Short Sales 101 – Going Public Attorneys

Short Sale Attorneys - Going Public LawyersIn recent years, the activities of short sellers have been the subject of considerable controversy.  While the average investor profits if he invests in a stock whose price increases, a short seller profits when a stock’s price declines.   While short selling is a simple process, it is widely misunderstood.  Simply put, a short sale is the sale of a security that the seller does not own.

Short sales can only be made on margin, and all the rules applicable to margin trading are enforced. To sell short, a trader must borrow stock and then sell it into the market.  The sale is not complete until the trader ensures delivery of the security to the new buyer. His or her brokerage firm arranges the loan.  The stock may come from the firm’s own inventory, the accounts of other clients on margin, or from another lender.

In most cases, the broker must be sure to have located the stock to be borrowed before the transaction can take place. If the broker needs to go outside his own firm, the loan will be set up through the broker’s clearing firm.

The short seller closes the position by buying to cover.  Even if stock price declines dramatically, he will not have access to the funds generated by his original sale until he covers.  In the meanwhile, he will be required to keep enough in his account to ensure that possible margin calls may be met.  In addition, he may be charged a daily fee to keep his short open.  Both margin and maintenance costs and fees may vary depending on whether the stock is “easy to borrow” or not.  Naturally, if stock price soars, the shorter will find his margin and maintenance increased; if he cannot pay the charges, his position will be “bought in,” which means that he must cover immediately.

 Short Selling is Risky 

Shorting is especially risky because the short seller’s liability is unlimited.  If, for example, a trader shorts a stock at $1, and the stock rises to $100, he would be forced to pay 100 times the amount he originally realized from his sale.  A short squeeze—a dramatic, though usually brief run—can occur if a large number of shorts try to cover their positions at the same time.

 The Alternative Uptick Rule

 In February 2010, the Securities and Exchange Commission (“SEC”) adopted Rule 201 under Regulation SHO; it is also known as the Alternative Uptick Rule. The rule generally applies to all equity securities, whether traded on an exchange or in the over-the-counter market.  As its name suggests, it was conceived as an alternative to the old uptick rule, which stipulated that short sales could only be executed on an uptick in the security in question.  That rule went into effect in 1938, and was not abandoned until 2007.  The Alternative Uptick Rule was formulated in the wake of the economic crisis of 2008.

The Alternative Uptick Rule restricts short selling when the price of a security drops at least 10% in the course of one session. At that point, short selling is permitted only if the price of the security is above the current highest bid price. The rule remains in effect for that security for the rest of the session, and for the following day.

The Alternative Uptick Rule also requires that brokers establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, crowdfunding, FINRA Rule 6490, Rule 506 private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 , IPO’s, OTC Pink Sheet listings, Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or [email protected]. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855