Page 15 Client Alert No. 1531 | May 30, 2013
Endnotes
1
Regulation M, which became effective on March 4, 1997, replaced former Exchange Act Rules 10b-6, 10b-6A, 10b-7 and 10b-21
and eliminated in its entirety the regulation of rights offerings formerly contained in Exchange Act Rule 10b-8. In adopting
Regulation M, the SEC expressly rejected requests from some commenters that the rules be designed as safe harbors,
determining instead that a prophylactic approach was a more effective means to protect the integrity of the offering process. See
SEC Release No. 34-38067 (Dec. 20, 1996) (the Reg M Adopting Release).
2
Note that characterization as a “reference security” does not depend on whether the subject security is immediately convertible,
exchangeable or exercisable for such security, or whether the conversion, exchange or exercise may take place only after a
certain contingency or condition has been met.
3
Unlike predecessor Rule 10b-6, this definition encompasses a security underlying an equity-linked security or similar instrument
that does not give the holder the right to acquire the underlying security but whose value is or may be derived from such security.
However, a security will be a “reference security” only when it, or an index of which it is a component, is referred to in the actual
terms of a subject security. A
security of the same or a similar issuer will not be deemed a reference security merely because its
price is used as a factor in determining the offering price of the security in distribution. See Reg M Adopting Release, n.32 and
accompanying text.
4
ADTV can be obtained from publicly available sources as long as such sources are reasonably believed to be reliable. Note that
the two-month or 60-day period must be met in full as specified in the ADTV definition. If the subject security has not been
outstandi
ng for
the full period specified in the ADTV definition, the ADTV calculation cannot be made and, as a result, neither the
one-business day restricted period, nor the exception for actively-traded securities, would be available. This situation typically
arises in connection with initial public offerings by US issuers, the distribution of a new series of debt securities, or in connection
with a related “tack on” offering or re-opening of the same series of debt securities that is proposed to be made before the end of
5
For purposes of Regulation M, a “business day” is a 24-hour period determined with reference to the principal market for the
securities to be distributed and that includes an entire trading session for that market. Note that if a person becomes a distribution
participant after the commencement of the restricted period, its activities prior to becoming a distribution participant will not be
deemed to violate Regulation M (in effect, such person’s restricted period will commence on the later of the applicable one- or
five-day period or the time such person becomes a distribution participant).
6
Note, however, that Exchange Act Rule 14e-5 continues to apply and may (absent an applicable exemption) prohibit purchases or
arrangements to purchase the securities that are the subject of a tender offer (or any security that is immediately convertible into
or exchangeable for such security) from the time of public announcement of the offer until the expiration of the offer.
7
Pursuant to Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC proposed an
amendment to Regulation M in April 2011 that would remove the references to
credit ratings in Rules 101 and 102 and replace
them with new standards that focus inst
ead on the trading characteristics of the covered securities.
See S
EC Release
No. 34-64352 (Apr. 27, 2011). Briefly, the exception would (if adopted as proposed) exempt from Regulation M’s trading
prohibitions nonconvertible debt securities, nonconvertible preferred securities and asset-backed securities that (i) are liquid
relative to the market for that asset class, (ii) trade in relation to general market interest rates and yield spreads and (iii) are
relatively fungible with securities of similar characteristics and interest rate yield spreads.
8
Note that this exception is not available in a distribution of a Rule 144A-eligible security that includes accredited investors. For this
reason, following the adoption of Regulation M, distributions of Rule 144A-eligible securities are typically made solely to QIBs and
do not include a side-by-side private placement or so-called “Section 4(1½)” offering to institutional accredited investors.
9
Although this exception is generally thought of as applying solely to transactions that satisfy the exemptions from Securities Act
registration provided by Rule 144A and Regulation S, it also encompasses, for example, direct placements by issuers that are not
eligible for Rule 144A (which applies to resale transactions) but instead satisfy the exemption from Securities Act registration
provided by Section 4(a)(2) or Regulation D, provided that the securities are eligible for resale under Rule 144A and are offered
and sold only to persons that are, or are reasonably believed to be QIBs or non-US persons under Regulation S.
10
Although Rule 102 does not contain an exception for actively-traded securities issued by the issuer or an affiliate of the issuer,
transactions in reference securities (including securities into which the security being distributed is convertible or exchangeable)
that are actively-traded securities and issued by an unaffiliated entity are exempt from Rule 102’s trading restrictions.
11
See note 7 above with respect to proposed changes to the investment grade rating element of this exception.
12
“Stabilizing” is the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing or otherwise maintaining
the price of a security.
13
A “syndicate covering transaction” is the placing of any bid, or the effecting of any purchase, on behalf of the syndicate (or a sole
distributor) to reduce a short position created in connection with the offering. Note that the exercise of an overallotment option is