Professional Documents
Culture Documents
7 July 2009
ule 144A under the Securities Act of 1933, as amended (the 1933 Act),
adopted in 1990, provides a non-exclusive safe harbor from registration
for the resale of restricted securities to certain large institutions, defined
in the rule as qualified institutional buyers, commonly referred to as
QIBs. The rule was designed to permit a more liquid and efficient institutional resale market for unregistered securities and typically is associated with private placements. However,
issuers also frequently rely upon the rule in connection with public offerings of securities.
These offerings do not violate the securities laws because the public offering is made by a
foreign issuer outside of the United States,
Turner Swan is General Counsel of Causeway Capital
Management LLC in Los Angeles, CA. Kurt Decko is of
counsel and Mark Perlow is a partner in the Investment
Management Practice Group of K&L Gates LLP in San
Francisco, CA. This article is for informational purposes
only and does not contain or convey legal advice. The
information herein should not be used or relied upon in
regard to any particular facts or circumstances without
first consulting with a lawyer.
Rule 144A
Under the US securities laws, offers and sales
of securities must be registered under Section 5 of
the 1933 Act, or meet an exemption from registration. Common registration exemptions appear in
Section 4(1) of the 1933 Act, which exempts persons other than an issuer, underwriter, or dealer,
and Section 4(2) of the 1933 Act and Regulation
D under the 1933 Act, which provide a series
of exemptions for transactions by an issuer not
involving any public offering, known as private
placements.3 In 1953, the Supreme Court, in
SEC v. Ralston Purina Co., established that a
transaction not involving any public offering is
[a]n offering to those who are shown to be able
to fend for themselves . . . .4 Section 5 also applies
to purchasers of securities who look to resell these
securities in the secondary market, and thus resellers also must find an exemption.
Rule 144A is a private placement exemption for
resales of securities to large institutions deemed by
the Securities and Exchange Commission (SEC)
to be able to fend for themselves. It is a safe
harbor from registration, meaning that it is nonexclusive. As noted in the preliminary notes to
the rule: Attempted compliance with [the rule]
does not act as an exclusive election; any seller
hereunder may also claim the availability of any
THE INVESTMENT LAWYER
Insurance companies;
Investment companies;
Business development companies;
Small business investment companies;
Public employee benefit plans;
Employee benefit plans under the Employee
Retirement Income Security Act of 1974
(ERISA);
Certain trust funds whose participants are
exclusively plans identified above;
Non-taxable organizations under Section
501(c)(3) of the Internal Revenue Code of
1986;
Corporations;
Partnerships;
Business trusts;
Investment advisers registered under the Investment Advisers Act of 1940;
Certain broker-dealers;
Many institutional clients, like public and private pension plans, endowments and foundations,
prohibit investment in private placements or
restricted securities. These clients, or often their
consultants, generally categorize investments as
equities, fixed income, and alternatives. The alternatives category is generally for allocations to
hedge funds, private equity, direct investments in
real estate, commodities and similar investments, so
that the guidelines for alternatives mandates often
will permit investments in derivative instruments
and private placements. In contrast, the guidelines
for traditional equity and fixed income mandates
often will restrict investments in derivatives and
private placements, with the intent of promoting liquidity. These restrictions, however, can have
unintended consequences: Because most foreign
IPOs and rights offerings are sold, if at all, only to
US QIBs as private placements under Rule 144A,
the client could be prevented, by its own guidelines, from investing in foreign IPOs and rights
offerings. Accordingly, when negotiating investment guidelines, international equity investment
managers should ensure that clients who restrict
or prohibit investments in private placements
or restricted securities, agree on an exception
for either all 144A securities, or at least for 144A
securities issued in connection with a foreign public offering or rights offering.
Conclusion
Rule 144A offerings provide foreign issuers a
useful way to gain access to the US institutional
investor market without bearing the costs of
the registration requirements of the 1933 Act,
and Regulation S provides the US investor with
a simple means to resell in the foreign secondary markets. These rules have resulted in greater
and cheaper exposure to international equities
for the US retail investor who invests through
mutual funds or participates in a pension plan,
and as such, they are a regulatory success story.
Nonetheless, the rules are highly technical and
not always intuitive in their application, and the
international investment manager must be on
guard against, and prepare for, potential pitfalls
that could offset the benefits of the exemptions
the rules afford.
NOTES
i.
the rule] is available, the seller and any person acting on its
behalf also may rely on a certification by the purchasers chief
financial officer, or another executive officer, specifying the
amount of securities owned and invested on a discretionary
basis by the purchaser as of a specific date on or since the close
of the purchasers most recent fiscal year.
The 144A Adopting Release reiterates that the bases for reliance
listed in Rule 144A are non-exclusive, and that other factors can
be used. It does note, however, that the seller could not rely on
certifications that it knew, or was reckless in not knowing, to be
false.
Reprinted from The Investment Lawyer July 2009, Volume 16, Number 7, pages 17-23,
with permission from Aspen Publishers, Inc., Wolters Kluwer Law & Business, New York, NY,
1-800-638-8437, www.aspenpublishers.com