On Monday, shares of electric vehicle startup Mullen Automotive (NASDAQ:MULN) triggered the SEC’s short sale-related circuit breaker, placing MULN stock on the Short Sale Restriction (SSR) list. According to these regulations, investors may no longer sell MULN shares short unless the stock price rises on that particular trade. Academic studies have found these “uptick” rules effective in helping prevent bear raids on certain risky stocks.

Mullen and the Short Sale Restriction (SSR) List

Short sale restrictions were implemented by the U.S. Securities and Exchange Commission (SEC) in 1938 to help prevent the type of speculative selling that sparks panic. The rules require circuit breakers to kick in whenever a stock drops 10% below its previous close, and remain in place for that trading day and the next. During this period, short sellers must wait until the share prices rise before any short-sale transaction is approved.

Mullen’s price drops this week means it joins other firms on this restricted list. And if MULN’s stock drops another 10% this week, the uptick rule will remain in place.

It isn’t the first time Mullen has triggered this circuit breaker. Since January, the California-based startup has triggered short sale restrictions at least 10 times, most recently on March 10. And the electric vehicle startup continues to experience high volatility; over the same period, Mullen’s stock has moved an average of 6% from its previous close on a daily basis.

What Does the SSR Mean for MULN Stock?

At first glance, the SSR list seems good for Mullen’s stock. Shares become harder to short, making sudden price declines less likely. Bullish traders could theoretically jump in and cause a short squeeze.

But these benefits are outweighed by worrying long-term concerns. Frequent 10% declines tend to indicate trading inefficiencies and a lack of clear direction. And Mullen’s choppy trading is worsened by its weak financial position.

This isn’t just a hypothetical exercise. Mullen’s chief accounting officer unexpectedly resigned on March 6, sending shares down 5%. That comes on top of an unexpected auditor change the week before.

Mullen’s shares will also likely decline as new shares hit markets. The company has around 2.49 billion shares that insiders would like to sell, a figure that dwarfs its current 2.1 billion outstanding shares. And the automaker’s management will be forced to issue more shares for cash in the coming quarters as reserves dry up. As of December 2022, the firm was burning through around $33 million in operating activities per quarter, a rate that would deplete its $68.1 million cash on hand within six months.

It’s why markets have continued to push Mullen’s stock down, despite extreme efforts by management to keep a stream of positive press releases on tap.

What’s Next for MULN Stock?

In December 2022, I wrote the Bagholder’s Guide to Meta Materials, a sober look into the “disappearance” of the firm’s preferred shares. These preferred shareholders were left with nothing, and even common stockholders would “likely face significant losses.”

Shares of Meta Materials’ common stock have declined another 45% since then. Its preferred shares no longer trade on any exchange.

Today, Mullen Automotive sits at a similar crossroads. The company has almost no chance of becoming a $2 stock again without reverse-splitting its shares. Multiple rounds of dilutive stock issuances have virtually guaranteed that outcome. The firm is also quickly running out of good options. Last week, a major Mullen creditor sued the company for allegedly acting in bad faith by increasing authorized Series D preferred stock by 5X. That decreased the number of possible authorized Series E stock to less than 10.3 million, cutting off the litigant’s ability to recoup losses.

Mullen has also been forced to accept onerous terms by its remaining creditors. On March 2, major backer Acuitas Capital LLC exercised its right to purchase Mullen’s Series D preferred stock on June 1, locking in its warrants for 185% of the common stock price. It’s an automatic 85% return at the expense of common shareholders, assuming Acuitas can sell all the shares without slippage.

In other words, the SEC’s short-sale restriction list is doing its job. Mullen’s share price has stabilized in the past several days. But it’s no protection from longer-term concerns. Buyer, beware.

On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.