1.1.2.6. Private Resales to Qualified Institutional Buyers—Rule 144A
Recall that most private placement securities are restricted, meaning they cannot be resold except through some kind of exemption, such as a Rule 144 exemption. But Rule 144 requires investors to wait at least six months before selling their securities. SEC Rule 144A provides a safe harbor for brokers and investors to resell their restricted securities without being subject to these holding limits by selling to qualified institutional buyers (QIBs).
A qualified institutional buyer (QIB or QUIB) is a large institutional investor that owns at least $100 million worth of securities, not counting securities issued by its affiliates. For registered broker-dealers, the threshold is only $10 million. A bank must also have a net worth of at least $25 million in order to be considered a QIB.
Common examples of QIBs include broker-dealers, insurance companies, investment companies, pension plans, and banks. However, any corporation, partnership, or LLC could qualify as a QIB. So can an IAI that owns at least $100 million in securities. Individuals can never be QIBs, regardless of their assets or financial sophistication.
If a firm has discretionary authority to invest securities owned by a QIB, those securities count toward whether the firm itself is considered a QIB. (Discretionary authority is discussed in Chapter 2.)
Example: ABC Broker-Dealer owns $9 million of securities in its own accounts. It controls $1 million of securities in a discretionary account for DEF Pension Fund. If DEF is a QIB, then its $1 million counts toward whether ABC is considered a QIB.
How a Rule 144A transaction generally works is that a foreign or U.S. issuer sells securities to a group of initial purchasers, who are usually broker-dealers. The broker-dealers then resell them to QIBs under Rule 144A. Under this safe harbor, the resellers are not considered to be underwriters and the offer is not considered