Stabilizing and Other Activities (Rule 104)
Another important exception to Regulation M’s broad prohibitions relates to stabilizing purchases in connection with a distribution. While the ability to effect stabilizing purchases is a critical tool, its use is fraught with peril: Rule 104 of Regulation M makes it unlawful to make a stabilizing bid, effect a syndicate covering transaction, or impose a penalty bid in connection with an offering except in compliance with the rule. Stabilizing is permitted only if it is intended to prevent or retard a decline in market price; it may not be used to boost the price of a stock.
To comply with Rule 104, a stabilizing bid must meet several requirements. The most important of these are:
- • Priority. Any person making a stabilizing bid must grant priority to any independent bid at the same price, even if the bid is for a different number of shares.
- • Single bid. A syndicate or sole distributor is limited to a single bid at a time in any one market.
- • Price. The maximum price for a stabilizing bid is the lower of (1) the offering price, or (2) the then-current stabilizing bid in the “principal market.” (The principal market is defined as the market with the largest aggregate trading volume for the security during the 12 months preceding the filing of the registration statement.) The initial stabilizing bid cannot be higher than the highest independent bid. One effect of t