General Securities Representative (Series 7) Practice Exam

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Who is permitted to purchase securities under Rule 144A?

Retail investors
Qualified institutional buyers (QIBs)
Any individual investor
Broker-dealers only

The correct answer is: Qualified institutional buyers (QIBs)

Under Rule 144A, the purchase of securities is specifically restricted to qualified institutional buyers (QIBs). This regulation was designed to facilitate the resale of restricted and control securities among institutional investors, thereby enhancing liquidity in the secondary market. Qualified institutional buyers are defined as institutions that own and invest on a discretionary basis at least $100 million in securities of unaffiliated entities. This criterion ensures that only those with sufficient investment expertise and financial resources can participate, thereby protecting individual retail investors from the risks associated with less regulated securities. Retail investors and individual investors do not meet the criteria for QIB status and therefore are not permitted to purchase securities under Rule 144A. The rule is intentionally carved to apply to sophisticated investors who have the capability to evaluate complicated securities transactions, reflecting the intent to create a controlled environment for securities that are not registered with the SEC. While broker-dealers may act on behalf of QIBs, they are not the primary purchasers under this rule unless they themselves qualify as QIBs, further emphasizing the exclusive nature of the participant eligibility defined by Rule 144A.