Prior to the adoption of Rule 144A, foreign investors were reluctant to raise capi-
tal in the United States in either the public or the private markets. Public offerings
must be registered with the SEC, which can be an expensive and time-consuming
process, involving large legal and accounting costs incurred in preparing the required
information in the format in which it must be presented to the SEC. Registration also
may involve the issuer in disclosing information (such as segment information)
which it has no interest in revealing to the outside world or to its competitors. For-
eign issuers were similarly disinclined to raise capital in the U.S. private markets be-
cause of the “illiquidity premium” involved in raising capital there. The fact that se-
curities placed privately could be resold only in limited circumstances meant that
investors demanded that they be recompensed in the pricing of the securities for those
securities’ lack of liquidity.
There were, prior to the adoption of Rule 144A, two principal ways pursuant to
which privately placed securities could be resold in the United States. The first was
to hold the securities for a two- to three-year period and resell them publicly, pur-
suant to Rule 144 under the Securities Act. Restricted securities could be sold sub-
ject to restrictions, including volume limitations, after two years and freely after three
years, pursuant to Rule 144. The second was to resell the securities privately in a
transaction, developed by the securities bar and never formally blessed by the SEC,
referred to as a “Section 4 (1 )” resale. This involved the provisions of letters of in-
vestment intent from the purchaser of the securities and was typically undertaken
only after the provision of an opinion of counsel.
Rule 144A added a third alternative. Under the rule, restricted securities may be
resold without registration and without any holding period if they are sold only to
specified institutional buyers who are “qualified institutional buyers,” that is, in-
vestors who have portfolios of at least $100 million of eligible securities (certain
types of securities are excluded from the $100 million). The other requirements of the
rule are straightforward: The seller must notify the buyer that the seller is relying on
Rule 144A; the securities resold may not be investment company securities or those
of the same class as securities listed on a U.S. securities exchange or quoted on NAS-
DAQ; and there must be at least some minimal information available about the issuer
of the securities. Provided these conditions are met, securities can be traded actively
among qualified institutional buyers from the date of their placement.
While Rule 144A is on its face applicable to resales only, the fact that it adds liq-
uidity to the secondary market for privately placed securities makes private place-
ments in the United States of securities that may be resold in reliance on Rule 144A
(referred to as “Rule 144A offerings”) a more attractive option.
It was the SEC’s intention that the new market created in the United States by Rule
144A should provide a U.S. complement to the Euromarkets. Foreign and U.S. is-
suers considering a Euromarket offering now routinely include a Rule 144A tranche.
Looking at the rule from the point of view of the investor (at least those large
enough to be “qualified institutional buyers”), the SEC intended to attract foreign is-
suers to the U.S. markets so that U.S. investors would have access to foreign securi-
ties without having to buy them overseas, unprotected by U.S. securities antifraud
laws.
The rule permits the market (i.e., the investors themselves) to determine what in-
formation in the way of a prospectus or offering circular is necessary for them to
make an informed investment decision. It is therefore open to issuers to provide as
much or as little information as they choose or the market dictates. Market practice
(^1)
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14 • 12 GLOBALIZATION OF WORLD FINANCIAL MARKETS