Transactions in securities eligible for resale under Rule 144A(d)(3), or any reference security, if the Rule 144A securities are sold in the United States solely to qualified institutional buyers, or to purchasers that the seller and any person acting on behalf of the seller reasonably believes are qualified institutional buyers, in transactions exempt from registration under section 4(2) of the Securities Act of 1933 or Rule 144A or Rule 500 et seq., or to persons not deemed to be U.S. persons for purposes of Rule 902(o)(2) or Rule 902(o)(7), during a distribution qualifying under Rule 102(b)(7)(i).

Under Rule 102(c)(1), Rule 102(a) does not apply to distributions of securities pursuant to a plan that are made solely to employees or security holders of an issuer or its subsidiaries, or to a trustee or other person acquiring such securities for the accounts of such persons. Rule 102(a) also does not apply to distributions pursuant to a plan made to persons other than employees or security holders, if bids for or purchases of securities pursuant to the plan are effected solely by an agent independent of the issuer and the securities are from a source other than the issuer or an affiliated purchaser of the issuer. Under Rule 102(c)(2), bids for or purchases of any security made or effected by or for a plan shall be deemed to be a purchase by the issuer unless the bid is made, or the purchase is effected, by an agent independent of the issuer.

Under Rule 102(d), Rule 102 does not apply to the following securities. Reference securities with an ADTV value of at least one million dollars that are issued by an issuer whose common equity securities have a public float value of at least one hundred fifty million dollars are excepted, provided that such securities are not issued by the issuer, or any affiliate of the issuer, of the security in distribution. Nonconvertible debt securities and nonconvertible preferred securities of issuers for which the probability of default, estimated as of the sixth business day immediately preceding the determination of the offering price and over the horizon of twelve full calendar months from such day, is 0.055 percent or less, as determined and documented, in writing, by the distribution participant acting as the lead manager, or in a similar capacity, of a distribution, as derived from a structural credit risk model, pursuant to Rule 101(c)(2)(i), are excepted. Asset-backed securities that are offered pursuant to an effective shelf registration statement filed on Form SF-3 are excepted. Exempted securities as defined in section 3(a)(12) of the Securities Exchange Act of 1934 are excepted, as are face-amount certificates issued by a face-amount certificate company, or redeemable securities issued by an open-end management investment company or a unit investment trust.

Under Rule 102(e), upon written application or upon its own motion, the Commission may grant an exemption from the provisions of Rule 102, either unconditionally or on specified terms and conditions, to any transaction or class of transactions, or to any security or class of securities.

In Staff Legal Bulletin No. 9, Frequently Asked Questions About Regulation M, revised November 22, 2019, issuers and selling security holders are always subject to the provisions of Rule 102, and rights offerings will be treated under Regulation M like any other offering.

Rule 103: Nasdaq Passive Market Making

Under Rule 103(a), Rule 103 permits broker-dealers to engage in market making transactions in covered securities that are Nasdaq securities without violating the provisions of Rule 101, except that Rule 103 does not apply to any security for which a stabilizing bid subject to Rule 104 is in effect, or during any at-the-market offering or best efforts offering.

Under Rule 103(b)(1), a passive market maker must effect all transactions in the capacity of a registered market maker on Nasdaq. A passive market maker shall not bid for or purchase a covered security at a price that exceeds the highest independent bid for the covered security at the time of the transaction, except as permitted by Rule 103(b)(3) or required by a rule promulgated by the Commission or the NASD, the National Association of Securities Dealers, Inc., governing the handling of customer orders. In Press Release 2007-151, dated July 26, 2007, the SEC gave final regulatory approval related to the consolidation of the member firm regulatory functions of the National Association of Securities Dealers, Inc. and NYSE Regulation, Inc., and the consolidated organization will be known as the Financial Industry Regulatory Authority, or FINRA.

Under Rule 103(b)(2), on each day of the restricted period, a passive market maker's net purchases shall not exceed the greater of its 30 percent ADTV limitation or two hundred shares, together the purchase limitation. A passive market maker may purchase all of the securities that are part of a single order that, when executed, results in its purchase limitation being equalled or exceeded. If a passive market maker's net purchases equal or exceed its purchase limitation, it shall withdraw promptly its quotations from Nasdaq, and it may not effect any bid or purchase in the covered security for the remainder of that day, irrespective of any later sales during that day, unless otherwise permitted by Rule 101.

Under Rule 103(b)(3), if all independent bids for a covered security are reduced to a price below the passive market maker's bid, the passive market maker must lower its bid promptly to a level not higher than the then highest independent bid, provided that a passive market maker may continue to bid and effect purchases at its bid at a price exceeding the then highest independent bid until the passive market maker purchases an aggregate amount of the covered security that equals or, through the purchase of all securities that are part of a single order, exceeds the lesser of two times the minimum quotation size for the security, as determined by NASD rules, or the passive market maker's remaining purchasing capacity under Rule 103(b)(2). Under Rule 103(b)(4), at all times, the passive market maker's displayed bid size may not exceed the lesser of the minimum quotation size for the covered security, or the passive market maker's remaining purchasing capacity under Rule 103(b)(2), provided that a passive market maker whose purchasing capacity at any time is between one and ninety-nine shares may display a bid size of one hundred shares.

Under Rule 103(b)(5), the bid displayed by a passive market maker shall be designated as such. Under Rule 103(b)(6), a passive market maker shall notify the NASD in advance of its intention to engage in passive market making, and shall submit to the NASD information regarding passive market making purchases, in such form as the NASD shall prescribe. Under Rule 103(c), no transaction shall be made at a price that the passive market maker knows or has reason to know is the result of activity that is fraudulent, manipulative, or deceptive under the securities laws, or any rule or regulation thereunder.

Rule 104: Stabilizing and Other Activities in Connection with an Offering

Under Rule 100(b), stabilizing means the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing, or maintaining the price of a security. A syndicate covering transaction means the placing of any bid or the effecting of any purchase on behalf of the sole distributor or the underwriting syndicate or group to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member in connection with an offering when the securities originally sold by the syndicate member are purchased in syndicate covering transactions.

Under Section 9(a)(6) of the Securities Exchange Act of 1934, it shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, or for any member of a national securities exchange, to effect either alone or with one or more other persons any series of transactions for the purchase and/or sale of any security other than a government security for the purpose of pegging, fixing, or stabilizing the price of such security in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

Under Rule 104(a), it shall be 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 Rule 104. No stabilizing shall be effected at a price that the person stabilizing knows or has reason to know is in contravention of Rule 104, or is the result of activity that is fraudulent, manipulative, or deceptive under the securities laws, or any rule or regulation thereunder.

Under Rule 104(b), stabilizing is prohibited except for the purpose of preventing or retarding a decline in the market price of a security. Under Rule 104(c), 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 such independent bid at the time that it is entered. Under Rule 104(d), no sole distributor or syndicate or group stabilizing the price of a security or any member or members of such syndicate or group shall maintain more than one stabilizing bid in any one market at the same price at the same time. Under Rule 104(e), stabilizing is prohibited in an at-the-market offering.

Under Rule 104(f)(1), notwithstanding the other provisions of this paragraph (f), 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. Under Rule 104(f)(2)(i), after the opening of quotations for the security in the principal market, stabilizing may be initiated in any market at a price no higher than the last independent transaction price for the security in the principal market if the security has traded in the principal market on the day stabilizing is initiated or on the most recent prior day of trading in the principal market and the current asked price in the principal market is equal to or greater than the last independent transaction price. If both conditions of the preceding sentence are not satisfied, stabilizing may be initiated in any market after the opening of quotations in the principal market at a price no higher than the highest current independent bid for the security in the principal market. Under Rule 104(f)(2)(iii), 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. If stabilizing is initiated before the offering price is determined, then stabilizing may be continued after determination of the offering price at the price at which stabilizing then could be initiated.

Under Rule 104(f)(3), a stabilizing bid initiated pursuant to Rule 104(f)(2), which has not been discontinued, may be maintained, or carried over into another market, irrespective of changes in the independent bids or transaction prices for the security. Under Rule 104(f)(4), a stabilizing bid may be increased to a price no higher than the highest current independent bid for the security in the principal market if the principal market is open, or, if the principal market is closed, to a price no higher than the highest independent bid in the principal market at the previous close thereof. A stabilizing bid may be reduced, or carried over into another market at a reduced price, irrespective of changes in the independent bids or transaction prices for the security. If stabilizing is discontinued, it shall not be resumed at a price higher than the price at which stabilizing then could be initiated.

Under Rule 104(h)(1), any person displaying or transmitting a bid that such person knows is for the purpose of stabilizing shall provide prior notice to the market on which such stabilizing will be effected, and shall disclose its purpose to the person with whom the bid is entered. Under Rule 104(h)(2), any person effecting a syndicate covering transaction or imposing a penalty bid shall provide prior notice to the self-regulatory organization with direct authority over the principal market in the United States for the security for which the syndicate covering transaction is effected or the penalty bid is imposed. Under Rule 104(h)(3), any person subject to Rule 104 who sells to, or purchases for the account of, any person any security where the price of such security may be or has been stabilized, shall send to the purchaser at or before the completion of the transaction, a prospectus, offering circular, confirmation, or other document containing a statement similar to that comprising the statement provided for in Item 502(d) of Regulation S-B or Item 502(d) of Regulation S-K.

Under Rule 104(g)(1), stabilizing to facilitate an offering of a security in the United States shall not be deemed to be in violation of Rule 104 if all 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 provisions of Rule 104. No stabilizing is made at a price above the offering price in the United States, except as permitted by Rule 104(f)(5).

Under Rule 104(j), Rule 104 does not apply to exempted securities as defined in section 3(a)(12) of the Securities Exchange Act of 1934, or to transactions in securities eligible for resale under Rule 144A(d)(3), if such securities are sold in the United States solely to qualified institutional buyers, or to purchasers that the seller and any person acting on behalf of the seller reasonably believes are qualified institutional buyers, in a transaction exempt from registration under section 4(2) of the Securities Act of 1933 or Rule 144A or Rule 500 et seq., or to persons not deemed to be U.S. persons for purposes of Rule 902(o)(2) or Rule 902(o)(7), during a distribution qualifying under Rule 104(j)(2)(i). Under Rule 104(k), upon written application or upon its own motion, the Commission may grant an exemption from the provisions of Rule 104, either unconditionally or on specified terms and conditions, to any transaction or class of transactions, or to any security or class of securities.

In Staff Legal Bulletin No. 9, notice of penalty bids need only be furnished when the penalty bid will be assessed.

Rule 105: Short Selling Before a Public Offering

Under Rule 105(a), in connection with an offering of equity securities for cash pursuant to a registration statement or a notification on Form 1-A or Form 1-E filed under the Securities Act of 1933, known as the offered securities, it shall be unlawful for any person to sell short the security that is the subject of the offering and purchase the offered securities from an underwriter or broker or dealer participating in the offering if such short sale was effected during the Rule 105 restricted period. The Rule 105 restricted period is the shorter of the period beginning five business days before the pricing of the offered securities and ending with such pricing, or the period beginning with the initial filing of such registration statement or notification on Form 1-A or Form 1-E and ending with the pricing.

Under Rule 105(b)(1), it shall not be prohibited for such person to purchase the offered securities as provided in Rule 105(a) if the person makes a bona fide purchase of the security that is the subject of the offering that is at least equivalent in quantity to the entire amount of the Rule 105 restricted period short sales, effected during regular trading hours, reported to an effective transaction reporting plan, and effected after the last Rule 105 restricted period short sale, and no later than the business day prior to the day of pricing, and the person did not effect a short sale, that is reported to an effective transaction reporting plan, within the thirty minutes prior to the close of regular trading hours on the business day prior to the day of pricing.

Under Rule 105(b)(2), Rule 105(a) does not prohibit 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. Under Rule 105(b)(3), Rule 105(a) does not prohibit an investment company that is registered under Section 8 of the Investment Company Act of 1940, or a series of such company, from purchasing an offered security where an affiliated investment company, or any series of such a company, or a separate series of the investment company, sold the offered security short during the Rule 105 restricted period. Under Rule 105(c), Rule 105 does not apply to offerings that are not conducted on a firm commitment basis.

In the remarks of Erik R. Sirri, Director of the Division of Market Regulation, at the SEC open meeting of June 20, 2007, the recommended amendments eliminate Rule 105's covering element, make it unlawful to purchase in an offering if a person sold short during the restricted period, and provide a brighter line for compliance. In the same remarks, Rule 105 applies only to offerings of equity securities.

In Rule 105 of Regulation M: Short Selling in Connection with a Public Offering, a risk alert of the Office of Compliance Inspections and Examinations of the SEC dated September 17, 2013, Rule 105 does not require intent on the part of the short seller to engage in a prohibited transaction. In 2007, the Commission amended Rule 105 in order to address the proliferation of trading strategies. As amended, Rule 105 makes it unlawful for a person to purchase securities in a firm commitment equity offering from an underwriter or broker-dealer participating in the offering if that person sold short the security that is the subject of the offering during the Rule 105 restricted period, absent an available exception. Firms are reminded that, in order to advance compliance with Rule 105, it is important to provide training to their employees regarding the application of the Rule, develop and implement policies and procedures reasonably designed to achieve compliance with the Rule, and enforce those policies and procedures. After-the-fact remediation would not absolve a firm or individual from the violation of Rule 105.

Enforcement of Regulation M

In Press Release 2013-182, dated September 17, 2013, the SEC announced enforcement actions against twenty-three firms for short selling violations. The actions were settled by twenty-two of the twenty-three firms charged, resulting in more than fourteen million four hundred thousand dollars in monetary sanctions. In the risk alert of September 17, 2013, the Commission has, from January 2010 through the present, settled over forty actions in which it found that firms and/or individuals have violated Rule 105, and has collected disgorgement, penalties, and interest in excess of forty-two million dollars.

In the order of September 19, 2024, Release No. 101049, in the matter of Gates Capital Management, Inc., the SEC found that Gates Capital violated Rule 105 of Regulation M under the Securities Exchange Act of 1934. Gates Capital has been registered with the Commission as an investment adviser since 2006. Gates Capital sold short shares from August 30 through September 1, 2023, during the Rule 105 restricted period, and Gates Capital, on behalf of its fund clients, purchased 100,000 shares in the offering. Upon discovering the violation, Gates Capital promptly reported the violation to Commission staff. Without admitting or denying the findings, except as to the Commission's jurisdiction over it, Gates Capital agreed to cease and desist from committing or causing any violations and any future violations of Rule 105, and to pay disgorgement of four hundred thirty-two thousand five hundred sixty-four dollars, prejudgment interest of five thousand four hundred forty-five dollars, and a civil money penalty of fifty-seven thousand six hundred fifteen dollars.

FINRA accepted a Letter of Acceptance, Waiver and Consent, No. 2019061652404, from National Securities Corporation on June 23, 2022. Between August 2016 and March 2018, the firm acted as an underwriter for three initial public offerings and seven follow-on offerings that collectively raised over two hundred million dollars for the issuers. In connection with each of the ten offerings, during the restricted periods, the firm directly and indirectly attempted to, and did, induce customers to make aftermarket purchases of the offered securities, and the Syndicate Department and the Investment Banking Department reduced or threatened to reduce allocations to representatives who refused to solicit their customers to participate in the aftermarket. FINRA found that the firm willfully violated Rule 101 of Regulation M and FINRA Rule 2010. In Offering A, a thirteen million eight hundred thousand dollar public follow-on offering for which the firm served as an underwriter, the offering had a five-day restricted period from September 22, 2016, through September 27, 2016. On September 27, the stock opened at seven dollars and nine cents, approximately 9 percent above its offering price of six dollars and fifty cents, and stayed above that price all day. The firm's trading that day, which consisted of all solicited buy orders, made up over 26 percent of the stock's daily trading volume, and approximately half of those orders were from customers who had received allocations.

In Offering B, a twenty-eight million seven hundred thousand dollar offering for which the firm served as the underwriter, the restricted period ran from August 11, 2017, to August 18, 2017. On August 18, 2017, the stock opened at two dollars and thirty-eight cents, approximately 10 percent above its offering price of two dollars and fifteen cents, and stayed above that price all day. The firm's buy orders that day, over 75 percent of which were solicited, made up over 18 percent of the stock's daily trading volume, and approximately 92 percent of those purchases were from customers who had received allocations.

Under FINRA Rule 5131(c), no person associated with a member may directly or indirectly recoup, or attempt to recoup, any portion of a commission or credit paid or awarded to an associated person for selling shares of a new issue that are subsequently flipped by a customer, unless the managing underwriter has assessed a penalty bid on the entire syndicate. The firm or another co-manager filed a trading notification form with FINRA, disclosing that it did not intend to apply a penalty bid to the syndicate. Nevertheless, in connection with each of the three initial public offerings, the firm included a flipper policy in the launch email sent to the firm's sales force, and FINRA found that the firm violated FINRA Rules 5131(c) and 2010.

The sanctions in the Letter of Acceptance, Waiver and Consent include a censure, a fine of three million six hundred thousand dollars, and disgorgement of four million seven hundred seventy thousand dollars.

Exam Relevance

The Securities Industry Essentials examination content outline lists Regulation M as the first entry under SEC Rules and Regulations in the rules list of Section 3, Understanding Trading, Customer Accounts and Prohibited Activities. Candidates should check the current outline before the examination.

Common Misunderstandings

Regulation M applies only to registered public offerings. Under Rule 100(b), a distribution is an offering of securities, whether or not subject to registration under the Securities Act of 1933.

Every offering is a distribution. Under Rule 100(b), a distribution is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods.

A private placement cannot be a distribution. In Staff Legal Bulletin No. 9, a private placement of securities can be a distribution under Regulation M if the offering satisfies the magnitude and special selling efforts and selling methods criteria.

Rights offerings fall outside Regulation M. In Staff Legal Bulletin No. 9, rights offerings will be treated under Regulation M like any other offering.

Rule 101 applies to the issuer. Under Rule 101(a), if a distribution participant or affiliated purchaser is the issuer or selling security holder of the securities subject to the distribution, such person is subject to the provisions of Rule 102, rather than Rule 101.

The restricted period ends when the offering is priced. Under Rule 100(b), the restricted period ends upon such person's completion of participation in the distribution. In a distribution involving a merger, acquisition, or exchange offer, the restricted period ends upon the completion of the distribution. An underwriter completes participation when such person's participation has been distributed, including all other securities of the same class that are acquired in connection with the distribution, and any stabilization arrangements and trading restrictions in connection with the distribution have been terminated.

A passive market maker may buy without limit. Under Rule 103(b)(2), on each day of the restricted period, a passive market maker's net purchases shall not exceed the greater of its 30 percent ADTV limitation or two hundred shares.

Stabilizing is always prohibited. Under Rule 104(b), stabilizing is prohibited except for the purpose of preventing or retarding a decline in the market price of a security.

After-the-fact fixes cure a Rule 105 violation. In the risk alert of September 17, 2013, after-the-fact remediation would not absolve a firm or individual from the violation of Rule 105.

Rule 105 requires intent. In the risk alert of September 17, 2013, Rule 105 does not require intent on the part of the short seller to engage in a prohibited transaction.

Rule 105 applies to every offering. Under Rule 105(c), Rule 105 does not apply to offerings that are not conducted on a firm commitment basis.

Only the SEC enforces Regulation M. FINRA found that National Securities Corporation willfully violated Rule 101 of Regulation M in the Letter of Acceptance, Waiver and Consent accepted June 23, 2022.

Key Points to Retain

Regulation M is intended to preclude manipulative conduct by persons with an interest in the outcome of an offering.

Regulation M consists of Rules 100 through 105. Rule 101 applies to distribution participants and Rule 102 applies to issuers and selling security holders.

Under Rule 101(a) and Rule 102(a), it shall be unlawful to bid for, purchase, or attempt to induce any person to bid for or purchase, a covered security during the applicable restricted period.

Under Rule 105(a), in connection with an offering of equity securities for cash pursuant to a registration statement or a notification on Form 1-A or Form 1-E, it shall be unlawful for any person to sell short the security that is the subject of the offering and purchase the offered securities from an underwriter or broker or dealer participating in the offering if such short sale was effected during the Rule 105 restricted period.