Regulation M's $1 Million Test Clears Underwriters: The Issuer Still Has a Restricted Period

A large-cap industrial prices a shelf takedown after the close. On pricing morning the compliance memo on the underwriter's desk says the stock is actively traded under Regulation M, that Rule 101 does not reach the offering, and that no restricted period needs clearing. The issuer's treasury group, running an open-market program, reads it the same way. The stock's ADTV value is roughly $40 million and its public float value about $2 billion, so the exception's thresholds, $1 million and $150 million, clear easily.

One of those readings is wrong, and the arithmetic is not what breaks it. The noun is. The two figures sit in different sections, qualifying Securities in one and Reference securities in the other. That decides whether the issuer may bid for its own stock the business day before pricing, and which FINRA Rule 5190 notice the deal generates. Regulation M keeps its vocabulary in Rule 100, the sell-side prohibition in Rule 101, the issuer prohibition in Rule 102.

Two Dollar Figures in Two Different Sections

Rule 101 governs distribution participants. Its excepted-securities list lifts the whole section, not one activity inside it, and its first branch carries the thresholds. From eCFR, 17 CFR 242.101 (Activities by distribution participants):

“(c) Excepted Securities. The provisions of this section shall not apply to any of the following securities:” … “(1) Actively-traded securities. Securities that have an ADTV value of at least $1 million and are issued by an issuer whose common equity securities have a public float value of at least $150 million; Provided, however, That such securities are not issued by the distribution participant or an affiliate of the distribution participant; or”

Rule 102 governs issuers and selling security holders. Its list opens with the same formula and the same two figures, but the subject of the sentence changes. From eCFR, 17 CFR 242.102 (Activities by issuers and selling security holders during a distribution):

“(1) Actively-traded reference securities. Reference securities with an ADTV value of at least $1 million that are issued by an issuer whose common equity securities have a public float value of at least $150 million; Provided, however, That such securities are not issued by the issuer, or any affiliate of the issuer, of the security in distribution.”

The thresholds are identical to the dollar. What differs is the class of security they admit. Rule 101's branch admits securities, the distributed security included. Rule 102's branch admits reference securities only, which Rule 100 defines as one into which the distributed security converts, exchanges or exercises, or which in whole or significant part sets its value. A plain common-stock offering holds none, so the branch that would have excused the issuer is empty.

The closing provisos point outward from different centres. Rule 101 withdraws its exception when the participant, or an affiliate of the participant, issued the stock sold. Rule 102 withdraws its exception when the reference security came from the issuer in distribution, or an affiliate.

The Proviso That Routes the Issuer Out of Rule 101

One could read the issuer into Rule 101's broader branch. The operative paragraph answers that:

“(a) Unlawful Activity. In connection with a distribution of securities, it shall be unlawful for a distribution participant or an affiliated purchaser of such person, directly or indirectly, to bid for, purchase, or attempt to induce any person to bid for or purchase, a covered security during the applicable restricted period; Provided, however, That if a distribution participant or affiliated purchaser is the issuer or selling security holder of the securities subject to the distribution, such person shall be subject to the provisions of § 242.102, rather than this section.”

Rule 102(a) carries the mirror clause, which is why the traffic runs both ways:

“(a) Unlawful Activity. In connection with a distribution of securities effected by or on behalf of an issuer or selling security holder, it shall be unlawful for such person, or any affiliated purchaser of such person, directly or indirectly, to bid for, purchase, or attempt to induce any person to bid for or purchase, a covered security during the applicable restricted period; Except That if an affiliated purchaser is a distribution participant, such affiliated purchaser may comply with § 242.101, rather than this section.”

Role, not security type, is the first sorting key. The underwriter sits in Rule 101. The issuer and the selling security holder sit in Rule 102 even while participating. An affiliated purchaser that is itself a participant, a broker-dealer on the syndicate, may elect Rule 101. Only then does the actively-traded test matter, because it lives inside whichever section the role assigned.

Counting the Four Branches in Each Excepted-Securities List

Stopping at branch (1) would miss why the lists get confused: each has four branches and three run parallel.

Branch	Rule 101(c) admits (distribution participants)	Rule 102(d) admits (issuer, selling security holder)
(1)	Actively-traded securities, subject security included	Actively-traded reference securities only
(2)(i)	Nonconvertible debt and preferred, modelled default probability 0.055% or less	Same test restated, then cross-referenced to § 242.101(c)(2)(i)
(2)(ii)	Asset-backed securities on an effective Form SF-3 shelf	Same
(3)	Exempted securities per section 3(a)(12) of the Exchange Act	Same
(4)	Face-amount certificates, redeemable open-end fund shares	Same

Read the column headings before the cells. The middle column is not a list of trades a participant may do; it lists securities the section stops applying to. Branch (2)(i) shows how exact the shared language is: default probability estimated as of the sixth business day immediately preceding the determination of the offering price, over a horizon of 12 full calendar months, documented by the lead manager from a structural credit risk model. Rule 102(d)(2)(i) restates that test in full and then appends a cross-reference to Rule 101's version.

The activity lists diverge further. Rule 101(b) runs to ten branches, including research, transactions complying with §§ 242.103 or 242.104, baskets of 20 or more securities where the covered security is at most 5% of basket value, de minimis purchases at (b)(7) and distribution-related transactions at (b)(8). Rule 102(b) has seven: odd-lots, closed-end company transactions, pool and partnership redemptions, exercises, offers to sell, unsolicited purchases, Rule 144A sales. A de minimis allowance appears nowhere among them.

ADTV Is Counted in Shares, ADTV Value in Dollars

Both branches turn on an ADTV value in dollars, while the de minimis allowance turns on a percentage of ADTV. Those are different quantities. The definition in eCFR, 17 CFR 242.100 (Regulation M definitions) is a volume definition: worldwide average daily trading volume over the two full calendar months preceding the registration statement filing, or any 60 consecutive calendar days ending within the 10 calendar days before it, with the same windows run against pricing for an unregistered or delayed § 230.415 sale.

The dollar conversion comes from the 1996 adopting release, SEC Release No. 34-38067, Anti-Manipulation Rules Concerning Securities Offerings, which says that “in calculating the dollar value of ADTV, any reasonable and verifiable method may be used” and gives two worked methods: shares times price trade by trade, or each day's volume times that day's close. Public float value is fixed by cross-reference too: Rule 100 takes it in the manner set forth on the front page of Form 10-K, even for an issuer that files none.

The de minimis branch is counted in shares:

“(7) De minimis transactions. Purchases during the restricted period, other than by a passive market maker, that total less than 2% of the ADTV of the security being purchased, or unaccepted bids; Provided, however, That the person making such bid or purchase has maintained and enforces written policies and procedures reasonably designed to achieve compliance with the other provisions of this section; or”

Take a mid-cap trading 50,000 shares a day at $12. Its ADTV value is 50,000 times $12, or $600,000, under the $1 million gate, so the actively-traded exception is out of reach for syndicate and issuer alike. A participant still has the de minimis branch, and 2% of ADTV is 2% of 50,000 shares, or 1,000 shares, not 2% of $600,000. Mixing the units misstates the allowance by the share price. Reported volume is no free parameter either: as covered in how an odd-lot print adds to consolidated volume, ADTV inherits whatever the tape counted. Volume-denominated caps recur elsewhere, as with the Rule 144 volume caps measured against a four-week average.

What the Restricted Period Still Costs the Issuer

Rule 102 keeps applying, so the issuer needs its window length. Rule 100 sets it with a smaller pair of thresholds:

“(1) For any security with an ADTV value of $100,000 or more of an issuer whose common equity securities have a public float value of $25 million or more, the period beginning on the later of one business day prior to the determination of the offering price or such time that a person becomes a distribution participant, and ending upon such person's completion of participation in the distribution; and”

“(2) For all other securities, the period beginning on the later of five business days prior to the determination of the offering price or such time that a person becomes a distribution participant, and ending upon such person's completion of participation in the distribution.”

The two threshold pairs nest. Actively traded needs an ADTV value of at least $1 million, ten times the $100,000 figure, and a float of at least $150 million, six times the $25 million figure. Anything actively traded therefore satisfies branch (1) too, and the issuer's window is one business day, not five. The converse fails: the mid-cap above, at $600,000 of ADTV value and a float of 3,500,000 shares at $12, or $42 million, satisfies branch (1) alone.

Both prongs of branch (1) have to hold. A micro-cap trading 8,000 shares a day at $12 has an ADTV value of $96,000, under the $100,000 prong, so branch (1) fails even though its float of 3,000,000 shares at $12, or $36 million, clears $25 million. That security drops to branch (2) and five business days.

The Commission said why liquidity buys the issuer nothing: “The Commission believes that persons subject to Rule 102 should not be able to trade in their securities, whether or not they are actively traded.” The basis given is the issuer's and selling security holder's stake in the proceeds and their generally lesser need to trade. The exception was extended to reference securities to keep equity-linked offerings hedgeable, not to free the subject security.

One route keeps certain issuer purchases running inside the window, and it is structural rather than numerical. Rule 102(c) carves out plan distributions and fixes attribution:

“(2) Bids for or purchases of any security made or effected by or for a plan shall be deemed to be a purchase by the issuer unless the bid is made, or the purchase is effected, by an agent independent of the issuer.”

Independence of the agent, not trade size, breaks the attribution. A board authorization is a ceiling on future purchases rather than a purchase, the distinction drawn in why buyback authorizations are not purchases.

Concrete Framework

One. Compute ADTV in shares and ADTV value in dollars separately. Use the window Rule 100 prescribes, and record which conversion was used, since the release asks only for a verifiable method.

Two. Compute public float value the Form 10-K way. Aggregate market value of common equity held by non-affiliates, whether or not the issuer files one.

Three. Settle the role before the thresholds. A participant reads Rule 101. The issuer and the selling security holder read Rule 102, by the proviso in Rule 101(a). An affiliated purchaser that is also a participant may elect Rule 101 under the Except clause in Rule 102(a).

Four. Apply the exception belonging to that section. Under Rule 101, branch (1) can except the subject security at $1 million of ADTV value and $150 million of float. Under Rule 102, branch (1) reaches reference securities only, so a plain equity deal leaves the issuer inside. Then size the window: $100,000 and $25 million give one business day, all other securities five, with mergers and exchange offers on their own branch.

Five. File the notice that matches the answer, not the one that matches the stock. FINRA Rule 5190 (Notification Requirements for Offering Participants) splits along the same seam, and its definitions paragraph takes actively traded, restricted period and covered security from Rules 100 and 101 of SEC Regulation M. The actively-traded notice is therefore a Rule 101 notice, due from the manager, or absent one from each participant and affiliated purchaser, by the close of business the next business day following pricing, unless specific circumstances require later notification. The restricted-period notice runs earlier, asking for “the member's determination as to whether a one-day or five-day restricted period applies under Rule 101 of SEC Regulation M and the basis for such determination” and the commencement details “no later than the business day prior to the first complete trading session of the applicable restricted period, unless later notification is necessary under specific circumstances”.

It reaches the issuer side when that issuer or selling holder is itself a member firm: “Any member that is an issuer or selling security holder in a distribution of any security that is a covered security subject to a restricted period under Rule 102 of SEC Regulation M shall comply with the notice requirements of paragraph (c)(1), unless another member has assumed responsibility in writing for compliance therewith.” One deal can produce both notices at once on the same stock.

What Would Invalidate This

An exemption would. Rule 102 closes with: “Upon written application or upon its own motion, the Commission may grant an exemption from the provisions of this section, either unconditionally or on specified terms and conditions, to any transaction or class of transactions, or to any security or class of securities.” Rule 101 carries a parallel paragraph. An order under either changes the answer, and the threshold arithmetic will not show it.

Facts would too. If the instrument distributed is equity-linked there is a reference security, and Rule 102(d)(1) becomes live rather than inapplicable, unless that reference security came from the issuer or an affiliate. If the placement runs to qualified institutional buyers under the Rule 144A branch of Rule 102(b), or through a plan whose purchases an independent agent effects, the question changes shape. In a merger, acquisition or exchange offer the restricted period starts when proxy or offering materials first go out.

Scope left unverified, stated so a reader can close it: §§ 242.103 and 242.104 were read only where Rule 101(b)(2) names them, and the short-sale provision in the same part was not read. Rule 101(b)(8) through (b)(10) and Rule 101's exemptive paragraph were taken from the eCFR section outline rather than quoted. Only the 1996 adopting release was consulted, so the later amendments behind the 0.055% branch and the Form SF-3 branch remain unread. Paragraphs (a) and (e) of Rule 5190, its Supplementary Material and its interpretive guidance were not read, nor were the notice forms. The dollar-conversion method for ADTV value sits in the adopting release rather than the Rule 100 definitions list, so narrower staff guidance would change the mid-cap arithmetic here.