Buying shares can support an offering or improperly influence its price. Your role, timing, purpose, and method determine which market activities are permitted.
You cannot evaluate an offering purchase until you know who is buying. Regulation M: Rule 100 supplies definitions; Rules 101 through 105 apply them to different actors and activities.
A distribution is an offering distinguished from ordinary trading by its size and special selling efforts. Registration is not required. A distribution participant includes an underwriter, prospective underwriter, broker, or dealer participating or agreeing to participate. Selling security holders offer existing holdings, while the issuer creates the securities.
An affiliated purchaser includes someone coordinating purchases with a participant, issuer, or selling holder, plus certain control relationships. A covered security includes the distributed security and any reference security. A reference security is one into which the offered security converts, exchanges, or exercises, or which materially determines its value. For convertible bonds, the underlying stock can therefore face prohibited bids too.
Common mistakes
- Treating $2 million ADTV with $20 million float as actively traded: the ordinary restricted period remains five business days.
- Calling Rule 105 a blanket short-sale ban: test the restricted-period short sale together with the offering purchase.
- Treating the offering price as the automatic stabilizing bid: a lower qualifying independent trade or bid lowers the ceiling, as in Example 1 ($24.80).
Bottom line
- Rule 101's actively traded thresholds are $1 million ADTV and $150 million float, subject to its issuer-affiliation limitation.
- Ordinary restricted periods begin one business day before pricing at $100,000 ADTV and $25 million float, or five business days otherwise.
- Distribution participants remain restricted until participation is complete; Rule 105's separate clock ends at pricing.
- Passive daily net purchases are limited to the greater of 30% of firm ADTV or 200 shares, with single-order completion permitted.
Exam shortcut
Circle the actor first: participant, issuer, short-selling investor, or retail customer. This selects the rule before any arithmetic. For a restricted-period problem, test both liquidity numbers, identify pricing time, and then locate the participant's completion date. For a greenshoe problem, calculate the remaining short before comparing acquisition costs. Deduct any underwriting discount when determining exercise cost. For a notice question, underline the event and recipient.
The full lesson (about 3,776 words, 25 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- B18
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