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SEC Rule 144A

John W. Sellers
Attorney John W. Sellers
SEC Rule 144a Team Lead
Former DOJ Trial Attorney
envelope iconContact John directly

SEC Rule 144A allows shareholders with restricted securities to resell them to certain types of buyers so long as certain rules are followed during the transaction. The goal of Rule 144A is to give these shareholders flexibility to move their securities around while still protecting the broader public from what could quickly become predatory behavior and investor fraud. However, shareholders who want to make a sale under the terms of SEC Rule 144A need to follow the regulation closely. If they make a mistake they could find themselves accused of securities fraud.

The securities litigation lawyers and SEC compliance professionals at the national law firm Oberheiden P.C. provide effective legal guidance and advice to securities professionals across the country who want to buy or sell securities under the provisions of SEC Rule 144A, or who have been accused of misconduct for violating the requirements of the Rule.

An Overview of SEC Rule 144A

SEC Rule 144A is a regulation promulgated by the U.S. Securities and Exchange Commission (SEC) under its power to enforce the Securities Act of 1933 (15 U.S.C. § 77a et seq.). Codified at 17 C.F.R. § 230.144A, SEC Rule 144A allows holders of privately-placed control and restricted securities in a company to resell those shares without registering them under Section 5 of the Securities Act. However, Rule 144A only allows them to be sold to qualified institutional buyers, sometimes referred to as QIBs. SEC Rule 144A effectively serves as a safe harbor from the Act’s registration requirements – a safe harbor that has proven to be especially popular for non-U.S.-based companies – and a way around SEC Rule 506, which forbids the resale of securities that were obtained through a private placement absent an exemption.

Additionally, amendments to the Rule in 2012 loosened the compliance obligations on shareholders who wanted to sell shares through SEC Rule 144A. Under those amendments, which were required by the Jumpstart Our Business Startups (JOBS) Act, shareholders no longer had to ensure that their potential buyer was actually a qualified institutional buyer under the definition of the Rule. Instead, they only had to reasonably believe that their buyer was a QIB – a much easier obligation to meet.

The goal of Rule 144A is to give shareholders who had privately acquired their shares in the issuer a far larger market in which to sell their securities, all without putting unsophisticated investors and purchasers at risk of fraud or a deceptive solicitation for investment. In theory at least, the qualified institutional buyers that can purchase securities under Rule 144A do not need the regulatory framework necessary to protect other, less experienced investors from misconduct. This drastically improves the liquidity of control and restricted securities, which would be far more difficult to sell without the exemption to the registration requirements provided under SEC Rule 144A.

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Qualified Institutional Buyers Under Rule 144A

The concept of a qualified institutional buyer is at the core of SEC Rule 144A. Holders of control and restricted shares in a company are very limited in how they can sell those shares. SEC Rule 144A provides a means to do so: Under the Rule, these shareholders can sell them to qualified institutional buyers who, in the eyes of U.S. securities law, do not need the protections of the legal system as much as unsophisticated investors.

What amounts to a “qualified institutional buyer” is laid out in the very first provision of SEC Rule 144A, at 17 C.F.R. § 230.144A(a)(1). It includes the following types of entities, so long as they own and invest at least $100 million in securities:

  • Insurance companies,
  • Investment companies,
  • Licensed small business investment companies,
  • State employee benefits plans,
  • Employee retirement benefit plans under the Employee Retirement Income Security Act (ERISA),
  • Certain trust funds,
  • Business development companies under the Investment Advisers Act,
  • 501(c)(3) non-profit organizations,
  • Corporations,
  • Partnerships,
  • Limited liability companies (LLCs),
  • Business trusts,
  • Investment advisers registered under the Investment Advisers Act, and
  • Institutional accredited investors, as defined by SEC Rule 501(a).

The following people or entities are also considered “qualified institutional buyers” under Rule 144A:

  • Dealers who are registered under Section 15 of the Securities and Exchange Act of 1934 (15 U.S.C. § 78o), so long as they:
    • Own and invest at least $10 million in securities, or
    • Act in a riskless principal transaction for another QIB;
  • Investment companies registered under the Investment Company Act and that have at least $100 million in securities within the organization’s family of investment companies,
  • Any entity whose equity owners are comprised solely of other QIBs, and
  • Banks, as defined by Section 3 of the Securities Act (15 U.S.C. § 77c(a)(2)), and savings and loan associations, as defined by 15 U.S.C. § 77c(a)(5)(A), that own and invest at least $100 million and that have an audited net worth of at least $25 million in the last 16 months (18 months for foreign institutions).

In calculating the threshold amounts necessary to make a person or entity a QIB, any investments that are affiliated with the holder are ignored. All other investments are valued according to their cost or, if no information about their cost is published and the holder reports their securities’ market value, according to their market value, instead. Additionally, the following amounts are excluded from the calculation:

  • Bank deposit notes,
  • Certificates of deposit (CDs),
  • Loan participations,
  • Repurchase agreements and securities that are subject to one, and
  • Currency, commodity, or interest rate swaps.

Importantly, sellers of restricted and control securities only have to reasonably believe that their purchaser is a qualified institutional buyer. 17 C.F.R. § 230.144A(d)(1) states that sellers can rely on the following information when forming that belief:

  • A certification from the purchaser’s chief financial officer (CFO) or someone in a similar role,
  • Any of the following types of information, so long as they are from within the last 16 months, for domestic purchasers, or the last 18 months for foreign ones:
    • The purchaser’s most recent publicly available financial statements,
    • The purchaser’s government filings, and
    • Information appearing in a recognized securities manual.

Conditions of Sale for Rule 144A Transactions

Even if the potential purchaser of the control or restricted securities is a QIB or is reasonably believed to be one by the seller, there are still some conditions that have to be met in order for the transaction to fall under the realm of SEC Rule 144A:

  1. The seller has to take reasonable steps to inform the purchaser that the transaction aims for Rule 144A exemption to registration, and
  2. The securities are not of the same class as those from the issuer that are listed on a national securities exchange.

Additionally, the purchaser of the securities has the right to demand the following, reasonably current information from the company that issued the securities:

  • A statement concerning the nature of the issuer’s business,
  • A description of the products and services that it offers, and
  • The issuer’s most recent balance sheet, profit and loss statement, retained earnings statement, and similar financial records from the past two years.

Frequently Asked Questions About Rule 144A and Oberheiden P.C.

Does the SEC Have the Authority is Impose and Enforce Rule 144A?

 

There are some strong arguments that the SEC oversteps its authority when it enacts and enforces securities regulations like SEC Rule 144A. However, challenges to its power to do so have consistently been turned aside by federal courts.

The SEC is a part of the executive branch of the federal government. This means its role is to enforce the law. The regulations that the SEC promulgates, however, both create new obligations that were not considered by Congress when it passed the country’s chief securities laws in the 1930s, and interpret vague provisions that are actually included within those laws. Arguments can be made that, in doing so, the SEC reaches into the realm of Congress by creating laws and into the field of the judiciary by interpreting what the statutes mean.

However, when these arguments have been presented to the courts, judges have routinely disagreed with them.

Are Securities Purchased Through a Rule 144A Transaction Still Restricted?

 

Yes. Following the requirements laid out in Rule 144A can allow shareholders to resell their restricted shares to institutional purchasers. However, it does not remove the restricted status of those shares. Purchasers in SEC Rule 144A transactions receive securities that are still restricted under the terms of SEC Rule 144 (17 C.F.R. § 230.144(a)(3)(iii)).

What Sets Oberheiden P.C. Apart from Other Securities Defense Firms?

 

What really sets Oberheiden P.C. apart from our competition is our refusal to hire anyone other than highly experienced lawyers to our firm.

Lots of securities litigation firms boast some impressively credentialed and accomplished securities attorneys. Many people hire those firms precisely for the legal defense and guidance that those experienced lawyers will provide. However, the vast majority of the legal services that these clients then receive from the firm will come from junior associates and paralegals, rather than the experienced attorneys that brought them there.

That does not happen at Oberheiden P.C. Here, we only hire experienced lawyers. We do not have any junior associates or even paralegals at our firm. All of the legal representation that you get from us comes from an attorney who has years of experience handling the problems that you are facing.

Why Doesn’t Oberheiden P.C. Call Itself the Best SEC Compliance Law Firm?

 

Because we prefer to let our work and our list of satisfied clients do that kind of talking for us. Our experienced and dedicated attorneys have produced a long track record of successful securities litigation defense cases as well as numerous uneventful careers for securities professionals and companies that wanted to make sure they were complying with the law.

We think those results speak for themselves.


SEC Compliance and Litigation Defense Lawyers at Oberheiden P.C.

SEC Rule 144A provides an important and frequently-traversed method for owners of control or restricted securities to take them to market. However, following the requirements that are demanded by the Rule are easier said than done. Failing to take the steps necessary to form a reasonable belief that your purchaser is a qualified institutional buyer or not going through the other requirements of Rule 144A can expose you and your company to legal risks and potentially to an enforcement action by the SEC.

The SEC compliance attorneys at the national law firm Oberheiden P.C. guide regulated securities professionals through the maze that is SEC Rule 144A, while the securities litigation lawyers at the firm protect securities traders who have been accused of violating the Rule.

Contact us online or call our law firm at (888) 680-1745 to get the legal help that you need today.

Why Clients Trust Oberheiden P.C.

  • 2,000+ Cases Won
  • Experienced Trial Attorneys
  • Former Department of Justice Trial Attorney
  • Former Federal Prosecutors, U.S. Attorney’s Office
  • Former Agents from FBI, OIG, DEA
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