Release on IPO Prohibitions and Allocations

The International Securities Trade Agency is issuing this release regarding prohibitions on conduct in relations to securities allocations, specifically with a focus on initial public offering allocations. The rationale behind this release is to impart directive in regard to the process known as book building, including the process for distributing shares in initial public offerings. The International Securities Trade Agency previously took five regulatory issues alleging infractions in the provisioning process in infringement. Based on these cases, the International Securities Trade Agency seeks to underscore certain proscribed activities that underwriters should prevent during limited periods.

These include:

• Enticements to pay for in the form of joint agreements or other requests of aftermarket sales or buyers prior to the conclusion of the allocation.
• Corresponding with investors that stating significance in purchasing stocks in the direct aftermarket or pressing aftermarket purchase would aid them to establish allotment of priority IPOs.
• mploring investors earlier to the conclusion of the allotment regarding whether and at what ratings and in what quantity they intend to position immediate aftermarket placements for IPO stock.
• Propositioning aftermarket ratings to investors or coercing investors who have shown aftermarket interest to set higher the ratings that they are willing to make placements in the direct aftermarket.
• Tolerating or looking for statements of interest from investors that they aim at buying a number of stocks in the aftermarket the same as the size of their IPO allocation or plan to bid for or buy particular number of stocks in the aftermarket that are attached to the allocation numbers without any reference to a stable total placement count.
• Propositioning aftermarket placements from investors before all IPO stocks are allotted or supplying investors with incentives for aftermarket placements by supplying additional IPO stocks to such investors.
• Dealing with customers in relation to one proposal that stating an interest in the aftermarket or purchasing in the aftermarket would aid them obtain IPO allotments of other priority IPOs.

Requisitioning or other efforts to influence aftermarket bids or purchases during an allocation destabilize the transparency of the market as an independent rating dynamics for the provisioned securities by giving investors the impression that there is a shortage of the provisioned securities.

This unethical conduct by underwriters of IPOs affects investor confidence in the money market system. In acknowledging the grave unfavorable effects of these activities, the International Securities Trade Agency has implemented rules, most recently embodied, which proscribe these activities.

Efforts to influence aftermarket activities during a classified period, or a trade--‐off period as it was known under its antecedent, have always been banned under these rules, The International Securities Trade Agency initially provided directive regarding foul practices in relation to IPO allocations.

The International Securities Trade Agency prompted sponsors that classified period requests and joint agreements for aftermarket activities are banned activities. Current enforcement actions indicate that during the priority IPO market, some sponsors and other market investors were unsuccessful in complying with regulations or previous directive.

Accordingly, the International Securities Trade Agency finds it fitting to recap allocation participants and their associated investors that trying to influence aftermarket activities during a classified period violates the regulation. Such directive is required at this time to preclude unethical conduct while maintaining the promotion of rightful sponsorship practices that will process capital raising activities.

As a cautionary rule, the directive prohibits activities that could affect falsely the market for an offered security. Particularly, the directive makes it illegal for any allocation participant or its associated investors, directly or indirectly, to tender for, buy, or attempt to influence any investor to tender for or buy, a restricted security during the allocation’s classified period.

The directive is anticipated to ensure that allotments of securities are not affected by market activities of tenders, buy and sell, and requests to buy by those who have an interest in the success of an allotment. The directive consequently takes in hand direct and indirect market activity by allocation participants and conduct by allocation participants that affects or is likely to affect another person to tender for or buy restricted securities.

Efforts to influence tenders or purchases of restricted securities targeted at aftermarket engagements essentially impede with the transparency of the market activities that are indispensable to the capacity of investors to examine the terms on which securities are propositioned. Among other things, efforts to influence aftermarket tenders or purchases can give prospective IPO buyers the notion that there is a shortage of the propositioned securities and the balance of their purchasing interest therefore can only be addressed in the aftermarket. As previously stated, efforts to influence aftermarket tenders or purchases are restricted throughout the classified period.

First, the directive is applicable to efforts thus disallowing an allocation participant’s conduct regardless of whether it essentially results in market activity by others. It is the influence or the effort to influence during the classified period that the directive prohibits. The influenced activity, aftermarket tenders or buying activities, may happen during or after the classified period, or certainly may never happen at all.

Second, the International Securities Trade Agency has said that coerced to buy extensively pertains to activity that affects or is likely to affect another investor to tender for or buy restricted securities. The cautionary prohibitions of the directive apply to such activities regardless of purpose of the allotment participant or affiliated investor. Therefore, no proof of deliberate wrongdoing is required.

Whether specific behavior is an illicit effort to influence to tender or buy a restricted security requires an assessment of all of the facts and scenarios surrounding the allotment participant’s activity. The International Securities Trade Agency is not dealing here with the full range of behavior proscribed by the directive. Instead, the dialogue is directed on applying it to specific facts and situations that we have noticed happening in the most recent priority IPO market and providing directive on some types of activities that are disallowed in light of the requirements.

In the perspective of an IPO, the directive banning on efforts to influence tenders and buying activities focuses on disallowed behavior during the classified period that could encourage others to transact in engagements when the trading market in the newly published securities first begins. Priority IPO markets offer unique problems in this context. By definition, priority IPO markets are attributed by optimum levels of demand for an allotment of the IPO stocks in the initial allocation, and therefore the stocks become important goods.

Sponsors may consequently be influenced to insist, necessitate, request, persuade, or otherwise influence to coerce investors to transact in direct aftermarket engagements in order to get an allocation of IPO stocks. Such activity violates the directive and also may infringe the general antifraud and anti--‐manipulation provisions of the regulatory compliance laws.

A former study focused on the priority issue market found that in the ratings of recent shares, sponsors could not help but be affected by the idea that the ratings of many issues would consequently increase in the direct aftermarket. The study determined a couple of violations and abuses that resulted from this knowledge, including the requests for aftermarket activities.

The study determined that, while it was often hard to identify whether requests for buying in the aftermarket happened before or directly following the preset date of the proposition, investors of certain allotment participants engaged in relevant market buying activities on the first day of transactions, thus recommending that the investors actively requested or suggested purchases at least as early as the note of efficiency.

Succeeding studies also tackled underwriters’ behavior in relation to IPOs. The International Securities Trade Agency issued a report assessing the priority issue market. Among other things, the report determined that underwriters used joint arrangements necessitating investors, as a requirement of participation in a priority issue offering, either to confirm to buy additional stocks of the same type at a later time, or to join in another provision.

Currently, the International Securities Trade Agency issued a report discussing underwriters’ behavior during the IPO bust of the last decade, a period in which there were an oddly huge count of IPOs that traded at unusual and direct aftermarket percentages. The report determined that among the most detrimental activities that falsely inflated aftermarket ratings were distributing IPO stocks based on a prospective investor’s obligation to buy additional stocks in the aftermarket at specified ratings, which the report referred to as laddering.

Book buildup pertains to the procedure by which underwriters obtain and evaluate potential investor demand for an offering of securities and gain information relevant to their findings as to the size and ratings of an issue. When used, the IPO book buildup procedure starts with the filing of documentation with an initial approximated rating range. Underwriters and the issuer then perform trading showcase to market the offering to potential investors, generally investment firms.

The trading showcase offers investors, the issuer, and underwriters the chance to obtain relevant information from each other. Investors look for information about a firm, its management and its prospects, and underwriters search for information from investors that will aid in finding out specific investors’ interest in the firm, evaluating demand for the program, and enhancing ratings accuracy for the trading showcase.

Investors’ requirement for an offering necessarily varies on the value they position, and the value they anticipate the market to position, on the share, both initially and in the future. In connection with the trading showcase, there are agreements between the underwriter’s sales representatives and potential investors to get investors’ viewpoints about the issuer and the propositioned securities, and to procure signals of the investors’ interest in buying quantities of the underwritten securities in the offering at particular ratings.

For questions and assistance on this release, please contact the International Securities Trade Agency.