Examkin

Question

Difficulty: Very hardMarket Participants and Investor Classifications

An institutional broker-dealer compliance officer is evaluating three client accounts to determine their legal eligibility to participate in private placements under SEC Regulation D and resales under SEC Rule 144A:

• Entity X: A 501(c)(3) charitable organization holding 15millionintotalassets.•EntityY:Acommercialbankholding15 million in total assets. • Entity Y: A commercial bank holding 110 million in securities owned and invested on a discretionary basis, with an audited net worth of 18million.•EntityZ:Astateemployeepensionplanholding18 million. • Entity Z: A state employee pension plan holding 130 million in securities owned and invested on a discretionary basis.

Based on SEC definitions, which of these entities qualifies as BOTH an Accredited Investor and a Qualified Institutional Buyer (QIB)?

  1. A
    Entities Y and Z only
  2. B
    Entities X, Y, and Z
  3. Entity Z onlyAnswer
  4. D
    Entities X and Y only

Answer

Only Entity Z qualifies as both an Accredited Investor under SEC Regulation D and a Qualified Institutional Buyer (QIB) under SEC Rule 144A.
The selection specifying Entity Z only is correct. Under SEC rules, Regulation D classifies 501(c)(3) organizations with assets over 5million,banks,andgovernmentbenefitplanswithassetsover5 million, banks, and government benefit plans with assets over 5 million as Accredited Investors. Therefore, all three entities are Accredited Investors. However, Rule 144A defines a Qualified Institutional Buyer (QIB) as an institution owning and investing at least 100millioninsecuritiesonadiscretionarybasis,withaspecificdual−requirementforbanksandsavingsandloaninstitutionsrequiringanauditednetworthofatleast100 million in securities on a discretionary basis, with a specific dual-requirement for banks and savings and loan institutions requiring an audited net worth of at least 25 million. Entity X lacks the 100millionsecuritiesthreshold.EntityYmeetsthe100 million securities threshold. Entity Y meets the 100 million securities test but fails the 25millionbanknetworthrequirement(25 million bank net worth requirement ( 18 million net worth). Entity Z meets both the $100 million securities threshold and all institutional criteria, making it the only entity that qualifies as both an Accredited Investor and a QIB.

Step-by-Step Solution

1
Evaluate Entity X under Regulation D and Rule 144A criteria.
Entity X (501(c)(3) with 15Massets)qualifiesasanAccreditedInvestorbecauseitstotalassetsexceed15M assets) qualifies as an Accredited Investor because its total assets exceed 5 million. However, it fails to qualify as a QIB because it does not own/invest at least $100 million in securities.
Accredited Investor rules require non-profits to have >5Minassets,whereasQIBstatusunderRule144Arequires5M in assets, whereas QIB status under Rule 144A requires 100M+ in discretionary securities.
2
Evaluate Entity Y (Commercial Bank) under Regulation D and Rule 144A criteria.
Entity Y qualifies as an Accredited Investor (banks automatically qualify regardless of size under Reg D). However, it fails to qualify as a QIB because, under Rule 144A, banks and savings and loan associations must satisfy a dual test: owning/investing at least 100millioninsecuritiesANDhavinganauditednetworthofatleast100 million in securities AND having an audited net worth of at least 25 million. Entity Y's net worth is only $18 million.
Rule 144A imposes an explicit additional requirement of at least $25 million in audited net worth specifically for bank and S&L entities.
3
Evaluate Entity Z (State Pension Plan) under Regulation D and Rule 144A criteria.
Entity Z qualifies as an Accredited Investor (government plan with assets exceeding 5million)ANDqualifiesasaQIBbecauseitownsandinvestsonadiscretionarybasisatleast5 million) AND qualifies as a QIB because it owns and invests on a discretionary basis at least 100 million in eligible securities ($130 million).
Institutional entities such as government pension plans that hold $100 million or more in discretionary securities qualify fully as QIBs under Rule 144A.

Key Concept

Accredited Investor vs. Qualified Institutional Buyer (QIB) qualification thresholds
Estimated Time:2m 0s
Rate this question

Topics

Market Participants and Investor Classifications

More questions from this topic