Rule 144A (Securities Law) Definition
Rule 144A is an exemption from the registration requirements prescribed in section 5 of the Securities Act. It allows public reselling of restricted and control securities without a registration if certain conditions are met.
A Little More on What is Rule 144A
The Securities Act of 1933 makes it mandatory for all the securities issued by a company to be registered with the Securities and Exchange Commission before any public offering or sale. Rule 144A provides a ‘safe harbor’ exemption to the sellers. This exemption can be used for reselling securities to the qualified buyers. The qualified buyers must be some institutions and not any individual. The rule allows the institutions to trade these securities among themselves avoiding a registration process.
The rule increases the liquidity of the restricted and control securities as it enables the large institutional investors to trade these securities more freely.
The rule makes it mandatory to remove the restrictive legends from the certificate before selling. Rule 144A describes how to have restrictive legend removed. There are certain other conditions need to be met for availing this exemption.
Holding Period for 144A Securities
According to the Rule 144A, one must hold the shares for a certain period of time before being able to sell the restricted securities in a marketplace. If the issuing company of the securities is a reporting company the required holding period is minimum six months and for the stocks of non-reporting companies the minimum required holding period is one year. The holding period begins on the day the securities are bought and fully paid.
Current Public Information Under Rule 144A
Minimum required information about the issuing company must be available publicly prior to the selling. Under the Securities Act, the reporting companies need to file its reports periodically. So, if the company is a reporting company and complies with the rules then the current information about the company should already be accessible by the public. For non-reporting companies, it is mandatory to disclose the basic information about the company publicly before the sale. This basic information includes the nature of its business, name, and identity of the directors and officers, financial statement etc.
Trading volume formula For Rule 144A
Affiliates are allowed to sell only up to a limited volume. During any three months of the period, their sell must not exceed the greater of 1% of the outstanding shares of the same class being sold or the average weekly reported volume during the four-week period preceding the notice of sale on Form 144.
Rule 144A Brokerage Transactions
For the affiliates, the sales must be considered and handled as routine trading transactions and the brokers must not receive more than the normal rate as commission. The sale of those securities cannot be solicited by either the seller or the broker.
Filing notice with the Security and Exchange Commission
If an affiliate sells more than 5,000 shares or the selling value exceeds $50,000 in any three- month period, it must be reported to the Security and Exchange Commission on Form 144.
References For Rule 144A Securities Regulation
Academic Research on Rule 144A
· The impact of SEC rule 144A on corporate debt issuance by international firms, Chaplinsky, S., & Ramchand, L. (2004). the Journal of Business, 77(4), 1073-1098. In this paper, tests were carried out to show the cost of burrowing international issuers in the 144A market. The investment grade 144A, however, have debt that has significantly higher yield spread whereas, these high yield spread can be comparable to public debt. The result gotten from this paper shows a bifurcation of the market where very high-quality firms issues in both markets and then encounters a higher spread in the 144A market and a low-quality firm issues only in the 144A market.
· The impact of Rule 144A debt offerings upon bond yields and underwriter fees, Livingston, M., & Zhou, L. (2002). Financial Management, 5-27. This research paper studies the utility and industrial bond issued under the rule 144A. This rule issues, however, are found to possess higher yield spreads than the public issued bond after checking for the risk attached. The yield [premium obtained from the rule 144A issues are mostly due to low liquidity rate, weaker legal protections for their investors and uncertainty of information. This research points out that most of the investment grade bonds do not usually have registration rights which most high yield bonds have.
· The birth of rule 144A equity offerings, Sjostrom Jr, W. K. (2008). UCLA L. Rev., 56, 409. This paper studies the legal framework of Rule 144A and the relationship with the trading market. It also compares the benefits and cost of an IPO to those of a Rule 144A equity theories and offering about a firm’s calculus for choosing a structure over the other. Also, this paper argues that the equity of the rule 144A offerings is strongly grounded in public policies thus, regulatory reform was postulated which will help to increase their viability. Although, a centralized trading market of the rule 144A equity securities has helped to increase their liquidity which in turn has improved the attractiveness of the rule 144A. Note that some firms may possess the value of pursuing the equity of rule 144A which exceed the value of pursuing an IPO.
· Global and local information asymmetries, illiquidity and SEC Rule 144A/Regulation S: The case of Indian GDRs, Pinegar, J. M., & Ravichandran, R. (2002). Journal of banking & finance, 26(8), 1645-1673. The results gotten from this study shows that GDR issuance can help increase the investors’ recognition of unknown shares even in the absence of any liquidity enhancements and even when the disclosure requirements are not as tasking as those that have been imposed on foreign firms whose depository receipts trade in the United States markets. Assumptions were made regarding the home stock price responses and these assumptions help to resolve two forms of information asymmetries namely; an asymmetry between international investors as a result of market segmentation and issuing of firms while the second one is an asymmetry between the home market investors and the Indian firms.
· Access to US Capital Markets for Foreign Issuers: Rule 144A Private Placements, Trevino, L. F. M. (1993). Hous. J. Int’l L., 16, 159. This paper explains the Rule 144A private placements as well as the Access to the United States capital markets for foreign issuers.
· The Capital Markets in Transition: A Response to New SEC Rule 144A, Testy, K. Y. (1990). Ind. LJ, 66, 233. According to the capital markets in transition, a response to new SEC rules 144A was implemented and the results were explained.
· Asset-Backed Securities: Secondary Market Implications of SEC Rule 144A and Regulation S, Tevis, J. B. (1991). Pac. LJ, 23, 135. This academic paper explained the asset-backed securities, as well as the secondary market implications of the SEC Rule 144A and the Regulation S. these two important entities, were explained in this paper and the correlation between them was established.
· Rule 144A: A quiet revolution in private placements, Glasky, J. H. (1989). Journal of Accountancy, 168(3), 68. This research paper explains the revolution that happened in the private placement of the rule 144A.
· The SEC and Internationalization of Capital Markets: Herein of Regulation S and Rule 144A-Part II, Bloomenthal, H. S. (1990). Denver. J. Int’l L. & Poly, 19, 343. According to this research thesis, the second SEC and the internationalization of capital market were studied as regards the herein of the Regulation S and the Rule 144A.
· The SEC and Internationalization of Capital Markets: Herein of Regulation S and Rule 144A, Bloomenthal, H. S. (1989). Denver. J. Int’l L. & Poly, 18, 83. This paper explains the first SEC and the internationalization of the capital market was studied as regards the herein of the Regulation S and the rule 144A.
· The impact of SEC Rule 144A on corporate debt issuance by foreign firms, Chaplinsky, S., Ramchand, L., Helwege, A. K., Sirri, E., Warga, A., & Zhou, L. (2000). Working Paper, University of Virginia. In the course of this study, a reform which allows firms to raise the capital from "qualified institutional buyers” without having to acquires the registration of the securities and compliance with the United States GAAP. The main aim of this rule is to help international firms reduce the cost of meeting the United State disclosure standards. The result gotten from this paper assumes a bifurcation of the markets where most high-quality firms have the opportunity to issue in both markets by then face higher spreads in the 144A market and the low-quality firms’ issues only in the 144A market.