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SEC Rule 144A
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Rule 144A. Securities Act of 1933, as amended (the "Securities Act") provides a safe harbor from the registration requirements of the Securities Act of 1933 for certain private resales of minimum $500,000 units of restricted securities to qualified institutional buyers (QIBs), which generally are large institutional investors that own at least $100 million in investable assets. When a broker or dealer is selling securities in reliance on Rule 144A, it may make offers to non-QIBs through general solicitations following an amendment to the Rule in 2012.[1]
Since its adoption, Rule 144A has greatly increased the liquidity of the securities affected. This is because the institutions can now trade these formerly restricted securities amongst themselves, thereby eliminating the restrictions that are imposed to protect the public. Rule 144A was implemented to induce foreign companies to sell securities in the US capital markets. For firms registered with the SEC or a foreign company providing information to the SEC, financial statements need not be provided to buyers. Rule 144A has become the principal safe harbor on which non-U.S. companies rely when accessing the U.S. capital markets.[2]
Originally, in 1990, the Nasdaq Stock Market offered a compliance review process which granted The Depository Trust Company (DTC) book-entry access to Rule 144A securities. That review was later abandoned as unnecessary.[3] Nasdaq launched an Electronic Trading Platform for Rule 144A securities called PORTAL.
Rule 144A should not be confused with Rule 144, which permits public (as opposed to private) unregistered resales of restricted and controlled securities within certain limits.
References
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[edit]SEC Rule 144A
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Background and History
Adoption and Initial Purpose
SEC Rule 144A was adopted by the Securities and Exchange Commission (SEC) on April 23, 1990, through Release No. 33-6862, published in the Federal Register at 55 FR 17933.[2][4] Prior to its adoption, Section 5 of the Securities Act of 1933 imposed strict registration requirements on the resale of privately placed restricted securities, making such transactions cumbersome and often requiring either a two-year holding period under Rule 144 or full public registration to avoid liability for unregistered offerings.[2] This regulatory framework limited liquidity in the secondary market for unregistered securities, as resales typically involved intensive legal analysis under exemptions like Sections 4(1) and 4(3) of the Act, leading to high transaction costs and paperwork burdens for institutional participants.[2] The initial purpose of Rule 144A was to establish a non-exclusive safe harbor exemption from the registration requirements of Section 5, specifically for the resale of restricted securities to qualified institutional buyers (QIBs)—sophisticated entities deemed capable of evaluating investment risks without the full protections of public registration. The adoption also included amendments to Rules 144 and 145 to redefine holding periods for restricted securities.[2] By targeting these institutional investors, the rule aimed to facilitate greater liquidity in private markets for unregistered debt and equity securities, enabling more efficient trading without subjecting issuers to the costs and delays of SEC registration.[2] The SEC's key rationale centered on addressing longstanding market demands from large institutional buyers for streamlined resale mechanisms, recognizing that such investors could "fend for themselves" in assessing securities, as established in precedents like SEC v. Ralston Purina Co.[2] Early implementation of Rule 144A included its integration with the Nasdaq-operated PORTAL Market, launched simultaneously in 1990 to provide a dedicated trading system for eligible 144A securities, ensuring compliance through pre-qualification of participants and issues.[5] Additionally, the Depository Trust Company (DTC) began offering book-entry access and settlement services for these securities starting in 1990, enhancing operational efficiency by allowing electronic transfers among QIBs without physical certificates.[6] The rule took effect immediately upon publication, applying to securities not featuring on domestic exchanges or authorized for quotation on automated interdealer quotation systems.[2]Major Amendments and Updates
Since its adoption in 1990, Rule 144A has undergone several targeted amendments to refine its scope, enhance market efficiency, and align with broader regulatory reforms. In 2013, the SEC adopted amendments implementing provisions of the Jumpstart Our Business Startups (JOBS) Act, which lifted the prohibition on general solicitation and advertising for certain private offerings under Rule 144A, provided sales are limited to QIBs.[7] These changes aimed to facilitate capital raising while preserving the rule's exemption from registration requirements under the Securities Act of 1933, without altering core QIB restrictions. The Financial Industry Regulatory Authority (FINRA) introduced a related enhancement in 2014 by mandating the reporting of Rule 144A trades to its Trade Reporting and Compliance Engine (TRACE) system, with public dissemination of transaction data beginning on June 30, 2014, to boost transparency in the secondary market for restricted securities.[8] This requirement applied to eligible corporate bonds and other debt securities, enabling better price discovery without compromising the private nature of 144A transactions.[9] In 2020, the SEC further amended Rule 144A as part of modernizing the accredited investor definition, expanding QIB eligibility to encompass limited liability companies and rural business investment companies that meet the $100 million investment threshold in securities.[10] This update tied into broader refinements of investor qualifications, allowing these entities to participate more readily in 144A resales while ensuring they possess sufficient sophistication and resources.[11] As of November 2025, no major amendments to Rule 144A have been adopted since 2020, though the SEC continues to monitor its potential applications to digital assets and emerging markets through ongoing regulatory reviews and guidance.Core Definitions and Eligibility
Qualified Institutional Buyers
A qualified institutional buyer (QIB) under SEC Rule 144A is defined as any institution that, in the aggregate, owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the institution, or, in the case of a registered dealer in securities, at least $10 million in such securities.[1] This threshold ensures that only entities with substantial financial resources and investment expertise are eligible, presuming their ability to evaluate and bear the economic risks of the securities without the full protections afforded to retail investors. Eligible entities encompass a specific range of institutional investors, as outlined in the rule. These include: insurance companies as defined in Section 2(a)(13) of the Securities Act of 1933; investment companies registered under the Investment Company Act of 1940 or business development companies as defined in the Investment Company Act; small business investment companies licensed by the U.S. Small Business Administration or rural business investment companies as defined in the Small Business Investment Act of 1958; plans established and maintained by a state, its political subdivisions, or any agency or instrumentality thereof, for the benefit of its employees, if such plan has total assets in excess of $5 million; employee benefit plans within the meaning of Title I of the Employee Retirement Income Security Act of 1974 (ERISA) with total assets exceeding $5 million or plans determined by an appropriate fiduciary to be QIBs; trust funds whose trustees are banks or trust companies and whose participants are exclusively plans of the types identified in the preceding category, excluding individual retirement accounts (IRAs) or Keogh plans; business development companies as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; and any entity (such as a corporation, partnership, limited liability company, trust, or similar organization) owned exclusively by QIBs, along with registered investment advisers with at least $100 million in assets under management, institutional accredited investors as defined in Rule 501(a)(1)-(3) under the Securities Act, or banks as defined in Section 3(a)(6) of the Securities Exchange Act of 1934 or savings and loan associations or other institutions as defined in Section 3(a)(5)(A) thereof that in the aggregate own and invest on a discretionary basis at least $100 million in securities of issuers not affiliated with it and that have an audited net worth of at least $25 million.[1] Dealers registered as broker-dealers under Section 15 of the Securities Exchange Act of 1934 also qualify if they act in a riskless principal capacity or for their own account or the account of another QIB.[1] The definition explicitly excludes individual investors, retail-oriented entities, and non-institutional buyers, emphasizing Rule 144A's focus on sophisticated market participants capable of conducting independent due diligence.[1] For instance, individual accredited investors, even those meeting net worth or income thresholds under Regulation D, do not qualify as QIBs unless they operate through an eligible institutional structure.[1] To establish QIB status, sellers must reasonably believe the prospective buyer meets the criteria, typically through reliance on the buyer's most recent publicly available financial statements, reports filed with the SEC, certifications from securities manuals, or written representations from an executive officer of the buyer confirming QIB eligibility.[1] Such certifications by the chief financial officer or an equivalent officer must be issued within 60 days prior to the sale and based on a review of financial statements dated no more than 16 months previously, providing a practical mechanism to verify compliance without exhaustive verification.[1] QIBs play a central role in enabling the private resale exemptions under Rule 144A by facilitating transactions in restricted securities among institutional holders.[1] Representative examples of QIBs include large pension funds qualifying as ERISA employee benefit plans with assets exceeding $5 million, mutual funds registered under the Investment Company Act that invest on a discretionary basis meeting the $100 million threshold, and hedge funds structured as entities wholly owned by other QIBs or managed by registered investment advisers with sufficient assets under management.[1]Restricted Securities and Scope
Restricted securities under SEC Rule 144A are defined as those acquired directly or indirectly from the issuer or an affiliate in a transaction or chain of transactions not involving any public offering, including securities obtained through private placements exempt from registration under Section 4(a)(2) of the Securities Act of 1933.[12][13] Such securities are deemed restricted pursuant to 17 CFR § 230.144(a)(3)(i) and (iii), particularly when resold under Rule 144A's safe harbor provisions to qualified institutional buyers (QIBs).[14] Additionally, securities acquired subject to the resale limitations of Regulation D or in transactions meeting Rule 144A's conditions qualify as restricted.[13] The scope of Rule 144A is limited to private resales of these restricted securities by persons other than the issuer, providing an exemption from the registration requirements of Section 5 of the Securities Act solely for offers and sales to QIBs.[14] It does not apply to initial offerings by issuers, focusing instead on secondary market transactions that enhance liquidity among institutional investors without public distribution.[14] A key limitation is that the rule excludes securities of the same class as those already listed on a national securities exchange or quoted in an automated inter-dealer quotation system in the United States at the time of issuance, though exceptions exist for convertible securities and warrants meeting specific premium and exercisability criteria (e.g., conversion premiums under 10% or warrants exercisable within three years at less than 10% premium).[14] Certain securities fall outside the rule's scope as key exclusions, including those already registered under the Securities Act or otherwise freely tradable in the public markets, as these do not meet the restricted securities criteria under 17 CFR § 230.144(a)(3).[13] The rule also does not cover equity securities of reporting companies that are readily tradable publicly, as such securities typically lack the private placement origin required for restriction status.[13] Furthermore, it is unavailable for transactions part of a plan or scheme to evade the Act's registration provisions.[14] In relation to holding periods, restricted securities eligible for resale under Rule 144A can be transferred to other QIBs without adhering to the general holding period requirements of Rule 144 (six months for reporting companies or one year for non-reporting companies), allowing for more immediate liquidity in the institutional market while maintaining the securities' restricted status.[13] This exemption underscores Rule 144A's role in facilitating efficient secondary trading of privately placed securities exclusively among sophisticated institutional buyers.[14]Operational Provisions
Resale Conditions
Under Rule 144A, resales of restricted securities are permitted solely to qualified institutional buyers (QIBs) or to persons that the seller and any person acting on behalf of the seller reasonably believe to be QIBs, as specified in 17 CFR § 230.144A(d)(1).[1] This condition ensures that transactions remain within a sophisticated institutional market, exempting them from the registration requirements of Section 5 of the Securities Act of 1933.[1] Sellers must also ensure that purchasers are aware that the resale relies on the Rule 144A exemption.[1] To establish reasonable belief in a purchaser's QIB status, sellers are required to take reasonable steps, such as obtaining written certifications from the buyer confirming its QIB qualifications or reviewing recent financial statements demonstrating the requisite investment capacity (at least $100 million in securities for most entities).[1] These verification measures help mitigate the risk of non-compliant transfers and maintain the rule's safe harbor status.[1] Following the 2013 amendments under the Jumpstart Our Business Startups (JOBS) Act, resales under Rule 144A permit general solicitation and general advertising, provided that securities are sold only to QIBs.[3] This provision aligns Rule 144A with similar changes to Rule 506(c) of Regulation D, though the latter applies to offerings to accredited investors. Restricted securities under Rule 144A must bear transfer limitations to prevent sales to non-QIBs, and in practice, this is commonly achieved by affixing "144A legends" to physical certificates, stating that the securities are eligible for resale only to QIBs pursuant to Rule 144A and prohibiting transfer without compliance.[15] Although not explicitly mandated by the rule, these legends serve as a critical compliance tool to enforce restrictions.[15] For securities held in book-entry form, the Depository Trust Company (DTC) manages these restrictions through its electronic systems, which flag restricted status and require QIB certification for transfers, facilitating efficient yet controlled trading among eligible parties.[16] In contrast to Rule 144, which imposes holding periods, volume limitations based on average trading volume, and manner-of-sale restrictions to prevent undue market impact, Rule 144A imposes no such limits on resales to QIBs, enabling greater flexibility and liquidity in the institutional market.[17] For securities of non-reporting issuers, resale conditions include providing buyers with access to specified current information, such as financial statements no more than 16 months old, upon reasonable request.[1]Information and Disclosure Requirements
Under Rule 144A, information and disclosure requirements are designed to provide qualified institutional buyers (QIBs) with sufficient basic information about non-reporting issuers to facilitate informed resales of restricted securities, while recognizing the sophistication of such buyers. These obligations apply specifically to resales of securities issued by entities not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, nor exempt under Rule 12g3-2(b), and not foreign governments eligible under Schedule B of the Securities Act.[14] The holder of the securities and any prospective purchaser designated by the holder must have the right to obtain the required information from the issuer upon request, and the prospective purchaser must actually receive it from the issuer, the seller, or a person acting on their behalf at or prior to the time of sale.[14] The specified information includes a very brief statement of the nature of the issuer's business and the products and services it offers, along with the issuer's most recent balance sheet as of a date less than 16 months before the resale date, and profit and loss and retained earnings statements (or similar financial statements) for the 12 months preceding that balance sheet date.[14] If the balance sheet is more than six months old at the time of resale, it must be accompanied by additional profit and loss and retained earnings statements covering the interim period up to less than six months before the resale.[14] The business description must be as of a date within 12 months prior to the resale, though for foreign private issuers, the timing may align with home country or principal trading market standards.[14] Financial statements should be audited to the extent reasonably available.[14] In practice, these requirements are often addressed through information rights covenants in private placement memoranda, where issuers agree to furnish the data upon request via secure delivery methods.[18] For issuers that are subject to Exchange Act reporting requirements—such as those filing Forms 10-K and 10-Q with the SEC—no additional information beyond publicly available filings is required under Rule 144A, as QIBs are expected to access such reports independently.[14] Sellers must take reasonable steps to ensure that prospective purchasers are aware of this availability.[2] There is no affirmative requirement for a formal prospectus in Rule 144A transactions, reflecting the presumption that QIBs possess the financial sophistication to evaluate risks without such documentation, though no automatic presumption of their capability overrides evidence to the contrary.[14] Sellers bear specific duties in connection with these disclosures, including the obligation to deliver or facilitate access to the required information with reasonable care and to disclose any known material inaccuracies in the issuer's provided information to avoid liability under antifraud provisions like Rule 10b-5.[14] This ensures that resales to QIBs proceed on the basis of reliable data, balancing efficiency with investor protection in the private resale market.[2]Comparisons and Interactions
Differences from Rule 144
Rule 144A and Rule 144 both provide safe harbors from the registration requirements of Section 5 of the Securities Act of 1933 for resales of restricted securities, but they differ significantly in scope, applicability, and conditions to facilitate distinct market needs—Rule 144, adopted in 1972 to clarify non-underwriter status for public resales, contrasts with Rule 144A, introduced in 1990 to promote liquidity in institutional trading of privately placed securities.[17][1][19] A primary distinction lies in holding periods: Rule 144A imposes no fixed holding period, enabling immediate resale of restricted securities to qualified institutional buyers (QIBs) without waiting, which enhances trading flexibility among institutions.[1][19] In contrast, Rule 144 requires a minimum six-month holding period for restricted securities of reporting companies and one year for those of non-reporting companies before public resale, with the period starting from the date of acquisition and requiring full payment.[17][20] Buyer restrictions further differentiate the rules: Under Rule 144A, resales are strictly limited to QIBs—sophisticated entities such as investment companies or banks managing at least $100 million in securities—or persons reasonably believed to be QIBs, excluding retail investors to maintain a private market.[1] Rule 144, however, permits sales to the general public, including unlimited non-affiliates, after satisfying the holding period and other conditions, without restricting buyers to institutions.[17][20] Both rules exempt resales from Section 5 registration, but Rule 144A emphasizes institutional private resales with no volume limitations, allowing QIBs to acquire and trade larger blocks without public distribution concerns.[1][21] Rule 144 provides a broader exemption for public resales but includes volume limits for affiliates (e.g., no more than 1% of outstanding shares or average weekly trading volume) to prevent distributions.[17][20] The manner of sale also varies: Rule 144A facilitates private transactions among QIBs without imposing broker-dealer restrictions typical of public markets, often through direct negotiations or established institutional channels.[1][22] Rule 144 mandates ordinary brokerage transactions, such as through brokers without solicitation or riskless principal trades, to ensure compliance with public market norms.[17][20]| Aspect | Rule 144A | Rule 144 |
|---|---|---|
| Eligibility | Resales limited to QIBs; no retail investors. | Open to public, including non-affiliates; affiliates subject to conditions. |
| Timelines (Holding Period) | No fixed period; immediate resale to QIBs permitted. | 6 months (reporting issuers) or 1 year (non-reporting) for restricted securities. |
| Applicability | Private institutional market; no volume limits; focuses on liquidity for unregistered securities. | Public market resales; volume limits for affiliates; safe harbor from underwriter status. |