Rule 144a

Rule 144a bonds are not generally traded on the stock market due to regulations put in place by the SEC. Typically, the term refers to the sale of restricted securities by qualified institutional buyers, or QIBs, under the relaxed regulations afforded by Rule 144a. The U.S. Securities Act of 1933 placed certain restrictions on the private sale of securities; Rule 144a loosens those restrictions, but only for sales between QIBs. As a result, Rule 144a bonds are not usually made available to the general public unless a complex series of steps has first been completed. A Rule 144a bond typically is used in international trading, rather than domestic stock market transactions.

Rule 144a Securities Act

In order to understand the significance of Rule 144a as it applies to bond transfers, it is essential to understand the financial environment that spurred its adoption; Rule 144a was adopted in 1990 and was intended to allow greater fluidity in international trade between large institutional investors, helping to encourage a greater volume of international investment in the U.S. Rule 144 sets forth the conditions under which unregistered sales of restricted securities may take place. Rule 144a loosens these regulations to remove the two-year lock-up period during which the investment must be held and cannot be sold or transferred, but only for sales to and from QIBs. QIBs are generally defined as major investment institutions to include banks and brokerages with over $100 million in assets. Since Rule 144a bond sales start at a minimum of $500,000 per transaction, this restriction is not particularly onerous to the average small investor.

Restricted and control securities

The types of securities covered under the provisions of Rule 144a are known as restricted and control securities. They typically are acquired directly from the issuer or through an affiliate of the issuer and may be received in return for seed money for the company or as employee stock benefits. Control securities are usually held by affiliates of the issuer, including major shareholders and directors who wield some measure of control over the issuing company. Securities that fall into these categories are typically marked as restricted on their certificates in order to identify that they may not be sold on the marketplace without proper registration of the sale with the SEC.

Rule 144a private placement

Most major investment firms have established Rule 144a private placement desks that handle the registration and sale of restricted and control securities. While most trades of Rule 144a bonds are transacted between large international banking institutions, smaller companies can also take advantage of Rule 144a bonds by registering all such sales with the SEC; Rule 144a private placement services assist in this process as well.

Rule 144a holding period

Rule 144 requires that companies purchasing restricted and control securities enforce a holding period during which time those securities may not be resold; typically, this holding period is between six months and two years. Rule 144 also limits the amount of restricted and control shares that may be sold during any one three-month period. However, Rule 144a eliminates this holding period for QIBs that meet the stated requirements, allowing greater liquidity for international trade.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
Day Trading Simulator provides the ability to simulate day trading 24 hours a day from anywhere in the world. TradingSim provides tick by tick data for...

Send this article to a friend.

Enter multiple addresses on separate lines or separate them with commas.