Guest Post by David Drake. David Drake is the founder and chairman of LDJ Capital, a New York City private equity firm, and The Soho Loft, a global event-driven financial media company helping funds advertise for investors. You can reach him directly at David@LDJCapital.com.
Actually, we care very much about Qualified Institutional Buyers (QIBs), investors with $100 million+ assets under management, especially given the new JOBS Act rule. Effective Sept. 23, 2013, the rule will remove the solicitation ban under SEC Regulation D, 506 exemption. This was one of the hot topics covered on November 19, 2012, in Newport Beach, CA, where we heard former former SEC chair Christopher Cox, Ted Roth of leading institutional broker Roth Capita of California, and CEO Cromwell Coulson of OTC. QIBs then and now are the hottest topic.
QIBs are sophisticated buyers with $100 million or more in assets under management. They have to invest a minimum of $500,000 into an investment to enjoy the privileges of a QIB. These QIBs need less protection trading assets and have more leeway and limits in their regulatory and public filing requirements. If an institution is a bank or savings and loans thrift, it only needs to have $25 million to be considered a QIB. Even broker dealers having at least $10 million in discretionary trade assets qualify as QIBs under rule 144a.
The SEC Act of 1933 created a safe harbor under rule 144a around sales of at least $500,000 in restricted stock to QIBs. The initial intent was to ease the facility for foreign firms to sell securities in the United States and access U.S. markets. It has allowed more liquidity for private offerings, as large institutions can easily qualify and leverage the ease of this safe harbor to trade.
Now the new Dodd-Frank Act rules require hedge funds to register with the SEC when they have over $100 million under assets. They are consequently becoming registered QIBs, and we expect the number of QIBs to nearly double, from 1,500 today to 3,000 by next year.
The JOBS Act will change Regulation D, 506 under SEC 1933 Act effective Sept. 23, and will remove the solicitation ban. This will allow private offerings of companies and funds with restricted stock pricing to be offered to QIBs and allow restricted stocks access to 3,000 QIBs.
It allows QIBs to buy secondaries and restricted stocks with less reporting and quicker and less expensive execution. It also allows them to trade among themselves with less restriction—technically and potentially creating a private exchange of secondary private shares market.
Chairman Bruce Lipnick of the hedge fund seeder Asset Alliance confirms this sentiment: “The JOBS Act on Sept. 23 allows me as a general manager in several hedge funds to advertise to QIBs while being SEC-compliant. It is a monumental opportunity. We have worked long to be an industry leader, and now we are extending our compliance knowledge to other hedge fund managers working with us.”
He adds “Capital markets must open up, and this is a step in the right direction. Yet we still have some amendments pending to this new law that are very challenging. These amendments need to be fair and easy to implement, and should reflect the intention of Congress.”
QIBs are another under-appreciated asset class opportunity that is about to stir up the private marketplace as they double in size.
Do let me know your thoughts about QIBs. I am easily accessible. That is why we care about QIBs.