9.3.1. Purchases by Issuers and Distribution Participants
Regulation M attempts to prevent those involved in an offering from manipulating the price by placing limits on their ability to buy up the securities themselves. The issuer and distribution participants are prohibited from bidding on or buying the offered security or any of its reference securities during a certain restricted period. This prohibition also applies to bidding on or purchasing the securities indirectly, such as through an affiliate, or by inducing a third party to make a bid or purchase on the issuer or participant’s behalf.
A reference security is any security that the offered security can be converted into or exchanged for. For example, if the offered securities are convertible bonds that convert into shares of the issuer’s common stock, the common stock is the reference security. If the issuer or participant can’t bid on or purchase the bond, it also can’t bid on or purchase the stock. (This relationship does not work the other way. The bond is not a reference security of the stock, and a restriction on bidding on or purchasing the stock would not result in a similar restriction on the bond.)
The restricted period varies depending on the size and trading activity of the security. The SEC has set up three tiers of securities depending on how easily the price of the security can be manipulated.
• Tier 1: These are also known as actively traded securities. The prices of these securities are not easily manipulated. There is no restricted period for these securities. To qualify as an actively traded security, a security must meet both of these criteria:
1. It must have an average daily trading volume (ADTV) of at least $1 million.
and
2. The total market value of the securities not held by affiliates of the issuer must be at least $150 million. (Recall that this is called the public float.)