The SEC voted Wednesday to strengthen Rule 105 of Regulation M in an effort to prevent manipulation of the offering prices of securities. The SEC press release is available here. Specifically, the SEC wants to combat traders who sell short prior to the pricing of an offering and then cover the short position with shares bought at a reduced offering price.

Selling short is a bet that the price of a particular security will decrease. A trader sells short by borrowing a specific security and selling it. If the price then goes down, the trader buys the amount of securities it initially borrowed and profits off the difference between the price on the date of sale and the price on the date of purchase.

The old Rule 105 prohibited using shares obtained in an offering to cover a short position taken in the restricted period before the pricing of the offering. The new rule prohibits purchasing an offered security if the trader took a short position in the restricted period prior to pricing the offering. In the words of the SEC, “the amended rule changes the prohibited activity from covering to purchasing the offered security.”