Capital Markets

SEC Eyes Crackdown on IPO Abuses

Dial 'M' for market abuse. The SEC proposes revisions to its Regulation M as a way to pump up investor confidence in IPOs.
Stephen TaubOctober 15, 2004

The Securities and Exchange Commission proposed new rule amendments aimed at investment banks in an attempt to crack down on abuses in the initial public offering (IPO) market.

The amendments to Regulation M “would prohibit certain market activities that undermine the integrity and fairness of the offering process,” commission officials said. That’s good news for issuers, because the new rules could make it easier for companies to enter the IPO market by enabling investors to feel more confident about the integrity of the process.

Adopted in 1996, Regulation M was designed to shut down activities that could artificially influence new securities offerings and create, for example, the perception that an IPO stock was scarce or that a significant aftermarket demand existed. Such abuses were common during the late 1990s and during other “hot issue” periods, said SEC staffers.

The proposed rules also aim to stifle “conditioning” schemes — the act of tying share allocations to a customer that agreed to buy shares in another less desirable offering. Another provision attempts to prevent the practice known as “laddering,” whereby the recipients of IPO shares agree to buy more shares in the open market when the stock begins trading, ensuring that the price of a hot IPO stock continues to rise after its market debut, a report Reuters report explained.

“The price of an offering and the aftermarket trading price should be determined by investor demand, and should be free from manipulative influence or misconduct on the part of those who brought the offering to market and stand to profit the most from the transaction,” SEC Chairman William Donaldson told an open meeting of the SEC, according to the wire service.

The SEC also seeks to bar syndicate members from penalizing investors for immediately selling their shares. However, the agency officials did concede that this practice “can function as an undisclosed form of stabilization.”

Another amendment focuses on lengthening the “restricted period” for IPOs beyond the current five-day period. The SEC wants this period to end when the IPO distribution is complete, a process than can take minutes or weeks, according to The Wall Street Journal.

Further, the SEC would require underwriters to publicly disclose when they are buying shares to cover short positions.

The comment period for the proposals will end in about 60 days.