Pre-Syndicate Bid

A pre-syndicate bid is entered by a syndicate manager or underwriter in the Nasdaq system to stabilize the price of a Nasdaq security prior to the effective date of a registered secondary offering. The term "penalty bid" is also used.

A pre-syndicate bid is permissible under SEC Rule 10b-7; otherwise the practice is prohibited. Because the bid serves to stabilize the price of the stock, it helps facilitate distribution of the offering. This process is sometimes also referred to as "pegging."

On December 20, 1996, the SEC approved new Regulation M to replace Rules 10b-6, 10b-6A, 10b-7, 10b-8, and 10b-21 (the trading practice rules) under the Securities Exchange Act of 1934, which were rescinded. New Regulation M, which consists of Rules 100 through 105, governs the activities of underwriters, issuers, selling security holders, and others that have an interest in the outcome of an offering of securities. Regulation M became effective March 4, 1997.

Regulation M represented the culmination of more than a two-year effort by the SEC to review and modernize the trading practice rules, which had been in effect for over 40 years. In recent years, the trading practice rules had come under attack from many market participants for the limitations they place on distribution and ordinary market-making activities of underwriters and others and the resulting increased costs. Particular concern had been directed at the effect of the trading practice rules on international offerings. Because foreign markets generally do not have comparable rules, and because the trading practice rules are deemed to apply to foreign distributions that occur only in part in the U.S., the rules had potentially serious international competitive consequences that have necessitated a series of interpretations and amendments designed to improve the effect of the rules in the context of international offerings.

Specifically, Rule 104 of Regulation M replaced Rule 10b-7, which regulated stabilization activities, including pre-syndicate bids, during a distribution. The new rule retained the requirement that only one stabilizing bid was permitted in any market at the same price, at the same time. The new rule permitted a stabilizing bid to be initiated, maintained, reduced or raised, based on the current price in the principal market for the security (domestic or foreign), as long as the bid did not exceed the offering price of the security or the stabilizing bid in the principal market. The rule stipulated that the appropriate price level for initiating a stabilizing bid was the security's principal market, with certain variations for different market situations. Thus, the most significant change from Rule 10b-7 was the ability under Rule 104 to increase a stabilizing bid to the level of the highest independent bid in the principal market.