Rule 144A: What It Is, What It Allows, and Criticism What is a qualified institutional buyer Rule 144A? A qualified institutional buyer ("QIB") is an institutional investor that meets certain eligibility criteria imposed by the U.S. Securities and Exchange Commission. Rule 144A of the SEC's rules and regulations provides a safe harbor from certain registration requirements for the offer and sale of securities to QIBs. In order to qualify as a QIB, an investor must meet one of the following criteria:
- Have total assets in excess of $100 million
- Be a registered investment company
- Be a business development company
- Be a governmental entity
- Be an entity that is majority owned by a QIB
- Be a broker-dealer that is registered with the SEC
- Be a bank
- Be a savings and loan association
In order to sell securities under Rule 144A, the issuer must take reasonable steps to ensure that the purchaser is a QIB. For example, the issuer may require the purchaser to represent in writing that it meets the definition of a QIB. Who can purchase a 144A issue? A 144A issue can be purchased by any institutional investor, whether domestic or foreign. However, to be able to purchase a 144A issue, the institutional investor must first go through a self-certification process in order to demonstrate that it meets the criteria to be considered a qualified institutional buyer (QIB). What is a Regulation S offering? A Regulation S offering is an offering of securities that is exempt from the registration requirements of the Securities Act of 1933. Regulation S offers can be made to investors in the United States and abroad, and are often used by companies when raising capital from foreign investors.
In order to qualify for the exemption, the securities must be offered and sold in a manner that does not involve any “directed selling efforts” in the United States. This means that the company cannot use any form of advertising or solicitation to sell the securities in the United States.
There are a few other requirements that must be met in order for an offering to qualify for the Regulation S exemption, but the lack of directed selling efforts is the most important one.
What is the difference between 144A and Reg S?
There are a few key differences between 144A and Reg S when it comes to securities offerings:
- 144A is only available to qualified institutional buyers (QIBs), while Reg S is available to anyone
- With 144A, the issuer can approach QIBs directly to solicit interest and gauge demand, while with Reg S the issuer must go through an intermediary (usually a broker-dealer)
- 144A offerings are not subject to the "gun-jumping" rules that apply to Reg S offerings, so the issuer can start marketing the offering before it is registered with the SEC
- Finally, Reg S offerings are not subject to state Blue Sky laws, while 144A offerings are
Are 144A securities liquid?
In the United States, the term "liquid" typically refers to cash or cash equivalents. The term "cash equivalents" generally refers to short-term, highly liquid investments that are readily convertible to cash, such as commercial paper, Treasury bills, and money market funds.
In the context of securities, the term "liquid" typically refers to publicly traded securities, such as stocks and bonds, that can be readily bought or sold in the marketplace. Private placement securities, such as those sold in 144A offerings, are not as liquid as publicly traded securities because they are not as readily bought or sold in the marketplace.
However, just because a security is not publicly traded does not mean it cannot be liquid. For example, some private placement securities, such as those sold in Rule 506(c) offerings, can be resold pursuant to Rule 144A. Under Rule 144A, a security can be sold to qualified institutional buyers (QIBs), which are large institutions that meet certain eligibility requirements. Because there is a market for Rule 144A securities, they are considered to be more liquid than other private placement securities.