Regulation M
Regulation M is a set of SEC anti-manipulation rules that restrict the trading activity of underwriters, issuers, selling shareholders, and their affiliated purchasers during distributions of securities, designed to prevent stabilization of a security's price through manipulative buying during the offering period.
When a company conducts a public offering of securities, there is an inherent incentive for the parties benefiting from a successful offering — the issuer, selling shareholders, and underwriters — to support or inflate the market price of the securities being sold. Without restrictions, they could buy shares in the open market to create artificial demand, boosting the offering price to the detriment of investors who purchase at inflated prices.
Regulation M addresses this concern through a system of restricted periods and prohibited activities. The core rule, Rule 101, prohibits distribution participants and affiliated purchasers from bidding for, purchasing, or attempting to induce others to bid for or purchase the covered security during the applicable restricted period. For actively traded securities, the restricted period begins one business day before pricing and ends upon completion of participation in the distribution. For less liquid securities, the restricted period extends to five business days before pricing.
Underwriters may engage in limited stabilizing activity under Rule 104 — purchasing in the secondary market at or below the offering price to prevent or retard a decline in the market price of the offered securities. However, stabilizing is strictly regulated: it must be disclosed in the prospectus, it cannot be used to raise prices above the offering price, and it must be reported to FINRA. Underwriters also frequently engage in over-allotment (selling more shares than the offering covers) and use a green shoe option to cover the short position — either by purchasing in the open market if the stock trades below the offering price, or by exercising the option to buy additional shares from the issuer if the stock trades above.
Regulation M also governs passive market making by underwriters and research analysts at firms participating in an offering. Rule 103 permits passive market making within defined parameters — purchases cannot exceed the daily trading volume and must be at or below the highest bid of an independent market maker. The regulation reflects a careful balance between allowing legitimate market support and preventing manipulation that would mislead investors about a security's true market value.