A short sale involves the sale of a security that the seller does not own. In order to deliver the security to the purchaser, the short seller will borrow the security. Later, when the price has dropped, the seller will purchase equivalent securities at the new price and return them to the lender. The difference between the sale price and the later purchase price is profit to the short seller.

Short selling can increase market liquidity and pricing efficiency. It can also, however, be used to manipulate stock prices, driving them downwards or exacerbating a downward trend already underway. Because PTP shares tend to be more thinly traded, they may be more vulnerable to abusive short selling.

From 1938 until 2007, short sales were subject to an “uptick” rule which stated that a listed security could only be sold short (a) at a price above the price at which the immediately preceding sale was effected (plus tick), or (b) at the last sale price if it was higher than the last different price (zero plus tick). The rule was eliminated in July 2007. During the time following the elimination of the rule, particularly in 2008, issuers of secondary PTP offerings experienced substantial price declines in the days preceeding the offering that were attributed to abusive short selling.

During the second half of 2008 and early 2009 there was extreme volatility and a steep price drop in the financial markets, leading to calls for re-regulation of short sales. On April 10 the SEC released proposed rules in which it offered alternatives for re-instating the uptick rule, and requested comments. NAPTP submitted comments supporting re-regulation of short sale prices and additional protections on June 19, 2009.

A more detailed discussion can be found in the 2009 Federal Affairs Committee Report in the Annual Meeting materials.

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