Qualified Institutional Buyers (QIBs) are sophisticated investors exempt from regulatory protection under the Securities Act. They are typically companies managing a minimum investment of $100 million in securities or registered broker-dealers with at least a $10 million investment in non-affiliated securities. In 2020, the Securities and Exchange Commission (SEC) broadened the eligibility criteria for QIBs and accredited investors. QIBs, governed by Rule 144A, can trade restricted and control securities on the market, increasing their liquidity.
Basics
QIBs are sophisticated investors who do not require regulatory protection under the Securities Act. They are typically institutional investors with significant holdings of securities. QIBs have exclusive trading privileges for Rule 144A securities, including restricted and control securities such as private placement securities.
Who Are Qualified Institutional Buyers?
Qualified Institutional Buyers are typically companies managing at least $100 million in securities or registered broker-dealers with a minimum of $10 million invested in non-affiliated securities. QIBs can include banks, savings and loans associations, investment and insurance companies, employee benefit plans, and entities fully owned by QIBs.
Previously, the definition of QIB was more rigid, and some qualified investors who met the $100 million threshold were excluded from QIB status and unable to participate in Rule 144A offerings. To address this issue and better identify knowledgeable investors in the U.S. private capital markets, the SEC made amendments to the QIB and "accredited investors" definitions on August 26, 2020.
These amendments expanded the QIB definition to include institutions that qualify as accredited investors and meet the $100 million securities ownership requirement. They also allowed entities to be formed as QIBs specifically to acquire the offered securities.
What Is Rule 144 or the Securities Act?
Rule 144 is a regulation that governs the sale of controlled and restricted securities in the marketplace. It serves to protect the interests of issuing companies by ensuring that sales closely align with their interests. Under Section 5 of the Securities Act of 1933, all offers and sales must be registered with the SEC or qualify for an exemption from registration requirements.
Rule 144 provides an exemption that allows for the public resale of controlled and restricted securities, provided certain conditions are met. These conditions include the length of time the securities are held, the method of sale, and the quantity sold in each transaction. Additionally, sellers are required to engage a transfer agent before conducting sales of restricted securities to the public.
QIBs & Rule 144A
Under Rule 144A, QIBs can trade restricted and control securities on the market, which increases their liquidity. This rule exempts the resale of securities from SEC registration requirements. Rule 144A applies only to the resale of securities, not the initial issuance. Transactions conducted under Rule 144A often involve offerings of complex securities, such as debt and preferred securities, offered by public issuers or common stock offerings from issuers that do not report. These securities may be challenging for retail investors to evaluate and may require research capability and risk management expertise that institutional investors possess.
Rule 144 & Exempt Offerings
Exempt offerings have gained significance in terms of both total funds raised and their proportion relative to capital raised in publicly registered markets. In 2019, the SEC reported that approximately $2.7 trillion was raised through exempt offerings, compared to $1.2 trillion from registered offerings.
Conclusion
Qualified Institutional Buyers are sophisticated investors exempt from regulatory protection under the Securities Act. They are typically institutional investors with significant holdings of securities, such as banks, savings and loans associations, and investment and insurance companies. QIBs have exclusive trading privileges for Rule 144A securities, including restricted and control securities such as private placement securities. With the recent expansion of the QIB definition, more investors can participate in Rule 144A offerings.