| The purpose of this article is to give an outline of the | | | | million or more). |
| parameters under which a company can purchase its | | | | 3. Price of purchases. The purchase price paid by the |
| own stock in the open market. This is a summary of | | | | company cannot exceed the highest independent bid |
| the rules, which will provide you guidelines sufficient for | | | | price, or the last independent transaction price, |
| most situations. These rules are set forth in rule 10b-18 | | | | whichever is higher, quoted at the time the purchase is |
| of the securities exchange act of 1934, and sec | | | | effected. |
| release no. 34-48766. | | | | This is potentially the most difficult of the conditions to |
| Applicability of rules | | | | meet. Typically, a buyer will buy at the ask, which is in |
| Rule 10b-18 is promulgated under the securities | | | | fact higher than the bid price, while a seller will sell at |
| exchange act of 1934, and thus is only applicable to | | | | the bid price. A company buying its own stock cannot |
| reporting companies. Rule 10b-18 is also a safe harbor, | | | | buy at the ask price unless that is also the last |
| meaning that reporting companies who follow it are | | | | transaction price, which effectively means that the |
| assured that they will not be liable for manipulating their | | | | company cannot buy its own stock if the immediately |
| own stock price, however it is not the only method | | | | preceding transaction was a sell transaction by |
| whereby a company can purchase its own securities. | | | | another shareholder. The company cannot support its |
| Even if a company is not a reporting issuer, following | | | | own stock price in this manner, which is consistent with |
| the safe harbor is clearly the most effective way for | | | | the intention of rule 10b-18 to prevent manipulation in |
| the company to avoid liability for manipulating its own | | | | the market. |
| stock price. Therefore, we generally recommend that | | | | 4. Volume of purchases. The total volume of |
| rule 10b-18 be followed by all public issuers, even those | | | | purchases by the company, and any affiliated |
| whose stock is traded on the pink sheets. | | | | purchaser, on any single day cannot exceed twenty |
| Conditions of rule 10b-18 | | | | five percent (25%) of the average daily trading |
| The anti-manipulation provisions of section 9(a)(2) or | | | | volume. However, once each week, instead of staying |
| 10(b) of the securities exchange act of 1934, and rule | | | | under the 25% limitation, the company may effect one |
| 10b-5 under the act, will not be deemed to have been | | | | block purchase (defined in the rule) if (i) no other rule |
| violated, if the issuer or an affiliated purchaser of the | | | | 10b-18 purchases are effected that day, and the block |
| issuer makes the purchases according to the following | | | | purchase is not included when calculating the four (4) |
| conditions: | | | | week average daily trading volume. |
| 1. One broker or dealer. Purchases must be effected | | | | The rule goes on to outline certain alternative |
| from or through only one broker or dealer on any | | | | conditions in the event of market-wide trading |
| single day. If there is more than one affiliated | | | | suspensions and other exceptions. |
| purchaser of the issuer purchasing on a single day, | | | | Practical application |
| they must all use the same broker or dealer. | | | | An issuer considering the purchase of its own |
| 2. Time of purchases. The purchases must not be:a. | | | | securities should open an account with a brokerage |
| The opening purchase of the day; orb. Effected during | | | | firm that has a clear understanding of, and experience |
| the thirty (30) minutes before the scheduled close of | | | | working under, these rules. A copy of these rules |
| the trading session (this time limit is reduced to ten (10) | | | | should be provided to the brokerage firm, including a |
| minutes for issuer's with an average daily trading | | | | copy to its compliance officer, in writing upon the |
| volume of $1m or more and a public float of $150 | | | | initiation of a stock purchase program. |