The SEC’s Division of Corporation Finance staff released 35 new Compliance and Disclosure Interpretations (C&DIs) (available here) on December 8th. Among numerous interpretations focused on issues applicable to foreign private issuers and offshore offerings under Regulation S were several C&DIs providing new interpretations of the SEC’s rules for determining qualified institutional buyer (QIB) status for Rule 144A offerings.
Overview: Rule 144A and QIBS
Rule 144A is a safe harbor exemption from the registration requirements of Section 5 of the Securities Act for certain offers and sales of qualifying securities (not listed on a U.S. securities exchange or quoted on a U.S. quotation system). Public company offerings of debt or preferred securities and offerings by non-reporting issuers or foreign issuers are the most common Rule 144A offerings.
The exemption available under Rule 144A allows resales of securities to QIBs, which are institutions (not individuals), deemed to be an “accredited investor” as defined under Rule 501 of the SEC’s Regulation D. To qualify as a QIB under Rule 144A, an entity must own and invest a minimum of $100 million in securities on a discretionary basis.
In new C&DI 138.05, the staff clarifies that securities purchased or are held on margin by an entity would still be considered owned by the entity (as long as they are not also subject to a repurchase agreement) for purposes of determining whether such entity meets the $100 million threshold to qualify as a QIB under Rule 144A(a)(1)(i).
Question 138.06 similarly provides that an entity’s loaning of securities does not preclude it from including such securities in calculating the $100 million requirement for QIBS.
In new C&DI 138.09, the staff expresses its view an investment company that is not registered under the 1940 Act may not aggregate investments by the other funds that are part of the family in the manner described under Rule 144A(a)(1)(iv) as such aggregation is only available to registered investment companies.
And in the staff’s final interpretation on QIB status under Rule 144A, Question 138.10, the staff provides additional clarification on the accommodation under Rule 144A(a)(1)(v) in which an entity may qualify as QIB if all of its equity owners are also QIBs. The C&DI notes that limited partners are considered the equity owners of a limited partnership for purposes of applying Rule 144A(a)(1)(v). As a result, the QIB status of a general partner need not be considered unless such general partner is also a limited partner.