Regulation M, Rule 104—Stabilizing Bids and Other Activities
When the price of a new issue rises after a public offering, it is good for both the underwriter and the issuer. It indicates that the underwriter was successful at both marketing and pricing the issue. It also shows that the public believes in the future success of the issuer. If the price of a security falls, it indicates the opposite for the underwriter and the issuer. For this reason, the underwriter has an interest in trying to stabilize the price of the issue if it begins to fall.
Rule 104 makes it unlawful to stabilize bids, effect any syndicate covering transactions, or impose a penalty bid to stabilize prices except under certain prescribed rules. Before examining the rules, let’s understand the activities that are being regulated.
A stabilizing bid is a bid made for shares of an IPO by the underwriters in an effort to prevent the price of the new issue from falling during the offering. A stabilizing bid usually is placed by the lead underwriter.
A pre-syndicate bid is a stabilizing bid made before the effective date of a follow-on offering. The lead manager must notify NASDAQ prior to making a pre-syndicate bid, and the manager must inform NASDAQ whether the bid should be converted to a traditional bid once the issue becomes effective.
A syndicate covering transaction is a bid or purchase made by a syndicate member to cover a short position created when the syndicate sells more shares than they are allotted in the firm commitment. These short positions are often covered by a greenshoe option (over-allotment option). But when the price of the security goes down from the public offering price, the syndicate will usually cover the short position by buying shares on the secondary market. If the syndicate has a “naked” short position, meaning there is no greenshoe option in which new shares can be issued, and th