MFA submitted a letter to the Securities and Exchange Commission (SEC) with empirical analysis that demonstrates how Rule 105 impedes capital formation by adversely affecting the pricing of follow-on and secondary offerings.
MFA describes the role of Rule 105 and provides the following empirical observations:
- Rule 105 is designed to protect the integrity of Covered Offerings by preventing manipulative short selling that could artificially depress the pricing of such offerings.
- Pricing efficiency of Covered Offerings depends on the participation of informed traders willing to commit capital at prices that reflect present valuations.
- A study of the Rule’s effects shows that:
- After the 2007 amendment, the average discount on overnight offerings nearly doubled, rising from 3.62% to 6.24%. Comparable non-overnight offerings showed no meaningful change in discounts over the same period.
- Investors participating in overnight offerings generally could not have known about the offerings before the announcement and had little practical ability to cure pre-announcement short sales before pricing.
- This pattern is consistent with Rule 105 excluding potential investors whose short sales were unrelated to the offering, rather than with the rule’s objective of reducing manipulative short selling.
- Issuers and selling shareholders bore the cost through lower offering prices and higher effective cost of capital. For a typical $200 million overnight offering, the
academic research suggests that the additional issuance cost is approximately $3.32 million.
