If you are company is considering launching a 144A bond or 144A note, PPM.net can assist. We have assisted hundreds of companies in the 144A debt space.
Common Question: Rule 144A vs Reg S
At PPM, we are often faced with a variety of questions from overseas as well as domestic companies about the best way to raise investment capital or raise money here in the United States. In this post, let’s discuss a little about the needs of companies seeking to raise capital here in the U.S., even if they are international entrepreneurs or overseas companies. We can also discuss US or international companies seeking to raise capital overseas. This could be through and type of private placement service, including the question of making an offering through Rule 144A vs Reg S (Regulation S), often through a bond offering.
Often times these entrepreneurs or growth companies already know what type of securities they want to sell to investors (debt securities or equity securities) and need us to provide the regulatory background and all the documentation to make sure they are in compliance. Others do not yet know the nuances and are wondering what would be the most effective way to raise the funds that they need from private investors. At PPM, we offer professional private placement services and clear explanations about our private placement services (including private placement memorandum writing (PPM writing) aka offering memorandum (OM) writing). We also
ensure our clients—both domestic and international entrepreneurs and growth companies—are in full compliance with regulatory requirements.
One of the most common question we receive from international clients seeking to raise capital is to compare the difference and use of Rule 144A vs Reg S. Both Rule 144A vs Reg S provide “safe harbor”—that is, a safe exemption—from rules requiring the registration of a company’s securities with the SEC. Rule 144A vs Reg S have their origins in the Securities Act of 1933.
Rule 144A Bonds
A 144A bond falls under the Rule 144A set by the Securities and Exchange Commission, which allows trading securities (also known as private placements) between authorized institutional investors for qualified institutional buyers (QIBs). A 144A bond is called restricted securities as well due to the fact that QIBs are the only ones who can trade it. Individuals are not allowed to sell or buy 144A bonds until the restriction is lifted. This 1990 rule by the SEC permits unregistered bonds to be traded, but is not applicable to mutual funds and other investments.
The Securities Act of 1933, meant to safeguard individual investors from the lack of regulations in the past that was somewhat held responsible for the Great Depression, was amended to allow
private securities that were initially not able to meet the criteria for SEC registration to be traded by QIBs until the bonds meet the rules for registration. The SEC revised the Securities Act in 1990 to permit private
placements to be traded without difficulty, boosting liquidity for institutional investors like banks, as well as newer or smaller companies.
Investors - QIBs
The investment portfolio of QIBs should have over $100 million in order to qualify. Banks that want to obtain a QIB classification should have a minimum net worth of $25 million. QIBs should present audited financial statements to the SEC and pass ‘holding’ prerequisites like maintaining 144A restricted securities for a minimum of 6 months before being sold. For investors not affiliated with an SEC reporting agency, they should maintain these securities for 1 year before they can resell them without any restriction.
Private 144A Notes vs Pubic Securities
There are 2 major differences between publicly sold stocks and 144A bonds. Registered securities have no required holding period. These stocks, which are available to individuals and
the general public, are just like over-the-counter shares since their prices are not visible on major stock exchanges. 144A bonds, on the other hand, can only be traded by QIBs and should be maintained by purchasers for 6 months for affiliated and 12 months for non-affiliated SEC reporting agencies.
144A bond owners are not permitted to sell the 144A securities to the general public until – and not before – the restricted designation of the 144A securities (also known as a legend) is lifted from their securities. Transfer agents for these securities are the only ones who can lift the restriction, and they will not remove the designation until owners of the 144A bond get the approval of the issuing agency and only after transfer agents receive a favorable opinion letter from the legal counsel of the agency. The SEC does not get embroiled in the event legal disputes occur due to the removal of designation; however, they do recommend that stock issuers and owners only work with lawyers knowledgeable in securities law.
Rule 144A vs Reg S: Reg S
Reg S (Regulation S) basically says that if you issue your securities in another country (an “offshore offering”) and meet certain requirements—no direct selling efforts nor involvement of parties within the US—you won’t have to register with the SEC under Section 5 of the Securities Act of 1933. Reg S is a means for entrepreneurs or growth companies to make their securities offering and raise money outside the United States while avoiding certain of the SEC’s registration requirements.
Regulation S as a safe harbour / safe harbor rule is often used for offshore offerings such as when a US company is seeking to raise foreign capital. Reg S defines cases when the securities in question from an offering are considered to “come to rest abroad.” The General Statement to Regulation S applies a territorial approach to Securities Act registration by providing that offers and sales subject to Section 5 include offers and sales that occur within the United States and do not include offers and sales that occur outside the United States. Regulation S also includes several safe harbour / safe harbor exemptions that address specified transactions.
Rule 144A vs Reg S:Rule 144A
Returning to the question of Rule 144A vs Reg S, on the other hand, Rule 144A refers to a safe harbor / safe harbour exemption from SEC registration requirements of a different kind. Rule 144A applies to cases for certain private resales of restricted securities within the United States. Rule 144A basically says that if the buyers of your securities are knowledgeable, savvy, sophisticated investors QIBs (called Qualified Institutional Buyers, or QIBs), then you don’t have to register that round of securities with the SEC. QIBs are considered smart enough to trade and re-sell securities amongst themselves without everything always being registered with the SEC. There is a technical definition of QIB, of course, which includes institutions with over $100 million in various securities or a broker holding $10 million or more in securities. As Deutsche Bank puts it, “Basically, a QIB should know what it is
doing and therefore shouldn’t need as much SEC protection.”
Our Clients and Rule 144A vs Reg S
144A is a private placement offering created by a domestic or international company in the US for US investors, while Reg S is a bond offering issued for international investors. In short, Rule 144A vs Reg S comes down to rules creating safe harbour / safe harbor from SEC registration requirements when the capital raise is crossing national boundaries or selling to certain QIBs in certain conditions. For securities sold entirely outside the U.S., PPM’s clients need a Reg S offering. For securities sold in the US by international companies to QIBs, and other sales to QIBs, PPM clients need to create their securities offering under Rule 144A provisions.
Reg S and 144A securities (bonds usually) must usually have assigned to them two separate sets of securities identification codes, known as ISIN and / or CUSIP numbers. Typically, Reg S bonds get a common code and an International Securities Identification Number (“ISIN”) and are generally accepted for clearance through the Clearstream, Luxembourg and other systems. 144A bonds get a CUSIP number and an “ISIN” and are generally accepted for clearance through the DTC system.
PPM.net is a leading business plan and private placement offering consultant in New York and has the ability to assist with document preparation, networking and general business strategy.
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