Rule 144A of the Securities Act: QIBs, Eligible Securities, and Resales

Rule 144A of the Securities Act is an SEC safe harbor that lets large institutional investors resell unregistered securities to each other without triggering the registration requirements of Section 5. The rule works only when four conditions line up: the buyer is a qualified institutional buyer (QIB), the seller notifies the buyer it is relying on the exemption, the securities are not interchangeable with any class trading on a U.S. exchange or automated quotation system, and basic financial information about the issuer is available to the buyer on request.¹ Together, those conditions support a private but highly liquid secondary market for restricted securities.

Rule 144A Is a Resale Rule, Not an Issuance Rule

A common misconception is that issuers sell securities directly to investors under Rule 144A. They don’t. The rule governs what happens after the initial private sale.

A typical 144A deal is a two-step transaction. One or more investment banks (the “initial purchasers”) buy the securities from the issuer in an unregistered placement under Section 4(a)(2) of the Securities Act or Regulation D. The initial purchasers then immediately resell those securities to QIBs, relying on Rule 144A for the resale leg. The rule’s preliminary notes confirm this design: the initial purchasers’ plan to resell under 144A does not spoil the issuer’s exemption for the original placement.¹

Securities acquired this way stay restricted. A QIB can flip them to another QIB under 144A, but the securities cannot be dumped into the public market. Anyone who wants to sell them outside the QIB ecosystem needs another exemption or has to wait for the issuer to register the securities.

Who Counts as a Qualified Institutional Buyer

The rule turns on the buyer. Only QIBs can purchase under 144A, and the qualification bar is deliberately high. The general standard: an entity must own and invest on a discretionary basis at least $100 million in securities of issuers it is not affiliated with.¹ That number counts only securities of unaffiliated issuers. An entity cannot pad the total with its own stock or securities of its parent.

Eligible entity types at the $100 million level include insurance companies, registered investment companies and business development companies, Small Business Investment Companies and Rural Business Investment Companies, ERISA and governmental employee benefit plans (with a qualified fiduciary making the investment decisions), bank-managed trust funds, corporations, partnerships, limited liability companies, Section 501(c)(3) tax-exempt organizations, and registered investment advisers. A family of investment companies can aggregate its funds’ portfolios to hit the $100 million floor. A wholly-owned subsidiary qualifies when each of its equity owners is itself a QIB.¹

Dealers and Banks Have Different Tests

Registered broker-dealers qualify at a lower level: $10 million in securities of unaffiliated issuers, held on a discretionary basis. Unsold allotments from a public offering don’t count toward that total. A dealer that falls short of $10 million can still handle a 144A trade as a riskless principal, buying and reselling to a QIB without taking inventory risk.¹

Banks and savings associations face a two-part test. They must meet the $100 million securities threshold and have an audited net worth of at least $25 million, shown in their most recent annual financial statements. Domestic banks’ financials must be dated within 16 months of the sale; foreign banks, 18 months.¹

The 2020 Amendments

The SEC broadened the QIB definition in 2020. It formally added limited liability companies and Rural Business Investment Companies to the list of eligible entity types, and it created a catch-all: any institutional accredited investor under Rule 501(a) that isn’t otherwise listed can now qualify as a QIB if it meets the $100 million threshold. That change brought in tribal governments, certain governmental bodies, and bank-maintained collective investment trusts, which previously had no clear path to QIB status.²

What the Seller Has to Do

Two separate obligations sit on the seller side of a 144A trade.

Reasonable Belief the Buyer Is a QIB

The seller, and anyone acting for the seller, must reasonably believe at the time of sale that the buyer is a QIB. This is not a checkbox. In practice, sellers obtain a representation letter (often called a QIB certificate) in which the buyer confirms it meets the applicable threshold, or they rely on publicly available financial statements or SEC filings.¹

Getting this wrong is expensive. Selling to a non-QIB can destroy the safe harbor for the whole transaction and expose the seller to liability for an unregistered sale under Section 5. Compliance teams typically bake QIB verification into standard trade procedures for that reason.

Notice of Reliance on the Rule

The seller must also take reasonable steps to make sure the buyer knows the seller is relying on Rule 144A. This is separate from QIB verification. The notice usually appears in the purchase agreement or trade confirmation. The rule does not prescribe a format; it just requires that the buyer be told.

Which Securities Are Eligible: The Fungibility Test

Rule 144A cannot be used for a security that is fungible — interchangeable — with a class of securities listed on a U.S. national securities exchange or quoted on a U.S. automated inter-dealer quotation system like NASDAQ. The test runs at the class level, not the issuer level. Common stock listed on the NYSE is off-limits, but the same company’s preferred stock or debt securities can still qualify if those classes are not publicly traded.¹

The securities that dominate the 144A market — high-yield corporate bonds, non-convertible preferred stock, and certain asset-backed tranches — rarely have listed counterparts of the same class, so they clear the hurdle easily.

Convertible securities get a special rule. A security convertible into an exchange-listed class can still qualify under 144A if the conversion premium is at least 10% at issuance. That buffer makes immediate conversion uneconomic and preserves the security’s private character.

Open-end investment companies (mutual funds), unit investment trusts, and face-amount certificate companies are categorically excluded. Those retail-oriented products have their own Investment Company Act registration requirements, and letting them into the 144A market would cut around those protections.

Issuers typically enforce non-fungibility through transfer restrictions and a restrictive legend on the securities noting they have not been registered under the Securities Act.

Information the Issuer Must Make Available

The fourth condition depends on whether the issuer already reports to the SEC. If the issuer files Forms 10-K, 10-Q, and similar Exchange Act reports, nothing more is required. QIBs can pull the filings themselves.

If the issuer is not a reporting company, the buyer and seller must have the right to obtain, on request, a brief description of the issuer’s business and its products or services, plus the issuer’s most recent balance sheet and income statement, dated within 16 months of the sale. Where the sale happens within six months after the end of the issuer’s fiscal year, the balance sheet must be dated within 12 months.¹

The financials need not be audited. That flexibility is a big reason foreign private issuers use Rule 144A: they can reach U.S. capital markets without producing a full audit to U.S. standards. Many satisfy the requirement by making their home-country public filings available. Foreign government issuers provide their most recent annual financial information.

A subtle point: the requirement is that the buyer have the right to request the information, not that anyone actually ask. If the issuer commits to furnish it on request, the condition is satisfied even if no QIB makes the request.

What Rule 144A Does Not Do

The rule’s preliminary notes are explicit that Rule 144A “relates solely to the application of section 5 of the Act and not to antifraud or other provisions of the federal securities laws.”¹ In plain terms: the exemption gets you out of registering the securities. It does not get you out of telling the truth about them.

Rule 10b-5 applies with full force to 144A transactions. A material misstatement or omission in an offering memorandum or investor presentation can trigger liability. That’s why issuers almost always prepare detailed offering memoranda that mirror the disclosure in a registered offering, even though nothing in Rule 144A requires them to. Section 12(a)(2) of the Securities Act, which lets buyers rescind for misstatements in a “prospectus,” does not reach private resales, so 10b-5 is the primary enforcement mechanism — and it requires proving intent to deceive, a higher bar than Section 12(a)(2)’s negligence standard.

General Solicitation After the JOBS Act

Before 2013, offers under Rule 144A could only be made directly to QIBs, which functionally banned public marketing. The Jumpstart Our Business Startups Act changed that. The SEC amended Rule 144A to permit general solicitation, so long as actual sales are limited to persons the seller reasonably believes are QIBs.³

In practice, most 144A offerings are still marketed through private channels and dealer networks. But the amendment removed a technical trap: incidental public exposure of offering terms no longer jeopardizes the exemption.

Why Institutions Use Rule 144A

The practical payoff is liquidity. QIBs can resell 144A securities to other QIBs immediately, with no holding period. Rule 144, by contrast, imposes a six-month holding period for reporting-company securities and a full year for non-reporting issuers.⁴ Same-day exit potential is what makes 144A pricing competitive with registered offerings; institutions accept lower yields or pay higher prices when they know they can trade out. Settlement runs through the Depository Trust Company’s standard book-entry system, with securities typically issued in global certificate form.⁵

Pairing With Regulation S

Issuers raising capital globally often pair a Rule 144A offering for U.S. QIBs with a simultaneous Regulation S offering for investors outside the United States. The same securities are sold in two tranches on generally identical terms. Distribution restrictions during a seasoning period keep the Regulation S tranche from flowing back into the U.S. market before it can be absorbed under 144A or another exemption. That template has become standard for international debt offerings and many equity placements by non-U.S. companies.

Registration Rights and A/B Exchanges

Many 144A debt offerings come with contractual registration rights. The issuer commits to file a registration statement, typically within 180 to 365 days after the placement, and then conduct an exchange offer in which QIBs swap their restricted 144A securities for freshly registered, freely tradeable securities with identical economic terms. Market participants call this an A/B exchange or Exxon Capital exchange. If the issuer misses the registration deadline, the deal documents usually step up the interest rate as a penalty. Rule 144A does not require any of this; it’s a market convention driven by investor demand, and it has become standard enough in high-yield 144A offerings that an issuer skipping it would face a higher yield to compensate.

1
eCFR. 17 CFR 230.144A – Private Resales of Securities to Institutions
2
U.S. Securities and Exchange Commission. Final Rule – Amending the Accredited Investor Definition
3
U.S. Securities and Exchange Commission. Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings
4
eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution
5
Federal Register. Self-Regulatory Organizations – The Depository Trust Company – Order Approving a Proposed Rule Change