Rule 144A

• What is Rule 144A?
• Who may rely on Rule 144A?
• What are the conditions that a reseller of restricted securities must satisfy to rely on Rule 144A?
• Must a reseller of restricted securities rely only on Rule 144A in making exempt resales?
• Are securities resold under Rule 144A freely tradable after such resale?
• What is the Section 4(1½) exemption?

• What is a "QIB"?
• How is the value of securities owned and invested by a QIB calculated under Rule 144A?
• If a company reports both cost and mark-to-market values of the securities it holds, which values should be used to determine whether an entity is a QIB?
• Can the amount of securities to be purchased in a Rule 144A offering be included in calculating the amount of securities owned or invested by a QIB?
• Will an entity that is formed solely for the purpose of acquiring restricted securities in a Rule 144A transaction be deemed to be a QIB?
• How does a reseller establish a reasonable belief that a person is a QIB?
• Can a reseller rely on the information enumerated in Rule 144A even though more current information shows that the level of securities owned by the prospective purchaser is lower?
• Can a reseller of restricted securities rely on information other than that enumerated in Rule 144A for its belief that the prospective purchaser is a QIB?

• Why must the reseller take reasonable steps to make the purchaser aware that it is relying on Rule 144A in connection with the resale?
• How does the reseller typically satisfy the requirement of making the buyer aware that the reseller may rely on Rule 144A in connection with the resale?

D. Eligible Securities

• When are securities deemed to be of the "same class" as securities listed on a U.S. national securities exchange or quoted on an automated inter-dealer quotation system?
• How is an effective conversion premium calculated?
• Are restricted securities received upon conversion eligible for resale even though they are the same class as securities listed on a national securities exchange or quoted in an automated inter-dealer quotation system?
• Can a reseller rely on Rule 144A to reoffer or resell securities underlying ADRs?
• What happens if a security that was previously resold pursuant to Rule 144A is subsequently listed on a U.S. stock exchange or quoted on a U.S. automated inter-dealer quotation system?
• What is the definition of U.S. automated inter-dealer quotation systems for purposes of Rule 144A?

E. Informational Requirements

• What type of information is required to be delivered to purchasers under Rule 144A?
• What does "reasonably current" information mean in connection with furnishing disclosure to purchasers?
• How is the purchaser's "right to obtain" such information from the issuer enforced?
• What type of information needs to be provided by a 1934 Act reporting company or a foreign issuer providing home country information?
• When does the obligation to provide a buyer with the information cease?
• What information is required to be provided to a buyer when a Rule 144A issuer's securities are guaranteed by its parent company?

F. Rule 144A Trading Markets

• Is there a trading market for Rule 144A securities?
• Who qualifies as a buyer on the PORTAL market?
• How do securities become eligible to trade on the PORTAL market?

G. Conducting Rule 144A Transactions

• How are Rule 144A transactions structured?
• What type of documentation is typically involved in a Rule 144A transaction?
• What is the offering process in connection with a Rule 144A transaction?
• Why do Rule 144A purchasers typically insist that the issuer register the securities issued in the Rule 144A transaction?
• How are Rule 144A securities registered under the 1933 Act?
• What is an Exxon Capital exchange offering?
• How are Rule 144A securities registered in a shelf offering?
• Why are shelf offerings not the preferable form of registering Rule 144A offerings?
• What is a "side-by-side" offering in the context of Rule 144A?

H. Use of the Internet to Conduct Rule 144A offerings

• Can the Internet be used to make Rule 144A reoffers and resales?

I. Miscellaneous

• Are the antifraud provisions of the federal securities laws applicable to Rule 144A transactions?
• Is a Rule 144A security a "covered security" for purposes of Section 18 of the 1933 Act?
• Can an issuer that is not a 1934 Act reporting company be required to register under the 1934 Act in connection with a Rule 144A transaction?
• Are securities resold in reliance on Rule 144A included in determining the amount of securities that a person can resell in reliance on Rule 144?
• May an issuer publish a notice about a proposed Rule 144A transaction?

Understanding Rule 144A

What is Rule 144A?

A safe harbor exemption from the registration requirements of Section 5 of the 1933 Act for resales of certain restricted securities to qualified institutional buyers, who are commonly referred to as “QIBs.” See more @ “What is a ‘QIB’?”

In particular, Rule 144A affords safe harbor treatment for reoffers or resales to QIBs - by persons other than issuers - of securities of domestic and foreign issuers that are not listed on a U.S. securities exchange or quoted on a U.S. automated inter-dealer quotation system. See more @ “Who may rely on Rule 144A?”

Rule 144A provides that reoffers and resales in compliance with the rule are not “distributions” and that the reseller is therefore not an “underwriter” within the meaning of Section 2(a)(11) of the 1933 Act.

If the reseller is not the issuer or a dealer, it can rely on the exemption provided by Section 4(1) of the 1933 Act. If the reseller is a dealer, it can rely on the exemption provided by Section 4(3) of the 1933 Act.

Who may rely on Rule 144A?

Any person other than an issuer. Affiliates of the issuer may rely on Rule 144A.

Rule 144A offers no protection for issuers - they must find another exemption for the offer and sale of unregistered securities. .

Source: Telephone Interpretation No. 5 of the March 1999 Supplement of the Division of Corporation Finance’s Manual of Publicly Available Telephone Interpretations.

What are the conditions that a reseller of restricted securities must satisfy to rely on Rule 144A?

There are four conditions:

• The reoffer or resale is made only to QIBs (see more @ what is a "QIB") or to an offeree or purchaser that the reseller (and any person acting on its behalf) reasonably believes is a QIB ( see more @ How does a reseller establish a reasonable belief that a person is a QIB);
• The reseller (or any person acting on its behalf) must take reasonable steps to ensure that the buyer is aware that the reseller may rely on Rule 144A in connection with such resale (see more @ Reseller’s Reasonable Steps So Buyer is Aware of Rule 144A Reliance);
• The securities reoffered or resold (a) when issued were not of the same class as securities listed on a U.S. national securities exchange or quoted on a U.S. automated inter-dealer quotation system (see more @ What is the definition of U.S. automated inter-dealer quotation systems for purposes of Rule 144A?), and (b) are not securities of an open-end investment company, unit investment trust, or face-amount certificate company that is, or is required to be, registered under the Investment Company Act of 1940; and
• In the case of securities of an issuer that is neither a 1934 Act reporting company nor exempt from reporting pursuant to Rule 12g3-2(b), the holder and a prospective buyer designated by the holder must have the right to obtain from the issuer, upon the holder's request, certain reasonably current information; and such buyer must receive, upon the buyer's request of the holder or issuer, certain reasonably current information about the issuer from the issuer, seller, or a person acting on behalf of either of them at or prior to the resale (see more @Informational Requirements).

Must a reseller of restricted securities rely only on Rule 144A in making exempt resales?

No, Rule 144A is a non-exclusive safe harbor.

As a result, a reseller may rely upon any applicable exemption from the registration requirements of the 1933 Act in connection with the resale of restricted securities.

Typically, resellers that cannot rely on the safe harbor under Rule 144A will attempt to rely on the hybrid Section 4(1½) exemption, which is technically an offering under Section 4(1) that includes some of the basic features of a Section 4(2) transaction. See more @ What is the Section 4 (1½) exemption?.

In addition, resellers of restricted securities may resell such securities outside of the U.S. under Regulation S.

Also, if a non-affiliate reseller can satisfy the one-year holding period requirement of Rule 144(d)(1) and the other conditions and restrictions imposed by paragraphs (c), (e), (f) and (h) of Rule 144, it may rely on the resale safe harbor provided by Rule 144 for the resale of restricted securities. However, because of the requirement imposed by paragraph (c) of Rule 144, such resales are limited to restricted securities of issuers that have securities registered pursuant to Section 12 or 15(d) of the 1934 Act.

If the non-affiliate reseller can satisfy the two-year holding period requirement of Rule 144(k), it may rely on the resale exemption provided by Rule 144 for the resale of restricted securities even though the issuer of the restricted securities does not have securities registered under the 1934 Act. Moreover, the volume limitations of Rule 144(e), the manner of sale restrictions of Rule 144(f) and the notice requirement of Rule 144(h) are not applicable to such resale.

Source: Preliminary Note No. 2 of Rule 144. With respect to the resale of restricted securities pursuant to Rule 144, see J. William Hicks, Resales of Restricted Securities, at 5-3 (West Group 1999) (the non-affiliate that resells restricted securities pursuant to Rule 144(k) “can treat [as] irrelevant the fact that the issuer might be private or that material information concerning it might not be current or publicly available.”).

Are securities resold under Rule 144A freely tradable after such resale?

No. Securities acquired in a Rule 144A transaction are deemed to be “restricted securities” within the meaning of Rule 144(a)(3) of the 1933 Act.

As a result, such securities may only be publicly resold pursuant to Rule 144 of the 1933 Act or a registration statement under the 1933 Act.

In addition, such securities may be resold pursuant to an exemption under the 1933 Act. Exempt resales of restricted securities may be made in compliance with Rule 144A, the so-called Section 4(1½) exemption or Regulation S. See more @ What is the Rule 4 (1½) exemption? or Regulation S

Source: Rule 144(a)(3)(iii) of the 1933 Act and Preliminary Note No. 6 of Rule 144A of the 1933 Act.

What is the Section 4(1½) exemption?

The Section 4(1½) exemption is a case law-derived exemption that allows the resale of privately placed securities in a subsequent private placement.

Technically, it is an offering under Section 4(1) that includes some of the basic features of a Section 4(2) transaction.

The Section 4(1½) exemption typically is relied on in connection with the resale of restricted securities to accredited investors who make appropriate representations. See more @ What are the conditions that a reseller of restricted securities must satisfy to rely on Rule 144A? .

Source: The seminal case involving the so-called Section 4(1½) exemption was the Second Circuit Court of Appeals decision in Gilligan, Will & Co. v. SEC, 267 F.2d 461 (2d Cir. 1959). The Second Circuit intimated that a person purchasing restricted securities from an issuer is not an underwriter for purposes of Section 4(1) of the 1933 Act if the purchaser resells the restricted securities to persons who qualify as purchasers under Section 4(2) as described by the U.S. Supreme Court in SEC v. Ralston Purina Co , 346 U.S. 119 (1953), and who acquire such restricted securities in a private offering of the type contemplated by Section 4(2).

B. Eligible Purchasers

What is a "QIB"?

In general, any entity included within one of the categories of “accredited investor” defined in Rule 501 of Regulation D of the 1933 Act, acting for its own account or the accounts of other QIBs, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers not affiliated with the entity ($10 million for a broker-dealer). See more @ Can the amount of securities to be purchased in a Rule 144A offering be included in calculating the amount of securities owned or invested by a QIB? .

Banks and savings and loan associations must also have a net worth of at least $25 million.

In addition, a broker-dealer acting as a riskless principal for an identified QIB would itself be deemed a QIB. To qualify as a riskless principal, the broker-dealer must have a commitment from the QIB that it will simultaneously purchase securities from the broker-dealer. The commitment from the QIB must be effective at the time of purchase in the Rule 144A transaction.

A QIB can be formed merely for the purpose of conducting a Rule 144A transaction. See more @ Will an entity that is formed solely for the purpose of acquiring restricted securities in a Rule 144A transaction be deemed to be a QIB? .

Source: Rule 144A(a)(1) of the 1933 Act. “The Commission decided on the $100 million in securities threshold as a presumptive mechanism - a presumption that the investor has enough experience to be able to fend for itself in the private resale market for restricted securities.” J. William Hicks, Resales of Restricted Securities at 7-34 (West Group 1999).

How is the value of securities owned and invested by a QIB calculated under Rule 144A?

On a cost basis (i.e., how much the securities cost when purchased), except that where the entity values securities on a fair market value basis for financial reporting purposes and no current information with respect to the cost of such securities has been published, the entity may use the fair market value basis for valuation. See more @ If a company reports both cost and mark-to-market values of the securities it holds, which values should be used to determine whether an entity is a QIB?

In determining the amount of securities, an entity may include securities of its consolidated subsidiaries if such securities are managed by the entity (a reporting subsidiary may also include securities of its consolidated subsidiary if it manages such securities) but must exclude securities issued or guaranteed by the United States or a U.S. instrumentality, bank deposit notes and certificates of deposit, loan participations, repurchase agreements, and currency, interest rate, and commodity swaps. See more @ Can the amount of securities to be purchased in a Rule 144A offering be included in calculating the amount of securities owned or invested by a QIB?.

Source: Rule 144A(a)(2), (3) and (4) of the 1933 Act. For a detailed discussion of the securities that are included and excluded for purposes of determining whether a prospective purchaser is a QIB, see SEC No-Action Letter UNUM Life Insurance Co. (available November 21, 1990).

If a company reports both cost and mark-to-market values of the securities it holds, which values should be used to determine whether an entity is a QIB?

Only the cost valuation method should be used.

The SEC staff has made clear its preference for the use of cost valuation versus market valuation when determining whether a prospective buyer is a QIB. This applies regardless of whether the company uses either cost or mark-to-market financial reporting.

Source: The staff's views are expressed in SEC No-Action Letter UNUM Life Insurance Co. (available November 21, 1990).

Can the amount of securities to be purchased in a Rule 144A offering be included in calculating the amount of securities owned or invested by a QIB?

No.

The amount of securities to be purchased in the Rule 144A transaction itself may not be included when calculating the amount of securities that are owned or invested on a discretionary basis by a prospective purchaser for purposes of determining whether the purchaser is a QIB eligible to participate in the offering.

Source: Telephone Interpretation No. 6 of the March 1999 Supplement of the Division of Corporation Finance’s Manual of Publicly Available Telephone Interpretations..

Will an entity that is formed solely for the purpose of acquiring restricted securities in a Rule 144A transaction be deemed to be a QIB?

Yes.

Eligible purchasers under Rule 144A can be entities formed solely for the purpose of acquiring restricted securities, so long as they satisfy the qualifying QIB tests.

Source: SEC Release No. 33-6862 (April 23, 1990).

How does a reseller establish a reasonable belief that a person is a QIB?

The reseller (and any person acting on the reseller’s behalf) may rely on the following, provided the information is as of a date not more than 16 months (18 months for a foreign purchaser) preceding the sale :

Source: Rule 144A(d)(1)(i) - (iv) of the 1933 Act and SEC Release 33-6862 (April 23, 1990)

Can a reseller rely on the information enumerated in Rule 144A even though more current information shows that the level of securities owned by the prospective purchaser is lower?

Yes. The SEC has expressly stated so. However, a reseller cannot rely on certifications that it knows, or is reckless in not knowing, are false.

Source: SEC Release 33-6862 (April 23, 1990).

Can a reseller of restricted securities rely on information other than that enumerated in Rule 144A for its belief that the prospective purchaser is a QIB?

Yes. The bases for reliance enumerated in Rule 144A are non-exclusive; resellers may be able to establish a reasonable belief of eligibility based on factors other than those cited.

A reseller cannot rely on certifications that it knows, or is reckless in not knowing, are false, but there is no duty of verification. In other words, unless circumstances give a reseller reason to question the veracity of the information relied upon, the reseller does not have a duty of inquiry to verify the information.

Source: Rule 144A(d)(1) of the 1933 Act and SEC Release No. 6862 (April 23, 1990).

C. Reseller's Reasonable Steps So Buyer is Aware of Rule 144A Reliance

Why must the reseller take reasonable steps to make the purchaser aware that it is relying on Rule 144A in connection with the resale?

The seller must make the purchaser aware that it is acquiring restricted securities since those securities may only be resold pursuant to an exemption or registration under the 1933 Act.

Source: Marvin E. Pollack, Resales of Restricted Securities Under SEC Rules 144 and 144A, The Bureau of National Affairs, Inc. (1997).

How does the reseller typically satisfy the requirement of making the buyer aware that the reseller may rely on Rule 144A in connection with the resale?

By a legend on the security itself, a statement in the private placement memorandum or other offering document, and a restricted CUSIP number.

The note or stock certificate representing the securities resold under Rule 144A will generally include a legend (or a notation for electronic records) stating that the securities have not been registered under the 1933 Act and, therefore, may not be resold or otherwise disposed of in the absence of such registration or unless such transaction is exempt from, or not subject to, registration.

In addition, the offering memorandum used in connection with the Rule 144A offering typically will state that:

"Each purchaser of the securities will be deemed to have represented and agreed that it is acquiring the securities for its own account or for an account with respect to which it exercises sole investment discretion, and that it or such account is a QIB and is aware that the sale is being made to it in reliance on Rule 144A."

D. Eligible Securities

When are securities deemed to be of the "same class" as securities listed on a U.S. national securities exchange or quoted on an automated inter-dealer quotation system?

If the securities are substantially identical.

Common stock is deemed to be of the “same class” if it is of substantially similar character and the holders enjoy substantially similar rights and privileges. See more @ Can a reseller rely on Rule 144A to reoffer or resell securities underlying ADRs? and What happens if a security that was previously resold pursuant to Rule 144A is subsequently listed on a U.S. stock exchange or quoted on a U.S. automated inter-dealer quotation system?

Preferred stock will be deemed to be of the same class if its terms relating to dividend rate, liquidation preference, voting rights, convertibility, call, redemption and other similar material matters are substantially identical.

Debt securities will be deemed to be of the same class if the terms relating to interest rate, maturity, subordination, convertibility, call, redemption, and the like are substantially the same.

In addition, a convertible or exchangeable security with an effective conversion premium on issuance (which means at pricing) of less than 10%, and a warrant with a term less than three years or an effective exercise premium on issuance (which means at pricing) of less than 10%, will be treated as the “same class” as the underlying security. See more @ How is an effective conversion premium calculated?.

Source: Rule 144A(d)(3)(i) and SEC Release No. 33-6862 (April 23, 1990). Rule 144A(d)(3)(i) “invites a comparison of apparently different types of securities of the same issuer to determine whether in reality they should be considered the same class.” J. William Hicks, Resales of Restricted Securities at 7-29 (West Group 1999). The SEC has stated that privately-placed securities that, at the time of issuance, were fungible with securities trading on a U.S. exchange or quoted in Nasdaq would not be eligible for resale under Rule 144A. In Release No. 33-6862 (April 23, 1990), the SEC stated that the test under Rule 144A to determine whether common stock will be deemed to be of the same class is the same as the test used under Section 12(g)(5) of the 1934 Act and will be interpreted by the SEC in the same manner.

How is an effective conversion premium calculated?

For a convertible security, by (a) taking its price at issuance, (b) subtracting from such price the aggregate market value of the securities that would be received on conversion, and (c) dividing the difference by the amount subtracted in (b).

For a warrant, by (a) taking its price at issuance, (b) adding to such price its aggregate exercise price, (c) subtracting from such number the aggregate market value of the securities that would be received on exercise, and (d) dividing the difference by the amount subtracted in (c).

For both of these calculations, the market value of the underlying securities is determined as of the day of pricing of the convertible security or warrant.

Source: Marvin E. Pollack, Resales of Restricted Securities Under SEC Rules 144 and 144A, The Bureau of National Affairs, Inc. (1997). Notes 25 and 26 of SEC Release No. 33-6862 (April 23, 1990) provide examples on how to calculate the effective conversion premium and effective exercise premium.

Are restricted securities received upon conversion eligible for resale even though they are the same class as securities listed on a national securities exchange or quoted in an automated inter-dealer quotation system?

Yes, but only if no additional consideration is paid by the holder in connection with such conversion. Thus, restricted securities received, without payment of additional consideration by the holder, upon conversion where the convertible securities are eligible for resale under Rule 144A may be resold in reliance on Rule 144A.

Source: SEC No-Action Letter Debevoise & Plimpton (available July 23, 1990).

Can a reseller rely on Rule 144A to reoffer or resell securities underlying ADRs?

No. If American Depositary Receipts are listed on a U.S. national securities exchange or quoted on an automated inter-dealer quotation system, the deposited securities underlying the ADRs would also be considered publicly traded, and thus may not be resold in reliance on Rule 144A.

Source: SEC Release No. 33-6862 (April 23, 1990).

What happens if a security that was previously resold pursuant to Rule 144A is subsequently listed on a U.S. stock exchange or quoted on a U.S. automated inter-dealer quotation system?

There is no effect on the eligibility of previously issued Rule 144A securities.

Because eligibility under Rule 144A is determined at the time of issuance, securities of the same class that thereafter are listed on a U.S. national securities exchange or a U.S. automated inter-dealer quotation system will not affect the eligibility of the securities under Rule 144A.

Source: In SEC Release No. 33-6839 (July 19, 1989), the SEC stated that “eligibility for resale [under Rule 144A] would be determined at the time of issuance in interest of certainty.” See also SEC No-Action Letter Shearman & Sterling (December 21, 1998).

What is the definition of U.S. automated inter-dealer quotation systems for purposes of Rule 144A?

Only securities quoted on the Nasdaq National Market and the Nasdaq Small Cap Market are deemed to be “quoted on a U.S. automated inter-dealer system” for purposes of Rule 144A. As a result, securities quoted in these systems cannot be resold under Rule 144A.

Securities quoted on the Nasdaq Electronic Bulletin Board or in the Pink Sheets can be resold under Rule 144A.

Source: SEC Release No. 33-6862 (April 23, 1990), note 22. See also Telephone Interpretation No. 72 relating to Rule 144 and No. 54 relating to Form S-3 of the Division of Corporation Finance’s Manual of Publicly Available Telephone Interpretations.

E. Informational Requirements

What type of information is required to be delivered to purchasers under Rule 144A?

At a minimum, the offering memorandum, which must be reasonably current –(see more @ What does “reasonably current” information mean in connection with furnishing disclosure to purchasers? ) should include:

This delivery obligation can continue for some time. See more @ When does the obligation to provide a buyer with the information cease? .

Source: Rule 144A(d)(4)(i) of the 1933 Act.

What does "reasonably current" information mean in connection with furnishing disclosure to purchasers?

To be reasonably current:

Source: Rule 144A(d)(4)(ii) of the 1933 Act.

How is the purchaser's "right to obtain" such information from the issuer enforced?

It varies. Rule 144A does not specify the manner by which the right to obtain such information would arise.

Typically, the obligation to furnish this information will be imposed by either:

What type of information needs to be provided by a 1934 Act reporting company or a foreign issuer providing home country information?

Rule 144A does not provide any specific requirements for these two scenarios.

However, as a matter of practice, because the antifraud rules apply to Rule 144A transactions, an offering memorandum containing the information comparable to what a prospectus would contain is a necessity. See more @ Are the antifraud provisions of the federal securities laws applicable to Rule 144A transactions?

When does the obligation to provide a buyer with the information cease?

The obligation to provide information continues so long as the issuer is neither a reporting company nor a foreign issuer providing home country information.

What information is required to be provided to a buyer when a Rule 144A issuer's securities are guaranteed by its parent company?

It depends on the status of the parent-guarantor.

The information requirement does not apply if the securities are guaranteed by a parent company that would itself be exempt from the information requirement. If the parent-guarantor is not exempt, the information to be supplied is that of the parent-guarantor.

Source: The staff's position comes from the SEC No-Action Letters British Aerospace (available May 9, 1990) and Schering-Plough Corp (available November 21, 1991).

F. Rule 144A Trading Markets

Is there a trading market for Rule 144A securities?

Yes. Rule 144A securities may be traded on the Nasdaq's screen-based automated trading system known as PORTAL, "Private Offerings, Resale and Trading through Automated Linkages."

In practice, even though many underwriters require that Rule 144A securities be eligible to trade in PORTAL, few securities are actually traded through it.

PORTAL was created for use in secondary trading of unregistered securities in transactions exempt from the registration and prospectus delivery requirements of the 1933 Act pursuant to Rule 144A, and for primary placement of Rule 144A securities.

PORTAL is intended to be a closed trading market that limits trading to qualified institutions and established depositary and clearance systems so that trades can only be made to other such institutions, or outside the United States, or pursuant to a registration statement or exemption from registration. See more @ Who qualifies as a buyer on the PORTAL market?

Source: SEC Release No. 34-27956 (April 27, 1990). The Rule 5300 series of the NASD Manual contains the regulations relating to the PORTAL market.

Who qualifies as a buyer on the PORTAL market?

Only qualified institutional buyers (see more @ What is a “QIB?”), dealers who are qualified institutional buyers, and certain NASD registered broker-dealers.

Anyone interested and eligible to use PORTAL must first register with PORTAL and demonstrate their credentials. See more @ How do securities become eligible to trade on the PORTAL market?

Source: See Rules 5338, 5339 and 5351 of the NASD Manual.

How do securities become eligible to trade on the PORTAL market?

First, an application must be made by a PORTAL participant (with or without the issuer’s consent), to determine if a security is eligible for deposit into the PORTAL depositary system.

As part of this process, the security must be deposited by the issuer or a PORTAL participant. The deposited security must be in a negotiable form not subject to any restriction that would impose an unreasonable burden on any PORTAL participant.

Source: See Rules 5321 and 5322 of the NASD Manual.

G. Conducting Rule 144A Transactions

How are Rule 144A transactions structured?

Typically, an issuer first sells restricted securities to a broker-dealer in a private placement conducted pursuant to Section 4(2) or Regulation D of the 1933 Act.

The broker-dealer then reoffers and resells the securities to QIBs pursuant to the exemption provided by Rule 144A. See more @ What are the conditions that a reseller of restricted securities must satisfy to rely on Rule 144A?

Rule 144A permits the broker-dealer to immediately reoffer and resell the restricted securities, irrespective of the fact that it has purchased the securities with a view to the distribution of such securities. This is because the availability of Rule 144A does not depend on how much time has expired since the securities were issued or on whether the reseller had an investment intent when it purchased the securities.

The resales under Rule 144A are completely divorced from the issuer’s original offering—no matter how soon they occur or how inconsistent they are with the issuer’s exemption. In this regard, Rule 144A states that resales “shall be deemed not to affect the availability of any exemption or safe harbor relating to any previous or subsequent offer or sale of such securities by the issuer.”

Source: Preliminary Note No. 7 to Rule 144A of the 1933 Act and Rule 144A(e) of the 1933 Act. See also C. Steven Bradford, Expanding the Non-Transactional Revolution: A New Approach to Securities Regulation Exemptions, 49 Emory L.J. 437, 460 (Spring 2000).

What type of documentation is typically involved in a Rule 144A transaction?

The documentation used in a Rule 144A transaction is similar to that used in registered offerings, including:

What is the offering process in connection with a Rule 144A transaction?

Generally, the Rule 144A offering process mimics the public offering process. The features of this process include:

1. solicitation of orders using a "red herring" or preliminary offering memorandum;
2. confirmation of orders using a final offering memorandum;
3. execution of purchase agreement at pricing;
4. delivery of comfort letter from accountants at pricing;
5. delivery of legal opinions and other closing documents at closing; and
6. closing three to five days after pricing.

Why do Rule 144A purchasers typically insist that the issuer register the securities issued in the Rule 144A transaction?

Liquidity is the primary benefit that comes from holding freely tradable securities versus restricted securities. See more @ Are securities resold under Rule 144A freely tradable after such resale?

In addition, certain state and federal laws prohibit mutual funds and insurance companies from investing more than a certain percentage of their assets in restricted securities. Thus, absent an issuer’s agreement to register Rule 144A securities, these entities would be severely limited in their ability to purchase securities in Rule 144A transactions.

Source: SEC No-Action Letter Morgan Stanley & Co. Incorporated (available June 5, 1991) and Marvin E. Pollack, Resales of Restricted Securities Under SEC Rules 144 and 144A, The Bureau of National Affairs, Inc. (1997).

How are Rule 144A securities registered under the 1933 Act?

The two principal methods to register Rule 144A securities under the 1933 Act are: