Institutional Investor with High Qualifications (QIB): Characteristics, Qualifications, and Advantages
In August 2020, the Securities and Exchange Commission (SEC) made significant strides in modernising the criteria for Qualified Institutional Buyers (QIBs) and Accredited Investors. The aim was to improve access to capital markets for institutional investors, reflect changes in the financial landscape since the original definitions were established, and update financial thresholds.
The amendments expanded the QIB definition to include any institution that qualifies as an accredited investor and meets the $100 million securities ownership threshold. Entities considered as QIBs now include banks, savings and loan associations, investment and insurance companies, employee benefit plans, and entities fully owned by QIBs.
QIBs, which are institutional investors or registered broker-dealers with at least $100 million or $10 million in securities, respectively, have access to restricted securities markets. These markets, governed by Section 5 of the Securities Act of 1933, require offers and sales to be registered with the SEC or to qualify for an exemption, with Rule 144 being one such exemption.
Rule 144 offers an exemption for the public resale of controlled and restricted securities, provided certain conditions are met, including the length of time securities are held, the method used to sell them, and the number that are sold in any one sale. It provides a safe harbour exemption against the SEC's registration requirements for trading restricted and controlled securities.
Transactions conducted under Rule 144A include offerings by foreign investors, private placements of debt and preferred securities, and common stock offerings from issuers that do not report. In 2019, an estimated $2.7 trillion was raised through exempt offerings, compared to $1.2 trillion from registered offerings.
The expansion in the QIB definition addresses previous limitations that excluded certain sophisticated investors from accessing Rule 144A offerings. The SEC permits QIBs to trade Rule 144A securities, which include restricted or control securities like private placements. Sellers are not permitted to conduct sales of restricted securities to the public until a transfer agent has been secured.
The amendments also permitted entities to be formed as QIBs specifically for the purpose of acquiring the securities offered. This move is expected to further enhance access to private capital markets for institutional investors.
It is important to note that securities traded under Rule 144A may be difficult to evaluate for retail investors due to their complexity. QIBs, as sophisticated investors, do not require the regulatory protection afforded to investors under the Securities Act's registration provisions.
In summary, the SEC's amendments to the QIB and Accredited Investor definitions in August 2020 aim to modernise the criteria, improve access to capital markets for institutional investors, and reflect changes in the financial landscape since the original definitions were established. These amendments will help to update financial thresholds and include new categories of investors to better align with current market practices and regulatory objectives.
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