Who qualifies as a Qualified Institutional Buyer (QIB) and what does this designation entail?

What Is a Qualified Institutional Buyer (QIB)?

A Qualified Institutional Buyer (QIB) is a distinguished type of investor recognized for their financial sophistication, exempt from certain Securities Act registration provisions. In essence, QIBs are institutional investors with a minimum of $100 million in securities under their management or ownership on a discretionary basis.

Specifically designated by the SEC, only QIBs are permitted to trade Rule 144A securities, which encompass restricted or control securities like private placement securities.

Key Takeaways:

• A QIB, being financially astute, is exempt from Securities Act registration provisions, unlike regular investors.
• Typically, a QIB manages a minimum of $100 million in securities or is a registered broker-dealer with a $10 million investment in non-affiliated securities.
• In August 2020, the SEC broadened the eligibility criteria for QIB and accredited investor designations.
• Rule 144A enables QIBs to enhance liquidity for restricted and control securities by trading them on the market.

Investopedia / Jessica Olah

Understanding Qualified Institutional Buyers (QIBs)

The title of Qualified Institutional Buyer is typically granted to groups consisting of savvy investors. These entities, due to their financial acumen, substantial assets under management (AUM), and overall net worth, are deemed exempt from the level of regulatory oversight that ordinary retail investors necessitate when engaging in securities transactions.

Among the entities qualified as a QIB are companies managing over $100 million in securities on a discretionary basis or registered broker-dealers with at least $10 million invested in non-affiliated securities. The scope of QIB entities also extends to include banks, savings and loans associations, investment and insurance firms, employee benefit plans, and entities fully owned by QIBs.

Compared to the broader accredited investor definition, the QIB category is more exacting. Previously, some sophisticated investors barely missed the QIB status due to the rigid $100 million securities ownership threshold, precluding them from participating in Rule 144A offerings.

To address these technical issues and to better identify institutional and individual investors well-versed in U.S. private capital markets, the SEC revised the QIB and accredited investor definitions in August 2020.

The QIB modifications include allowing institutions meeting the accredited investor standards and the $100 million securities ownership requirement to qualify as QIBs. These entities are also permitted to establish as QIBs specifically for acquiring offered securities.

QIBs and Rule 144A

Rule 144A empowers QIBs to trade restricted and control securities, boosting liquidity for these assets on the market. Besides enhancing liquidity, this rule offers a safe harbor exemption from SEC registration requirements for securities.

Rule 144A only applies to securities resale, not initial issuances. In underwritten offerings, the sale from underwriter to investor falls under Rule 144A, not the initial transaction from issuer to underwriter.

Transactions under Rule 144A typically involve offerings by foreign investors seeking to bypass U.S. reporting requirements, private placements of debt and preferred securities, and stock offerings by non-reporting issuers.

Due to their complexity, these securities may be challenging for retail investors to evaluate, making them more suitable for institutional investors with research capabilities and risk management expertise.

Securities Act Rule 144 and Exempt Offerings

Rule 144 governs the sale of controlled and restricted securities in the market, safeguarding the interests of issuing companies. Section 5 of the Securities Act of 1933 covers all offers and sales, requiring registration with the SEC or qualifying for an exemption from registration requirements.

Providing an exemption, Rule 144 enables the public resale of controlled and restricted securities if specific conditions are met. These include the holding period, sales method, and quantity sold in each transaction. Moreover, sellers must secure a transfer agent before trading restricted securities publicly.

The significance of exempt offerings has grown significantly, with a substantial portion of capital raised through exempt offerings compared to public registered markets, based on 2019 data from the SEC.