Qualified Institutional Buyer (QIB)?

A qualified institutional buyer (QIB) is a class of investor that can safely be assumed to be a sophisticated investor and, hence, does not require the regulatory protection that the Securities Act's registration provisions give investors. In broad terms, QIBs are institutional investors that own or manage at least $100 million worth of securities on a discretionary basis.

The SEC allows only QIBs to trade Rule 144A securities, which are specific securities deemed to be restricted or controlled securities, such as private placement securities.

Understanding Qualified Institutional Buyers (QIBs)

The qualified institutional buyer designation is often conferred upon entities comprised of sophisticated investors. Essentially, due to their experience, assets under management (AUM), and net worth, these individuals or entities are considered not to require the regulatory oversight needed by regular retail investors when purchasing securities.

Typically, a QIB is a company that manages a minimum investment of $100 million in securities on a discretionary basis or is a registered broker-dealer with at least $10 million invested in non-affiliated securities. The entities deemed qualified institutional buyers also include banks, savings and loan associations (which must have a net worth of $25 million), investment and insurance companies, employee benefit plans, and entities wholly owned by QIBs.

The definition of QIB is generally narrower than the list of entities in the broader accredited investor definition. The formerly rigid QIB definition had resulted in some sophisticated investors that had met the $100 million securities ownership threshold being technically excluded from achieving QIB status and hence ineligible to participate in Rule 144A offerings.

To remedy these technical deficiencies and better identify institutional and individual investors with the knowledge and expertise to participate in the U.S. private capital markets, on Aug. 26, 2020, the Securities and Exchange Commission (SEC) adopted amendments to the QIB and "accredited investors" definitions.

The QIB amendments added a provision to the QIB definition to include any institution not explicitly listed in the definition of the qualified institutional buyer but that qualifies as an accredited investor and meets the $100 million securities ownership threshold. The amendments also permitted these entities to be formed as QIBs to acquire the securities offered.

QIBs and Rule 144A

Under Rule 144A, QIBs are allowed to trade restricted and controlled securities on the market, which increases the liquidity for these securities. This rule provides a safe harbour exemption against the SEC's registration requirements for securities.

Rule 144A applies only to resales of securities and not when they are initially issued; in a typical underwritten security offering, only the resale of the security from underwriter to investor constitutes a Rule 144A transaction, not the initial sale from issuer to underwriter.

Typically, transactions conducted under Rule 144A include foreign investors offering to avoid U.S. reporting requirements, private placements of debt and preferred securities of public issuers, and standard stock offerings from issuers that do not report.

These securities have a degree of complexity that may make them difficult to evaluate for retail investors. They may thus only be suitable for institutional investors with the research capability and risk management expertise to make an informed decision about investing in them.

Securities Act Rule 144 and Exempt Offerings

This rule governs the sales of controlled and restricted securities in the marketplace. This rule protects the interests of issuing companies because the sales are so close to their interests. Section 5 of the Securities Act of 1933 governs all offers and sales and requires them to be registered with the SEC or to qualify for an exemption from registration requirements.

Rule 144 offers an exemption, allowing the public resale of controlled and restricted securities if certain conditions are met. This includes the length of time securities are held, the method used to sell them, and the number that are sold in any one sale. Even if all requirements have been met, sellers are permitted to conduct sales of restricted securities to the public once a transfer agent has been secured.

The significance of exempt offerings has increased regarding the total amount raised relative to capital raised in public registered markets. According to the SEC, in 2019, an estimated $2.7 trillion (or 69.2% of the total) was raised through exempt offerings, compared to $1.2 trillion (30.8%) from registered offerings.