SEC Offers Guidance on IPO Allocations

By Stephen T. Adams and Ettore A. Santucci

The SEC recently offered interpretive guidance to underwriters with respect to the allocation of securities and prohibited conduct under Regulation M, particularly with respect to IPO allocations. The release is a reminder that certain conduct that causes or is likely to cause an undertaking, promise, commitment or understanding on the part of a customer to make aftermarket bids or purchases of an offered security, in relation to an expected allocation of shares in an offering, is impermissible under Regulation M. The interpretive guidance offers several examples of permissible book-building activities and distinguishes them from activities prohibited by Regulation M. The interpretive guidance cautions underwriters that they should have effective policies and procedures to detect and prevent solicitations, tie-in agreements, and other attempts to induce aftermarket bids or purchases in violation of Regulation M.