Securities offerings in the United States can be either registered or unregistered. Under Section 5 of the Securities Act of 1933 (Securities Act), an offering or sale of equity or debt securities must be registered with the Securities and Exchange Commission (SEC). If the offering is not registered, it must be conducted in reliance on an exemption or safe harbor from the registration requirements.

Unregistered securities offerings have risen in popularity since they are generally faster to execute. Private placements in reliance on Rule 144A of the Securities Act to qualified institutional buyers (QIBs) are particularly common.

A Rule 144A offering involves the sale of unregistered securities by an issuer to one or more investment banks. The banks in a Rule 144 offering are referred to as the initial purchasers. The initial purchasers then can resell the unregistered securities to any investors that are considered QIBs. The QIBs are then allowed to resell the unregistered securities to other QIBs. Under Rule 144(d)(1), securities in a Rule 144A offering must be sold to QIBs or investors that the seller reasonably believes to be QIBs.

An investor must meet certain criteria under Rule 144A to be considered a QIB. While 144A sets forth specific categories and requirements, generally speaking they are sophisticated institutional investors that own or invest at least $100 million of securities. Individuals cannot be QIBs.

In order to conduct a Rule 144A offering, the seller must provide reasonable notice to potential purchasers that the offering and sale of securities is being made pursuant to Rule 144A. This notice is usually provided through the offering memorandum, the main disclosure document describing the issuer’s business, financial condition, and the details of the securities offering. In addition, the securities will have a unique CUSIP number that identifies them as Rule 144A eligible. A CUSIP number is an identification number assigned to distinct securities.

Regulation M under the Securities Exchange Act of 1934 (Exchange Act), a set of rules designed to prevent manipulative trading activity, provides an exemption for Rule 144A offerings. This is because securities sold pursuant to Rule 144A are considered “covered securities” under Section 18 of the Securities Act. Covered securities are exempt from registration requirements under state securities laws, also known as blue sky laws.

Rule 144A offerings only permit resales to QIBs. There is another category of resales known as “Rule 144A eligible” offerings that utilize the Section “4(1½)” resale procedures to resell unregistered securities to certain institutional accredited investors (IAIs), a broader classification than QIBs. The Section “4(1½)” resale procedures have been developed and refined over time through case law and use by investment professionals. They are not formally written in any SEC rules or regulations. Therefore, sellers should exercise precaution before relying on the Section “4(1½)” resale procedures.

Another exemption from the registration requirements of the Securities Act that can be relied upon is Section 4(a)(7). The Section 4(a)(7) registration exemption was established by the Fixing America’s Surface Transportation Act (FAST Act), which was enacted in 2015.

Section 4(a)(7) permits the resale of unregistered securities to accredited investors, a broader classification than QIBs. Section 4(d) of the Securities Act establishes the requirements for using the Section 4(a)(7) exemption. Unlike Rule 144A offerings, sellers conducting offerings under Section 4(a)(7) cannot use general solicitation or general advertising.