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Rule 144A: Private Resales of Securities to Institutions

Filed in: Exam Content, Series 24, Series 65, Series 66, Series 7, Series 79

Rule 144A is a safe harbor exemption from the Act of ’33. It144a provides that certain buyers – Qualified Institutional Buyers (“QIBs”) – may purchase unregistered securities (the buyer, not the seller, has to be a QIB). The 144A market, therefore, allows issuers to raise capital by selling securities to large institutional investors and avoid the cost and delay associated with registered offerings. Rule 144A is often used for institutional purchases of debt securities and asset-backed securities. Criteria and characteristics of Rule 144A transactions are set forth below.

Rule 144A Question

Rule 144A Answer

Who is a Qualified Institutional Buyer (“QIB”)QIBs are defined as institutional investors that own or invest on a at least $100 million on discretionary basis. Examples include:

  • investment companies
  • pension funds
  • insurance companies
  • broker-dealers (Note: broker dealers qualify as QIBs if they own or invest only $10 million or more)

Can a wealthy individual (>$100 million of net worth) be a QIB?
No. Only institutions can be QIBs.

What types of transaction are effected through Rule 144A?Both debt and equity securities can be sold in Rule 144A transactions. Typical offerings under Rule 144A include:

  • Debt and preferred stock offerings
  • Foreign companies raising US capital, but that want to avoid US registration & reporting requirements
  • Common stock of companies that are non-reporting

What securities CANNOT be sold through a Rule 144A transaction?

  • Open-end investment companies (mutual funds) or UIT securities
  • Company that have US publicly traded securities (listed on a national securities exchange) cannot sell that class of security through Rule 144A.
Who determines whether the purchaser is an eligible QIB?Rule 144A requires that:

  1. The buyer to be a QIB or
  2. the seller have a reasonable belief that the buyer is a QIB.

What grounds might seller reasonably rely upon to determine if the purchaser is a QIB?

  1. The prospective purchaser’s most recent publicly available financial statements or SEC filings (e.g. 10k, 10q, etc), provided they are fewer than 16 months old (18 months for foreign purchasers)
  2. A certification/attestation by the CEO, CFO, or other similar principal that the purchaser qualifies as a QIB. These are sometimes called “Big Boy letters”.
Is there a holding period between Rule 144A sales.There is no required holding period between Rule 144A sales.
Are there volume or capital limitations in connection with Rule 144A transactions?There are no volume or capital limitations in connection with Rule 144A transactions.
Can securities acquired in a Rule 144A transaction be resold?Securities acquired in a Rule 144A transaction are restricted securities and can only be sold through other exempt transaction, or be registered and then sold to the general public.
Who reports Rule 144A transactions ?Equity securities sold pursuant to Rule 144A report to the ORF.Debt securities sold pursuant to Rule 144A report to TRACE.
How can investors learn about last sale price and other trade data for 144A transactions?FINRA disseminates data (such as sale price) on Rule 144A transactions in real-time as transactions are entered into TRACE.

Knopman Notes
Rule 144A offers issuers of securities the ability to raise capital and avoid the expense and time of completing the registration process. This is an effective way for issuers to reach large buyers, but candidates should remember that individual investors – including retail investors, regardless of their assets or net worth – cannot participate in 144A deals.

Relevant Exams
Series 7, Series 24, Series 65, Series 66, Series 79

Written by Dave Meshkov

Dave's mission (and job: Managing Director of Course Design) is to make FINRA exam training engaging, approachable, and dare he even say, enjoyable. Having trained and coached over ten thousand students to exam success he knows how to present complex subjects in memorable and understandable ways. Prior to joining Knopman Marks in 2011, Dave practiced bankruptcy law at Weil, Gotshal & Manages and served as a law clerk in a the Southern District of New York Bankruptcy Court working on the General Motors and Lehman Brothers bankruptcies. Building on his legal expertise and training allows him to keep all our courses updated with the latest legislative and rule-making changes. Dave currently trains for the Securities Industry Essentials (SIE) exam and the Top-Off Series 6, 7, 24, 57, 63, 65, 66, 79, 86, 87, and 99 exams. He also delivers executive one-on-one training and shares his passion for learning outside of work as a ski instructor and yoga teacher. Dave graduated magna cum laude from Fordham Law School, and cum laude with a BA from the University of Pennsylvania.

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