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What are Qualified Institutional Buyers (QIBs)?

Qualified institutional buyers, or QIBs, are sophisticated investors that are deemed to have sufficient investing experience and assets to participate in riskier and higher-value securities offerings. The criteria to be classified as a QIB are laid out in Rule 144A of the Securities Act.

There are several requirements to be considered a QIB, including:

  • The entity must own and invest at least $100 million in securities on a discretionary basis. This criteria applies to banks, insurance companies, employee benefit plans, investment companies, business development companies, and entities completely owned by QIBs.

  • For broker-dealers, they must own and invest at least $10 million in securities on a discretionary basis.

  • For other entities, they must be worth at least $100 million in investment securities owned by the entity.

Some common examples of QIBs include:

  • Pension funds like CalPERS and CalSTRS

  • Mutual fund companies like Vanguard, Fidelity, and BlackRock

  • Insurance companies like Prudential, AIG, and MetLife

  • Investment banks like Goldman Sachs, Morgan Stanley, and JPMorgan

  • Sovereign wealth funds of countries like Norway and Singapore

  • Endowment funds of major universities like Harvard and Yale

Why are QIBs important?

QIBs are important investors because Rule 144A allows companies to raise capital through unregistered private placements that are open only to QIBs. This exempts the issuer from having to follow many of the disclosure and registration requirements of a public offering. Rule 144A offerings provide issuers with faster time to market and lower costs compared to a fully registered public offering. However, these securities cannot be resold to non-QIBs for a year after issuance. The Rule 144A private placement market has grown substantially, with $1.9 trillion raised in 2021 versus $1.2 trillion in 2012.

Major advantages of Rule 144A for QIBs:

  • Earlier access to new securities before public offerings

  • Ability to trade 144A securities among other QIBs

  • Reduced disclosure requirements provide informational advantages

While QIBs are sophisticated investors, Rule 144A securities still carry risks around liquidity, disclosure, and complexity. But the prospects of higher returns and early access to offerings make 144A an attractive market for large institutional investors.

Regulatory Oversight

While QIBs are sophisticated investors, regulators still monitor the 144A market. The Securities and Exchange Commission (SEC) has brought enforcement actions against issues for inadequate disclosures or other violations related to 144A offerings. Additionally, global regulatory efforts like the European Union's MiFID II have sought to provide more transparency and oversight of the previously opaque 144A private placement world.

Growth of the 144A Market

The 144A market has expanded significantly in recent decades. Initially, it was used primarily by higher-risk companies to issue debt. But today, a wide range of borrowers tap the 144A market for equity, debt, convertibles, and other instruments. In 2021, proceeds from 144A offerings totaled $1.9 trillion, including over $500 billion in equities. Technology, finance, and energy/utilities were the largest sectors for issuance. While U.S. issuers dominated, the market also saw activity from international players, particularly out of Asia. Looking ahead, bankers expect the 144A private placement market to continue growing as companies seek alternative funding sources beyond the public markets. Its advantages of speed, confidentiality, and access to QIB capital make Rule 144A an enduring market for institutional investors and issuers alike.

QIBs play a critical role in facilitating capital raising through the Rule 144A private placement market. Their investing muscle and risk appetite provide companies an alternative path to raise funds from qualified big money investors.

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