Hear that? It’s the sound of a very big door opening into the elite, large, 144A private securities marketplace. Not only will companies that want access to capital be able to choose between public offerings and 144A offerings, but for 144A units that have already come to market, a secondary market is being created that may provide much more liquidity and transparency for buyers and sellers, easier settlements, and pricing history for the securities.
Since 144A securities can be bought only by the relatively few institutions that are deemed qualified institutional buyers (QIBs)–those with $100 million or more in investable assets–the laws affecting companies that issue 144A securities are different from those that cover publicly traded securities. Companies that go private instead of public don’t have to comply with Sarbanes-Oxley. Additionally, those QIBs that invest in 144A securities have a much wider playing field of investments to choose from. According to Nasdaq, “global equity offerings with a 144A tranche raised $162 billion in 2006,” while “global public equity offerings raised $154 billion,” through primary and secondary public offerings in Nasdaq, NYSE, and Amex.
There are other differences between companies that offer private 144A securities and public offerings. For one, the timeline is generally longer to take a company public than to go private. Private 144A securities can have no more than 499 QIB investors. They can have fewer investors than that, according to Ed Canaday, a Goldman Sachs spokesman, who says it’s up to the issuer.
One drawback for QIBs that have invested in 144A securities has been lack of price data and liquidity. The marketplace for these securities has been a bit esoteric, and 144A buyers who wanted to sell the securities had to either contact another QIB directly, or return to the broker that originally sold them to get bids. Neither technique was very efficient or conducive to the best price discovery, and since 144A securities typically don’t trade daily and there’s not an organized stable of buyers competing for them, putting a price on them is an inexact science. For those reasons, the door is opening to a new private equity marketplace and the first major players are Goldman Sachs and, later this summer, Nasdaq.
First to Market: Goldman