Rule 144A

An issuer's placement agent is evaluating whether a prospective institutional purchaser qualifies to buy unregistered notes being resold in reliance on Rule 144A, and separately whether that same institution would qualify as an accredited investor for a different offering being conducted under Regulation D. Are the "qualified institutional buyer" standard under Rule 144A and the "accredited investor" standard under Regulation D the same test?

1. A.Yes, both standards use the identical dollar thresholds and criteria, simply applied under two different rule numbers for historical reasons.Wrong. The two standards are set at different levels under different rules.
2. B.Yes, but only because any institution large enough to be a qualified institutional buyer is automatically presumed accredited under a specific Regulation D cross-reference provision.Wrong. There is no such automatic cross-qualification provision linking the two standards.
3. C.No, and in fact the accredited investor standard is the higher bar of the two, since it is designed to protect individual investors specifically.Wrong. This reverses which standard is generally higher; qualified institutional buyer status requires a substantially larger securities portfolio.
4. D.No -- they are separate standards from different rules, with qualified institutional buyer status generally the higher bar, and meeting one does not automatically establish the other.Correct. The two standards must be checked independently.

Why: No. They are separate standards from different rules. The qualified institutional buyer standard under Rule 144A is generally a materially higher bar, tied to owning and investing a substantial amount in securities of unaffiliated issuers, than the accredited investor standard under Regulation D, which can be satisfied through income, net worth, or other tests set at a lower threshold. Meeting one standard does not automatically confirm the other.

An issuer wants to place unregistered debt with large institutions and tells its placement agent to rely on Rule 144A for the sale. What is wrong with that instruction?

1. A.Nothing is wrong; Rule 144A exempts any sale of unregistered debt to a qualified institutional buyer.Wrong. The safe harbor is confined to resales by persons who are not the issuer.
2. B.Rule 144A applies only to equity, so the issuer must use Regulation S for debt.Wrong. Rule 144A is not limited to equity and Regulation S turns on the offering being offshore.
3. C.Rule 144A is available only after the applicable Rule 144 holding period has run.Wrong. Rule 144A operates independently of the Rule 144 holding periods.
4. D.Rule 144A exempts resales rather than the issuer own sale, which still needs its own exemption.Correct. The issuer leg is normally Section 4(a)(2) or Regulation D, with the resale leg under Rule 144A.

Why: Rule 144A is a resale safe harbor. It exempts a resale of restricted securities by a person other than the issuer to a qualified institutional buyer; it says nothing about the issuer own sale. The customary structure is therefore two-legged: the issuer places the securities with an initial purchaser under Section 4(a)(2) or Regulation D, and the initial purchaser then resells to qualified institutional buyers under Rule 144A. If the issuer tried to sell directly in reliance on Rule 144A alone, it would have no exemption for its own leg of the transaction.

A bank holds well over one hundred million dollars of securities of unaffiliated issuers on a discretionary basis. What additional condition does Rule 144A impose before it is a qualified institutional buyer?

1. A.That it be a member of the Federal Reserve System.Wrong. Membership of any particular system is not part of the definition.
2. B.That it hold the securities for the account of other qualified institutional buyers only.Wrong. A bank may act for its own account or for the accounts of other qualified institutional buyers.
3. C.An audited net worth of at least twenty-five million dollars shown in recent annual financial statements.Correct. The bank category adds a capital condition to the securities-holding test.
4. D.That its securities holdings be marked to market daily.Wrong. No valuation frequency requirement appears in the definition.

Why: Banks and savings and loan associations sit in their own paragraph of the definition. In addition to the one hundred million dollar securities test they must have an audited net worth of at least twenty-five million dollars, demonstrated in the latest annual financial statements as of a date not more than sixteen months before the sale for a domestic institution, and eighteen months for a foreign one. The extra condition reflects that a bank securities portfolio can be very large relative to its own capital. No other category of qualified institutional buyer carries a net worth condition of this kind.

A qualified institutional buyer (QIB), as used in the context of eligible investors for certain exempt offerings, is best described as:

1. A.Any individual investor who meets the accredited investor income or net worth thresholdsWrong. QIB status is an institution-level classification with its own asset thresholds, distinct from the individual accredited-investor test.
2. B.A large institutional investor meeting a specified minimum threshold of securities owned and investedCorrect. This is the core concept behind QIB status.
3. C.Any broker-dealer registered with FINRAWrong. Broker-dealer registration alone does not confer QIB status; QIB status depends on the size of securities owned and invested.
4. D.A government entity exempt from all securities regulationWrong. QIBs are not exempt from securities regulation generally; QIB status is relevant to specific transaction exemptions such as Rule 144A.

Why: A QIB is an institutional investor (such as certain insurance companies, investment companies, banks and other large institutions) that meets a specified minimum threshold of securities owned and invested, reflecting a level of sophistication and financial capacity that makes certain exemptions (such as Rule 144A resales) available when securities are sold only to QIBs.