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Freeriding (Underwriting): What You Need to Know About This Illegal Practice
Definition & Meaning
Freeriding refers to two illegal practices in the context of securities trading. First, it involves a member of an underwriting syndicate withholding a portion of a new securities issue and later selling it at a higher price. Second, it describes the act of purchasing a stock and selling it before the payment for that stock is completed. Both activities are prohibited by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD).
Table of content
Legal Use & context
Freeriding is primarily relevant in the fields of securities law and financial regulation. It is crucial for underwriters and brokerage firms to adhere to legal guidelines to maintain market integrity. Users may encounter freeriding issues when dealing with stock transactions, and understanding this term can help them navigate the complexities of buying and selling securities. For those looking to manage such transactions, US Legal Forms provides templates that can assist in ensuring compliance with relevant laws.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A broker buys shares of a newly issued stock and sells them on the same day without having paid for the shares. This practice is considered freeriding and is illegal.
Example 2: An underwriting syndicate member holds back a portion of a new stock offering and later sells it at a profit. This action violates SEC regulations. (hypothetical example)
Relevant laws & statutes
Freeriding is governed by regulations set forth by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD). Specific rules include:
SEC Rule 15c3-3: This rule addresses the requirement for payment of securities transactions.
NASD Rule 2510: This rule outlines the prohibition against freeriding practices.
Comparison with related terms
Term
Definition
Key Differences
Freeriding
Illegal practice of selling securities before payment is made.
Involves both withholding securities and selling before payment.
Short Selling
Borrowing and selling securities with the intention of buying them back at a lower price.
Legitimate trading strategy, not illegal unless done with fraudulent intent.
Insider Trading
Buying or selling securities based on non-public information.
Illegal practice focused on information asymmetry, distinct from freeriding.
Common misunderstandings
What to do if this term applies to you
If you suspect that you are involved in a freeriding situation, it is essential to cease any related transactions immediately. Consult a financial advisor or legal professional to understand the implications and potential penalties. Additionally, US Legal Forms offers templates that can help you navigate securities transactions legally and effectively.
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