# Understanding Rule 144A: Key Features, Implications, and Criticisms

## What Is Rule 144A?

Rule 144A, introduced under the Jumpstart Our Business Startups (JOBS) Act and implemented by the SEC in 2013, significantly transformed the trading of privately placed securities. This provision relaxes the restrictions of the original Rule 144 under the Securities Act of 1933, enabling trades among qualified institutional buyers (QIBs) and enhancing the liquidity of these investments. While Rule 144A provides a streamlined mechanism that does not require SEC registration for these transactions, it has sparked criticism due to potential risks, such as facilitating fraudulent foreign offerings and reducing security offerings to the general public.

### Key Takeaways

*   Rule 144A modifies restrictions for the purchase and sale of privately placed securities among qualified institutional buyers without the need for SEC registrations.
*   According to the rule, sophisticated institutional investors don’t require as much information and protection as individual investors.
*   Rule 144A shortens the holding periods of securities.
*   Critics say the rule lacks transparency and doesn't clearly define what constitutes a qualified institutional buyer.
*   Concerns endure that Rule 144A may give unscrupulous overseas companies access to the U.S. market without SEC scrutiny.

![Rule 144A: A legal provision that lifts restrictions on the trading of privately placed securities for qualified institutional buyers.](https://www.investopedia.com/thmb/A1RMh4UH3KDN4AmE2RruxLITNms=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Rule144a_final-4f434dac904f4f0d8b64141e9f6a45e3.png)

*— Investopedia / Michela Buttignol*

## How Rule 144A Works in Securities Trading

Rule 144A was created in 2012 under the Jumpstart Our Business Startups (JOBS) Act. Subsequently, the SEC took the decision to implement it in 2013. It allowed sales to take place to more sophisticated [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp), as they may not require the same type of information and protection as other investors. Securities issuers must register with the SEC and provide documentation before they can offer securities to the public.

Under the original Rule 144 from the Securities Act, a minimum level of public-accessible information is required of the selling party. For reporting companies, this issue is addressed as long as they are in compliance with their regular reporting minimums. For nonreporting companies (also called [non-issuers](https://www.investopedia.com/terms/n/nonissuertransaction.asp)), basic information regarding the company, such as company name and the nature of its business, must be publicly available.

Rule 144A provides a mechanism for the sale of [securities](https://www.investopedia.com/terms/s/security.asp) that are privately placed to QIBs that do not—and are not required—to have an SEC registration in place. Instead, securities issuers are only required to provide whatever information is requested by the purchaser before making an investment. This creates a more [efficient market](https://www.investopedia.com/terms/m/marketefficiency.asp) for the sale of those securities.

> **Important**
>
> A qualified institutional buyer owns and invests at least $100 million in unaffiliated securities.

A brokerage or registered firm must handle the sale in a routine manner for affiliate sales. This requires that no more than a normal commission be issued, where neither the [broker](https://www.investopedia.com/terms/b/broker.asp) nor the [seller](https://www.investopedia.com/terms/s/seller.asp) can be involved in the solicitation of the sale of those securities.

## Important Considerations for Using Rule 144A

Affiliate sales of more than 5,000 shares or $50,000 in three months must be reported to the SEC on Form 144. Affiliate sales below these limits don't need an SEC filing.

For [affiliates](https://www.investopedia.com/terms/a/affiliatedcompanies.asp), there is a limit on the number of transactions, referred to as the volume, that cannot be exceeded. This must amount to no more than 1% of the [outstanding shares](https://www.investopedia.com/terms/o/outstandingshares.asp) in a class over three months or the average weekly reported volume during the four-week period preceding the notice of sale on [Form 144](https://www.investopedia.com/terms/f/form144.asp).

Rule 144A relaxed the [holding period](https://www.investopedia.com/terms/h/holdingperiod.asp) regulations for securities before they can be offered or sold to qualified institutional buyers. Rather than the customary two-year holding period, a minimum six-month period applies to a reporting company, and a minimum one-year period applies to issuers who are not required to meet reporting requirements. These periods start on the day the securities are bought and paid in full.

## Addressing the Criticisms Surrounding Rule 144A

Rule 144A boosted non-SEC trading activity, raising concerns about trades largely invisible to individual and some institutional investors. The [Financial Industry Regulatory Authority](https://www.investopedia.com/terms/f/finra.asp) (FINRA) began to report Rule 144A trades in the corporate debt market in 2014 in order to bring more transparency to the market and to allow the reporting of valuation "for [mark-to-market](https://www.investopedia.com/terms/m/marktomarket.asp) (MTM) purposes."

The SEC also responded to questions in 2017 about the definition of qualified institutional buyers allowed to participate in Rule 144A trades, and how they calculate the requirement that they own and invest on a discretionary basis at least $100 million in securities of unaffiliated issuers.

Concerns still endure about the effects of Rule 144A, including how it may allow unscrupulous overseas companies to fly under the regulatory radar when offering investments in the U.S. Critics say the rule ultimately creates a [shadow market](https://www.investopedia.com/terms/s/shadow-market.asp), allowing foreign companies to avoid the scrutiny of the SEC while opening the U.S. markets up to the possibility of [fraud](https://www.investopedia.com/terms/f/fraud.asp) committed by these entities.

> **Article Sources**
>
> 1.  Cbonds. "[Rule 144A](https://cbonds.com/glossary/rule-144a/)."
>     
> 2.  Morgan Lewis. "[SEC Adopts Amendments to Rule 506 and Rule 144A To Permit General Solicitation and General Advertising, and Proposes Additional Related Requirements](https://www.morganlewis.com/pubs/2013/07/sec-adopts-amendments-to-rule-506-and-rule-144a)."
>     
> 3.  Federal Registrar. "[Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings](https://www.federalregister.gov/documents/2013/07/24/2013-16883/eliminating-the-prohibition-against-general-solicitation-and-general-advertising-in-rule-506-and)."
>     
> 4.  U.S. Securities and Exchange Commission. "[Rule 144: Selling Restricted and Control Securities](https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144)."
>     
> 5.  Cornell Law School Legal Information Institute. "[Rule 144A](https://www.law.cornell.edu/wex/rule_144a)."
>     
> 6.  Cornell Law School Legal Information Institute. "[17 CFR § 230.144A - Private Resales of Securities to Institutions](https://www.law.cornell.edu/cfr/text/17/230.144A)."
>     
> 7.  U.S. Securities and Exchange Commission. "[Rule 144: Selling Restricted and Control Securities](https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144htm.html)."
>     
> 8.  FINRA. "[FINRA Brings 144A Corporate Debt Transactions Into the Light](https://www.finra.org/media-center/news-releases/2014/finra-brings-144a-corporate-debt-transactions-light)."