506 can be certain that it is conducting an offering that is properly exempt as a “private offering” under Section 4(2). Under Rule 506, an issuer may offer and sell securities to an unlimited number of "accredited investors"<sup>86</sup> and a limited number of non-accredited investors without registration. All non-accredited investors must, however, meet certain conditions of “sophistication.” According to Rule 506, each non-accredited investor must “either alone or with his purchaser representative(s) [have] such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale” that the investors fits that description. Any offering under Rule 506 to nonaccredited investors requires delivery of specified information to those investors.

In general, securities that are acquired in a private placement are “restricted” securities and cannot be resold unless registered with the SEC or subject to an exemption. In 1990, the SEC adopted Rule 144A, providing a nonexclusive safe-harbor from the registration requirements of the Securities Act for resales of restricted securities to “qualified institutional buyers” or QIBs.<sup>87</sup> The SEC’s purpose in adopting Rule 144A was to increase the liquidity of privately placed securities and to increase access to the market for non-US issuers. By providing an exemption from registration, the SEC was able to attract many nonUS issuers who were eager to tap US capital pools but reluctant to submit themselves to the requirements of registration and disclosure, including the necessity of preparing financial statements in accordance with, or reconciled to, US GAAP.<sup>88</sup> Studies of the Rule 144A market suggest that Rule 144A has in fact worked as intended and that “the majority of foreign issuers now opt to raise debt in the 144A market rather than the public debt market, more so if they are issuing high yield or non-rated debt.”<sup>89</sup> Following the adoption of Rule 144A, the NASD created the PORTAL (Private Offerings, Resales and Trading through Automated Linkages) trading system, which further increased the liquidity of the market. PORTAL is a screenbased system designed to facilitate the trading of Rule 144A securities by QIBs. Together, Rule 144A and PORTAL have substantially expanded the market for corporate debt securities in the United States. Issuers relying on Rule 144A may also avoid compliance with SEC requirements concerning disclosure, accounting,

> 86 Rule 501 of Regulation D defines “accredited investor” to include, among others, certain institutions, organizations, and entities, as well as a natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1 million, and any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.   Securities Act, Rule 501.

> 87 A QIB generally includes institutional investors that own and invest on a discretionary basis at least $100 million in securities of issuers unaffiliated with the QIBs or $10 million in the case of broker-dealers. QIBs also include US banks and savings and loan associations.   Securities Act, Rule 144A (17 CFR 230.144A).

> 88 Of course, US investors, particularly institutional investors, may demand US GAAP financial statements even if they are not technically required under Section 4(2) and Rule 144A. 89 See, e.g., Chaplinsky, 2000.

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