SEC ISSUES GUIDANCE REGARDING PROHIBITED CONDUCT IN CONNECTION WITH IPO ALLOCATIONS
FOR IMMEDIATE RELEASE
Washington, D.C., April 7, 2005 - The Securities and Exchange Commission today issued an interpretive release (Release Nos. 33-8565; 34-51500; IC-26828) to provide guidance regarding prohibited conduct by underwriters in connection with initial public offering (IPO) allocations. Regulation M prohibits underwriters and others from bidding for, purchasing, or attempting to induce any person from bidding for or purchasing an offered security during a restricted period as defined in Regulation M. Generally, the restricted period begins 1 or 5 business days prior to the determination of an offering price and ends upon a person's completion of participation in the distribution.
The guidance serves as a reminder that attempts to induce aftermarket purchases during a restricted period are prohibited by Regulation M. Attempts to induce aftermarket bids or purchases undermine the integrity of the market as an independent pricing mechanism and give prospective IPO purchasers the impression that there is a scarcity of the offered securities and the balance of their buying interest can only be satisfied in the aftermarket. Moreover, other investors who purchase shares in the aftermarket would not know that aftermarket demand had been stimulated by the underwriter's unlawful conduct. The guidance includes references to recent Commission enforcement cases alleging inducements in the offering process in violation of Regulation M.
The guidance also discusses distinctions between conduct that violates Regulation M and legitimate book-building. We hope that it will be used as firms review their policies and procedures designed to achieve compliance with Regulation M.
The Commission solicits comments on the guidance for its consideration as it continues to monitor IPO allocation practices.