Concept Release on Harmonization of Securities Offering Exemptions

Federal RegisterJun 26, 2019

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 227, 230, 239, 240, 249, 270, 274, and 275

[Release Nos. 33-10649; 34-86129; IA-5256; IC-33512; File No. S7-08-19]

RIN 3235-AM27

Concept Release on Harmonization of Securities Offering Exemptions

AGENCY:

Securities and Exchange Commission.

ACTION:

Concept release; request for comment.

SUMMARY:

The Securities and Exchange Commission is publishing this release to solicit comment on several exemptions from registration under the Securities Act of 1933 that facilitate capital raising. Over the years, and particularly since the Jumpstart Our Business Startups Act of 2012, several exemptions from registration have been introduced, expanded, or otherwise revised. As a result, the overall framework for exempt offerings has changed significantly. We believe our capital markets would benefit from a comprehensive review of the design and scope of our framework for offerings that are exempt from registration. More specifically, we also believe that issuers and investors could benefit from a framework that is more consistent and addresses gaps and complexities. Therefore, we seek comment on possible ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections.

DATES:

Comments should be received on or before September 24, 2019.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (

https://www.sec.gov/rules/concept.shtml

); or

• Send an email to

rule-comments@sec.gov.

Please include File Number S7-08-19 on the subject line.

Paper Comments

• Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-08-19. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's website (

https://www.sec.gov/rules/concept.shtml

). Comments are also available for website viewing and copying in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Jennifer Riegel or Amy Reischauer, Office of Small Business Policy, Division of Corporation Finance, at (202) 551-3460; Timothy White or Geeta Dhingra, Division of Trading and Markets, at (202) 551-5550; or Mark T. Uyeda, Division of Investment Management, at (202) 551-6792, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

II. Current Exempt Offering Framework Request for Comment

A. Accredited Investor Definition

1. Background

2. Implications Outside of the Regulation D Context

3. Accredited Investor Staff Report

4. Comments on the Accredited Investor Staff Report

5. Request for Comment

B. Private Placement Exemption and Rule 506 of Regulation D

1. Section 4(a)(2) of the Securities Act

2. Rule 506 of Regulation D

3. Request for Comment

C. Regulation A

1. Scope of the Exemption

2. Disclosure Requirements

3. Solicitation of Interest

4. Relationship With State Securities Laws

5. Analysis of Regulation A in the Exempt Market

6. Request for Comment

D. Limited Offerings—Rule 504 of Regulation D

1. Scope of the Exemption

2. Filing Requirements and Relationship With State Securities Laws

3. Analysis of Rule 504 in the Exempt Market

4. Request for Comment

E. Intrastate Offerings

1. Section 3(a)(11) of the Securities Act

2. Securities Act Rules 147 and 147A

3. Request for Comment

F. Regulation Crowdfunding

1. Scope of the Exemption

2. Disclosure Requirements

3. Relationship With State Securities Laws

4. Analysis of Regulation Crowdfunding in the Exempt Market

5. Request for Comment

G. Potential Gaps in the Current Exempt Offering Framework

1. Micro-Offerings

2. Request for Comment

III. Integration

A. Facts and Circumstances Analysis

B. Safe Harbors

1. Regulation D

2. Rule 152

3. Abandoned Offerings: Rule 155

4. Regulation A, Rules 147 and 147A, and Regulation Crowdfunding

5. Other Integration Provisions

C. Request for Comment

IV. Pooled Investment Funds

A. Background

1. Interval Funds and Tender Offer Funds

2. Private Funds

B. Pooled Investment Funds as Accredited Investors

C. Retail Investor Access to Pooled Investment Funds That Invest in Exempt Offerings

D. Request for Comment

V. Secondary Trading of Certain Securities

A. Resale Exemptions

1. Section 4(a)(1) and Rule 144

2. Rule 144A

3. Section 4(a)(3)

4. Section 4(a)(4)

5. Section 4(a)(7)

B. Relationship With State Law

1. Section 18: Federal Preemption for Secondary Offerings

2. State Exemptions for Secondary Sales

C. Request for Comment

VI. Conclusion

I. Introduction

The Securities Act of 1933

(the “Securities Act”) requires that every offer

and sale of securities be registered with the Securities and Exchange Commission (the “Commission”), unless an exemption is available. The purpose of registration is to provide investors with full and fair disclosure of material information so that they are able to make their own informed investment and voting decisions.

Congress recognized, however, that in certain situations there is no practical need for registration or the public benefits from registration are too remote.

Accordingly, the Securities Act contains a number of exemptions from its registration requirements and authorizes the Commission to adopt

additional exemptions. As described in more detail below, the scope of exempt offerings has evolved over time through Commission rules and legislative changes. Significantly, the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) greatly expanded the options to raise capital in exempt offerings.

Since then, the Fixing America's Surface Transportation Act of 2015 (the “FAST Act”)

and the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “Economic Growth Act”)

resulted in further revisions to our exemptions.

As a result, the current exempt offering framework is complex and made up of differing requirements and conditions, which may be difficult for issuers, who bear the burden of demonstrating the availability of any exemption,

to navigate. Smaller companies with more limited resources, which may be more likely to need to rely on these exemptions given the costs associated with conducting a registered offering and becoming a reporting company, may find it particularly difficult to manage this complexity.

15 U.S.C. 77a

et seq.

See

15 U.S.C. 77b(a)(3) (noting that an offer includes every attempt to dispose of a security or interest in a security, for value; or any solicitation of an offer to buy a security or interest in a security).

See, e.g.,

Commissioner Francis M. Wheat, Disclosure to Investors—A Reappraisal of Federal Administrative Policies under the '33 and '34 Acts (Mar. 1969) (often referred to as the “Wheat Report”).

H.R. Rep. No. 73-85, at 5 (1933).

Public Law 112-106, 126 Stat. 306 (2012). The JOBS Act, among other things: Directed the Commission to revise 17 CFR 230.506 (“Rule 506”) to eliminate the prohibition against general solicitation or general advertising for offers and sales of securities to accredited investors (

see

Section II.B.2.b); added Section 4(a)(6) [15 U.S.C. 77d(a)(6)] and Section 4A [15 U.S.C. 77d-1(b)] to the Securities Act and directed the Commission to issue rules to permit certain crowdfunding offerings (

see

Section II.F); and directed the Commission to expand Regulation A [17 CFR 230.250

et seq.

] (

see

Section II.C).

Public Law 114-94, 129 Stat. 1312 (2015).

Public Law 115-174, 132 Stat. 1296 (2018).

The FAST Act added Section 4(a)(7) to the Securities Act [15 U.S.C. 77d(a)(7)], providing a new exemption for private resales of securities.

See

Section V.A.5. Among other changes, the Economic Growth Act required the Commission to amend Regulation A to permit entities subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act to use the exemption.

See

Section II.C.

See

SEC

Ralston Purina Co.,

346 U.S. 119, 126 (1953) (“Keeping in mind the broadly remedial purposes of federal securities legislation, imposition of the burden of proof on an issuer who would plead the exemption seems to us fair and reasonable.”).

Market participants have conveyed concerns about the complexity of the exempt offering framework and have recommended that the Commission undertake a comprehensive review of the available exemptions.

For example, the 2012 Small Business Forum recommended that the Commission initiate a top-to-bottom review of the exempt offering landscape to ensure a rational regulatory scheme, including providing greater guidance regarding integration of the new, as well as existing, exemptions from registration.

In addition, the 2018 Small Business Forum recommended that the Commission rationalize, harmonize, simplify, consolidate, and prioritize the regulatory regime for exempt offerings, including communications restrictions, issuer eligibility, size of the offering, type of investors, disclosure, and other conditions of exemption.

Given the impact of the JOBS Act on the exempt offering framework, generally, this release references comments and recommendations provided by various market participants, including any relevant recommendations from the advisory committees to the Commission and the SEC Government-Business Forums on Small Business Capital Formation (each, a “Small Business Forum”), received since the adoption of the JOBS Act in 2012 or, if later, the adoption of the relevant rule or the most recent amendment or request for comment.

See

Final Report of the 2012 SEC Government-Business Forum on Small Business Capital Formation (Apr. 2013)

available at https://www.sec.gov/info/smallbus/gbfor31.pdf

(“2012 Forum Report”).

The Small Business Investment Incentive Act of 1980 directed the Commission to conduct an annual government-business forum to undertake an ongoing review of the financing problems of small businesses. 15 U.S.C. 80c-1. The Small Business Forum has met annually since 1982 to provide a platform to highlight perceived unnecessary impediments to small business capital formation and address whether they can be eliminated or reduced. Each forum seeks to develop recommendations for government and private action to improve the environment for small business capital formation, consistent with other public policy goals, including investor protection. Information about the Small Business Forum is

available at https://www.sec.gov/corpfin/infosmallbussbforum-2shtml.

See

Final Report of the 2018 SEC Government-Business Forum on Small Business Capital Formation (Jun. 2019)

available at https://www.sec.gov/info/smallbus/gbfor37.pdf

(“2018 Forum Report”).

In this concept release, we undertake a broad review of available exemptions to the registration requirements of the federal securities laws that facilitate capital raising and seek input in order to assess whether our exempt offering framework, as a whole, is consistent, accessible, and effective for both issuers and investors or whether we should consider changes to simplify, improve, or harmonize the exempt offering framework. In this regard, we seek to explore whether overlapping exemptions may create confusion for issuers trying to determine and navigate the most efficient path to raise capital. At the same time, we seek to identify gaps in our framework that may make it difficult, especially for smaller issuers, to rely on an exemption from registration to raise capital at key stages of their business cycle. We also consider whether the limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection (

i.e.,

whether the current levels of investor protection are insufficient, appropriate, or excessive) or pose an undue obstacle to capital formation or investor access to investment opportunities. For example, we explore whether we should revise our investor eligibility limitations to focus more particularly on the sophistication of the investor, the amount of the investment, or other criteria rather than just the income or wealth of the individual investor. In addition, this release looks at whether we can and should do more to allow issuers to transition from one exempt offering to another and, ultimately, to a registered public offering, if desired, without undue friction or delay. We also examine whether we should take steps to expand issuers' ability to raise capital through pooled investment funds, and whether retail investors should be allowed greater exposure to growth-stage issuers through pooled investment funds in light of the potential advantages of investing through such funds, including the ability to have an interest in a diversified portfolio. Finally, we look at secondary trading of securities initially issued in exempt offerings and consider whether we should revise our rules governing exemptions for resales of securities to facilitate capital formation and to promote investor protection by improving secondary market liquidity.

Each section of this release can be read, and commented on, independently. We welcome all feedback and encourage interested parties to submit comments on any or all topics of interest and to respond to one, multiple, or all questions asked in this release. In responding to comments, it would be most helpful if commenters provide an explanation why we should or should not take a particular action or approach, as appropriate.

II. Current Exempt Offering Framework

The Securities Act contains a number of exemptions to its registration requirements and authorizes the Commission to adopt additional exemptions. Section 3 of the Securities Act generally identifies certain classes of securities that are exempt from the registration requirements of the Securities Act.

Most of these exemptions are based on characteristics of the securities themselves, though some exempted securities are identified based on the transaction in which they are offered or sold.

Section 4 of the

Securities Act identifies a number of transactions that are exempt from the registration requirements.

In addition, Section 28 of the Securities Act, which was added by the National Securities Markets Improvement Act of 1996 (“NSMIA”),

authorizes the Commission to exempt other persons, securities, or transactions to the extent “necessary or appropriate in the public interest [and] consistent with the protection of investors.”

15 U.S.C. 77c.

For example, Section 3(b)(1) of the Securities Act authorizes the Commission to exempt certain

issues of securities where the aggregate amount offered does not exceed $5 million to the extent that “the enforcement of this title with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering.” 15 U.S.C. 77c(b)(1).

15 U.S.C. 77d.

Public Law 104-290, 110 Stat. 3416 (Oct. 11, 1996).

15 U.S.C. 77z-3.

The statutory exemptions and those established by the Commission's rules and regulations include a variety of requirements, investor protections, and other conditions. For example, some exemptions limit the amount of securities that may be offered or sold. Some exemptions limit the manner in which the offering can be conducted, such as by prohibiting the use of general solicitation or general advertising to solicit investors. Some offerings are exempt if they restrict sales to certain sophisticated or “accredited” investors that are presumed to possess sufficient financial sophistication and ability to sustain the risk of loss of their investment or to fend for themselves to render the protections of the Securities Act's registration process unnecessary.

In addition, some exemptions specify disclosures required to be included in prescribed forms to be filed with the Commission or otherwise provided to all or a subset of prospective investors. Many exemptions exclude certain types of issuers, such as non-U.S. issuers, issuers subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”),

or investment companies, or specifically disqualify offerings involving certain “bad actors” from relying on the exemption.

See

Regulation D Revisions; Exemption for Certain Employee Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015] (the “Regulation D Revisions Proposing Release”).

15 U.S.C. 78a

et seq.

Table 1 summarizes some of the characteristics of the most commonly used exemptions

from registration.

Commission rules also provide exemptions for certain offerings where the purpose of the offering is other than to raise capital. For example, 17 CFR 230.701 (“Rule 701”) exempts certain sales of securities made to compensate employees, consultants, and advisors.

See

note 512 for a brief discussion of Rule 701.

Generally, Table 1 is organized by typical offering size from largest to smallest. Certain regulatory exemptions from registration are based on statutory provisions, but provide specific frameworks or safe harbors to comply with the statutory exemptions. For example, as discussed in more detail in Section II.B.2.a, Rule 506(b) provides a safe harbor to comply with the exemption under Section 4(a)(2) [15 U.S.C. 77d(a)(2)], or, as discussed in Section II.E.2, Rule 147 provides a safe harbor under Section 3(a)(11) [15 U.S.C. 77c(a)(11)]. An issuer may choose not to avail itself of one of these specific regulatory exemptions and instead conduct an offering pursuant to the statutory exemption itself, such as Section 4(a)(2), following principles-based requirements that have been developed over time.

346 U.S. 119, 126 (1953).

Regulation D [17 CFR 230.501

et seq.

] relates to transactions exempted from the registration requirements of Section 5 of the Securities Act under 17 CFR 230.504 (“Rule 504”), Rule 506(b) and Rule 506(c). Rule 504 provides an exemption for the public offer and sale of up to $5 million of securities in a 12-month period. General solicitation and general advertising are permitted if the offering is registered in a state requiring the use of a substantive disclosure document or sold exclusively to accredited investors under a corresponding state exemption.

See

Section II.D for a discussion of Rule 504.

While it is not a filing requirement, offerings relying on Rule 506(b) require additional information to be provided to non-accredited investors purchasing in the offering.

While the exemptions identified here as excluding blank check companies do not use the term “blank check company,” they exclude development stage issuers that have no specific business plan or purpose or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies, which is substantially similar to the definition of blank check company in Securities Act Rule 419, used elsewhere in Commission rules.

See

17 CFR 230.419.

Table 1—Overview of Capital-Raising Exemptions

Type of offering

Offering limit within 12-month period

General solicitation

Issuer requirements

Investor requirements

SEC filing requirements

Restrictions on resale

Preemption of state registration and qualification

Section 4(a)(2)

None

Transactions by an issuer not involving any public offering.

See SEC

Ralston Purina Co.

None

Yes. Restricted securities

No.

Rule 506(b) of Regulation D

None

“Bad actor” disqualifications apply

Unlimited accredited investors. Up to 35 sophisticated but non-accredited investors

Form D

Yes. Restricted securities

Yes.

Rule 506(c) of Regulation D

None

Yes

“Bad actor” disqualifications apply

Unlimited accredited investors; Issuer must take reasonable steps to verify that all purchasers are accredited investors

Form D

Yes. Restricted securities

Yes.

Regulation A: Tier 1

$20 million

Permitted; before qualification, testing the waters permitted before and after the offering statement is filed

U.S. or Canadian issuers. Excludes blank check companies,

registered investment companies, business development companies, issuers of certain securities, and certain issuers subject to a Section 12(j) order. “Bad actor” disqualifications apply. No asset-backed securities

None

Form 1-A, including two years of financial statements. Exit report

No.

Regulation A: Tier 2

$50 million

Non-accredited investors are subject to investment limits based on annual income and net worth, unless securities will be listed on a national securities exchange

Form 1-A, including two years of audited financial statements. Annual, semi-annual, current, and exit reports

Yes.

Rule 504 of Regulation D

$5 million

Permitted in limited circumstances

Excludes blank check companies, Exchange Act reporting companies, and investment companies. “Bad actor” disqualifications apply

None

Form D

Yes. Restricted securities except in limited circumstances

No.

Intrastate: Section 3(a)(11)

No federal limit (generally, individual state limits between $1 and $5 million)

Offerees must be in-state residents

In-state residents “doing business” and incorporated in-state; excludes registered investment companies

Offerees and purchasers must be in-state residents

None

Securities must come to rest with in-state residents

No.

Intrastate: Rule 147

No federal limit (generally, individual state limits between $1 and $5 million)

Offerees must be in-state residents

In-state residents “doing business” and incorporated in-state; excludes registered investment companies

Offerees and purchasers must be in-state residents

None

Yes. Resales must be within state for six months

No.

Intrastate: Rule 147A

No federal limit (generally, individual state limits between $1 and $5 million)

Yes

In-state residents and “doing business” in-state; excludes registered investment companies

Purchasers must be in-state residents

None

Yes. Resales must be within state for six months

No.

Regulation Crowdfunding; Section 4(a)(6)

$1.07 million

Permitted with limits on advertising after Form C is filed. Offering must be conducted on an internet platform through a registered intermediary

Excludes non-U.S. issuers, blank check companies, Exchange Act reporting companies, and investment companies. “Bad actor” disqualifications apply

Investment limits based on annual income and net worth

Form C, including two years of financial statements that are certified, reviewed or audited, as required. Progress and annual reports

12-month resale limitations

Yes.

As Table 1 illustrates, the current exemptions impose a variety of conditions designed to protect investors. Exemptions tend to incorporate more investor protection measures where non-accredited or less sophisticated investors are permitted to participate in the offering. This focus on the characteristics of the investors involved in a particular offering is articulated in the context of the Section 4(a)(2) exemption in the leading case interpreting that provision,

SEC

Ralston Purina.

In that case, the Supreme Court set forth the position that the availability of the Section 4(a)(2) exemption “should turn on whether the particular class of persons affected needs the protection of the Act. An offering to those who are shown to be able to fend for themselves is a transaction `not involving any public offering.' ”

The emphasis on the characteristics of the investors extends throughout the current exempt offering framework, in which the fewest conditions apply to an offering under an exemption where sales are restricted to accredited investors, while offerings that permit less wealthy or sophisticated investors to participate are subject to an assortment of disclosure requirements, offering and investment limits, and other conditions meant to mitigate the risk of not having the traditional protections of registration under the Securities Act.

346 U.S. 119 (1953).

Id.

at 125.

As discussed below, we seek comment on how an investor's characteristics should be considered in determining whether an investor is able to participate in a particular type of exempt offering. In addition, we seek comment throughout this concept release on specific conditions of each of the current capital-raising exemptions from registration and whether the investment protections of those exemptions are appropriately structured to encourage capital formation, while mitigating the risk of not having the traditional investor protections of registration.

We also seek input on the framework as a whole, in light of the many changes implemented over the years. The current exemptions were not adopted as part of one cohesive regulatory scheme but rather developed and evolved over time through Commission rules and legislative changes. In addition to the JOBS Act and the adoption over time of each of the exemptions from registration discussed in this concept release, the evolution of the existing framework and exempt offering market has been significantly affected by other legislative developments over the years. For example, as noted above, NSMIA added Section 28 to the Securities Act, providing the Commission with significant flexibility to tailor the exempt offering framework by giving the Commission authority to exempt persons, securities, and transactions, or classes thereof, from the Securities Act. NSMIA also preempted the state registration and review of transactions involving “covered securities” and amended Section 18 of the Securities Act to establish classes of covered securities, including securities offered or sold to “qualified purchasers.”

The authority granted to the Commission under Section 18(b)(3) to adopt rules that define a “qualified purchaser” is another significant source of flexibility for the Commission with respect to the exempt offering framework.

Public Law 104-290, 110 Stat. 3416 (Oct. 11, 1996).

In 2015, the Commission used this authority to define “qualified purchaser” to include any person to whom securities are offered or sold in a Regulation A Tier 2 offering.

See

17 CFR 230.256.

In 2001, the Commission proposed a definition of “qualified purchaser” that mirrored the definition of accredited investor in Regulation D in an effort to identify well-established categories of persons it had previously determined to be financially sophisticated and therefore not in need of the protection of state registration when they were offered or sold securities. The Commission intended the definition to facilitate capital formation, especially for small businesses, to impose uniformity in the regulation of transactions to these financially sophisticated persons, and to reduce burdens on capital formation.

See

Defining the Term “Qualified Purchaser” under the Securities Act of 1933, Release No. 33-8041 (Dec. 19, 2001) [66 FR 66839 (Dec. 27, 2001)]. Although the Commission solicited comment from interested parties, it took no further action on the proposal.

Over time, Congress and the Commission have made changes to the federal securities laws and Commission

rules that may enable issuers to remain private longer than in the past. For example, the JOBS Act and the FAST Act revised the thresholds for registration under Section 12(g) of the Exchange Act, with the result that an issuer that is not a bank, bank holding company, or savings and loan holding company is required to register a class of equity securities under the Exchange Act if it has more than $10 million of total assets and the securities are “held of record” by either 2,000 persons or 500 persons who are not accredited investors.

15 U.S.C. 78l(g)(1); 17 CFR 240.12g-1. An issuer that is a bank, bank holding company, or savings and loan holding company is required to register a class of equity securities if it has more than $10 million of total assets and the securities are “held of record” by 2,000 or more persons. Prior to the JOBS Act, Section 12(g) of the Exchange Act required an issuer to register a class of its equity securities if, at the end of the issuer's fiscal year, the securities were “held of record” by 500 or more persons and the issuer had total assets exceeding $1 million.

Securities are deemed to be “held of record” by each person identified as the owner of such securities on the records maintained by or on behalf of the issuer, subject to certain conditions and exceptions.

See

17 CFR 240.12g5-1.

For securities issued in an offering under Regulation A, Regulation Crowdfunding [17 CFR 230.227

et seq.

], or Rule 701, there is a conditional exemption from the mandatory registration provisions of Section 12(g) if certain conditions are met.

See

Sections II.C.1.d and II.F.1.g.

See also

17 CFR 240.12h-1.

The Commission also has taken steps to address uncertainties with respect to the integration of one exempt offering with another exempt offering or with a registered offering, as discussed in detail in Section III below, by providing some guidance to issuers as to their ability to transition from one offering to another.

The exempt markets have also been affected by Commission rule changes and market developments that provide for some measure of liquidity for securities in exempt offerings. Secondary market liquidity is a key concern of investors and may have a significant impact on an issuer's choices with respect to capital raising. In other words, an investor's willingness to participate in an exempt offering and the price he or she would be willing to pay may depend on the investor's assessment of whether, when, and on what terms the security can be resold. With regard to secondary market resales of securities initially sold pursuant to an exemption from registration, the Commission adopted 17 CFR 230.144 (“Rule 144”) in 1972, providing a non-exclusive safe harbor for resales of securities acquired in transactions not involving a public offering.

In 1990, the Commission created a safe harbor for resales of securities by persons other than issuers to “qualified institutional buyers” (“QIBs”) in 17 CFR 230.144A (“Rule 144A”).

In 2015, the FAST Act added Section 4(a)(7) to the Securities Act, which exempts certain private resales of securities to accredited investors.

Further, in recent years, markets have developed that facilitate the resale of securities of non-reporting companies.

However, resales of securities originally purchased in a transaction exempt from registration raise a variety of issues, including whether the primary and secondary sales should be considered part of the same distribution of securities and whether secondary sales have an impact on the availability of the exemption from registration relied on for the primary offering.

While the primary focus in this concept release is on the harmonization of the exemptions from registration for primary offerings, we also seek public input on whether we should consider rule changes that in certain cases would allow for more or less flexibility with regard to resales.

See

Release No. 33-5223 (Jan. 11, 1972) [37 FR 591] (“Rule 144 Adopting Release”). For a discussion of Rule 144,

see

Section V.A.1.

See

Resale of Restricted Securities; Changes to Method of Determining Holding Period of Restricted Securities under Rules 144 and 145, Release No. 33-6862 (Apr. 23, 1990) [55 FR 17933 (Apr. 30, 1990)] (“Rule 144A Adopting Release”). For a discussion of Rule 144A,

see

Section V.A.2.

Public Law 114-94, 129 Stat. 1312 (2015).

See

Section V.A.5.

See, e.g.,

David F. Larcker, Brian Tayan, and Edward Watts,

Cashing it in: Private-Company Exchanges and Employee Stock Sales Prior to IPO,

Stanford Closer Look Series (Sep. 12, 2018).

Persons reselling securities must consider whether they could be an “underwriter” if they acquired the securities with a view to “distribution” or if they are participating in a “distribution.”

See

Section 2(a)(11) of the Securities Act [15 U.S.C. 77b(a)(11)] (defining the term “underwriter”). The Section 4(a)(1) [15 U.S.C. 77d(a)(1)] exemption, discussed in Section IV, is not available to a seller that is deemed to be an underwriter, and the resale by such an underwriter may be considered part of the primary offering by the issuer of the securities, calling into question the availability of the exemption for the original offering.

See

Section IV.

Separate and apart from these regulatory changes, the exempt markets have been influenced by changes over the years in information and communications technologies. Given the rise of social media and other forms of communication, as well as online trading platforms for unregistered securities, information about exempt securities offerings is far more readily available to potential investors and to the general public and at a lower cost than at the time many of the exemptions were promulgated.

As the regulatory and operational framework for exempt offerings has evolved, the amount raised in exempt markets has increased both absolutely and relative to the public registered markets. In 2018, registered offerings accounted for $1.4 trillion of new capital compared to approximately $2.9 trillion that we estimate was raised through exempt offering channels.

Unless otherwise indicated, information in this release on Regulation D offerings, including offerings under Rule 504 and Rule 506, is based on analysis by staff in the Commission's Division of Economic Risk and Analysis (“DERA”) of data collected from Form D [17 CFR 239.500] filings on the Commission's Electronic Data Gathering, Analysis and Retrieval system (“EDGAR”) from January 2009 through December 2018. DERA staff determined the amount raised based on the amounts reported as “Total amount sold” in all Form D filings (new filings and amendments) on EDGAR. Subsequent amendments to a new filing were treated as incremental fundraising and recorded in the calendar year in which the amendment was filed. It is likely that the reported data on Regulation D offerings underestimates the actual amount raised through these offerings. First, as discussed in Section II.B.2, 17 CFR 230.503 (“Rule 503”) of Regulation D requires issuers to file a Form D no later than 15 days after the first sale of securities, but a failure to file the notice does not invalidate the exemption. Accordingly, it is possible that some issuers do not file Forms D for offerings relying on Regulation D. Second, underreporting could also occur because a Form D may be filed prior to completion of the offering, and our rules do not require issuers to amend a Form D to report the total amount sold on completion of the offering or to reflect additional amounts offered if the aggregate offering amount does not exceed the original offering size by more than 10%.

Data on Regulation A offerings was collected from Form 1-Z [17 CFR 239.94] and 1-K [17 CFR 239.91] filings on EDGAR from May 2015 through December 2018. DERA staff supplemented information from Forms 1-Z and 1-K by manually reviewing semi-annual reports on Form 1-SA [17 CFR 239.92], available current reports on Form 1-U [17 CFR 239.93], and offering circular supplements filed during the sample period, and for issuers whose securities have become exchange-listed, information from other public sources. However, data on amounts raised may remain incomplete, and discrepancies in classification may arise. Estimates are based on available reports filed during this period and represent a lower bound on the amounts raised given: (1) The time frames for reporting proceeds following completed or terminated offerings; and (2) that offerings qualified during the report period may be ongoing. As discussed in Section II.C.2.b, Regulation A requires issuers in Tier 1 offerings to report sales and to update certain issuer information by filing a Form 1-Z exit report with the Commission not later than 30 calendar days after termination or completion of an offering. Tier 2 issuers are required to report sales in their first annual report on Form 1-K after termination or completion of a qualified offering, or in their exit report on Form 1-Z. Therefore, some issuers that have completed offerings during the sample period might not have reported proceeds during this period. Accordingly, amounts provided for these offerings likely underestimate the actual amount of capital raised during the period.

Data on Regulation Crowdfunding offerings was collected from Form C [17 CFR 239.900] filings on EDGAR from May 2015 through December 2018. For offerings that have been amended, the data reflects information reported in the latest amendment as of the end of the considered period. As discussed in Section II.F, Regulation Crowdfunding requires an issuer to file a progress update on Form C-U within 5 business days after reaching 100% of its target offering amount. The data on Regulation Crowdfunding excludes 107 withdrawn offerings (involving a Form C-W filing or an intermediary that has withdrawn its registration as of the report date). Some withdrawn offerings may be failed offerings. Amounts raised may be lower than the target or maximum amounts sought.

See

note 41 for a discussion of the data on other exempt offerings, which includes Section 4(a)(2), Regulation S [17 CFR 230.901

et seq.

], and Rule 144A offerings.

See also

Scott Bauguess, Rachita Gullapalli and Vladimir Ivanov,

Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2017

(Aug. 2018) (the “Unregistered Offerings White Paper”), available at

https://www.sec.gov/files/DERA%20white%20paper_Regulation%20D_082018.pdf.

The methodology DERA staff used to analyze data in this release is consistent with the methodology described in more detail in the Unregistered Offerings White Paper.

We do not have data available on, and are unable to estimate, amounts raised under the intrastate exemptions under Securities Act Section 3(a)(11) or Rule 147 or 147A.

See

Section 70.

Figure 1 shows registered and exempt offerings over the period 2009-2018.

The data shows that exempt offerings have accounted for significantly larger amounts of new capital compared to registered offerings during the period under consideration. Both markets exhibit an upward trend, which is consistent with the favorable macroeconomic environment during this period. Although the magnitudes of exempt capital and registered capital raised vary over time, the amount reported raised in exempt offerings is always larger than the amount raised in registered offerings during this time period.

The sample period begins in 2009 due to data availability: Form D, from which we obtain data on exempt offerings under Regulation D, was required to be filed electronically starting in 2009. We note that, as a result, the sample period excludes the years of the 2007-2008 financial crisis. The sample period ends in 2018, which is the last full year of data on offerings.

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Of the approximately $2.9 trillion estimated as raised in exempt offerings in 2018, Table 2 shows the amounts that we estimate were raised under each of the identified exemptions in 2018.

Table 2—Overview of Amounts Raised in the Exempt Market in 2018

Exemption

Amounts

reported or

estimated as

raised in 2018

(billion)

Rule 506(b) of Regulation D

$1,500

Rule 506(c) of Regulation D

211

Regulation A: Tier 1

0.061

Regulation A: Tier 2

0.675

Rule 504 of Regulation D

Regulation Crowdfunding; Section 4(a)(6)

0.055

Other exempt offerings

1,200

The amounts

estimated as raised in other exempt offerings include estimated amounts raised in offerings under Rule 144A and Regulation S. Rule 144A is a non-exclusive safe harbor for resales of certain restricted securities. However, Rule 144A is typically used by market participants to facilitate capital raising by issuers by means of a two-step process in which the first step is a primary offering on an exempt basis to one or more financial intermediaries, and the second step is a resale to QIBs in reliance on Rule 144A.

Regulation S provides a safe harbor for offers and sales of securities outside the United States so long as the securities are sold in an offshore transaction and there are no “directed selling efforts” in the United States.

Although Rule 144A and Regulation S transactions account for a significant proportion of the transaction activity in the exempt markets, we have opted to focus this concept release on other commonly used safe harbors and exemptions from registration for primary offerings.

See

Table 8.

See id.

“Other exempt offerings” includes Section 4(a)(2), Regulation S, and Rule 144A offerings. The data used to estimate the amounts raised in 2018 for other exempt offerings includes: Offerings under Section 4(a)(2) of the Securities Act that were collected from Thomson Financial's SDC Platinum, which uses information from underwriters, issuer websites, and issuer SEC filings to compile its Private Issues database; offerings under Regulation S that were collected from Thomson Financial's SDC Platinum service; and resale offerings under Rule 144A that were collected from Thomson Financial SDC New Issues database, Dealogic, the Mergent database, and the Asset‐Backed Alert and Commercial Mortgage Alert publications, to further estimate the exempt offerings under Section 4(a)(2) and Regulation S. We include amounts sold in Rule 144A resale offerings because, as discussed below, those securities are typically issued initially in a transaction under Section 4(a)(2) or Regulation S but generally are not included in the Section 4(a)(2) or Regulation S data identified above.

See

Section V.A.2 for a discussion of the two-step process typically used by market participants in Rule 144A offerings.

These numbers are accurate only to the extent that these databases are able to collect such information and may understate the actual amount of capital raised under these offerings if issuers and underwriters do not make this data available.

See

Section V.A.2.

17 CFR 230.901

et seq.

Figures 2 and 3 show the trends in capital raising under various offering exemptions during the period 2009-2018. The amounts raised in Rule 506(b), Rule 506(c), other exempt offerings, Regulation A, and Regulation Crowdfunding show an upward trend over the period under consideration, while the amounts raised in Rule 504 offerings have fluctuated significantly; however, as discussed in Section D.3, we believe that the increase in Rule 504 offerings starting in 2016 is largely due to the repeal of 17 CFR 230.505 (“Rule 505”).

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EP26JN19.002

There are

many possible reasons why the amount of capital raised in exempt offerings exceeds the amount raised in registered offerings. However, the focus of this concept release is to seek input on whether, in light of the increased activity in the exempt markets, the current exempt offering framework is working effectively to provide access to capital for a variety of issuers, particularly smaller issuers, and access to investment opportunities for a variety of investors while maintaining investor protections. Historically, a retail investor's primary investment option was registered offerings, and encouraging registered offerings and facilitating investor access to such investment opportunities continues to be a Commission priority, as demonstrated by recent rule changes, proposals, guidance, and other initiatives facilitating capital raising through registered offerings.

However, many issuers, including early-stage and smaller issuers, may find that they need alternative access to capital in order to build their businesses and grow to become public reporting companies. For such issuers, an exempt offering market that allows for efficient access to capital may make it more likely that they achieve this growth.

Due to data limitations, Regulation A totals reflect amounts reported raised annually under Regulation A after the 2015 amendments.

See, e.g.,

Solicitations of Interest Prior to a Registered Public Offering, Release No. 33-10607 (Feb. 19, 2019) [84 FR 6713 (Feb. 28, 2019)]; Disclosure Update and Simplification, Release No. 33-10532 (Aug. 17, 2018) [83 FR 50148 (Oct. 4, 2018)]; Amendments to Smaller Reporting Company Definition, Release No. 33-10513 (Jun. 28, 2018) [83 FR 31992 (Jul. 10, 2018)]; FAST Act Modernization and Simplification of Regulation S-K, Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674 (Apr. 2, 2019)].

See also

Division of Corporation Finance, Draft Registration Statement Processing Procedures Expanded (Jun. 29, 2017; supplemented Aug. 17, 2017),

available at https://www.sec.gov/corpfin/announcement/draft-registration-statement-processing-procedures-expanded.

In addition, it may be argued that the increased amount raised in exempt offerings relative to registered offerings leaves certain types of investors with fewer investment opportunities than might have been available to them if the public markets were used more frequently. The current framework permits non-accredited investors some limited access to unregistered offerings. Based on available data,

non-accredited investors participate primarily

in offerings under Regulation A,

Rule 504, and Regulation Crowdfunding.

In 2018, however, aggregate investments in exempt offerings in which non-accredited investors participated

represented less than one percent of investment in all exempt offerings, and approximately two percent of all exempt offerings, excluding other exempt offerings.

We do not have data on, and are unable to estimate, amounts raised under the intrastate exemptions under Securities Act Section 3(a)(11) or Rule 147 or 147A.

See

Section 70.

While Rule 506(b) offerings can have up to 35 non-accredited but sophisticated investors, issuers reported non-accredited investors as participating in only six percent of Rule 506(b) offerings in each of 2015, 2016, 2017, and 2018, which offerings reported raising between two and three percent of the total capital raised under Rule 506(b) in each of 2015, 2016, 2017, and 2018.

See

Unregistered Offerings White Paper at Table 12.

See also

Sections II.B.2 and II.B.2.f for a discussion of the requirements for Rules 506(b) and 506(c).

17 CFR 230.251

et seq.

17 CFR 227.100

et seq.

This data includes offerings under Rule 506(b) but is limited to those offerings where issuers reported one or more participating non-accredited investor.

See

note 41 for a discussion of the data on other exempt offerings.

A significant number of attractive investment opportunities in the exempt market, including access to many growth-stage issuers, may be available only to investors with certain characteristics, such as accredited investors who, if natural persons, must meet an income or net worth test. For example, the amount of capital raised in Rule 506(b) offerings to accredited investors is greater than amounts raised in registered offerings, and significantly greater than the amounts raised in the types of exempt offerings that are more broadly accessible to non-accredited investors.

Accordingly, while a non-accredited investor may be able to invest in multiple offerings across the exempt market, such an investor would likely not have the same level of access to the full range of investment opportunities in the exempt market as an accredited investor would. We seek comment below on whether it would be consistent with capital formation and investor protection for us to consider steps to make a broader range of investment opportunities available to

those investors currently considered non-accredited.

See

Section II.B.2.f.

All securities offerings are (1) registered with the Commission, (2) exempt from registration, or (3) conducted in violation of the federal securities laws as a result of a failure to register when an exemption is not available. The distinction between fraudulent exempt offerings and illegal offerings as a result of a failure to register is an important one. A failure to comply with the registration provisions of Section 5 of the Securities Act is distinct from a violation of the antifraud provisions of the federal securities laws. Due to data limitations, it is difficult to draw rigorous conclusions about the extent of fraud in exempt securities offerings. Accordingly, we seek data about fraudulent activity in the exempt markets. In particular, we seek quantitative data on fraudulent activity in the context of securities offerings conducted pursuant to a valid exemption from registration, as opposed to illegal securities offerings that fail to comply with the registration provisions of Section 5. Such data may assist us in considering the incidence of fraud in these markets.

Due to data limitations, it is also difficult to draw rigorous conclusions about the average magnitude of investor gains and losses in exempt securities offerings.

Accordingly, we also seek data about the performance of investments in exempt markets. We also seek public input on the review of the exempt offering framework as a whole, and whether and how to best achieve our goal of improving and harmonizing the framework. Because the responses to the following requests for comment may overlap with responses to the more specific requests for comment elsewhere in this release, commenters may wish to consider these broader themes in the context of their responses to those more specific requests for comment.

It is difficult to perform a comprehensive market-wide analysis of investor gains and losses in exempt offerings given the significant limitations on the availability of data about the performance of these investments. Where partial data is available for some types of investments in exempt offerings, it does not lend itself to a comprehensive estimate of investment performance and risks across the entire market of exempt offerings. A typical startup issuer may require a long period of time to experience a liquidity event or close its business, and we lack comprehensive data on such events and associated investor gains and losses. The lack of a secondary trading market for many securities issued in exempt offerings further limits our ability to examine investor gains and losses.

Request for Comment

1. Does the existing exempt offering framework provide appropriate options for different types of issuers to raise capital at key stages of their business cycle? For example, are there capital-raising needs specific to any of the following that are not being met by the current exemptions: Small issuers; start-up issuers; issuers in a particular industry, such as technology, biotechnology, manufacturing, or consumer products; issuers in different geographic regions, including those in rural areas or those affected by natural disasters; or issuers led by minorities, women, or veterans? What types of changes should we consider to address any such gaps in the exempt offering framework? Would legislative changes be necessary or beneficial to address any such gaps?

2. Do the existing exemptions from registration appropriately address capital formation and investor protection considerations? If so, should we retain our current exempt offering framework as it is? Are there burdens imposed by the rules that can be lifted while still providing adequate investor protection?

3. Is the existing exempt offering framework too complex? Should we reduce or simplify the number of exemptions available? If so, should we focus on having a limited number of exemptions based on the amount of capital sought (for example, a micro exemption, an exemption for offerings up to $75 million, and an unlimited offering exemption)? Or should we focus our exemptions on the type of investor allowed to participate? Would legislative changes be necessary or beneficial if we were to replace the current exempt offering framework with a simpler offering framework?

4. Are the exemptions themselves too complex? Can issuers understand their options and effectively choose the one best suited to their needs? Do any exemptions present pitfalls for small businesses, especially for issuers that may be unfamiliar with the general concepts underlying the federal securities laws?

5. In light of the fact that some exemptions impose limited or no restrictions at the time of the offer, should we revise our exemptions across the board to focus consistently on investor protections at the time of sale rather than at the time of offer? If our exemptions focused on investor protections at the time of sale rather than at the time of offer, should offers be deregulated altogether? How would that affect capital formation in the exempt market and what investor protections would be necessary or beneficial in such a framework? Would legislative changes be necessary or beneficial if we were to focus on the sale of a security, rather than the offer and sale?

6. What metrics should we consider in evaluating the impact of our exemptions on efficiency, competition, capital formation, and investor protection? In particular:

• How should we evaluate whether our existing exemptions appropriately promote efficiency, competition, and capital formation? For example, in evaluating our exempt offering market, should we consider whether investors have more opportunities to participate in exempt offerings? To appropriately evaluate the market, should we consider the cost of capital for a variety of issuers? What other indicators should we consider?

• How should we evaluate whether our exemptions provide adequate investor protection? For example, is there quantitative data available that shows an increased incidence of fraud in particular types of exempt offerings or in the exempt market as a whole? If so, what are the causes or explanations and what should we do to address it? What other factors should we consider in assessing investor protection?

7. How has technology affected an issuer's ability to communicate with its potential and current investors? Do our exempt offering rules limit an issuer's ability to provide disclosure promptly to its potential and current investors? Are there technologies or means of communication (

e.g.,

online chat or message boards) that would effectively provide updated disclosure to potential and current investors that are currently not being used due to provisions in our rules or regulations? If so, what rules are limiting this disclosure and what changes should we consider? Given the transformation of information dissemination that has occurred since our rules were adopted and particularly over the last two decades, should we consider any rule changes to enhance an issuer's ability to communicate with investors throughout the exempt offering framework? How would such changes affect capital formation in the exempt market and what investor protections would be necessary or beneficial in such a framework? Would legislative changes be necessary or beneficial to make such changes?

8. Are there rule changes we should consider to ease issuers' transition from one exempt offering to another as their businesses develop and grow?

9. Would rule changes that simplify, harmonize, and improve the exempt offering framework have an effect on the registered public markets? For example, would a more streamlined exempt market encourage more issuers to

remain private longer or forgo registered offerings, and result in less capital being raised in the registered market over time? Are there changes to the current exempt offering framework that we should consider to help issuers transition to a registered public offering without undue friction or delay? Are there changes to the exempt offering framework that we should consider to encourage more issuers to enter the registered public markets? Would these changes increase the costs to issuers? Would these changes benefit investors or particular classes of investors? Would legislative changes be necessary or beneficial to address any such changes?

10. Which conditions or requirements are most or least effective at protecting investors in exempt offerings? Are there changes to these investor protections or additional measures we should implement to provide more effective investor protection in exempt offerings? Are there investor protection conditions that we should eliminate or modify because they are ineffective or unnecessary? Would legislative changes be necessary or beneficial to address any changes to investor protection conditions?

11. In light of the increased amount of capital raised through the exempt offering framework, should we consider rule changes that will help make exempt offerings more accessible to a broader group of retail investors than those who currently qualify as accredited investors? If so, what types of changes should we consider? For example, should we expand the definition of accredited investor to take into account characteristics other than an individual's wealth? Should we allow investors, after receiving disclosure about the risks, to opt into accredited status? Should we amend the existing exemptions or adopt new exemptions to accommodate some form of non-accredited investor participation such that these exemptions may be more attractive to, or more widely used by, issuers?

12. When the current exemptions from registration include offering limits or limits on the amount an individual investor may invest, what should we take into account to determine whether the limits and amounts are appropriate? Should the amounts of all offering limits or investment limits be subject to periodic inflation adjustments? If so, what inflation measure should we use for such adjustments and how often should the adjustments occur? Should we use dollar limits, or some other measure? For example, should individual investment limits be based on a percentage of the investor's income or investment portfolio? Do these limits impose any particular challenges, for example, by having different effects in different parts of the country due to regional differences?

Should any investors be limited in how much they can invest?

See, e.g.,

Table 4.

13. Many of the existing exemptions from registration require issuers to provide specified disclosure to investors at the time of the offering and, in some cases, on an ongoing basis following the offering. The type of information required to be provided, and the frequency with which the disclosures are required, vary from exemption to exemption. Should we harmonize the disclosure requirements of the various exemptions? If so, how? Should we focus on making the requirements more uniform or more scaled to the characteristics of the issuer or of the offering? Could changes to the various disclosure requirements of the exemptions help to facilitate issuers' transition from one exempt offering to another or to a registered offering? Would legislative changes be necessary or beneficial if we were to replace the current exempt offering framework with such a framework?

14. Should the availability of any exemptions be conditioned on the involvement of a registered intermediary, such as the registered funding portal or broker-dealer in crowdfunding offerings, particularly where the offering is open to retail investors who may not currently qualify as accredited investors?

The status of persons that provide introductions or otherwise solicit potential investors for an issuer (generally, “finders”) is not discussed within this release. The Division of Trading and Markets is reviewing the status of finders for purposes of Section 15(a) of the Exchange Act [15 U.S.C. 78o(a)].

15. Should the availability of any exemptions be conditioned on particular characteristics of the issuer or lead investor(s)? For example, in an offering to non-accredited investors where there is one or more lead investors, should we require that the lead investor(s) hold a minimum amount of the same security type (or a junior security) sold to the non-accredited investors?

16. Should we consider a more unified approach to the exempt offering framework that focuses on the types of investors permitted to invest in the offering and the size of the offering, tailoring the additional investor protections and conditions to be applied based on those characteristics? For example, should we consider changes to the requirements for any or all of the existing exemptions from registration so that specific requirements (such as disclosure requirements or individual investment limits) will not apply if participation in the offering is limited to accredited investors? Would legislative changes be necessary or beneficial if we were to replace the current exempt offering framework with a more unified approach?

17. Should we consider rule changes that would allow non-accredited investors to participate in exempt offerings of all types, subject to conditions such as a limit on the size of the offering, a limit on the amount each non-accredited investor could invest in each offering, across all offerings, or across all offerings of a certain type, a decision by the investor—after receiving disclosure about the risks—to opt into the offering, and/or specific disclosure requirements? If so, should we scale the type and amount of information required to be disclosed to non-accredited investors based on the characteristics of the investors or the offering, such as the net worth or sophistication of the non-accredited investors, or whether the offering amount is capped, individual investment limits apply, or an intermediary is involved in the offering? What benefits would be conferred by such an approach? What would be the investor protection concerns? Would legislative changes be necessary or beneficial if we were to replace the current exempt offering framework with such an approach?

18. Should we move one or more current exemptions into a single regulation, such as currently provided by Regulation D with respect to the exemptions under Rules 506(b), 506(c), and 504? What, if any, current exemptions should be included in a single set of regulations? Would a new single set of exemptions be overly complicated and obscure any possible benefits of coordination and harmonization?

19. Are we effectively communicating information about the exempt offering framework, including the requirements of each exemption, to the issuers seeking to raise capital and investors seeking investment opportunities in this market? What types of communications have worked best? How can we improve our communications to issuers and investors about the exempt offering framework? Are there additional technologies or means of communication that we should use to convey information about exempt offerings to issuers and investors?

The remainder of this concept release discusses the requirements for each of the capital-raising exemptions from registration that make up our current exempt offering framework. As indicated in the requests for comment set forth following the discussion of each exemption, we are seeking feedback from issuers, investors, and other market participants on whether any changes to Commission rules or the underlying statutes are needed or desired to improve the utility of the exemptions or the entire exempt offering framework consistent with investor protection. This release also discusses other broad topics that are relevant to the entire, or a significant portion of, the framework, including the definition of “accredited investor,” the integration analyses applied in the context of exempt offerings, exempt offerings by pooled investment funds,

and the current regulatory landscape affecting the secondary trading market for securities originally sold in exempt offerings.

We refer in this release to “pooled investment funds” because that term is used in Form D.

A. Accredited Investor Definition

Section 413(b)(2)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act [Pub. L. 111-203, 124 Stat. 1376 (2010)] (the “Dodd-Frank Act”) directed the Commission to review the accredited investor definition as it relates to natural persons every four years to determine whether the definition should be modified or adjusted for the protection of investors, in the public interest, and in light of the economy. We intend the discussion in this Section II.A to satisfy that requirement.

See

Report on the Review of the Definition of “Accredited Investor” (Dec. 18, 2015) (“Accredited Investor Staff Report”), available at

https://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf. See also

Section II.A.3 for a discussion of the Accredited Investor Staff Report, which was prepared in connection with the first review in 2015.

1. Background

The “accredited investor” definition is set forth in 17 CFR 230.501(a) (“Rule 501(a)”) of Regulation D

and is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act's registration process unnecessary.”

The definition is a central component of several exemptions from registration, including Rules 506(b) and 506(c) of Regulation D.

In addition, Securities Act Section 2(a)(15) [15 U.S.C. 77b(a)(15)] and 17 CFR 230.215 (“Rule 215”) under the Securities Act define accredited investor for purposes of Securities Act Section 4(a)(5) [15 U.S.C. 77d(a)(5)]. Section 4(a)(5) exempts non-public offers and sales of up to $5 million made solely to accredited investors. However, based on DERA staff's review of Form D filings from January 1, 2009 through December 31, 2018, no issuer has reported relying on the Section 4(a)(5) exemption. The definition of accredited investor in Section 2(a)(15) enumerates certain categories of persons and authorizes the Commission to prescribe additional categories. Pursuant to this authority, the Commission has prescribed additional categories in Rule 215. The definition contained in Rule 215 is substantially similar to Rule 501(a).

See, e.g.,

Regulation D Revisions Proposing Release;

see also

Amendments for Small and Additional Issues Exemptions under the Securities Act (Regulation A), Release No. 33-9741 (March 25, 2015) [80 FR 21805 (April 20, 2015)] (“2015 Regulation A Release”) at note 146.

See

Section II.B for a discussion of Rule 506.

Accredited investors may, under Commission rules, participate in investment opportunities that are generally not available to non-accredited investors, such as investments in many private issuers and offerings by hedge funds, private equity funds, and venture capital funds.

The Rule 506 market has become a large and vibrant market for raising capital, especially for small business capital formation.

Rule 506 offerings to accredited investors occur with greater frequency than any other type of offering surveyed by the staff.

Issuers in those offerings are not required to provide any substantive disclosure and are permitted to sell securities to an unlimited number of accredited investors with no limit on the amount of money that can be raised from each investor or in total.

Purchasers in Rule 506(c) offerings are limited to accredited investors.

See

note 47 for data reflecting non-accredited investors' participation in Rule 506(b) offerings.

See

Sections II.B.2 and II.B.2.f for a discussion of the requirements for Rules 506(b) and 506(c).

See

Section IV.A.2 for a discussion of private funds.

Recent research has examined the importance of the pool of accredited investors for the entry of new businesses and employment. In their working paper, Lindsey and Stein (2019) examine the effects on angel finance stemming from Dodd-Frank Act's elimination of the value of the primary residence in the determination of net worth for purposes of accredited investor status.

See

note 66 and accompanying text. Lindsey and Stein find that geographic areas experiencing a larger reduction in the number of potential accredited investors experienced negative effects on new firm entry and employment levels at small entrants.

See

Laura Lindsey and Luke C.D. Stein (2019)

Angels, Entrepreneurship, and Employment Dynamics: Evidence from Investor Accreditation Rules,

Working paper.

The aggregate amount of capital raised through Rule 506(b) and (c) offerings is large, but the median size of offerings by non‐financial issuers is less than $1 million, indicating a large number of small offerings, consistent with the original regulatory objective to target the capital formation needs of small businesses.

See

Unregistered Offerings White Paper.

See

Unregistered Offerings White Paper.

See

17 CFR 230.506(b) and 17 CFR 230.506(c).

Under the Regulation D accredited investor definition, natural persons are accredited investors if:

• Their income exceeds $200,000 in each of the two most recent years (or $300,000 in joint income with a person's spouse) and they reasonably expect to reach the same income level in the current year;

17 CFR 230.501(a)(6).

• Their net worth exceeds $1 million (individually or jointly with a spouse), excluding the value of their primary residence.

17 CFR 230.501(a)(5). Section 413(a) of the Dodd-Frank Act excluded the value of a person's primary residence from the net worth calculation and directed the Commission to adjust similarly any accredited investor net worth standard in its Securities Act rules. In 2011, the Commission revised Rules 215 and 501 to exclude any positive equity that individuals have in their primary residences.

See

Net Worth Standard for Accredited Investors, Release No. 33-9287 (Dec. 21, 2011) [76 FR 81793 (Dec. 29, 2011)] (“Primary Residence Adopting Release”). The revised calculation requires that any excess of indebtedness secured by the primary residence over the estimated fair market value of the residence be considered a liability for purposes of determining accredited investor status on the basis of net worth. The Commission also added a 60-day look-back period to prevent investors from artificially inflating their net worth by incurring incremental indebtedness secured by their primary residence, thereby effectively converting their home equity into cash or other assets that would be included in the net worth calculation.

In addition, directors, executive officers, and general partners of the issuer selling the securities are accredited investors for purposes of that issuer.

Certain enumerated entities with over $5 million in assets qualify as accredited investors,

while others, including regulated entities such as banks and registered investment companies, are not subject to the assets test.

The definition of an accredited investor includes, among others, the following entities:

17 CFR 230.501(a)(4). In addition, directors, executive officers, and general partners of a general partner of the issuer are accredited investors for purposes of the issuer. 17 CFR 230.501(a)(4).

17 CFR 230.501(a)(1), (3), and (7).

17 CFR 230.501(a)(1), (2), and (8).

• A bank, registered broker-dealer, insurance company, registered investment company, business development company (“BDC”) as defined in the Investment Company Act of 1940 (“Investment Company Act”),

or small business investment company (“SBIC”);

15 U.S.C. 80a-2(a)(48). In this release, unless otherwise specified, we use the term “BDC” to refer to a business development company as defined in the Investment Company Act.

See

note 526 for a description of a BDC.

17 CFR 230.501(a)(1).

See

Section IV for a discussion of pooled investment funds.

• A private business development company as defined in the Investment Advisers Act of 1940 (“Advisers Act”);

15 U.S.C. 80b-2(a)(22).

• An employee benefit plan (within the meaning of the Employee Retirement Income Security Act

(“ERISA”)

) if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;

Public Law 93-406, 88 Stat. 829 (1974).

17 CFR 230.501(a)(1).

• A tax exempt charitable organization, corporation, or partnership with assets in excess of $5 million;

17 CFR 230.501(a)(3).

• An enterprise in which all the equity owners are accredited investors;

and

17 CFR 230.501(a)(8).

• A trust with assets of at least $5 million, not formed only to acquire the securities offered, and the purchases of which are directed by a person who meets the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.

17 CFR 230.501(a)(7).

An entity that is not covered specifically by one of the enumerated categories is generally not an accredited investor under the rule.

Below we estimate the number of U.S. households that qualify as accredited investors under the existing criteria.

For this analysis, we use the same methodology and variable definitions as the 2015 Accredited Investor Staff Report. The underlying household data for this analysis was obtained from the Federal Reserve Board's Survey of Consumer Finances (the “SCF”) for 2016,

available at https://www.federalreserve.gov/econresdata/scf/scfindex.htm.

The SCF is a triennial survey that provides insights into household income and net worth, where the household is considered to be the primary economic unit within a family. As of the date of this release, the most recent SCF data is from the 2016 survey. The SCF employs weights to make the data representative of the U.S. population.

The 2015 Accredited Investor Staff Report used the definitions from Jesse Bricker, Lisa J. Dettling, Alice Henriques, Joanne W. Hsu, Kevin B. Moore, John Sabelhaus, Jeffrey Thompson, and Richard A. Windle, Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances, Federal Reserve Bulletin, Vol. 100, No. 4 (2014).

We estimate households and not individuals due to data limitations because the database underlying our analysis measures wealth and income at the household level. It should be noted that in the SCF database, income is reported at the household level. Similar to the 2015 Accredited Investor Staff Report, we do not attempt to differentiate income based on marital status of the household because data on individual income from all sources is not publicly available in the database. As a result, accredited investor (household) estimates based on individual income thresholds are likely to be overestimated and would represent upper bounds. A household can have multiple family members with independent sources of income that qualify them as accredited investors based on income. We count them as one accredited investor for each household, which implies we are also likely underestimating the actual pool of accredited investors when we provide household estimates. Consequently, the household estimates we derive using the joint income threshold would represent a lower bound for individuals qualifying on the basis of income. The actual number of individuals that qualify as accredited investors on an income basis (individual or joint) would, in all likelihood, lie between the estimates that we derive for the individual income threshold and the joint income threshold.

Table 3—Households Qualifying Under Existing Accredited Investor Criteria

Criterion

Number of qualifying households

(

Standard errors are in

parentheses

)

Qualifying households as % of U.S. households

(

Standard errors are in

parentheses

)

Individual income

threshold ($200,000)

11.2 million (0.3 million)

8.9% (0.2%).

Joint income

threshold ($300,000)

5.8 million (0.2 million)

4.6% (0.2%).

Net worth

($1,000,000)

11.8 million (0.3 million)

9.4% (0.2%).

Overall number of qualifying households

16.0 million (0.3 million)

13.0% (0.2%).

The

data above provides an estimate of the overall pool of qualifying households in the United States. It does not, however, represent the actual number of accredited investors that do or would invest in the Regulation D market or in other exempt offerings.

For purposes of this analysis, income is defined to include wage income, business income, rent income, interest and dividend income, pension income, social security income, income from retirement accounts, transfers, and other income. According to the SCF documentation, income data is collected for the year prior to the year of the SCF while family balance sheet data covers the status of the family at the time of the interview. Thus, we use income data inflation-adjusted to 2016. Further, for comparability, income data is adjusted for inflation by a factor of 1.05914411 from 2016 dollars to March 2019 dollars using Consumer Price Index (“CPI”) data from the U.S Department of Labor Bureau of Labor Statistics (“BLS”).

See

note 79.

For purposes of this analysis, net worth is defined as the difference between household assets and household debt. Assets include all financial assets (stocks, bonds, mutual funds, cash and cash management accounts, retirement assets, life insurance, managed assets like trusts and annuities, and other financial assets like deferred compensation, royalties, futures, etc.) and non-financial assets. Debt includes mortgage and home equity loans, lines of credit, credit card debt, installment loans including vehicle loans, margin loans, pension loans, and other debt (

e.g.,

loans against insurance). We exclude the value of the household's principal residence and any outstanding mortgages associated with the principal residence. Further, for comparability, net worth data is adjusted for inflation by a factor of 1.05914411 from 2016 dollars to March 2019 dollars using BLS CPI data.

The number of households qualifying under either the income or net worth criterion is smaller than the sum of the number of households qualifying under the income and the number of households qualifying under the net worth criterion because some households may qualify under both criteria.

Form D data and other data available to us on private placements do not allow us to estimate the number of unique accredited investors participating in the exempt offerings.

Below we also present information on median and mean income and net worth of U.S. households in major U.S. geographic regions. The data shows that household income and net worth tend to be much higher in the Northeast and West regions. This indicates that households that would qualify as accredited investors are more likely to be located in these two regions.

Table 4—U.S. Household Income and Net Worth, by Region

($ thousands)

Northeast

Midwest

South

West

Mean household income (before-tax)

136.5

102.0

100.0

108.5

Median household income (before-tax)

64.4

54.7

51.5

57.5

Mean household net worth

851.3

658.8

636.9

873.7

Median household net worth

154.5

103.2

87.0

114.3

Below

we also provide an overview of the educational attainment level of the estimated accredited investor pool, based on the existing criteria. As can be seen below, accredited investors tend to be more highly educated relative to the general population.

The Federal Reserve Board's 2016 SCF Chartbook,

available at https://www.federalreserve.gov/econres/files/BulletinCharts.pdf,

at 28, 29, 64, 65. The public version of the SCF database does not provide information regarding geographical location of households. As a result, we are unable to identify in which states households that qualify as accredited investors are likely to be concentrated. Unlike Table 3, in which we exclude the value of the primary residence from net worth, Table 4 does not exclude the value of the primary residence from the net worth of households. The figures were adjusted for inflation to March 2019 dollars using BLS CPI data.

EP26JN19.003

We lack data

to generate a comprehensive estimate of the overall number of institutional accredited investors because disclosure of accredited investor status across all institutional investors is not required and because, while we have information to estimate the number of some categories of institutional accredited investors, we lack comprehensive data that will allow us to estimate the unique number of investors across all categories of institutional accredited investors under Rule 501.

The data underlying these charts was obtained from the 2016 SCF, adjusted for inflation to March 2019 dollars.

For example, Form ADV filers report information about the number of clients of different types, such as pooled investment vehicles, banking institutions, corporations, charities, pension plans, etc., some of which are potential institutional accredited investors. However, the data available to us does not allow identification of unique clients (to account for cases where a client has multiple advisers) or institutional accredited investors that do not retain services of a Form ADV filer. Further, Form D filings do not provide a breakdown of investors by type—institutions or natural persons—that invested in an offering.

2. Implications Outside of the Regulation D Context

The Regulation D accredited investor definition plays an important role in other federal securities law contexts. For example:

• Regulation A limits the amount of securities non-accredited investors can purchase in certain of those offerings to no more than 10% of the greater of their annual income or their net worth.

Accredited investors are not subject to investment limits under Regulation A.

17 CFR 230.251(d)(2)(i)(C).

See

Section II.C.1.c.

• Under Section 12(g) of the Exchange Act,

an issuer that is not a bank, bank holding company or savings and loan holding company is required to register a class of equity securities under the Exchange Act if it has more than $10 million of total assets and the securities are “held of record” by either 2,000 persons, or 500 persons who are not accredited investors.

As a result, issuers seeking to rely on these thresholds must differentiate between record holders who are accredited investors and non-accredited investors.

15 U.S.C. 78l(g).

See id.; see also

17 CFR 240.12g-1 (“Rule 12g-1”) (clarifying that accredited investor status for this purpose is determined as of the last day of its most recent fiscal year rather than at the time of the sale of the securities); Changes to Exchange Act Registration Requirements to Implement Title V and Title VI of the JOBS Act, Release No. 33-10075 (May 3, 2016) [84 FR 6713 (Feb. 28, 2019)] (“Changes to Exchange Act Registration Requirements Release”) at Section II.B. (“Under amended Rule 12g-1, an issuer will need to determine, based on facts and circumstances, whether prior information provides a basis for a reasonable belief that the security holder continues to be an accredited investor as of the last day of the fiscal year.”).

• Under Section 5(d) of the Securities Act, an emerging growth company

is permitted to “test the waters”

with potential investors that are QIBs

institutional accredited investors

before or after filing a registration statement to gauge such investors' interest in a contemplated securities offering. In February 2019, the Commission proposed expanding this testing the waters accommodation to all issuers, including registered investment companies and BDCs.

An emerging growth company refers to an issuer that had total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement. That issuer continues to be an emerging growth company for the first five fiscal years after the date of the first sale of its common equity securities pursuant to an effective registration statement, unless one of the following occurs: Its total annual gross revenues are $1.07 billion or more; it has issued more than $1 billion in non-convertible debt in the past three years; or it becomes a “large accelerated filer,” as defined in 17 CFR 240.12b-2 (“Rule 12b-2”) under the Exchange Act.

See

17 CFR 230.405 (“Rule 405”) and Rule 12b-2 (defining “emerging growth company”).

Communications between an issuer and potential investors for the purpose of assessing investor interest before having to commit the time and expense necessary to carry out a contemplated securities offering are often referred to as “testing the waters.”

See

Section V.A.2 for a discussion of the definition of a QIB.

An institutional accredited investor refers to any institutional investor who is also an accredited investor.

See

Solicitations of Interest Prior to a Registered Public Offering, Release No. 33-10607 (Feb. 19, 2019) [84 FR 6713 (Feb. 28, 2019)].

In addition, some states use the accredited investor definition to determine whether investment advisers to certain private funds are required to be registered.

States also incorporate the definition in a variety of other contexts. For example, the definition is used in government finance,

finance lending,

mortgage lending,

insurance,

and financial institution regulation.

100

The accredited investor definition also served as a model for an exemption under the Uniform Securities Act of 2002.

101

See, e.g.,

Final Order Granting Exemption From the Registration Requirements for Investment Advisers to Private Funds and Their Investment Adviser Representatives, Wisconsin Department of Financial Institutions, Division of Securities (Feb. 17, 2012); Certificate Exemption for Investment Advisers to Private Funds, Cal. Code Regs. Title 10 § 260.204.9; Sixth Transition Order administering the Michigan Uniform Securities Act, State of Michigan Department of Energy, Labor & Economic Growth, Office of Financial and Insurance Regulation (Mar. 11, 2011).

See, e.g.,

Cal. Gov't Code § 64111.

See, e.g.,

Cal. Fin. Code § 22064.

See, e.g.,

Fla. Stat. §§ 494.001 and 494.00115.

See, e.g.,

Tex. Ins. Code § 1111A.002.

100

See, e.g.,

Conn. Gen. Stat. § 36a-2 (2014).

101

Uniform Securities Act of 2002 §§ 102(11)(F) through 102(11)(K), 102(11)(O) and 202(13), National Conference of Commissioners on Uniform State Laws (also known as the Uniform Law Commission). The Uniform Law Commission provides states with model legislation in areas of state statutory law when uniformity is desired and practicable. The Uniform Securities Act of 2002 is a model state securities law

available at https://www.uniformlaws.org/committees/community-home?communitykey=8c3c2581-0fea-4e91-8a50-27eee58da1cf&tab=groupdetails.

FINRA Rule 5123 uses the accredited investor definition to provide an exemption from the general requirement that each member firm that sells an issuer's securities in a private placement file with FINRA a copy of any private placement memorandum, term sheet, or other offering document the firm used within 15 calendar days of the date of the sale, or indicate that it did not use any such offering documents.

102

The exemption applies to offerings sold to, among other persons, accredited investors described in Rule 501(a)(1), (2), (3), or (7). The rule does not incorporate the entire accredited investor definition and in particular excludes the net worth and income criteria set forth in Rule 501(a)(5) and (6) respectively.

103

102

FINRA Rule 5123(b)(1)(J).

103

The Commission release approving FINRA's adoption of this rule noted the following rationale:

“Several commenters requested additional exemptions from coverage under Rule 5123. [One commenter], for example, requested an exemption for all accredited investors. FINRA stated that it does not believe that the exemption should extend to offers to accredited investors under Rule 501(a)(4), (5), or (6) of Regulation D. In particular, FINRA stated that it believes that the criteria used to measure whether a person meets the accredited investor standard do not necessarily reflect a sufficiently high level of sophistication to justify exemption from the proposed rule.”

Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendments No. 2 and No. 3 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendments No. 1, No. 2, and No. 3 to Adopt FINRA Rule 5123 (Private Placements of Securities) in the Consolidated FINRA Rulebook, Release No. 34-67157 (June 7, 2012) [77 FR 35457 (June 13, 2012)].

3. Accredited Investor Staff Report

In December 2015, the Commission issued a staff report on the accredited investor definition.

104

The report examined the history of the accredited investor definition

105

and considered comments on the definition received from a variety of sources, including public commenters, the Commission's Investor Advisory Committee,

106

the Commission's Advisory Committee on Small and Emerging Companies,

107

and the 2014 Small Business Forum.

108

The report considered alternative approaches to defining “accredited investor,” provided staff recommendations for potential updates and modifications to the existing definition, and analyzed the impact potential approaches may have on the pool of accredited investors. The report noted that any change to the accredited investor definition would have to consider both the impact the change could have on investors and the supply of capital to the Regulation D market. The report acknowledged the tradeoff between using a principles-based accredited investor definition and the need for bright-line standards that investors, issuers, and their advisors can understand and apply easily. In the report, the staff recommended that the Commission consider any one or more of the methods of revising the accredited investor definition described in Table 5 below.

104

See

Accredited Investor Staff Report. The report focused on the accredited investor definition as used in Regulation D, with the understanding that any revisions to the definition should be made to the Rule 215 definition as well.

105

See id

at Section II.

106

See

Recommendation of the Investor Advisory Committee: Accredited Investor Definition (Oct. 9, 2014)

available at http://www.sec.gov/spotlight/investor-advisory-committee-2012/accredited-investor-definition-recommendation.pdf.

107

See

Advisory Committee on Small and Emerging Companies: Recommendations Regarding the Accredited Investor Definition (Feb. 17, 2015)

available at http://www.sec.gov/info/smallbus/acsec/acsec-accredited-investor-definition-recommendation-030415.pdf.

108

See

Final Report of the 2014 SEC Government-Business Forum on Small Business Capital Formation (May 2015)

available at http://www.sec.gov/info/smallbus/gbfor33.pdf

(“2014 Forum Report”).

In addition to the staff recommendations described in Table 5 below, the report also discussed whether individuals with certain professional degrees or licenses or financial experience, or who are advised by professionals, should be considered accredited investors. The report, however, did not include any staff recommendations about whether individuals with certain professional degrees or licenses or financial experience, or who are advised by professionals, should be considered accredited investors.

4. Comments on the Accredited Investor Staff Report

Following the release of the Accredited Investor Staff Report, the Commission has continued to receive recommendations about revisions to the accredited investor definition from the Advisory Committee on Small and Emerging Companies and the annual Small Business Forum.

In July 2016, the Advisory Committee on Small and Emerging Companies recommended, among other things, that the Commission:

• Not change the current financial thresholds in the accredited investor definition except to adjust on a going-forward basis to reflect inflation;

• Expand the pool of accredited investors to include individuals who have passed examinations that test their knowledge and understanding in the areas of securities and investing, including the Series 7, Series 65, Series 82, and CFA Examinations and equivalent examinations; and

• Explore ways to allow participation by potential investors with specific industry or issuer knowledge or expertise who would not otherwise be considered accredited investors.

109

See

Advisory Committee on Small and Emerging Companies: Recommendations Regarding the Accredited Investor Definition (July 20, 2016)

available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendations-accredited-investor.pdf.

The recommendation also noted that the Committee would support expanding the definition to take into account measures of non-financial

sophistication, regardless of income or net worth, thereby expanding rather than contracting the pool of accredited investors; however, the recommendations cautioned that any non-financial criteria should be able to be ascertained with certainty as “simplicity and certainty are vital to the utility of any expanded definition of accredited investor.”

110

The Committee also recommended that the Commission continue to gather data for ongoing analysis of what “attributes best encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act's registration process unnecessary.”

111

110

Id.

111

Id.

The 2016, 2017, and 2018 Forum Reports all included a recommendation that, consistent with the recommendations of the Advisory Committee on Small and Emerging Companies, the Commission should: (a) Maintain the monetary thresholds for accredited investors; and (b) expand the categories of qualification for accredited investor status based on various types of sophistication, such as education, experience, and training, including without limitation persons holding FINRA licenses or CPA or CFA designations, passing a test that demonstrates sophistication, or status as managerial or key employees affiliated with the issuer.

112

See

Final Report of the 2016 SEC Government-Business Forum on Small Business Capital Formation (Mar. 2017)

available at https://www.sec.gov/info/smallbus/gbfor35.pdf

(“2016 Forum Report”); Final Report of the 2017 SEC Government-Business Forum on Small Business Capital Formation (Mar. 2018)

available at https://www.sec.gov/files/gbfor36.pdf

(“2017 Forum Report”); and 2018 Forum Report.

In October 2017, the U.S. Department of the Treasury prepared a report that included recommendations to, among other things, revise the accredited investor definition.

113

The 2017 Treasury Report recommended that the Commission undertake amendments to the accredited investor definition with the objective of expanding the eligible pool of sophisticated investors. The 2017 Treasury Report stated that the definition could be broadened to include: (a) Any investor who is advised on the merits of making a Regulation D investment by a fiduciary, such as an SEC- or state-registered investment adviser; and (b) financial professionals, such as registered representatives and investment adviser representatives, who are considered qualified to recommend Regulation D investments to others.

114

113

See

A Financial System That Creates Economic Opportunities Capital Markets, U.S. Dept. of the Treasury (Oct. 2017 (“2017 Treasury Report”),

available at https://www.treasury.gov/press-center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf,

at p. 44.

114

See

2017 Treasury Report, at p. 44.

In addition, the Commission received over 50 comment letters on the Accredited Investor Staff Report.

115

While a few commenters opposed changes to the definition,

116

most commenters generally supported at least one of the staff's recommended changes to the definition.

117

In addition, some commenters advocated for lower thresholds or an elimination of the need for the accredited investor definition altogether.

118

115

The comment letters received in response to the Accredited Investor Staff Report are

available at https://www.sec.gov/comments/4-692/4-692.shtml

116

See, e.g.,

Letter from Jillian Sidoti dated Jan. 25, 2016

available at https://www.sec.gov/comments/4-692/4692-10.htm

(raising concerns about increasing the financial thresholds to “higher, and perhaps unbearable, thresholds”) (“Sidoti Letter”); Letter from Michael John Sewell dated Dec. 23, 2015

available at https://www.sec.gov/comments/4-692/4692-2.htm

(“Sewell Letter”) (raising concerns about increasing the complexity of defining an accredited investor); and Letter from Robert Kent dated May 4, 2016

available at https://www.sec.gov/comments/4-692/4692-1736913-151030.htm

117

See

Table 3 for a summary of the responses from commenters on each staff recommendation.

118

See, e.g.,

Letter from Ryan Carpel dated May 12, 2016

available at https://www.sec.gov/comments/4-692/4692-30.htm

; Letter from Nader Rahelan dated Apr. 23, 2016

available at https://www.sec.gov/comments/4-692/4692-25.htm

; Letter from Darrell J. Leamon dated Apr. 29, 2016

available at https://www.sec.gov/comments/4-692/4692-27.htm

; Letter from Andrew Thompson, J.D. dated Feb. 9, 2016

available at https://www.sec.gov/comments/4-692/4692-12.htm

(“Thompson Letter”); Letter from Caroline B. Austin dated Jan. 30, 2016

available at https://www.sec.gov/comments/4-692/4692-11.htm

; Letter from Public Startup Company, Inc. dated Feb. 16, 2016

available at https://www.sec.gov/comments/4-692/4692-13.pdf

(“PSC Letter”); Letter from Roger Q. Doctor dated Jun. 14, 2016

available at https://www.sec.gov/comments/4-692/4692-36.htm

; Letter from Karl T. Muth, Lecturer, Northwestern University dated May 17, 2016

available at https://www.sec.gov/comments/265-27/26527-58.htm

(“Muth Letter”); Anonymous Letter dated Jul. 5, 2016

available at https://www.sec.gov/comments/4-692/4692-39.pdf

(“Anon 2 Letter”); Letter from Martha J. Escudero Acosta dated Oct 15, 2016

available at https://www.sec.gov/comments/4-692/4692-45.htm

(“Escudero Letter”); Letter from The TAN2000 International Regulatory Corporation dated Dec. 10, 2016

available at https://www.sec.gov/comments/4-692/4692-46.pdf

(“TAN2000 Letter”); Letter from Cole Hyland dated Jan. 27, 2017

available at https://www.sec.gov/comments/4-692/4692-1536599-131180.htm

; Letter from Charles A. Gokas dated Jul. 7, 2017

available at https://www.sec.gov/comments/4-692/4692-1840627-154975.htm

; Letter from David Kinsfather dated Aug. 5, 2017

available at https://www.sec.gov/comments/4-692/4692-2185513-159906.htm

; Michael K. Smith dated Jan. 23, 2018

available at https://www.sec.gov/comments/4-692/4692-2945318-161851.htm

; and Letter from Anonymous Lawyer dated Aug. 2, 2016

available at https://www.sec.gov/comments/4-692/4692-41.htm

(“Anon 3 Letter”) (recommending that there should be different and lower thresholds for service providers of the issuer to be deemed an accredited investor).

Of the staff's recommended changes, commenters were overwhelmingly supportive of the creation of additional methods of accreditation other than financial criteria.

119

Many commenters expressed that financial thresholds are not effective in defining a population of sophisticated investors and that one or more of the alternative methods of accreditation may be more indicative of sophistication than income and net worth alone.

120

A few commenters recommended investment limits

121

or an additional financial net worth qualification for these investors.

122

! PROPOSED RULES P22 PC\J\247001-A26JN2-175-*****-*****-

Table 5 provides an overview of the feedback provided by commenters

about each of the specific recommendations.

119

See, e.g.,

Letter from Consumer Federation of America and Americans for Financial Reform dated Apr. 27, 2016

available at https://www.sec.gov/comments/4-692/4692-26.pdf

(“CFA/AFR Letter”); Letter from Crowdfund Intermediary Regulatory Advocates dated Jan. 14, 2016

available at https://www.sec.gov/comments/4-692/4692-6.pdf

(“CFIRA Letter”); Letter from Biotechnology Innovation Organization dated Apr.8, 2016

available at https://www.sec.gov/comments/4-692/4692-21.pdf

(“BIO Letter”); Letter from National Small Business Association dated Mar. 29, 2016

available at https://www.sec.gov/comments/4-692/4692-18.pdf

(“NSBA Letter”); Letter from North American Securities Administrators Association, Inc. (“NASAA”) dated May 25, 2016

available at https://www.sec.gov/comments/4-692/4692-34.pdf

(“NASAA Letter”); Letter from Engine dated Mar. 14, 2016

available at https://www.sec.gov/comments/4-692/4692-17.pdf

(“ENGINE Letter”); Letter from Investment Management Consultants Association dated Mar. 29, 2016

available at https://www.sec.gov/comments/4-692/4692-19.pdf

(“IMCA Letter”); Letter from Dar'shun Kendrick, Kendrick Law Practice dated May 1, 2016

available at https://www.sec.gov/comments/4-692/4692-29.htm

(“Kendrick Letter”); Letter from Anonymous Investment Banker dated Apr. 13, 2016

available at https://www.sec.gov/comments/4-692/4692-22.htm

(“Banker Letter”); Letter from Keith J. Johnson, JD dated Mar. 6, 2016

available at https://www.sec.gov/comments/4-692/4692-16.pdf

(“Johnson Letter”); Letter from Cornell Securities Law Clinic dated Apr. 30, 2016

available at https://www.sec.gov/comments/4-692/4692-28.pdf

(“Cornell Law Clinic Letter”); Letter from the Small Business Investor Alliance dated Mar. 7, 2016

available at https://www.sec.gov/comments/4-692/4692-15.pdf

(“SBIA Letter”); PSC Letter; Letter from Leonard A. Grover, Founder/CEO, FinToolbox/Screener.co dated Jun. 13, 2016

available at https://www.sec.gov/comments/4-692/4692-35.pdf

(“Grover Letter”); Letter from Investment Adviser Association dated Jun. 29, 2016

available at https://www.sec.gov/comments/4-692/4692-38.pdf

(“IAA Letter”); Anon 2 Letter; Letter from Tom C.W. Lin, Associate Professor of Law, Temple University Beasley School of Law dated Jul. 14, 2016

available at https://www.sec.gov/comments/4-692/4692-40.pdf

(“Lin Letter”); Escudero Letter; Letter from Jeff Carlsen, CPA dated Jan. 17, 2017

available at https://www.sec.gov/comments/4-692/4692-1497754-130754.htm

(“Carlsen Letter”); Letter from Kyle Beagle dated Jan. 13, 2016

available at https://www.sec.gov/comments/4-692/4692-4.htm

(“Beagle Letter”); Letter from Ava Badiee dated May 10, 2016

available at https://www.sec.gov/comments/4-692/4692-31.pdf

(“Badiee Letter”); Letter from Chase R. Morello, Esq. dated Jan. 13, 2016

available at https://www.sec.gov/comments/4-692/4692-5.pdf

(“Morello Letter”); Mark R. Maisonneuve, CFA dated Apr. 26, 2017

available at https://www.sec.gov/comments/4-692/4692-1722772-150627.htm

(“Maisonneuve Letter”); TAN2000 Letter; Letter from Managed Funds Association dated Jun. 16, 2016

available at https://www.sec.gov/comments/4-692/4692-37.pdf

(“MFA-1 Letter”); and Letter from Managed Funds Association dated May 18, 2017

available at https://www.sec.gov/comments/s7-07-16/s70716-1761663-152156.pdf

(“MFA-2 Letter”).

120

See, e.g.,

CFA/AFR Letter; CFIRA Letter; Banker Letter; Cornell Law Clinic Letter; Grover Letter; Anon 2 Letter; Carlsen Letter; and Maisonneuve Letter.

121

See, e.g.,

Badiee Letter.

122

See, e.g.,

NASAA Letter.

Table 5—Responses to Staff Recommendations on the Accredited Investor Definition

Staff recommendation

Responses from commenters

Leave the current income and net worth thresholds in place, subject to investment limits

—A few commenters generally supported the recommendation;

123

—Several commenters supported leaving the current income and net worth thresholds in place;

124

—Several commenters were either opposed to, or raised concerns about, adding investment limits to investors that met these thresholds;

125

and

—One commenter was opposed both to leaving the current income and net worth threshold in place and to adding investment limits on those investors.

126

A few commenters stated that the structure would add costs and complexity to the capital-raising process.

127

Add new inflation-adjusted income and net worth thresholds that are not subject to investment limits

Some commenters supported the recommendation,

128

and some opposed raising the income and net worth thresholds.

129

While one commenter stated that there should be some sophistication qualification, in addition to the net worth or income thresholds,

130

another commenter stated that this qualification should remain independent from any investment limits or qualitative restrictions.

131

Permit individuals with a minimum amount of investments to qualify as accredited investors

A few commenters supported this recommendation,

132

and no commenters specifically opposed this recommendation.

Permit individuals with certain professional credentials to qualify as accredited investors

All of the commenters who expressed a view about this recommendation generally supported this recommendation.

133

Some of these commenters, however, supported the recommendation with the following limitations and conditions:

—Some commenters believed that a minimum amount of professional experience should also be a part of this qualification.

134

—One commenter believed that the professional experience should be with early stage financing.

135

—One commenter supported investment limits for these investors.

136

Several commenters stated that qualifying credentials should include one or more of the following: Passing the Series 7, Series 65, Series 66, or Series 82 examinations, being a certified public accountant (CPA), certified financial analyst (CFA), certified management accountant (CMA), registered investment advisor (RIA) or registered representative (RR), having an MBA from an accredited educational institution or having a certified investment management analyst (CIMA) certification, or having been in the securities industry as a broker, lawyer, or accountant.

137

Other commenters had more general views on the sophistication necessary to qualify an investor as accredited.

138

Permit individuals with experience investing in exempt offerings to qualify as accredited investors

Most of the commenters who expressed a view about this recommendation supported the recommendation,

139

while one commenter opposed it.

140

Permit knowledgeable employees

141

of private funds to qualify as accredited investors for investments in their employer's funds

Several commenters supported the recommendation,

142

while one commenter opposed it.

143

A few commenters stated that the recommendation is unlikely to have any significant impact.

144

Index all financial thresholds in the definition for inflation on a going-forward basis

Most of the commenters who expressed a view about this recommendation supported the recommendation,

145

while a few commenters opposed it.

146

Permit spousal equivalents to pool their finances for the purpose of qualifying as accredited investors

Responses were mixed, with a few commenters that generally supported the recommendation

147

and one commenter that opposed it.

148

Permit all entities with investments in excess of $5 million to qualify as accredited investors

Responses were mixed, with a few commenters that supported the recommendation

149

and a few commenters that opposed it.

150

Permit an issuer's investors that meet and continue to meet the current accredited investor definition to be grandfathered with respect to future offerings of the issuer's securities

Most of the commenters who expressed a view about this recommendation supported the recommendation,

151

while one commenter opposed it.

152

Permit individuals who pass an accredited investor examination to qualify as accredited investors

Most of the commenters who expressed a view about this recommendation supported the recommendation.

153

A few of these commenters, however, noted workability concerns, administration costs and the inability of a test to properly measure financial sophistication and account for industry and investment experience.

154

One commenter stated that a more thorough analysis of the level of financial sophistication required was needed.

155

addition, multiple commenters recommended changes to the accredited

investor definition that were not contemplated in the staff recommendations. These recommendations were:

123

See, e.g.,

CFA/AFR Letter; NASAA Letter; and Johnson Letter.

124

See, e.g.,

SBIA Letter; CFIRA Letter; ENGINE Letter (“Any increase in the financial thresholds should be justified based on the goals of the definition, and there is no evidence that the current definition is failing to adequately protect investors.”); and BIO Letter (“Completely removing a substantial portion of current investors from the accredited pool could have an immediate, drastic, and potentially devastating impact on capital availability for emerging companies.”).

125

See, e.g.,

NSBA Letter (“Creating a middle-ground or a lower tier will only increase the regulatory burdens and make it more difficult for small businesses to comply with the regulations”); SBIA Letter (stating that the recommendations relating to restricting the pool of accredited investors would “significantly harm the pool of available capital for small business investment”); CFIRA Letter (raising concerns that the recommendation would shrink the pool of available capital for small business investments); ENGINE Letter (stating that adding investment limitations on the pool of existing accredited investors would “effectively create a second tier of accredited investor, diminishing the total pool of capital available to startups”); and BIO Letter (raising concerns about investment limitations, including that such limitations would “entirely foreclose participation by conditional accredited investors in certain offerings”).

126

See, e.g.,

Cornell Law Clinic Letter (stating that the Commission should focus on “overhauling the current threshold, rather than simply mitigating it with investment limitations”).

127

See, e.g.,

NSBA Letter (stating that obtaining information about prior investments to assess the investment limit would be “difficult information for small business or even the broker to obtain, and needlessly complicates the process”); Cornell Law Clinic Letter (“Adding investment limitations may not only fail to address issues of capital formation and identifying sophisticated investors, but also add administrative costs and complexity that may then restrict otherwise qualified investors.”); and BIO Letter.

128

See, e.g.,

Letter from Public Investors Arbitration Bar Association dated May 17, 2016

available at https://www.sec.gov/comments/4-692/4692-33.pdf

(“PIABA Letter”) (“the current accredited investor standard, in creating a comparatively large pool of investors qualified to be offered Reg. D securities, makes it a particularly attractive tool to promote fraudulent schemes”); NASAA Letter; Badiee Letter; Johnson Letter; Cornell Law Clinic Letter (“[T]he Clinic supports inflation adjustments because it would more accurately qualify financially sophisticated investors than the current income and net asset thresholds.”); MFA-1 Letter; and MFA-2 Letter (stating that the adjustments would “help to ensure that the thresholds have not been diluted over time”).

129

See, e.g.,

NSBA Letter; ENGINE Letter (stating that there is no evidence that the current definition has harmed individuals who would be excluded under an inflation adjusted threshold); SBIA Letter (stating that the recommendations relating to restricting the pool of accredited investors would “significantly harm the pool of available capital for small business investment”); TAN2000 Letter; Sidoti Letter (requesting that the Commission “consider smaller companies and investors prior to updating the parameters to higher, and perhaps unbearable, thresholds”); and BIO Letter.

130

See, e.g.,

PIABA Letter (“Because of the speculative nature of private placements, it is important that investors have the financial means necessary to withstand the risks inherent in these securities.”).

131

See, e.g.,

MFA-1 Letter and MFA-2 Letter (noting the importance of retaining the certainty that this bright line rule provides for issuers).

132

See, e.g.,

CFA/AFR Letter (“We agree with the staff study that, `Investments may in some cases be a more meaningful measure of individuals' experience with and exposure to the financial and investing markets than income or net worth.' ”); and Cornell Law Clinic Letter (“Allowing individuals to qualify as accredited investors through a minimum amount of investments aligns with the Commission's goal to determine which individuals are exempt from public securities law requirements due to financial sophistication.”).

133

See, e.g.,

CFA/AFR Letter; Kendrick Letter; NSBA Letter; NASAA Letter; Beagle Letter; Badiee Letter; Morello Letter; Johnson Letter; Cornell Law Clinic Letter; IMCA Letter; Banker Letter; Grover Letter; TAN2000 Letter; Carlsen Letter; MFA-1 Letter; MFA-2 Letter; Maisonneuve Letter; and CFIRA Letter.

134

See, e.g.,

Kendrick Letter; Cornell Law Clinic Letter; NASAA Letter; and TAN2000 Letter.

135

See, e.g.,

TAN2000 Letter.

136

See, e.g.,

Beagle Letter.

137

See, e.g.,

CFA/AFR Letter (“. . . the Series 7, Series 65, and Series 82 examinations likely `provide demonstrable evidence of relevant investor sophistication because of the subject matter their examinations cover.' ”); NASAA Letter (recommending qualifying credentials to include passing the Series 7, Series 65, or Series 66, provided that there is also a requisite minimum amount of professional experience); MFA-1 Letter and MFA-2 Letter (recommending qualifying credentials would include being a CPA or CFA or having a MBA from an accredited educational institution); Maisonneuve Letter (recommending qualifying credentials would include being a CFA); IMCA Letter (recommending qualifying credentials would include having a CIMA certification); CFIRA Letter (recommending qualifying credentials would include being a CPA, CFA, CMA, RIA, RR or securities attorney); and Kendrick Letter (recommending qualifying credentials would include having been in the securities industry as a broker, lawyer or accountant).

138

See., e.g.,

NSBA Letter (“. . . if someone is sophisticated enough to advise others on investing in these types of offerings, for example, they should themselves be qualified to invest in them”); Cornell Law Clinic Letter (credentials required should be substantially high to cause financial sophistication to make up for the loss in ability to sustain financial losses); Grover Letter (experts in industries historically passed over by angel investors should be allowed to qualify as accredited investors); and Carlsen Letter (individuals with business related college degrees).

139

See, e.g.,

CFA/AFR Letter (“a better measurement of relevant expertise than mere investment experience”); NSBA Letter (“[this recommendation addresses] those who previously qualified as an accredited investor . . . however subsequently failed to qualify as an accredited investor”); Beagle Letter (stating that the recommendation should limit the amount individuals who qualify under it can invest); Johnson Letter (“the exact individuals that should be accredited investors”); and Cornell Law Clinic Letter (“[the] quintessential sign of sophistication is experience in the field”).

140

See, e.g.,

NASAA Letter (noting that such investors were already likely to qualify as accredited and it would be “difficult to objectively assess that an individual's experience investing in an exempt offering has given rise to financial sophistication”).

141

The staff recommendation stated that the Commission could use the definition of the term knowledgeable employee in 17 CFR 270.3c-5 (“Rule 3c-5”) under the Investment Company Act (“knowledgeable employee”).

142

See, e.g.,

CFA/AFR Letter (“. . . such individuals `likely have significant investing experience and sufficient access to the information necessary to make informed decisions about investments in their employer's funds' ”); NSBA Letter; Cornell Law Clinic Letter (“Knowledgeable employees of private funds are likely some of the highest levels of financial sophistication among potential investors.”); MFA-1 Letter; and MFA-2 Letter (“. . . such knowledgeable employees have meaningful investing experience and sufficient access to information necessary to make informed investment decisions about the private fund's offerings. In addition, investments by knowledgeable employees are beneficial for private fund investors in that they further align investor interests of adviser employees and fund investors.”).

143

See, e.g.,

NASAA Letter (“Such an approach could raise suitability issues, may be difficult to verify, and ultimately has a negligible impact in improving capital formation efforts.”).

144

See, e.g.,

CFA/AFR Letter; and NASAA Letter.

145

See, e.g.,

PIABA Letter; CFA/AFR Letter (stating that periodic adjustments would help avoid the type of shock to the system that the current recommendations are likely to have); NASAA Letter; Johnson Letter; Cornell Law Clinic Letter (stating that indexing financial thresholds for inflation would “keep these financial thresholds current with the market and thus more accurately qualify financially sophisticated investors”); MFA-1 Letter; and MFA-2 Letter.

146

See, e.g.,

ENGINE Letter (stating that there is not enough evidence that such adjustments are necessary to protect investors); and SBIA Letter (stating that the recommendations relating to restricting the pool of accredited investors would

“significantly harm the pool of available capital for small business investment”); s

ee also

NSBA Letter (“Indexing the thresholds levels for the accredited investor definition may complicate compliance as the thresholds will change”).

147

See, e.g.,

CFA/AFR Letter (stating that this recommended change “helps to bring the securities laws up to date with modern values and expectations”); NSBA Letter (noting that this recommended change would “expand opportunities to invest in small businesses to more households”); and SBIA Letter.

148

See, e.g.,

Cornell Law Clinic Letter (“. . . the Commission does not provide a clear rationale behind why civil unions and domestic partnerships should be given equal regulatory treatments as marriages other than that such treatment would provide consistency across Commission rules such as the family office rule, accountant independence standards, and crowdfunding rules”).

149

See, e.g.,

SBIA Letter; NSBA Letter (stating that this recommendation recognizes that “those with such significant assets invested are both very likely to be sophisticated enough to protect themselves from the risks of the investment and also secure enough to withstand the potential loss of a particular investment”); and NASAA Letter (“An investments test is a better gauge of financial sophistication than simply analyzing net worth or income.”).

See also

SBIA Letter (“However a $5 million threshold is very high and will severely limit investment by 529 Plans and other similar plans.”).

150

See, e.g.,

Beagle Letter (stating that an asset-based test as well as the knowledge of the representatives making the investment should be used in determining an entity's accredited investor status); Cornell Law Clinic Letter (stating that the amount of an entity's investments is not a reliable indicator of financial sophistication) and Reardon Letter (stating that a change from “assets” to “investments” would be “ill-advised, and would exclude many prospective investors, particularly outside of large urban areas where the financial support of local companies is crucial to the local economy”).

151

See, e.g.,

BIO Letter; NSBA Letter (stating that this recommendation is “incredibly important to the small business community”); Johnson Letter; SBIA Letter; MFA-1 Letter and MFA-2 Letter (stating that to provide investors with the ability to prevent investment dilution, current investors who are no longer accredited investors should be able to purchase securities by the issuer or any wholly-owned subsidiaries of the issuer).

152

See, e.g.,

Cornell Law Clinic Letter (“The future offerings of the issuer's securities may not necessarily have the same level of financial risk as the issuer's former offerings. The investor may be exposed to greater financial risk and, therefore, should also meet the new accredited investor definition for future offerings, regardless of the issuer or existing investments.”).

153

See, e.g.,

SBIA Letter; CFIRA Letter (stating that investors who pass a standardized test covering the specificities of private placements should also be considered able to “fend for themselves,” having demonstrated their understanding of the risks involved in investment in these securities by passing the requisite examination); NSBA Letter (suggesting that the private sector be involved in the development and administration of the test); Beagle Letter (supporting the recommendation only if it was accompanied by limits on the amount an investor could invest in private offerings); Cornell Law Clinic Letter (“. . . having an accredited investor examination would increase the number of informed investors in the market because passing a rigorous test is a bright-line rule that shows an advanced level of financial sophistication and indicates that the investor is able to fend for themselves.”); IMCA Letter (stating that there should be continuing education requirements to meet this criterion and suggesting that the private sector be involved in the development and administration of the test); NASAA Letter (suggesting that there also be a five year experience requirement); PSC Letter (suggesting an internet-based test); Grover Letter; Badiee Letter; and TAN2000 Letter (suggesting the test be reflective of knowledge of early stage financing).

154

See, e.g.,

NASAA Letter; and Badiee Letter.

155

See, e.g.,

CFA/AFR Letter.

• Allow individuals to self-certify their status as accredited investors;

156

See, e.g.,

NSBA Letter; Thompson Letter; and PSC Letter.

• Allow otherwise non-accredited investors to retain professionals to advise them in order to qualify as accredited investors without limitation;

157

See, e.g.,

NSBA Letter; IMCA Letter; IAA Letter; and CFA/AFR Letter (conditioned on individuals acting as a professional having no personal financial stake in the issuer).

But see

Muth Letter (expressing concern whether investors would be sufficiently protected by relying on the guidance of outside advisors with respect to unusual or complex investments).

• Allow any individual to invest in early growth issuers if such individual invests less than 10% of his or her income or is advised by sophisticated professionals;

158

See, e.g.,

Morello Letter.

• Conduct a study of the United Kingdom's approach to qualifying investors as sophisticated enough to take part in certain investments;

159

See, e.g.,

ENGINE Letter.

See also

Badiee Letter (describing the UK's approach).

• Harmonize the definitions of “qualified purchasers” in Section 2(a)(51) of the Investment Company Act

160

and “qualified client” under the Investment Advisers Act

161

to include accredited investors.

162

Another commenter suggested harmonizing the definition of “family” across the Securities Act, Investment Company Act, and the Investment Advisors Act to allow a family office and its family clients to be accredited investors for purposes of Regulation D and Sections 3(c)(1) and 3(c)(7) of the Investment Company Act;

163

160

See

Section IV.A.2.b for a discussion of qualified purchasers.

161

See Section IV.A.2.c for a discussion of qualified clients.

162

See, e.g.,

MFA-1 Letter and MFA-2 Letter (“These changes would simplify the existing mismatch in standards for private fund investors without raising investor protection concerns. In particular, these changes would maintain existing financial thresholds and continue to ensure that only sophisticated investors are able to invest in private funds.”).

See

Section IV.

163

See, e.g.,

Letter from Martin E. Lybecker, Perkins Coie LLP dated Aug. 8, 2016

available at https://www.sec.gov/comments/4-692/4692-42.pdf.

• Clarify that having a broker's client meet the “accredited investor” definition does not relieve a broker from its obligation to make only suitable recommendations;

164

See, e.g.,

PIABA Letter.

• Create an accredited investor designation for algorithmic investors;

165

See, e.g.,

Lin Letter.

• Add a limit on the spousal pooling allowance;

166

See, e.g.,

Cornell Law Clinic Letter.

• Expand the accredited investor standard in Rule 501(a)(8) to include existing or newly formed entities in which: (a) The investment decisions are made exclusively by accredited investors; and (b) accredited investors have provided a supermajority of the capital to be invested (

e.g.,

75-80%);

167

and

167

See, e.g.,

Reardon Letter.

• Consider additional changes to address the geographic disparity in the number of accredited investors among the different regions of the country.

168

See, e.g.,

NSBA Letter.

One commenter also made a recommendation that the Commission develop an approach to third-party verification of accredited investor status that actively encourages the availability of such services while ensuring the independence and reliability of such providers.

169

See, e.g.,

CFA/AFR Letter.

5. Request for Comment

For additional requests for comment related to the accredited investor definition as it applies to pooled investment funds, see Section IV.D.

20. Should we change the definition of accredited investor or retain the current definition? If we make changes to the definition, should the changes be consistent with any of the recommendations contained in the Accredited Investor Staff Report?

170

Have there been any relevant developments since the 2015 issuance of the Accredited Investor Staff Report, such as changes to the size or attributes of the pool of persons that may qualify as accredited investors; developments in the market or industry that may assist in potentially identifying new categories of individuals that may qualify as accredited investors;

171

or changes in the risk profile, incidence of fraud, or other investor protection concerns in offerings involving accredited investors that we should consider? How do those

changes affect investors, issuers, and other market participants?

170

See

discussion of the Accredited Investor Staff Report at Section II.A.3.

171

See, e.g.,

the revised qualifying exams administered by FINRA to become registered securities professionals, including a new introductory-level exam that precedes a qualification exam:

https://www.finra.org/industry/qualification-exams.

21. Should we revise the financial thresholds requirements for natural persons to qualify as accredited investors and the list-based approach for entities to qualify as accredited investors? If so, should we consider any of the following approaches to address concerns about how the current definition identifies accredited investor natural persons and entities:

• Leave the current income and net worth thresholds in place, subject to investment limits;

• Create new, additional inflation-adjusted income and net worth thresholds that are not subject to investment limits;

• As recommended by the Advisory Committee on Small and Emerging Companies in 2016, index all financial thresholds for inflation on a going-forward basis;

• Permit spousal equivalents to pool their finances for purposes of qualifying as accredited investors;

• Revise the definition as it applies to entities with total assets in excess of $5 million by replacing the $5 million assets test with a $5 million investments test and including all entities rather than specifically enumerated types of entities; and

• Grandfather issuers' existing investors that are accredited investors under the current definition with respect to future offerings of their securities.

22. As recommended by the Advisory Committee on Small and Emerging Companies in 2016, the 2016, 2017, and 2018 Small Business Forums, and the 2017 Treasury Report, should we revise the accredited investor definition to allow individuals to qualify as accredited investors based on other measures of sophistication? If so, should we consider any of the following approaches to identify individuals who could qualify as accredited investors based on criteria other than income and net worth:

• Permit individuals with a minimum amount of investments to qualify as accredited investors;

• Permit individuals with certain professional credentials to qualify as accredited investors;

• Permit individuals with experience investing in exempt offerings to qualify as accredited investors;

• Permit knowledgeable employees of private funds to qualify as accredited investors for investments in their employer's funds;

• Permit individuals who pass an accredited investor examination to qualify as accredited investors; and

• Permit individuals, after receiving disclosure about the risks, to opt into being accredited investors.

23. Under the current definition, a natural person just above the income or net worth thresholds would be able to invest without any limits, but a person just below the thresholds cannot invest at all as an accredited investor. Should we revise this aspect of the definition? If so, how?

24. What are the advantages and disadvantages to issuers and investors of changing—by either narrowing or expanding—the accredited investor definition?

25. Are there other changes to the definition that we should consider when harmonizing our exempt offering rules? For example, should we amend Rule 501(a)(3) to expand the types of entities that may qualify as accredited investors? If so, what types of entities should be included? Should we consider amendments to apply an investments-owned standard, or other alternative standard, for entities to qualify as accredited investors?

26. Many foreign jurisdictions provide exemptions from registration or disclosure requirements for offers and sales of securities to sophisticated or accredited investors.

172

These jurisdictions use a variety of methods to identify sophisticated or accredited investors. In addition to criteria based on income, net worth, total assets, or investment amounts, certain regulatory regimes rely on certification or verification by financial professionals. Are there experiences in other jurisdictions that should inform our approach?

172

See

Section III.I. of the Accredited Investor Staff Report.

27. Should we, as recommended by the 2017 Treasury Report, revise the accredited investor definition to expand the eligible pool of sophisticated investors? If so, should we permit an investor, whether a natural person or an entity, that is advised by a registered financial professional to be considered an accredited investor? Being advised by a financial professional has not historically been a complete substitute for the protections of the Securities Act registration requirements and, if applicable, the Investment Company Act. If we were to permit an investor advised by a registered financial professional to be considered an accredited investor, should we consider any other investor protections in these circumstances? For example, should we require educational or other qualifications for a financial professional advising such an investor and, if so, what type of qualifications? What additional disclosure, if any, should the financial professional be required to provide to the investor in connection with an investment available only to accredited investors? Should the financial professional be required to assess the appropriateness of the investment in an exempt offering on a transaction-by-transaction basis, or would it be appropriate to make the assessment looking at the investor's investment portfolio as a whole?

28. If we were to permit an investor advised by a registered financial professional to be considered an accredited investor, should we specify or limit the types or amounts of investments that such an investor can make in exempt offerings? For example, should we allow investors that are not accredited investors under the current definition to invest in pooled investment funds, such as private funds under Section 3(c)(1) under the Investment Company Act,

173

if these investors are: (1) Subject to limits on the amounts of investments in such pooled investment funds, such as a dollar amount or percentage of investments; and/or (2) limited to making the investment out of retirement or other similarly federally-regulated accounts (

i.e.,

accounts that are more likely to be invested for the long term)? Would such a change substantially eliminate current distinctions between registered funds and private funds? Are there provisions of the Investment Company Act that should apply to such funds, such as diversification requirements, redemption requirements, and/or restrictions on leverage and affiliated transactions? Are there different disclosures that such funds should have to provide investors? Should the type of private fund be limited to a qualifying venture capital fund or otherwise have a limit on the fund's size?

174

Should there be restrictions or requirements on the class or classes of interests in such funds available to investors advised by a registered financial professional? Should there be any restrictions or requirements regarding fees and expenses for such investors relative to the fees and expenses for other investors in the fund? What other conditions or limitations are appropriate, if any?

173

15 U.S.C. 80a-3(c)(1).

See

Section IV.A.2 for a discussion of Section 3(c)(1) funds.

174

See

Section IV.A.2.a for a discussion of qualifying venture capital funds.

29. If an investment limit is implemented for investors considered to be accredited investors because they are advised by registered financial professionals, what should we take into

consideration in setting the amount of the limit? Should the limit vary depending on the particular exemption relied on for the offering or be consistent for all exempt offerings? Should the limit vary depending on the type of issuer conducting the exempt offering (

e.g.,

whether the issuer is an operating company or a pooled investment fund, whether the issuer has a class of securities registered under the Exchange Act, or whether the issuer is subject to any on-going disclosure requirements)? Would varying limits increase complexity for issuers and investors? Should the limit be applied on a per-offering basis or some other basis? Should the limit be determined on an aggregate basis for all securities purchased in exempt offerings over the course of a year or some other time period?

30. If we were to expand the definition of an accredited investor and/or limit the types or amounts of investments by accredited investors in exempt offerings, what challenges would exist in the application and enforcement of the revised criteria?

31. Are there other regulatory regimes, such as ERISA, that may affect the ability of certain classes of investors to invest in exempt offerings?

32. Under Rule 12g-1, to calculate the number of holders of record that were not accredited investors as of the last day of its most recent fiscal year, an issuer needs to determine, based on facts and circumstances, whether prior information provides a basis for a reasonable belief that the security holder continues to be an accredited investor as of the last day of the fiscal year. If such prior information does not provide a reasonable basis, is it difficult for an issuer to calculate the number of holders of record that were not accredited investors as of the last day of its most recent fiscal year pursuant to Rule 12g-1? If so, should we consider changes to Rule 12g-1? For example, should we revise Rule 12g-1 to permit issuers to determine accredited investor status at the time of the last sale of securities to the respective purchaser, rather than the last day of its most recent fiscal year? Would such a change raise concerns about the use of outdated information that may no longer be reliable?

175

See

Changes to Exchange Act Registration Requirements Release at Section II.B.

B. Private Placement Exemption and Rule 506 of Regulation D

1. Section 4(a)(2) of the Securities Act

Section 4(a)(2)

176

of the Securities Act exempts from registration requirements “transactions by an issuer not involving any public offering.” The Securities Act does not define the phrase “transactions by an issuer not involving any public offering.” Accordingly, it has been left to court decisions and Commission interpretations to define the scope of the exemption.

176

15 U.S.C. 77d(a)(2).

a. Scope of Exemption

SEC

Ralston Purina Co.,

177

the Supreme Court established the basic criteria for determining the availability of Section 4(a)(2).

178

To qualify for this exemption, which is sometimes referred to as the “private placement” exemption, the persons in the offering must:

177

346 U.S. 119 (1953).

178

See

Section IV.A.2 for a discussion of restrictions under Sections 3(c)(1) and 3(c)(7) of the Investment Company Act on certain funds' ability to make a public offering of its securities.

• Be shown to be able to fend for themselves and, accordingly, do not need the protection afforded by the Securities Act;

179

and

179

See SEC

Ralston Purina Co.,

346 U.S. 119 (1953) (“The focus of inquiry should be on the need of the offerees for the protections afforded by registration. The employees here were not shown to have access to the kind of information which registration would disclose. The obvious opportunities for pressure and imposition make it advisable that they be entitled to compliance with § 5.”).

• Have access to the type of information normally provided in a prospectus for a registered securities offering.

180

See id.

The precise limits of the statutory private placement exemption are not defined by rule. Whether a transaction is one not involving any public offering is essentially a question of fact and necessitates a consideration of all surrounding circumstances, including such factors as the relationship between the offerees and the issuer, and the nature, scope, size, type, and manner of the offering.

181

If an issuer offers securities to even one person who does not meet the necessary conditions, the exemption may be lost, and the entire offering may be in violation of the Securities Act. An issuer relying on Section 4(a)(2) is restricted in its ability to make public communications to attract investors to its offering because public advertising is incompatible with a claim of exemption under Section 4(a)(2).

182

Section 4(a)(2) does not specify limits on the amount that an issuer can raise or the amount an investor can invest in an offering.

181

See

Non-Public Offering Exemption, Release No. 33-4552 (Nov. 6, 1962) [27 FR 11316 (Nov. 16, 1962)] (“Non-Public Offering Exemption Release”). Section 4(a)(2) was traditionally viewed as a way to provide “an exemption from registration for bank loans, private placements of securities with institutions, and the promotion of a business venture by a few closely related persons.” In 1962, prompted by increased use of the exemption for speculative offerings to unrelated and uninformed persons, the Commission clarified limitations on the exemption's availability.

See

Non-Public Offering Exemption Release.

182

See

Non-Public Offering Exemption Release.

b. Issuance of Restricted Securities

Purchasers in a Section 4(a)(2) offering receive “restricted securities.”

183

“Restricted securities” are securities that were issued in certain exempt transactions. Rule 144(a)(3) identifies the types of offerings that result in the acquisition of restricted securities. Security holders can only resell restricted securities into the market by registering the resale transaction or relying on a valid exemption from registration for the resale, such as Section 4(a)(1), available to “transactions by any person other than an issuer, underwriter, or dealer.” For the resale of restricted securities, most holders rely on Rule 144, which provides a safe harbor from being considered an “underwriter” under, and therefore ineligible to rely on the exemption from registration in, Section 4(a)(1).

184

183

See

17 CFR 230.144(a)(3)(i).

See also

Rule 144 Adopting Release (“Rule 144, together with the other related rules and amendments, is designed to provide full and fair disclosure of the character of securities sold in trading transactions and to create greater certainty and predictability in the application of the registration provisions of the [Securities] Act by replacing subjective standards with more objective ones.”).

184

For a discussion of Rule 144 and other resale exemptions,

see

Section V.A.

See also

Rule 144 Adopting Release (“persons who offer or sell restricted securities without complying with Rule 144 are hereby put on notice by the Commission that in view of the broad remedial purposes of the [Securities] Act and of public policy which strongly supports registration, they will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers and other persons who participate in the transactions do so at their risk”).

c. Filing Requirements and Relationship With State Securities Laws

An issuer conducting an offering pursuant to Section 4(a)(2) is not required to file any information with, or pay any fees to, the Commission. Such issuer, however, must comply with state securities laws and regulations in each state in which securities are offered or sold, also known as “blue sky” laws.

Each state's securities laws or regulations have their own registration or qualification requirements and exemptions from such requirements.

2. Rule 506 of Regulation D

Regulation D originated as an effort to facilitate capital formation, consistent with the protection of investors.

185

It simplified and clarified existing rules and regulations, eliminated unnecessary restrictions those rules and regulations placed on issuers, particularly small businesses, and harmonized federal and state exemptions.

186

185

See

Revision of Certain Exemptions From Registration for Transactions Involving Limited Offers and Sales, Release No. 33-6389 (Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)] (the “Regulation D Adopting Release”).

186

See id.

The Commission adopted Rule 506 of Regulation D as a non-exclusive “safe harbor” under Section 4(a)(2), providing objective standards on which an issuer could rely to meet the requirements of the Section 4(a)(2) exemption.

187

In 2012, Section 201(a) of the JOBS Act required the Commission to eliminate the prohibition on using general solicitation under Rule 506 where all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors.

188

To implement Section 201(a), the Commission adopted paragraph (c) of Rule 506, and retained the prior Rule 506 safe harbor as Rule 506(b).

189

Offerings under both Rule 506(b) and Rule 506(c) must satisfy the conditions of:

187

See

Regulation D Adopting Release. Rule 506 of Regulation D replaced former 17 CFR 230.146. Attempted compliance with any rule in Regulation D does not preclude an issuer from claiming the availability of another applicable exemption. For example, an issuer's failure to satisfy all the terms and conditions of Rule 506(b) does not raise a presumption that the exemption provided by Section 4(a)(2) is not available.

See

17 CFR 230.500(c) (“Rule 500(c)”).

188

Public Law 112-106, sec. 201(a), 126 Stat. 306, 313 (Apr. 5, 2012).

189

See

Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9415 (Jul. 10, 2013) [78 FR 44771 (Jul. 24, 2013)] (“Rule 506(c) Adopting Release”). Note that as a result of Congress' directive in Section 201(a) of the JOBS Act, Rule 506 continues to be treated as a regulation issued under Section 4(a)(2) of the Securities Act, notwithstanding the ability of an issuer to make public communications to solicit investors for its offering under Rule 506(c).

• 17 CFR 230.501 (“Rule 501”) (definitions for the terms used in Regulation D);

• 17 CFR 230.502(a) (“Rule 502(a)”) (integration);

190

See

Section III.

• 17 CFR 230.502(d) (“Rule 502(d)”) (limitations on resale); and

• Rule 506(d) (“bad actor” disqualification).

Offerings under Rule 506(b) must also satisfy the conditions of:

• 17 CFR 230.502(b) (“Rule 502(b)”) (type of information to be furnished);

191

and

191

See

Section II.B.2.a(2).

• 17 CFR 230.502(c) (“Rule 502(c)”) (limitations on the manner of offering).

192

See

Section II.B.2.a(1).

In addition, Rule 503, which requires the filing of a notice of sales on Form D, applies to all Rule 506 offerings. We summarize below first the terms and conditions specific to each of Rule 506(b) and Rule 506(c) offerings, and then the rule requirements that apply to all Rule 506 offerings.

a. Rule 506(b) Safe Harbor

Issuers conducting an offering under Rule 506(b) can sell securities to an unlimited number of accredited investors with no limit on the amount of money that can be raised from each investor or in total. An offering under Rule 506(b), however, is subject to the following requirements:

• No general solicitation or advertising to market the securities

193

is permitted; and

193

See

17 CFR 230.502(c).

• Securities may not be sold to more than 35 non-accredited investors that, either alone or with a purchaser representative, must have sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.

194

See

17 CFR 230.506(b).

See also

Section II.A.

(1) Prohibition on General Solicitation and General Advertising

As discussed above, public or general advertising of the offering and general solicitation of investors are incompatible with the private placement exemption. Although the terms “general solicitation” and “general advertising” are not defined in Regulation D, Rule 502(c) does provide examples of general solicitation and general advertising, including advertisements published in newspapers and magazines, communications broadcast over television and radio, and seminars where attendees have been invited by general solicitation or general advertising.

195

The Commission has stated that other uses of publicly available media, such as unrestricted websites, also constitute general solicitation and general advertising.

196

In determining whether an advertisement or other communication would constitute a general solicitation of securities, the Commission has historically interpreted the term “offer” broadly, and has explained that “the publication of information and publicity efforts, made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer or in its securities constitutes an offer.”

197

In this release, we refer to both general solicitation and general advertising as they relate to an “offer” of securities as “general solicitation.”

195

See

17 CFR 230.502(c).

196

See

Use of Electronic Media for Delivery Purposes, Release No. 33-7233 (Oct. 6, 1995) [60 FR 53458, 53463-64 (Oct. 13, 1995)]; Use of Electronic Media, Release No. 33-7856 (Apr. 28, 2000) [65 FR 25843, 25851-52 (May 4, 2000)].

197

Securities Offering Reform, Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (“Securities Offering Reform Release”) at note 88 (“The term `offer' has been interpreted broadly and goes beyond the common law concept of an offer.”) (

citing Diskin

Lomasney & Co.,

452 F.2d 871 (2d. Cir. 1971);

SEC

Cavanaugh

, 1 F. Supp. 2d 337 (S.D.N.Y. 1998)).

See also

Securities Act Section 2(a)(3) (noting that an offer includes every attempt to dispose of a security or interest in a security, for value; or any solicitation of an offer to buy a security or interest in a security).

(2) Disclosure Requirements for Non-Accredited Investors

If non-accredited investors are participating in an offering under Rule 506(b), the issuer conducting the offering must furnish to non-accredited investors the information required by Rule 502(b)

198

a reasonable time prior to the sale of securities and provide non-accredited investors with the opportunity to ask questions and receive answers about the offering.

199

Further, if the issuer provides additional information to accredited investors, it must make this information available to the non-accredited investors as well.

200

If an issuer limits purchasers in its Rule 506(b) offering to accredited investors, Rule 506(b) does not require the issuer to provide substantive disclosure to those accredited investors. Nevertheless, issuers and funds conducting private accredited investor-only offerings often provide prospective purchasers with information about the issuer. An issuer that provides information to non-accredited investors may choose to provide the information to accredited investors as well, in view of the antifraud provisions of the federal securities laws.

201

198

See

17 CFR 230.502(b)(2)(i) through (vii).

199

See

17 CFR 230.502(b)(2)(v).

200

See

17 CFR 230.502(b)(2)(iv).

201

See

Note to 17 CFR 230.502(b).

The type of information to be furnished to non-accredited investors varies depending on the size of the offering and the nature of the issuer; however, the disclosure generally contains the same type of information as provided in a Regulation A offering or in a registered offering, including financial statement information, certain portions of which are required to be audited or certified.

202

See

17 CFR 230.502(b)(2)(i) through (vii).

Specifically, if the issuer is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the issuer must furnish certain non-financial statement information and financial statement information. The issuer is required to provide this information only to the extent it is material to an understanding of the issuer, its business, and the securities being offered.

203

Regarding non-financial statement information, the issuer must provide the information required by Part II of Form 1-A

204

(if the issuer is eligible to use Regulation A

205

) or Part I of a Securities Act registration statement on a form that the issuer would be entitled to use (if the issuer is not eligible to use Regulation A).

206

The required financial statement information for issuers not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act varies depending on the size of the offering.

207

The issuer must furnish the following information to the extent material to an understanding of the issuer, its business, and the securities being offered:

203

See

17 CFR 230.502(b)(2).

204

17 CFR 239.90.

205

See

Section II.C.1.a for a discussion of the Regulation A eligibility requirements.

206

See

17 CFR 230.502(b)(2)(i)(A).

207

See

17 CFR 230.502(b)(2)(i)(B).

• For offerings up to $2 million, the information required in Article 8 of Regulation S-X,

208

except that only the issuer's balance sheet, which shall be dated within 120 days of the start of the offering, must be audited;

209

208

17 CFR 210.8.

209

17 CFR 230.502(b)(2)(i)(B)(1).

• For offerings up to $7.5 million, the financial statement information required in Form S-1

210

for smaller reporting companies. If an issuer, other than a limited partnership,

211

cannot obtain audited financial statements without unreasonable effort or expense, then only the issuer's balance sheet, which shall be dated within 120 days of the start of the offering, must be audited;

212

210

17 CFR 239.10.

211

If the issuer is a limited partnership and cannot obtain the required financial statements without unreasonable effort or expense, it may furnish financial statements that have been prepared on the basis of federal income tax requirements and examined and reported on in accordance with generally accepted auditing standards by an independent public or certified accountant.

212

17 CFR 230.502(b)(2)(i)(B)(2).

• For offerings over $7.5 million, the financial statement information as would be required in a registration statement filed under the Securities Act on the form that the issuer would be entitled to use. If an issuer, other than a limited partnership,

213

214

213

See

note 211.

214

17 CFR 230.502(b)(2)(i)(B)(3).

If the issuer is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and is a foreign private issuer

215

eligible to use Form 20-F,

216

it must disclose the same kind of information required to be included in an Exchange Act registration statement on a form that the issuer would be entitled to use.

217

The financial statements need to be certified only to the extent that such information would be required to be audited under Rule 502(b) for issuers not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act.

218

215

A foreign issuer, other than a foreign government, will qualify as a “foreign private issue

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