Financial Industry Regulatory Authority (FINRA) Practice Exam 2025 - Free FINRA Practice Questions and Study Guide

Under Rule 144A, an issuer of restricted stock can sell to Qualified Institutional Buyers (QIBs). This regulation was established by the SEC to facilitate the resale of restricted securities and enhance liquidity in the private placement market. QIBs are defined as institutional investors that own and invest at least $100 million in securities.

The primary reason that sales under Rule 144A are limited to QIBs is to ensure that the transactions are conducted among sophisticated investors who are assumed to have adequate knowledge and experience to evaluate and manage the risks associated with restricted securities. This mechanism allows issuers to engage in private placements while providing them with a broader base of potential buyers, which can enhance liquidity.

In this context, financial institutions and accredited investors may capture a wider group, but they do not fit the specific definition of QIBs necessary for the sales under Rule 144A. Nonaccredited investors, lacking the financial sophistication and resources typical of QIBs, are likewise excluded, as they may not fully understand the complexities involved with restricted securities. Thus, the emphasis is on ensuring that transactions are made with qualified and experienced market participants, reinforcing the rationale behind the restriction to QIBs.