Rule 105 offering shorts

Rule 105 offering shorts are short sales of a stock in the restricted period before a follow-on offering is priced, followed by a purchase of that stock in the offering, which Regulation M Rule 105 prohibits whatever the trader intended.

Also called Rule 105 violations, Regulation M short selling before offerings, restricted-period short selling. Observed in equities. One of the benchmark and cross-market manipulation techniques. 84 enforcement actions in the library.
Updated 2026-09-20

Where is the line between Rule 105 and market manipulation?

Rule 105 is an anti-manipulation rule that does not require manipulation to be shown. That is the whole difficulty with classifying it.

Regulation M is the part of the SEC’s rulebook that governs trading around securities offerings, and its stated goal is that an offering is priced by supply and demand, not by artificial forces. Rule 105 is its short-selling provision. A person who sells a stock short in the restricted period before a follow-on offering is priced, and then buys that stock in the offering, has broken the rule. The SEC’s adopting release calls the rule prophylactic and says it applies irrespective of the short seller’s intent. It is a bright line drawn to catch conduct that may distort a price, not a test of whether the price was in fact distorted or whether anyone meant it to be.

The library places it in the benchmark and cross-market family for a specific reason. The family’s common feature is moving one price to profit somewhere else. Here the price is the market price in the days before pricing, which is what the offering price is set against, and the profit is the discounted allocation that the trader buys afterwards. That fits. What does not fit is everything else the family usually involves. Nothing false is communicated to anyone. There is no scheme to be proved, no reference rate is skewed, and the short sale and the offering purchase are each lawful on their own.

So read a Rule 105 order for what it says. It finds that a rule was breached, and the respondent in almost every case settled without admitting or denying that finding. It does not find that anyone set out to manipulate. Related pages draw the neighbouring lines: short and distort needs a false statement, the naked short selling debate concerns delivery failures, and price manipulation needs an artificial price and an intent to create it.

How does a Rule 105 violation work?

A company or a large shareholder plans a follow-on or secondary offering of stock that is already trading, sold on a firm commitment basis through underwriters. The offer price is normally set at a discount to a recent market price, so an investor who expects to be allocated shares knows they will probably cost less than the stock trades for just before pricing.

That expectation is the incentive. The SEC’s release describes it: a person likely to receive shares can sell the stock short shortly before pricing, which may press the market price and so the offering price down, and then use the allocation to close the position at the lower price. The staff’s 2013 risk alert describes the same sequence. Selling short first and buying second largely removes market risk from the trade.

An illustration, with numbers made up for the purpose and taken from no case. A stock closes at $20.00. On the day before pricing a fund sells 10,000 shares short at an average of $19.90. The offering prices at $19.40 and the fund is allocated 10,000 shares. On the matched shares the fund holds a $5,000 gain, the $0.50 difference between short proceeds and offering cost. Any allocation beyond the shorted amount carries a further gain, the discount to the market price. A restricted-period short that is then not followed by any offering purchase would breach nothing.

The SEC’s orders measure the profit in three parts: the difference between short proceeds and the cost of an equal number of offering shares, the discount on any shares beyond that number, and the loss avoided where the offering price was above the short-sale price. A fund can thus breach the rule even when the offering priced higher than its short sales, and the order still counts a benefit.

What law applies?

The operative text is short. Rule 105(a) makes it unlawful, in connection with a registered cash offering of equity securities, to sell short the security that is the subject of the offering and purchase the offered securities from an underwriter, or from a broker or dealer taking part in the offering, if the short sale was effected in the restricted period. That period is the shorter of five business days before pricing to pricing, or the first filing of the registration statement (or Form 1-A or 1-E notification) to pricing. The rule does not apply to offerings that are not conducted on a firm commitment basis.

Three exceptions sit in Rule 105(b). The bona fide purchase exception lets a trader buy in the offering if, before pricing, they bought at least as many shares as the whole restricted-period short, in regular trading hours, reported to the tape, after the last short sale and no later than the business day before pricing, and made no reported short sale in the final thirty minutes of regular trading on that business day. The separate-accounts exception covers a purchase in one account where the short was in another, if decisions for each are made separately and without coordination. The investment-company exception covers a registered fund buying when an affiliated fund or another series sold short.

The rule took its present form in 2007. Before that it prohibited covering a restricted-period short with offered shares, and the SEC found that market participants were building structures to disguise the covering. The amendments, effective 9 October 2007, removed the covering element and prohibited the purchase.

The orders in this library are mostly settled administrative cease-and-desist orders under Exchange Act Section 21C, with civil penalties under Section 21B. Two 2023 matters also involved federal court complaints, settled with the SEC, alongside related administrative orders.

What do the real cases show?

Which real enforcement actions have alleged rule 105 offering shorts?

This library holds 84 enforcement actions tagged rule 105 offering shorts. The table shows the largest by civil penalty together with the most recently filed. Every row links to a page carrying the regulator's own release and, where one was published, the complaint.

All 84rule 105 offering shortsactions →

The record is dominated by two enforcement sweeps and a long tail. On 16 September 2013 twenty-three records in this library are dated on the same day, matching the SEC’s announcement of actions against 23 firms; on 16 September 2014 there are twenty, matching 19 firms and one individual trader. A smaller group followed on 14 October 2015. Across 2013 to 2015 there are 66 tagged records, then a handful a year, then six in 2024. The technique is tagged 84 times in all.

The orders themselves are formulaic. UBS O’Connor (order) breached the rule sixteen times between 2009 and 2011 because its funds were run by units it treated as separate accounts but which shared information; the order finds the exception did not apply. BlackRock Institutional Trust Company (order) breached it on three occasions. Worldwide Capital and Jeffrey W. Lynn (order) breached it in 60 offerings and were ordered, jointly and severally, to pay the largest penalty in the set. A 2016 order against an individual and seven entities (order) describes 130 offerings traded across 69 accounts. All of these settled without admitting or denying the findings.

What the record does not show is how common the conduct is. It shows what the SEC chose to settle and announce, and the sweeps were driven by data analysis of trading, not by any sample of market behaviour. The library also holds no Rule 105 matter before February 2013, although the SEC’s own risk alert says it had settled more than 40 such actions from January 2010 to September 2013. A count here is a count of records, not of violations. Some records are also duplicates: two 2023 litigation releases repeat matters that also have order records.

How is Rule 105 detected?

• A short sale in a stock during the five business days before a follow-on or secondary offering is priced, in an account or fund that then receives an allocation in that offering.
• Underwriter allocation records set against the same client's short-sale history for the preceding week, across every offering the client joined.
• Repetition across many offerings by the same person or the same group of accounts; the orders in this library describe sequences of 60 and 130 offerings.
• Accounts that buy in an offering while a related account sold short, where the firm relies on the separate-accounts exception but shares personnel, positions or information between them.
• An examination finding that a firm has no written Rule 105 policy, no training, and no pre-trade check of offerings against its own short sales.

The breach can be tested after the fact, which is why it produced sweeps. Everything the breach depends on is recorded: the pricing date, the trader’s short sales, and the underwriter’s allocation. The SEC said its 2014 sweep used trading data gathered with FINRA and the examination program, applying the same method to each firm’s profit and penalty. A firm can also find its own breaches. The SEC’s complaint against Candlestick Capital alleged that the firm acknowledged its violation only when examination staff asked about it.

What penalties does Rule 105 carry?

What penalties does rule 105 offering shorts actually attract?

The numbers below are computed from this site's own case records at build time, not quoted from a secondary source. They change whenever a new action is added to the library.

The typical order combines a cease-and-desist order, disgorgement of the trading profit, prejudgment interest and a civil penalty. Of 77 records that carry a penalty, the median was about $107,000 and the largest $2,514,571 (Worldwide Capital). Twenty were at exactly $65,000, so many small violations carry the same penalty regardless of profit; in one order a $4,091 disgorgement came with a $65,000 penalty. Three orders imposed no penalty. Two of them also waived most or all of the disgorgement and interest on the respondent’s sworn statement of financial condition. The largest disgorgement, $6.5 million, was ordered against Weiss Asset Management in 2022.

What are the red flags?

• A portfolio manager can short a name while another desk or fund can bid in an offering for the same name, with no pre-clearance between them.
• A separate-accounts assumption that rests on a label rather than on separate strategies, information barriers and separate profit-and-loss statements.
• No written policy or training on Rule 105 at a firm that routinely buys in follow-on offerings.
• A hedge placed by short sale shortly before pricing that is meant to be covered from the allocation, which is the pattern the rule was written to stop.

Rule 105 compliance is mostly a pre-trade control, not a surveillance problem. The firms in the orders did not usually plan to depress a price. They lacked a rule that stopped one desk shorting while another bought, or relied on the separate-accounts exception when their structure did not qualify. The exception is narrow on purpose: the release says it applies where the short seller cannot lock in a profit by buying the discounted shares, and the UBS O’Connor order tested the firm’s structure against the release’s indicia of separateness.

Frequently asked questions about rule 105 offering shorts

What techniques are related to rule 105 offering shorts?

• Short and distort — Short and distort is taking a short position and then publishing false or materially misleading negative claims about the issuer, in order to drive the price down and cover cheaply.
• The naked short selling debate — Naked short selling is selling short without having borrowed the security or arranged to borrow it, which is restricted by Regulation SHO and whose real-world scale and price impact remain genuinely contested.
• Price manipulation — Price manipulation is trading intended to create an artificial price — one that does not reflect genuine supply and demand — and it is the general charge a regulator brings when the conduct does not fit a more specific named technique.
• Marking the close — Marking the close is trading in the final minutes of a session specifically to move the closing price, which is the price that sets portfolio valuations, margin calls, index levels and derivative settlements.
• Settlement price manipulation — Settlement price manipulation is trading to move an official settlement price, because that price determines margin, portfolio marks and the payoff on contracts many times larger than the trading itself.

Terms defined on this page

Regulation M · Short Selling · Artificial Price · Neither Admit Nor Deny · Cease And Desist Order · Disgorgement · Prejudgment Interest · Civil Monetary Penalty · Rule 105 · Rule 105 Restricted Period · Follow On Offering · Firm Commitment Offering · Prophylactic Rule · Bona Fide Purchase Exception

Sources

1. 17 C.F.R. § 242.105, Short selling in connection with a public offering — Legal Information Institute, Cornell Law School
2. Short Selling in Connection with a Public Offering, Exchange Act Release No. 34-56206 (adopting release, 2007) — U.S. Securities and Exchange Commission
3. Rule 105 of Regulation M: Short Selling in Connection With a Public Offering, OCIE Risk Alert (17 September 2013) — U.S. Securities and Exchange Commission
4. SEC Charges 23 Firms With Short Selling Violations in Crackdown on Potential Manipulation in Advance of Stock Offerings (2013-182) — U.S. Securities and Exchange Commission
5. SEC Sanctions 19 Firms and Individual Trader for Short Selling Violations in Advance of Stock Offerings (2014-195) — U.S. Securities and Exchange Commission
6. SEC Announces Largest Monetary Sanction for Rule 105 Short Selling Violations (2014-43) — U.S. Securities and Exchange Commission
7. In the Matter of UBS O’Connor, LLC, Exchange Act Release No. 69680 (3 June 2013) — U.S. Securities and Exchange Commission

Reviewed September 20, 2026. Every statute link points at the primary text. If something here is wrong, tell us — corrections are logged in public.