Shorting against restricted stock...

Discussion in 'Trading' started by NTB, Mar 10, 2006.

  1. NTB


    What is the rule for shorting against restricted stock? I thought this was illegal as in PIPEs, however, I've recently been told otherwise. I was told that one cannot 'cover' short sales with restricted stock, however, shorting the stock and holding the restricted and then unwinding in two separate transactions is permissible. Anyone know about this? Thanks.
  2. slickman


    Look at NAT on 3/9/06 and you see almost that. They placed 3.75 million at 28.5 and the selling kicked volume way above average. Stands to reason that protection was put in place until an unwinding of some sort.
  3. NTB


  4. alanm


    I don't know if it's possible, but it seems unlikely that it would be legal. The stock has to be delivered to the buyer, and this can't happen if it's restricted stock.
  5. Happens all the time. There are all manner of firms - large and small - that can provide the necessary...ah...machinations.

    Google is your friend.
  6. Best discussed with a competent 33/34 act lawyer .... but my layman's understanding is that in general securities cannot be offered to the public unless they comply with the 33/34 act, which is essentially an agreement to provide current and sufficient disclosure.

    Under exceptions, such Rule 144 or Reg D, you can avoid this onerous process. However these securities are restricted from the general public. If you borrow restricted stock and short it in the market, regulators will say you are wilfully circumventing the 33/34 Act.

    There might also be a deemed underwriting problem - ie you are in fact acting as a underwriter even though you are not registered to do so, this is Reg M.

    I've only described the problems of course, I can't speak to the solutions. I'm sure there are many creative ideas on how these problems can be solved.