Accredited Investor Definition

Federal RegisterOct 9, 2020

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SECURITIES AND EXCHANGE COMMISSION

17 CFR PARTS 230 and 240

[Release Nos. 33-10824; 34-89669; File No. S7-25-19]

RIN 3235-AM19

Accredited Investor Definition

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

We are adopting amendments to the definition of “accredited investor” in our rules to add new categories of qualifying natural persons and entities and to make certain other modifications to the existing definition. The amendments are intended to update and improve the definition to identify more effectively investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the Securities Act of 1933. We are also adopting amendments to the “qualified institutional buyer” definition in Rule 144A under the Securities Act to expand the list of entities that are eligible to qualify as qualified institutional buyers.

DATES:

This final rule is effective December 8, 2020.

FOR FURTHER INFORMATION CONTACT:

Jennifer Zepralka, Office Chief, or Charlie Guidry, Special Counsel, Office of Small Business Policy, at (202) 551-3460, Division of Corporation Finance; Jennifer Songer, Branch Chief, or Lawrence Pace, Senior Counsel, at (202) 551-6999, Investment Adviser Regulation Office, Division of Investment Management; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

We are adopting amendments to 17 CFR 230.144A (“Rule 144A”), 17 CFR 230.163B (“Rule 163B”), 17 CFR 230.215 (“Rule 215”), and 17 CFR 230.501 (“Rule 501”) of 17 CFR 230.500 through 230.508 (“Regulation D”) under the Securities Act of 1933 (“Securities Act”);

and 17 CFR 240.15g-1 (“Rule 15g-1”) under the Securities Exchange Act of 1934 (“Exchange Act”).

15 U.S.C. 77a

et seq.

15 U.S.C. 78a

et seq.

Table of Contents

I. Introduction and Background

II. Final Amendments to the Accredited Investor Definitions

A. Proposed Amendments

B. Final Amendments

1. Natural Persons

a. Natural Persons Holding Professional Certifications and Designations or Other Credentials

b. Knowledgeable Employees of Private Funds

2. Entities

a. Registered Investment Advisers

b. Rural Business Investment Companies

c. Limited Liability Companies

d. Other Entities Meeting an Investments-Owned Test

e. Certain Family Offices and Family Clients

3. Permitting Spousal Equivalents To Pool Finances for the Purposes of Qualifying as Accredited Investors

4. Notes to 501(a)

a. Note to Rule 501(a)(5)

b. Note to Rule 501(a)(8)

5. Amendment to Rule 215

6. Other Comments

III. Amendments to Securities Act Rule 163B and Exchange Act Rule 15g-1

IV. Discussion of the Final Amendments to the Qualified Institutional Buyer Definition

A. Proposed Amendments

B. Final Amendments

V. Other Matters

VI. Economic Analysis

A. Introduction and Broad Economic Considerations

B. Baseline and Affected Parties

C. Anticipated Economic Effects

1. Potential Benefits to Issuers

a. More Efficient Capital Raising Process in Exempt Offerings

b. Facilitate Capital Formation by Expanding the Pool of Investors in Exempt Offerings

c. Increase Liquidity of Securities Issued in Unregistered Offerings

d. Other Benefits

2. Potential Benefits to Investors

3. Potential Costs to Issuers

4. Potential Costs to Investors

5. Variation in Economic Effects

6. Efficiency, Competition, and Capital Formation

7. Alternatives

a. Inflation Adjustment of Financial Thresholds

b. Investment Limits

c. Geography-Specific Thresholds

d. Including Additional Categories of Natural Persons and Entities

VII. Paperwork Reduction Act

VIII. Final Regulatory Flexibility Analysis

IX. Statutory Authority

I. Introduction and Background

On December 18, 2019, the Commission proposed amendments to the definition of “accredited investor” in Securities Act Rules 215 and 501(a) and to the definition of “qualified institutional buyer” in Rule 144A.

The proposed amendments were intended to update and improve the definitions to identify more effectively institutional and individual investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the Securities Act.

Amending the “Accredited Investor” Definition, Release Nos. 33-10734; 34-87784 (Dec. 18, 2019) [85 FR 2574 (Jan. 15, 2020)] (“Proposing Release”).

The Proposing Release and the amendments we are adopting are part of a broader effort to simplify, harmonize, and improve the exempt offering framework under the Securities Act to promote capital formation and expand investment opportunities while maintaining and enhancing appropriate investor protections.

As we noted in the Proposing Release, these amendments will provide a foundation for our ongoing efforts to assess whether the exempt offering framework, in its component parts and as a whole, is consistent, accessible, and effective for both issuers and investors. The Securities Act contains a number of exemptions from its registration requirements and authorizes the Commission to adopt additional exemptions. As the Commission has previously noted, the regulatory framework for exempt offerings has evolved, and the significance of the exempt securities markets has increased both in terms of the absolute amount raised and relative to the public registered markets.

In 2019, registered offerings accounted for $1.2 trillion (30.8 percent) of new capital, compared to approximately $2.7 trillion (69.2 percent) that we estimate was raised through exempt offerings.

Of this, the estimated amount of capital reported as being raised in offerings under Rule 506(b) and 506(c) of Regulation D was approximately $1.56 trillion.

See

Concept Release on Harmonization of Securities Offering Exemptions, Release No. 33-10649 (June 18, 2019) [84 FR 30460 (June 26, 2019)] (“Concept Release”) and Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, Release Nos. 33-10763; 34-88321 (Mar. 4, 2020) [85 FR 17956 (Mar. 31, 2020)] (“Access to Capital Proposing Release”).

See

Concept Release at 30465.

See also

Access to Capital Proposing Release at 17957.

Unless otherwise indicated, information in this release on offering amounts is based on analyses by staff in the Commission's Division of Economic Risk and Analysis (“DERA”) of data collected from SEC filings.

The accredited investor definition is a central component of the Rule 506 exemptions from registration and plays an important role in other exemptions and other federal and state securities law contexts. Qualifying as an accredited investor, as an individual or an institution, is significant because accredited investors may, under Commission rules, participate in investment opportunities that are generally not available to non-accredited investors, including certain investments in private companies and offerings by certain hedge funds, private equity funds, and venture capital funds. The final rules are tailored to permit investors with reliable alternative indicators of financial sophistication to participate in such investment opportunities, while maintaining the safeguards necessary for investor protection and public confidence in investing in areas of the economy that disproportionately create new jobs, foster innovation, and provide for growth opportunities.

Historically, the Commission has stated that the accredited investor definition is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or fend for themselves render the protections of the Securities Act's registration process unnecessary.”

Prior to the adoption of these final rules, in the case of individuals, the accredited investor definition has used wealth—in the form of a certain level of income or net worth—as a proxy for financial sophistication. However, as stated in the Proposing Release, we do not believe wealth should be the sole means of establishing financial sophistication of an individual for purposes of the accredited investor definition. Rather, the characteristics of an investor contemplated by the definition can be demonstrated in a variety of ways. These include the ability to assess an investment opportunity—which includes the ability to analyze the risks and rewards, the capacity to allocate investments in such a way as to mitigate or avoid risks of unsustainable loss, or the ability to gain access to information about an issuer or about an investment opportunity—or the ability to bear the risk of a loss.

Accordingly, the final rules create new categories of individuals and entities that qualify as accredited investors irrespective of their wealth, on the basis that such investors have demonstrated the requisite ability to assess an investment opportunity.

See

Regulation D Revisions; Exemption for Certain Employee Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015 (Jan. 30, 1987)].

See also

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

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

The amendments we are adopting are the product of years of efforts by the Commission and its staff to consider and analyze possible approaches to revising the accredited investor definition. A number of the amendments are consistent with those recommended by the Commission staff

in a 2015 report on the accredited investor definition,

while some of the amendments are substantially similar to those the Commission proposed in 2007.

Many of the amendments have been recommended, in one form or another, by the Small Business Capital Formation Advisory Committee, the former Advisory Committee on Small and Emerging Companies, the Investor Advisory Committee, and a wide array of public commenters.

See

2015 Staff Report.

Revisions of Limited Offering Exemptions in Regulation D, Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)] (“2007 Proposing Release”).

The definition of “qualified institutional buyer” in Rule 144A is similarly intended to “identify a class of investors that can be conclusively assumed to be sophisticated and in little need of the protection afforded by the Securities Act's registration provisions.”

With the exception of registered dealers, a qualified institutional buyer must in the aggregate own and invest on a discretionary basis at least $100 million in securities of issuers that are not affiliated with such a qualified institutional buyer.

The final rules expand the list of entities eligible for qualified institutional buyer status to be consistent with the amendments to the accredited investor definition, maintaining the $100 million threshold for these entities to qualify for qualified institutional buyer status. In this way, the final rules avoid inconsistencies between the entity types eligible for each status while continuing to ensure that these entities have sufficient financial sophistication to participate in investment opportunities that do not have the additional protections provided by registration under the Securities Act.

See

Resale of Restricted Securities; Changes to Method of Determining Holding Period of Restricted Securities Under Rules 144 and 145, Release No. 33-6806 (Oct. 25, 1988) [53 FR 44016 (Nov. 1, 1988)]. Rule 144A provides a non-exclusive safe harbor exemption from the registration requirements of the Securities Act for resales to qualified institutional buyers of certain restricted securities. Any person other than the issuer or a dealer who offers or sells securities in compliance with Rule 144A is deemed not to be engaged in a distribution of the securities and therefore not an underwriter of the securities within the meaning of Section 2(a)(11) of the Securities Act, such that the Section 4(a)(1) exemption is available for the resales of the securities.

Rule 144A(a)(1)(i). A registered dealer is a qualified institutional buyer if it owns and invests in the aggregate at least $10 million of securities of non-affiliated issuers on a discretionary basis or if it is acting in a riskless principal transaction on behalf of a qualified institutional buyer. Rules 144A(a)(1)(ii) and (iii).

We received more than 200 unique comment letters on the Proposing Release.

Many commenters supported expanding the accredited investor definition,

while some commenters did not.

Other commenters recommended eliminating the definition altogether so that anyone could invest in exempt offerings.

We also received comments from several commenters in general support of expanding the definition of qualified institutional buyer in Rule 144A.

In addition, in response to the Concept Release, the SEC's Small Business Capital Formation Advisory Committee adopted a recommendation regarding changes to the accredited investor definition,

and the 2019 SEC Government-Business Forum on Small Business Capital Formation (“SEC Small Business Forum”) provided a recommendation on the accredited investor definition.

Prior to the Concept Release, the SEC's Investor Advisory Committee adopted a recommendation regarding changes to the accredited investor definition.

After considering the public comments received and these recommendations, we are adopting the amendments substantially as proposed but with certain modifications in response to commenters' feedback. Commenters' views on different aspects of the proposal, as well as its effects, are discussed topically below.

Unless otherwise indicated, comments cited in this release are to comment letters received in response to the Proposing Release, which are

available at https://www.sec.gov/comments/s7-25-19/s72519.htm.

See, e.g.,

letters from Matt Langford dated Dec. 18, 2019 (“M. Langford”); Ben Peterman dated Dec. 18, 2019 (“B. Peterman Letter”); SAF Financial Securities LLC dated Dec. 18, 2019 (“SAF Financial Letter”); Calfee, Halter & Griswold LLP dated Jan. 15, 2020 (“Calfee, Halter & Griswold Letter”); Blake Delaplane dated Jan. 13, 2020 (“B. Delaplane Letter”); Nexus Private Capital dated Jan. 9, 2020 (“Nexus Private Capital Letter”); Private Investor Coalition dated Mar. 9, 2020 (“PIC Letter”); Securities Intermediary and Financial Markets Association dated Mar. 11, 2020 (“SIFMA Letter”); Morningstar dated Mar. 16, 2020 (“Morningstar Letter”); Investment Company Institute dated Mar. 12, 2020 (“ICI Letter”); Native American Finance Officers Association dated Mar. 16, 2020 (“NAFOA Letter”); ALTI LLC dated Mar. 13, 2020 (“ALTI Letter”); Committee on Securities Laws of the Business Law Section of the Maryland State Bar Association dated Mar. 16, 2020 (“Md St. Bar Assn. Comm. on Sec. Laws Letter”); Center for Capital Markets Competitiveness dated Mar. 16, 2020 (“CCMC Letter”); Teachers Insurance and Annuity Association of America dated Mar. 16, 2020 (“TIAA Letter”); Rep. J. French Hill, Sen. Thom Tillis, Sen. Pat Toomey, Rep. David Schweikert, Rep. Bryan Steil, Rep. Anthony Gonzalez, and Rep. Warren Davidson dated Mar. 16, 2020 (“Rep. J. French Hill et al. Letter”); Investment Adviser Association dated Mar. 18, 2020 (“IAA Letter”); Small Business Investor Alliance dated Mar. 16, 2020 (“SBIA Letter”); North American Securities Administrators Association, Inc. dated Mar. 16, 2020 (“NASAA Letter”) (NASAA does not support the proposals for natural persons but does generally support the proposals for entities); eShares, Inc. (d/b/a Carta) dated Mar. 16, 2020 (“Carta Letter”); OpenDeal, Inc. (d/b/a Republic) dated Mar. 16, 2020 (“Republic Letter”) (preferring a “principles-based approach to assessing certain factors of an individual's sophistication and ability to tolerate risk”); and Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association dated May 22, 2020 (“ABA FR of Sec. Comm. Letter”).

See, e.g.,

letters from Mike L. dated Dec. 19, 2020 (“M. L. Letter”); Consumer Federation of America dated Mar. 9, 2020 (“CFA Letter”); Healthy Markets Association dated Mar. 16, 2020 (“Healthy Markets Letter”); Securities Arbitration Clinic at St. John's University School of Law dated Mar. 16, 2020 (“St. John's Sec. Arbitration Clinic Letter”); Better Markets dated Mar. 16, 2020 (“Better Markets”); Xavier Becerra, Attorney General of the State of California et al. dated Mar. 16, 2020 (“CA Attorney General et al.”); Public Investors Arbitration Bar Association dated Mar. 16, 2020 (“PIABA Letter”); and Matthew J. Trudeau dated Mar. 13, 2020 (“M. Trudeau Letter”).

See, e.g.,

letters from Ryan Carpel dated Dec. 18, 2019 (“R. Carpel Letter”); Joseph Peter dated Dec. 20, 2019 (“J. Peter Letter”) (elimination of accredited investor/non-accredited investor distinction in Reg D offerings); Amrik Mann dated Dec. 20, 2019 (“A. Mann Letter”); Guenadi Jilevski dated Dec. 21, 2019 (“G. Jilevski Letter”); Samuel dated Dec. 23, 2019 (“S. Letter”); Conduit Investment Advisers, LLC dated Dec. 30, 2019 (“Conduit Letter”); Stuart Kuzik dated Apr. 24, 2020 (“S. Kuzik” Letter) (elimination of the definition); Bhavin Shah dated June 30, 2020 (“B. Shah Letter”); Kelly Wilson dated July 19, 2020 (“K. Wilson Letter”) (replacement of the definition with an acknowledgement-of-risk form); and Gary Freedman dated July 19, 2020 (“G. Freedman Letter”); and working paper

Abandon the Concept of Accredited Investors in Private Securities Offerings

submitted as comment letter from Andrew Vollmer, Mercatus Center at George Mason University, Aug. 21, 2020.

See, e.g.,

Better Markets Letter; ICI Letter; and letter from Fidelity Investments dated Mar. 16, 2020 (“Fidelity Letter”).

See

U.S. Sec. and Exch. Comm'n Small Bus. Capital Formation Advisory Comm.,

Recommendation

(Dec. 11, 2019) (“SBCFAC Recommendations”),

available at https://www.sec.gov/spotlight/sbcfac/recommendation-accredited-investor.pdf.

The SBCFAC recommended that the Commission: (i) “[l]eave the current financial thresholds in place, subject to possibly adjusting such thresholds downwards for certain regions of the country;” (ii) “[g]oing forward, index the financial thresholds for inflation on periodic basis;” and (iii) “[r]evise the definition to allow individuals to qualify as accredited investors based on measures of sophistication. In doing so, the Commission should create bright line rules for qualifying as an accredited investor by sophistication, which could include professional credentials, work experience, education, and/or a sophistication test.”

See

U.S. Sec. and Exch. Comm'n Gov't-Bus. Forum on Small Bus. Capital Formation,

Report on the 38th Annual Government-Business Forum on Small Business Capital Formation

(Aug. 14, 2019) (“SEC Small Business Forum Report”),

available at https://www.sec.gov/files/small-business-forum-report-2019.pdf.

The SEC Small Business Forum Report recommended that the Commission: (i) “[f]or natural persons, in addition to the income and net worth thresholds in the definition, add a sophistication test as an additional way to qualify;” (ii) “[p]rovide tribal governments parity with state governments;” and (iii) “[r]evise the dollar amounts to scale for geography, lowering the thresholds in states/regions with a lower cost of living.”

See

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

available at http://www.sec.gov/spotlight/investor-advisorycommittee-2012/accredited-investor-definitionrecommendation.pdf.

The IAC recommended that the Commission (i) “evaluate whether the accredited investor definition, as it pertains to natural persons, is effective in identifying a class of individuals who do not need the protections afforded by the [Securities] Act;” (ii) “revise the definition to enable individuals to qualify as accredited investors based on their financial sophistication;” (iii) “consider alternative

approaches to setting such thresholds—in particular limiting investments in private offerings to a percentage of assets or income—which could better protect investors without unnecessarily shrinking the pool of accredited investors;” and (iv) “take concrete steps [to] encourage development of an alternative means of verifying accredited investor status that shifts the burden away from issuers who may, in some cases, be poorly equipped to conduct that verification, particularly if the accredited investor definition is made more complex.”

II. Final Amendments to the Accredited Investor Definitions

A. Proposed Amendments

In the Proposing Release, the Commission proposed to amend the accredited investor definition to add categories of both natural persons and entities. For natural persons, the Commission proposed to add new categories to the definition that would permit natural persons to qualify as accredited investors based on certain professional certifications or designations or other credentials or, with respect to investments in a private fund, based on the person's status as a “knowledgeable employee” of the fund. Specifically, the Commission proposed to add the following natural persons:

• Natural persons holding in good standing one or more professional certifications or designations or other credentials from an accredited educational institution that the Commission has designated as qualifying an individual for accredited investor status; and

• natural persons who are “knowledgeable employees,” as defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940 (the “Investment Company Act”), of the private-fund issuer of the securities being offered or sold.

A private fund is an issuer that would be an investment company, as defined in Section 3 of the Investment Company Act, but for Sections 3(c)(1) or 3(c)(7) of that Act.

See

Section 202(a)(29) of the Investment Advisers Act of 1940 (the “Advisers Act”).

For entities, the Commission proposed to add:

• SEC- and state-registered investment advisers and rural business investment companies to the list of entities specified in Rule 501(a)(1);

• limited liability companies to the list of entities specified in Rule 501(a)(3);

• entities, of a type not listed in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8), not formed for the specific purpose of acquiring the securities offered, owning investments in excess of $5,000,000;

• “family offices,” as defined in Rule 202(a)(11)(G)-1 under the Advisers Act: (i) With assets under management in excess of $5,000,000, (ii) that are not formed for the specific purpose of acquiring the securities offered, and (iii) whose prospective investment is directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment; and

• “family clients,” as defined in Rule 202(a)(11)(G)-1 under the Advisers Act, of a family office meeting the requirements in new Rule 501(a)(12).

In the Proposing Release, the Commission also proposed to amend the accredited investor definition to allow spousal equivalents to pool finances for the purpose of qualifying as accredited investors. Finally, the Commission proposed to codify several staff interpretations by adding notes to Rule 501 to clarify that:

• The calculation of “joint net worth” for purposes of Rule 501(a)(5) can be the aggregate net worth of an investor and the investor's spouse (or spousal equivalent if “spousal equivalent” is included in Rule 501(a)(5));

Throughout this release, references to an investor's spouse include a spousal equivalent, as applicable, in light of the adoption of the amendments to Rule 501(a)(5) and Rule 501(a)(6).

• the securities being purchased by an investor relying on the joint net worth test of Rule 501(a)(5) need not be purchased jointly; and

• when determining the accredited investor status of an entity under Rule 501(a)(8), one may look through various forms of equity ownership to natural persons.

B. Final Amendments

1. Natural Persons

a. Natural Persons Holding Professional Certifications and Designations or Other Credentials

In the Proposing Release, the Commission proposed to designate by order certain professional certifications and designations and other credentials from an accredited educational institution as qualifying for accredited investor status, with such designation to be based upon consideration of all the facts pertaining to a particular certification, designation, or credential. The proposed amendment included the following non-exclusive list of attributes that the Commission would consider in determining which professional certifications and designations or other credentials qualify a natural person for accredited investor status:

• The certification, designation, or credential arises out of an examination or series of examinations administered by a self-regulatory organization or other industry body or is issued by an accredited educational institution;

• the examination or series of examinations is designed to reliably and validly demonstrate an individual's comprehension and sophistication in the areas of securities and investing;

• persons obtaining such certification, designation, or credential can reasonably be expected to have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of a prospective investment; and

• an indication that an individual holds the certification or designation is made publicly available by the relevant self-regulatory organization or other industry body.

The Commission indicated that it preliminarily expected that the initial Commission order accompanying the final rule would include the following certifications or designations administered by the Financial Industry Regulatory Authority, Inc. (FINRA): The Licensed General Securities Representative (Series 7), Licensed Investment Adviser Representative (Series 65), and Licensed Private Securities Offerings Representative (Series 82).

i. Comments

Many commenters supported adding some form of professional certifications and designations or other credentials.

Some of these commenters noted that attaining credentials may signal a level of sophistication exceeding that of investors who currently qualify as accredited investors under the income or net worth thresholds.

In addition, a few commenters supported the proposal to add professional certifications or designations to the definition, but suggested that the Commission also require professional experience.

Another commenter opposed the proposal, raising a concern that individuals qualifying as accredited investors solely under such criteria would not have the financial capacity to be able to bear the financial risk of private investments.

Another commenter opposed the proposal and the existence of the accredited investor concept, arguing that “educational tests” are inherently discriminatory.

See

letter from Jeff LaBerge dated Jan. 17, 2020 (“J. LaBerge Letter”); letter from Alex Naegele dated Jan. 9, 2020 (“A. Naegele Letter”); letter from Kevin Gebert dated Mar. 4, 2020 (“K. Gebert Letter”); letter from Adam Moehn dated Mar. 8, 2020 (“A. Moehn Letter”); letter from Davis Treybig dated Dec. 20, 2019 (“D. Treybig Letter”); letter from Michael Seng dated Dec. 19, 2019 (“M. Seng Letter”); letter from Corey Wangler dated Feb. 26, 2020 (“C. Wangler Letter”); letter from Mercer Global Advisors, Inc. dated Mar. 11, 2020 (“Mercer Advisors Letter”); Morningstar Letter; ALTI Letter; Md St. Bar Assn. Comm. on Sec. Laws Letter; letter from National Association of Manufacturers dated Mar. 16, 2020 (“NAM Letter”); letter from Chartered Market Technicians Association dated Mar. 16, 2020 (“CMT Letter”); letter from High Level Working Group on Cryptocurrency and Digital Assets Self-Regulation dated Mar. 16, 2020 (“HLWG Letter”); SBIA Letter; Republic Letter; letter from Riley T. Maud dated Mar. 6, 2020 (“R. Maud Letter”); letter from Investments & Wealth Institute dated Mar. 13, 2020 (“IWI Letter”); letter from Managed Funds Association and Alternative Investment Management Association dated Mar. 13, 2020 (“MFA and AIMA Letter”); letter from Cornell

Securities Law Clinic dated Mar. 13, 2020 (“Cornell Sec. Clinic Letter”); Fidelity Letter; Carta Letter; CFA Letter; Rep. J. French Hill et al. Letter; letter from Tron Black dated Dec. 24, 2019 (“T. Black Letter”); letter from Seyed Arab dated Dec. 18, 2019 (“S. Arab Letter”); letter from Malcolm Douglas dated Dec. 18, 2019 (“M. Douglas Letter”); letter from James J. Angel dated Mar. 3, 2020 (“J. Angel Letter”); letter from Crowdwise, LLC dated Mar. 1, 2020 (“Crowdwise Letter”); letter from Geraci LLP dated Mar. 9, 2020 (“Geraci Letter”) and letter from American Association of Private Lenders submitted May 27, 2020 (“AAPL Letter”) (the Geraci Letter and the AAPL Letter are essentially identical); letter from Leonard A. Grover dated Dec. 21, 2019 (“L. Grover Letter”); letter from Ryan L. Doyal dated Dec. 23, 2019 (“R. Doyal Letter”); letter from Kathreek Pulavarthi dated Dec. 29, 2019 (“K. Pulavarthi Letter”); letter from G. Philip Rutledge dated Jan. 31, 2020 (“P. Rutledge Letter”); letter from Inportal dated Feb. 21, 2020 (“Inportal Letter”); CCMC Letter; letter from Institute for Portfolio Alternatives dated Mar. 16, 2020 (“IPA Letter”); letter from Karen Salay dated Dec. 19, 2019 (“K. Salay Letter”); letter from Gordon Hodge dated Dec. 21, 2019 (“G. Hodge Letter”); letter from Graham Gintz dated Mar. 6, 2020 (“G. Gintz Letter”); letter from CityVest dated Jan. 7, 2020 (“CityVest Letter”); letter from Bryan M. Crane dated Dec. 19, 2019 (“B. Crane Letter”); letter from National Introducing Brokers Association dated Mar. 3, 2020 (“NIBA Letter”); M. Langford Letter; letter from Timothy E. Messenger dated Dec. 19, 2019 (“T. Messenger Letter”); letter from Ruthlynn E. Black dated Dec. 30, 2019 (“R. Black Letter”) (the R. Doyal Letter and the R. Black Letter are essentially identical); letter from Chris Lakumb dated Dec. 18, 2019 (“C. Lakumb Letter”); letter from Ashley Wunderlich dated Feb. 7, 2020 (“A. Wunderlich Letter”); letter from Kurt Wunderlich dated Feb. 7, 2020 (“K. Wunderlich Letter”); letter from Kevin King dated Jan. 23, 2020 (“K. King Letter”); letter from Michael Bernstein dated Dec. 19, 2019 (“M. Bernstein Letter”); letter from Luke Denlinger dated Dec. 22, 2019 (“L. Denlinger Letter”); CFA Letter; B. Peterman Letter; letter from American Bankers Association dated Mar. 16, 2020 (“Am. Bankers Assn. Letter”); letter from Raymond Wu dated Feb. 21, 2020 (“R. Wu Letter'); letter from Joseph Caruso dated Jan. 28, 2020 (“J. Caruso Letter”); letter from Cody L. West dated Feb. 23, 2020 (“C. West Letter”); letter from American Investment Council dated Mar. 16, 2020 (“AIC Letter”); letter from Jared Smith dated Feb. 10, 2020 (“J. Smith Letter”); letter from Angel Capital Association dated Mar. 9, 2020 (“ACA Letter”); letter from Rudolph Langenbach dated Jan. 10, 2020 (“R. Langenbach Letter”); letter from Association of Trust Organizations, Inc. dated Apr. 15, 2020 (“ATO Letter”); letter from Brian Seelinger dated Dec. 18, 2019 (“B. Seelinger Letter”); letter from Artivest dated Apr. 23, 2020 (“Artivest Letter”); letter from David R. Burton dated May 1, 2020 (“D. Burton Letter”); letter from CFA Institute dated May 4, 2020 (“CFA Institute Letter”); ABA FR of Sec. Comm. Letter; letter from Biotechnology Innovation Organization dated June 16, 2020 (“BIO Letter”); and letter from Brandon Andrews et al. dated May 4, 2020 (“B. Andrews et al. Letter”).

See

Morningstar Letter (indicating that “[p]utting an emphasis on allowing investors with knowledge and expertise to participate in private capital markets is sensible. These investors, by definition, should be better able to cope with the opacity and limited availability of comparable measures in our private markets”); M. Seng Letter (positing that “someone who has professional certification(s) is far more qualified to determine if the investment is right for them or not far better than someone who doesn't understand the investment but has money looking to invest”); and C. Wangler Letter (stating that “professional licensing is more indicative of investment knowledge than how much money one has”).

See

NASAA Letter (noting that a level of years of experience should be required); letter from Nasdaq, Inc. dated May 18, 2020 (“Nasdaq Letter”) (noting that “most professional designations or certifications alone [do not] suffice to establish the financial sophistication and independent judgment required to evaluate private investments that are inherently risky and illiquid. An examination of knowledge, without an additional requirement of industry experience, is not a satisfactory means to determine whether an investor can bear the risk of and evaluate a potential investment in an exempt offering without the benefit of a registration statement or similar disclosure”); and Geraci Letter and AAPL Letter (supporting inclusion of Series 7, 65, and 82 license holders without an experience requirement, but conditioning support for the inclusion of CPAs, JDs, CFAs, and CAIAs on having three years of experience, and noting that the experience requirement “protect[s] newly licensed individuals, who may not be familiar with the real world applications of their education, from partaking in inappropriate investment opportunities”).

See

St. John's Sec. Arbitration Clinic Letter.

See

B. Shah Letter (stating that income and wealth requirements are also discriminatory).

A number of commenters specifically responded on the use of FINRA-administered exams. Several commenters expressed support for inclusion of the Series 7,

Series 65,

and/or Series 82 exams.

One commenter noted that these exams test important investing concepts,

while another stated that individuals qualified to advise others on whether to invest in private offerings should be able to invest themselves.

One commenter opposed the inclusion of these exams,

while another stated that a person should be required to pass all three exams to be considered an accredited investor.

See

T. Black Letter; S. Arab Letter; M. Douglas Letter; J. Angel Letter; Crowdwise Letter; L. Grover Letter; R. Doyal Letter and R. Black Letter; K. Pulavarthi Letter; P. Rutledge Letter; Inportal Letter; Md St. Bar Assn. Comm. on Sec. Laws Letter; NAM Letter; CCMC Letter; IPA Letter; HLWG Letter; SBIA Letter; R. Maud Letter (indicating that “professional certifications such as the [Series 7], [Series 65], and [Series 82] are exactly the types of certifications that indicate financial sophistication which in turn would satisfy the accredited investor definition”); Artivest Letter; ABA FR of Sec. Comm. Letter; and Geraci Letter and AAPL Letter (noting that “those who hold a Series 7, 65, or 82 license should be permitted to qualify as accredited investors without any additional approval by the Commission as obtaining such a license enables them to evaluate investments on behalf of third parties, thus qualifying them to effectively evaluate investment opportunities on their own behalf as well”).

See

T. Black Letter; S. Arab Letter; M. Douglas Letter; J. Angel Letter; Crowdwise Letter; K. Salay Letter; G. Hodge Letter; L. Grover Letter; R. Doyal Letter and R. Black Letter; K. Pulavarthi Letter; P. Rutledge Letter; Inportal Letter; Md St. Bar Assn. Comm. on Sec. Laws Letter; NAM Letter; CCMC Letter; IPA Letter; HLWG Letter; SBIA Letter; R. Maud Letter; Artivest Letter; ABA FR of Sec. Comm. Letter; and Geraci Letter and AAPL Letter.

See

M. Douglas Letter; Crowdwise Letter; L. Grover Letter; R. Doyal Letter and R. Black Letter; K. Pulavarthi Letter; P. Rutledge Letter; Inportal Letter; Md St. Bar Assn. Comm. on Sec. Laws Letter; NAM Letter; CCMC Letter; IPA Letter; HLWG Letter; SBIA Letter; R. Maud Letter; Artivest Letter; ABA FR of Sec. Comm. Letter; and Geraci Letter and AAPL Letter.

See

HLWG Letter (noting that the Series 7, 65, and 82 exams “are sufficiently rigorous, effectively assess the degree of knowledge and understanding of key investment subjects and concepts, and result in the development of competent and capable investment professionals. Thus, they render the protections of the Securities Act unnecessary”).

See

J. Angel Letter (stating that “[i]t certainly makes sense that licensed people in the securities industry who are allowed to sell private offerings to their clients should also be allowed to invest in those same offerings as accredited investors”).

See

letter from Al Hemmingsen dated Dec. 29, 2019 (“A. Hemmingsen Letter”).

See

Cornell Sec. Clinic Letter (positing that “one of these examinations alone is [not] enough to test an individual's financial sophistication. Instead, the SEC should require an investor to pass all three of these exams”).

One commenter supported including all FINRA exams.

A number of commenters also specifically supported including the following examinations: Series 3 (National Commodities Futures Examination),

Series 6 (Investment Company and Variable Contracts Products Representative Examination),

Series 22 (Direct Participation Programs Limited Representative Examination),

Series 66 (Uniform Combined State Law Examination),

Series 79 (Investment Banking Representative Examination),

and Series 86 and 87 (Research Analyst

Examination).

A few commenters supported inclusion of the FINRA “Securities Industry Essentials” (SIE) examination,

while a few other commenters opposed its inclusion.

See

P. Rutledge Letter (noting that “[i]f the SEC and relevant state securities regulators think [FINRA license holders] sufficiently qualified to render investment-related services to the public, those individuals should be able to purchase investments of their choice”).

See

P. Rutledge Letter; NIBA Letter; IPA Letter; Artivest Letter; and ABA FR of Sec. Comm. Letter.

See

P. Rutledge Letter; IPA Letter; Artivest Letter; and ABA FR of Sec. Comm. Letter.

See

P. Rutledge Letter and ABA FR of Sec. Comm. Letter.

See

P. Rutledge Letter; A. Naegele Letter; IPA Letter; Artivest Letter; D. Burton Letter; and ABA FR of Sec. Comm. Letter.

See

P. Rutledge Letter and CCMC Letter.

See

P. Rutledge Letter; R. Wu Letter; CCMC Letter; CMT Letter (86 only); and ABA FR of Sec. Comm. One commenter specifically did not support including the Series 86 and 87 examinations.

See

A. Naegele Letter.

See

J. Angel Letter (noting its belief that “[w]hile the SIE is clearly less rigorous than the CFA, CFP®, Series 7, or Series 65 exams,” Regulation Best Interest reduces the risk of bad products being marketed to unsophisticated investors); Crowdwise Letter; SBIA Letter; and D. Burton Letter (indicating that it “probably” should be included but noting that “[t]he sample test, however, seems more concerned with the regulation of investment professionals than investment knowledge. Moreover, the investment knowledge tested for appears to be primarily the nature of various public securities other than common stock and investment products rather than an understanding of business, enterprise, accounting or finance”).

See

A. Naegele Letter; NASAA Letter; and HLWG Letter (supporting consideration of the exam but stating that “since this exam is not particularly rigorous or tailored to private fund investments, additional training and education may be required, such as investment-related courses from an accredited institution”).

Commenters also responded to the Proposing Release's request for comment on what other professional certifications and designations or other credentials should be included in a Commission order designating qualifying credentials. We received a diverse range of comments relating to the inclusion of certain professional credentials, educational experience, and professional experience. With respect to professional credentials, several commenters expressed support for including certified public accountants (CPAs),

while a few commenters were opposed to their inclusion.

One commenter noted its support for including CPAs was based on the commenter's view that the exam process is “rigorous” and requires “extensive” education and that the license is granted by the states.

Commenters who were opposed expressed their view that the CPA credential is not focused on investing,

and does not reliably demonstrate an individual's comprehension and sophistication in the areas of securities and investing.

Some commenters also supported including Chartered Financial Analyst (CFA),

Chartered Alternative Investment Analyst (CAIA),

Certified Financial Planner (CFP),

Certified Trust and Financial Advisor (CTFA),

and Certified Investment Management Analyst (CIMA) and Certified Private Wealth Advisor (CPWA) certifications.

One commenter expressed concern with such an approach, noting that “private designation conferring organizations are not subject to [C]ommission oversight.”

See

M. Langford Letter; S. Arab Letter (noting that the designation is “issued through a rigorous examination process” and is “licensed by state regulatory bodies,” which may mean the CPA is subject to “more oversight than many other types of certifications”); CityVest Letter; Geraci Letter and AAPL Letter (these commenters would also require three years of experience and good standing); T. Messenger Letter; G. Hodge Letter; R. Doyal Letter and R. Black Letter; B. Crane Letter; IPA Letter; HLWG Letter; Carta Letter; Artivest Letter; and D. Burton Letter.

See

P. Rutledge Letter; Md St. Bar Assn. Comm. on Sec. Laws Letter (noting that “[w]e do not believe that even the most thorough understanding of accounting and auditing standards provides the individual who possesses such knowledge with any degree of financial sophistication in the sense of being able to make knowledgeable investment decisions”); NASAA Letter; and CFA Letter.

See

S. Arab Letter (noting that “CPA certifications are not only issued through a rigorous examination process and require extensive education, they are also licensed by state regulatory bodies and are under more oversight than many other types of certifications”).

See

NASAA Letter.

See

CFA Letter.

See

C. Lakumb Letter; A. Wunderlich Letter; K. Wunderlich Letter; P. Rutledge Letter; K. King Letter; J. Angel Letter; A. Naegele Letter; CityVest Letter; A. Moehn Letter; Geraci Letter and AAPL Letter (these commenters would also require three years of experience and good standing); M. Bernstein Letter; L. Denlinger Letter; CFA Letter; IPA Letter; Mercer Advisors Letter; HLWG Letter; Fidelity Letter; Carta Letter; ATO Letter; B. Seelinger Letter; Artivest Letter; D. Burton Letter; and CFA Institute Letter (the CFA designation is awarded by the CFA Institute).

See

B. Peterman Letter; C. Lakumb Letter; A. Wunderlich Letter; K. Wunderlich Letter; CityVest Letter; Geraci Letter and AAPL Letter (these commenters would also require three years of experience and good standing); HLWG Letter; Fidelity Letter; Carta Letter; and Artivest Letter.

See

C. Lakumb Letter; P. Rutledge Letter; J. Angel Letter; Mercer Advisors Letter; HWLG Letter; CFP Letter; Carta Letter; ATO Letter; and D. Burton Letter (positing that “[t]he CFA Charter and CFP certification generally require the mastery of a broader range of material at a deeper level than the series 7 exam and, therefore, better equip a person to evaluate investments”).

See

Am. Bankers Assn. Letter (the CTFA designation is awarded by the Am. Bankers Assn.) and ATO Letter.

See

IWI Letter (the CIMA and CPWA designations are awarded by the Investments & Wealth Institute).

See

A. Hemmingsen Letter.

Commenters also responded on whether the Commission should include certain educational attributes. We received several comments in support of including law degrees,

and a similar number of comments opposing their inclusion.

Two commenters supported the inclusion of lawyers with legal experience,

while another noted that some level of financial experience should be required.

Several commenters supported including a master's degree in business administration from an accredited educational institution;

while others were opposed.

Similarly, several commenters supported including various graduate degrees,

while a few commenters expressed opposition.

Commenters also expressed support for including various other educational programs.

One commenter did not

support including any educational experience, citing disparities in educational quality.

See

CityVest Letter; Geraci Letter and AAPL Letter (positing that “[t]hese individuals have received significant training on evaluating complex legal and financial concepts, and given experience practicing in their given fields, we believe they are more than capable of making complex investment decisions on their own behalf,” but also stating that the Commission should include a three year experience and licensing requirement); A. Naegele Letter; J. Caruso Letter (supporting inclusion of concentrations, legal certifications, and master of laws programs in securities law); C. West Letter; and AIC Letter.

See

P. Rutledge Letter; CFA Letter (noting that “[a]bsent some additional investment-specific experience or expertise, individuals with [a law degree] cannot reasonably be expected to have sufficient knowledge or experience to evaluate the merits and risks of a prospective investment absent the protections afforded in the public markets (access to comprehensive and reliable information about the offering)”; letter from Sarah H. Moller dated Mar. 13, 2020 (“S. Moller Letter”); Md St. Bar Assn. Comm. on Sec. Laws Letter (noting that “[e]ven a thorough understanding of the federal securities laws and how they operate in practice does not provide a person with such sophistication and knowledge when applied to evaluating `the merits and risks of a prospective investment'”); NASAA Letter; and Cornell Sec. Clinic Letter.

See

Geraci Letter and AAPL Letter.

See

A. Naegele Letter.

See

G. Gintz Letter; CityVest Letter; J. Angel Letter; B. Crane Letter; Artivest Letter; and Geraci Letter and AAPL Letter. The Geraci Letter and AAPL Letter would also require “verification of graduation from a nationally accredited university.”

See

S. Arab Letter; P. Rutledge Letter; A. Naegele Letter; Md St. Bar Assn. Comm. on Sec. Laws Letter; CMT Letter; NASAA Letter; Cornell Sec. Law Clinic Letter; and CFA Letter.

See

CityVest Letter (supporting masters level degree in business, accounting, economics, or law); J. Smith (supporting advanced finance degrees); J. Angel Letter (supporting Master of Science in Finance); B. Crane Letter (supporting Ph.D. in a “business related discipline”); CCMC Letter (supporting doctoral degrees in accounting, finance, or economics); Cornell Sec. Clinic Letter (supporting advanced degrees in finance); AIC Letter (supporting mathematics, science (

e.g.,

physics or computer science), business, accounting, finance, economics, or law); and D. Burton Letter (supporting advanced degrees in business, business administration or business management, entrepreneurship, economics, finance, or accounting).

See

CFA Letter and S. Moller Letter.

See

ACA Letter (certifications from Angel Capital Association's ACA University); J. Angel Letter (undergraduate degree in business); letter from Christy Logan dated Dec. 20, 2019 (“C. Logan Letter”) (“reasonable education”); R. Langenbach Letter (“some certain education/certification”); AIC Letter (bachelor's, bachelor's equivalent, or higher degree (such as a master's or J.D.) from an accredited educational institution in a discipline that requires a significant amount of statistical or quantitative analysis or acquaintance with business and legal issues); D. Burton Letter (medical and advanced scientific, engineering, or technology degrees); BIO Letter (proposing to include “Doctor of Philosophy (Ph.D.) in the hard sciences, Medical Doctor degrees (MD), or Master of Science (MS) in

hard sciences for the specific purpose of participating in the seed and early stage funding of biotechnology companies”).

See

S. Arab Letter.

Commenters also responded to a request for comment in the Proposing Release on whether the Commission should include professional experience in areas such as finance and investing, apart from professional certifications and designations, as another means for qualifying for accredited investor status. Several commenters supported using professional experience,

some of whom also recommended including investing experience.

No commenters specifically opposed including professional experience.

See

ABA FR of Sec. Comm. Letter (stating that expanding the accredited investor definition to include investors with relevant experience in respect of the particular investment “would increase investment opportunities with little or no impact on investor protection”); letter from Hunter Todd dated Dec. 19, 2019 (“H. Todd Letter”), letter from Omar Plummer dated Dec. 20, 2019 (“O. Plummer Letter”) (would extend accredited investor status to individuals who “have participated in investment banking and can prove they did, or do in fact, still have a license”); letter from Jeffrey P. Jacobson dated Feb. 7, 2020 (“J. Jacobson Letter”); letter from Andrew Rea dated Jan. 2, 2020 (“A. Rea Letter”) (would extend accredited investor status to “people with a certain amount of years working in venture-backed startups or venture capital funds themselves”); letter from Dar'shun Kendrick dated Dec. 19, 2019 (“D. Kendrick Letter”); letter from Timo Muro dated Dec. 19, 2019 (“T. Muro Letter”); letter from Thomas Englis dated Dec. 19, 2019 (“T. Englis Letter”) (noting that “[h]aving worked in the venture capital industry for 4 years, I have a very high level of knowledge of technology startups . . . [t]he existing law does not accurately measure an individual's knowledge of risk”); CCMC Letter; AIC Letter; Artivest Letter; BIO Letter (stating that “[s]cientific professionals are uniquely knowledgeable and experienced in [early stage biotechnology companies] and can more accurately assess the risks of a scientific endeavor than the vast majority of investors”); and K. Wilson Letter.

See

letter from Matthew Youngs dated Feb. 4, 2020, (“M. Youngs Letter”); A. Naegele Letter; letter from Michael Penn Smith dated Dec. 20, 2019 (“M. Smith Letter”) (positing that “there's no good reason to deny knowledgeable retail investors access to venture investments”); letter from Matthew M. Peterson dated Dec. 26, 2019; SIFMA Letter; ABA FR of Sec. Comm.; and K. Wilson Letter.

The Proposing Release also solicited comment on whether the Commission should develop an accredited investor examination and whether the Commission should allow individuals to self-certify that they have the requisite financial sophistication to be an accredited investor. Of the commenters responding to the request for comment on an accredited investor examination, most supported an accredited investor examination,

while a few did not.

One commenter expressed a preference for an accredited investor exam due to concerns about the cost of the Series 7, 65, and 82 exams.

Regarding self-certification, although some commenters were in favor,

some were opposed.

One commenter cited the difficulty of procuring necessary documentation for foreign nationals to prove net worth as a reason to allow self-certification of financial sophistication.

Another supported self-certification only as a component of a broader certification regime that would also include a qualifying examination and attaining sufficient private market and/or early-stage investing experience.

One commenter who opposed self-certification argued that it would not be subject to any standards,

while another commenter argued that “the average investor will be in no position to make unbiased determinations regarding their own financial sophistication.”

See

T. Black Letter; letter from Einar Vollset dated Dec. 18, 2019 (“E. Vollset Letter”); B. Delaplane Letter; letter from Mark Headrick dated Feb. 7, 2020 (“M. Headrick Letter”); M. Youngs Letter; Crowdwise Letter; letter from Josh Kelner dated Jan. 10, 2020 (“J. Kelner Letter”); A. Naegele Letter; letter from Wiebke Zuch dated Jan. 8, 2020 (“W. Zuch Letter”); letter from Tony Sparks dated Jan. 2, 2020 (“T. Sparks Letter”) (supporting an accredited investor exam because “it's wise for people to be somewhat informed on how investments work before they invest”); letter from Bruce A. Wallick dated Dec. 19, 2019 (“B. Wallick Letter”) (positing that “[w]hat's really needed to evaluate various investments and avoid endangering one's wealth is adequate analytical skill . . . [p]erhaps requiring some case study investment analysis as part of the test would be sufficient to determine level of understanding”); letter from Patrick Poole dated Dec. 20, 2019 (“P. Poole Letter”); A. Hemmingsen Letter; Mercer Advisors Letter; Md St. Bar Assn. Comm. on Sec. Laws Letter; Carta Letter; R. Doyal Letter and R. Black Letter; letter from Ben Lawrence dated Apr. 15, 2020 (“B. Lawrence Letter”); and D. Burton Letter.

See

P. Rutledge Letter (preferring FINRA-administered exams because “FINRA is subject to SEC oversight and has existing mechanisms for making examination-related information publicly available”) and J. Angel Letter.

See

E. Vollset Letter (noting that the Series 7, 65, and 82 exams “likely would cost more to obtain than a lot of people are willing to invest”).

See

M. Douglas Letter; J. Angel Letter; K. Pulavarthi Letter; D. Burton Letter; letter from Gregory S. Fryer dated March 16, 2020 (“G. Fryer Letter”) (supporting self-certification for investors investing less than $15,000); and G. Freedman Letter.

See

P. Rutledge Letter; Crowdwise Letter; Mercer Advisors Letter; Md St. Bar Assn. Comm. on Sec. Laws Letter; NASAA Letter; R. Maud Letter; and CFA Institute Letter (noting that “[b]ehavioral science has long recognized overconfidence bias in general and has specifically documented individuals' overconfidence in their investing skills and financial knowledge”).

See

K. Pulavarthi Letter.

See

Crowdwise Letter.

See

NASAA Letter.

See

Md St. Bar Assn. Comm. on Sec. Laws Letter.

Under the proposed approach, individuals with certain professional certifications and designations or other credentials would qualify as accredited investors regardless of their net worth or income. The Proposing Release requested comment on whether additional conditions, such as investment limits, for individuals with these certifications, designations, or credentials should be considered. A few commenters supported investment limits,

while others did not.

One commenter who recommended imposing investment limits expressed the view that individuals who do not meet the current net worth or income thresholds, “while possibly financially sophisticated, could not sustain larger losses from these types of investments,” and favorably noted the investment limits in place under Regulation A and Regulation Crowdfunding.

Conversely, another commenter expressed concern about the administrative burden of investment limits and stated that it would “substantially reduce the attractiveness of this approach (as it has for Regulation A and Regulation CF).”

Another commenter stated that such limits may “continue to propagate the disparate impact that the current standards have on women, minority and rural investors.”

See

A. Naegele Letter; Mercer Advisors Letter; and Artivest Letter.

See

L. Glover Letter; HLWG Letter; CCMC Letter; and D. Burton Letter.

See

Mercer Advisors Letter.

See

D. Burton Letter.

See

CCMC Letter.

As proposed, individuals who obtain the designated professional credentials would be required to maintain these certifications or designations in good standing in order to qualify as accredited investors. Several commenters supported a good-standing requirement.

One of these commenters based its support of a good-standing requirement on the need to maintain up-to-date knowledge.

In contrast, another commenter opposed such a requirement, suggesting that a good standing requirement would impose a “needless barrier” to investment.

See

letter from Da Kui dated Jan. 10, 2020 (“D. Kui Letter”); A. Naegele Letter; Mercer Advisors Letter; HLWG Letter; R. Maud Letter; letter from Jiaxin Na dated Mar. 13, 2020 (“J. Na Letter”); and Geraci Letter and AAPL Letter.

See

D. Kui Letter (noting that, without a good standing requirement “the investor may no longer have up-to-date knowledge and information about the related fields, especially when considering the increasingly changing world of finance and investment”).

See

D. Burton Letter (stating that “[t]he general investment knowledge imparted by these programs will not materially dissipate or decline, particularly

if the person is making investments. The Commission should not erect needless barriers reducing access to these investments. It should not actively create an advantage for those it regulates (

i.e.

those in the securities industry) by requiring that a person be associated with a broker-dealer”).

The Proposing Release also requested comment on whether individuals who obtain the designated professional credentials should also be required to practice in the fields related to the certifications or designations, or to have practiced for a minimum number of years. A few commenters suggested that the Commission require professional experience,

with one expressing the view that the “ability to pass a test is no substitute for demonstrable investing or financial services experience.”

One commenter opposed a work experience requirement for individuals who pass the Series 7 and 65 exams, noting that such individuals “can practice as securities professionals without an apprenticeship or relevant experience.”

See

See also

Geraci Letter and AAPL Letter (supporting inclusion of Series 7, 65, and 82 license holders without an experience requirement, but conditioning support for the inclusion of CPAs, JDs, CFAs, and CAIAs on having three years of experience, and noting that the experience requirement “protect[s] newly licensed individuals, who may not be familiar with the real world applications of their education, from partaking in inappropriate investment opportunities”).

See

NASAA Letter.

See

L. Grover Letter.

The proposed amendments included a mechanism by which the Commission would designate qualifying professional credentials by order and noted that the Commission “anticipate[d] that the Commission generally would provide public notice and an opportunity for public comment before issuance of such order.”

Two commenters raised Administrative Procedure Act (“APA”) concerns with this approach.

Both commenters indicated that the Commission should provide the public with the opportunity to comment on any additional categories of qualifying professional credentials before issuing a final order. Another commenter similarly encouraged the Commission to provide public notice and an opportunity for public comment before issuance of such an order.

Other commenters were generally supportive of the proposal to designate the professional credentials by order.

See

Proposing Release at 2581.

See

NASAA Letter (suggesting that the “policy would also potentially violate the Administrative Procedure Act, as the new accredited investor standards would likely constitute legislative rules, for which public notice and comment are required”) and CA Attorney General et al. Letter (“[t]he proposed process fails to afford stakeholders an opportunity to provide valuable insight on proposed changes and violates the Administrative Procedures Act”).

See also

5 U.S.C. 551

et seq.

See

IWI Letter.

See

ABA FR of Sec. Comm. Letter and D. Burton Letter.

We also requested comment on the proposed non-exclusive list of attributes that the Commission would consider in determining which professional certifications and designations or other credentials qualify for accredited investor status. A few commenters expressed support for the proposed list.

One proposed attribute was an indication that an individual holds the certification or designation is made publicly available by the relevant self-regulatory organization or other industry body. One commenter expressed support for this attribute but suggested that it be broadened to include not only publicly available certifications, but also those relevant certifications that may be “otherwise independently verifiable.''

In addition, one commenter urged the Commission to establish a routine review of the defined list of eligible designations, certifications, and licenses.

See

Fidelity Letter; CFA Institute Letter (noting that “[w]e believe the Release articulates sound principles in its non-exclusive list of attributes that it would consider in determining which professional certifications and designations or other credentials qualify for accredited investor status”); and ABA FR of Sec. Comm. Letter (“[t]he Committee supports this approach, which would be based on criteria that are verifiable and provide ongoing flexibility for the Commission to add further appropriate investor categories”).

See

Fidelity Letter (noting that such approach “[p]rovides the SEC flexibility as it considers additions to the list of professional certifications that meet its specified criteria in the future, which may not necessarily be searchable on a public website, but would be otherwise verifiable, such as on an access-controlled website”).

See

Carta Letter (“[t]he final rule should provide the Commission with flexibility to reevaluate previously designated certifications, designations, or credentials if they change over time, and also designate other, possibly new, certifications, designations, or credentials that meet specified criteria”).

ii. Final Amendments

After considering the comments, we are adopting the amendment substantially as proposed. We continue to believe that certain professional certifications and designations or other credentials provide a reliable indication that an investor has a sufficient level of financial sophistication to participate in investment opportunities that do not have the additional protections provided by registration under the Securities Act. We note that many commenters agreed with our conclusion in this regard. Further, we continue to believe that relying solely on financial thresholds as an indication of financial sophistication is suboptimal, including because it may unduly restrict access to investment opportunities for individuals whose knowledge and experience render them capable of evaluating the merits and risks of a prospective investment—and therefore fending for themselves—in a private offering, irrespective of their personal wealth. While certain of these individuals may have fewer financial resources and, as a result, be less able to bear the financial risk of private investments, as one commenter suggested,

we believe their professional credentials and experience should enable these investors to assess investment opportunities, appropriately allocate capital based on their individual circumstances, including whether to reallocate investment capital between private investments and other equivalent-sized investments, and otherwise make appropriately informed decisions regarding their financial interests, including their ability to bear the financial risk.

See supra

note 26.

As proposed, the final amendment provides that the Commission may designate qualifying professional certifications, designations, and other credentials by order, with such designation to be based upon consideration of all the facts pertaining to a particular certification, designation, or credential. Also as proposed, the final amendment includes a nonexclusive list of attributes that the Commission will consider in determining which professional certifications and designations or other credentials qualify a natural person for accredited investor status. As noted in the Proposing Release, given the evolving nature of market and industry practices, this approach will provide the Commission with flexibility to reevaluate previously designated certifications, designations, or credentials if they change over time, and also to designate other certifications, designations, or credentials if new certifications, designations, or credentials develop or are identified that are consistent with the specified criteria and that the Commission determines are appropriate. Although a few commenters questioned this approach, we believe that

designating credentials by order is consistent with the APA. The rules provide specific standards by which the Commission will evaluate additional qualifying credentials. Moreover, consistent with commenters' suggestions, we are revising the final rules to clarify that, in connection with any future designations of qualifying credentials, the Commission will provide notice and an opportunity for public comment before issuing any final order. To assist members of the public, the professional certifications and designations and other credentials currently recognized by the Commission as satisfying the adopted criteria will be posted on the Commission's website.

We agree with the commenter's suggestion that the non-exclusive attribute requiring that an indication that the individual holds the certification or designation be made publicly available by the relevant self-regulatory organization or other industry body should be expanded to include that the certification or designation could also be otherwise independently verifiable.

This addition will provide the Commission with flexibility as it considers whether to add future certifications or designations that are not publicly available but would be independently verifiable.

See supra

note 92.

We are also adopting a good-standing requirement, which was supported by many commenters addressing the requirement, but are not requiring that the individual practice in the fields related to the certification, except to the extent that continued affiliation with a firm is required to maintain the certification, designation, or credential.

We continue to believe that passing the requisite examinations and maintaining an active certification, designation, or license is sufficient to demonstrate the individual's financial sophistication to invest in exempt offerings, even when the individual is not practicing in an area related to the certification or designation. We also continue to believe that an inactive certification, designation, or license, particularly when the certification or designation has been inactive for an extended period of time, could lessen the validity of the certification or designation as a measure of financial sophistication. We are not, however, adopting a requirement that individuals holding qualifying credentials must practice in the fields related to the certifications or designations or that such individuals have practiced for a minimum number of years. We are concerned that adding such additional criteria would make it more difficult for financially sophisticated investors to demonstrate, and issuers and other market professionals to verify, accredited investor status, but would not provide significant additional protection for investors.

For example, an individual's registration as a general securities representative will lapse two years after the date that his or her employment with a FINRA member has been terminated.

See

FINRA Rule 1210.08. An individual who ceases to be employed by a FINRA member but whose registration remains current will continue to qualify as an accredited investor until such registration lapses.

In connection with the adoption of this amendment, in a separate order, we are designating the General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82), and the Licensed Investment Adviser Representative (Series 65) as the initial certifications, designations, or credentials designated by the Commission under Rule 501(a)(10). Of the various professional certifications, designations, and credentials on which we received comment, these received significant support. The Series 7 license qualifies a candidate “for the solicitation, purchase, and/or sale of all securities products, including corporate securities, municipal securities, municipal fund securities, options, direct participation programs, investment company products, and variable contracts.”

The Series 65 exam is designed to qualify candidates as investment adviser representatives and covers topics necessary for adviser representatives to understand to provide investment advice to retail advisory clients.

The Series 82 license qualifies candidates seeking to effect the sales of private securities offerings.

FINRA developed and administers the Series 7 examination. An individual must be associated with a FINRA member firm or other applicable self-regulatory organization member firm to be eligible to take the exam and be granted a license.

See https://www.finra.org/registration-exams-ce/qualification-exams/series7.

NASAA developed the Series 65 examination, and FINRA administers it. An individual does not need to be sponsored by a member firm to take the exam, and successful completion of the exam does not convey the right to transact business prior to being granted a license or registration by a state.

See https://www.nasaa.org/exams/study-guides/series-65-study-guide.

FINRA developed and administers the Series 82 examination. An individual must be associated with and sponsored by a FINRA member firm or other applicable self-regulatory organization member firm to be eligible to take the exam.

See https://www.finra.org/registration-exams-ce/qualification-exams/series82.

In light of the subject matter encompassed by these exams, and for the reasons stated above and in the Proposing Release, we believe that individuals who have passed these examinations and hold their certifications or designations in good standing have demonstrated a sufficient level of financial sophistication to participate in investment opportunities that do not have the additional protections provided by registration under the Securities Act. In this regard, we note that these certifications and designations are required in order to represent or advise others in connection with securities market transactions.

100

To comply with the good standing requirement, the General Securities Representative license holder, the Private Securities Offerings Representative license holder,

101

and the Licensed Investment Adviser Representative must have passed the required examinations and must maintain the individual's license or registration, as applicable, in good standing.

102

100

See

Geraci Letter and AAPL Letter (noting that “such a [Series 7, 65, or 82] license enables them to evaluate investments on behalf of third parties, thus qualifying them to effectively evaluate investment opportunities on their own behalf as well”).

101

To maintain their certifications and designations in good standing, General Securities Representatives and Private Securities Offerings Representatives are subject to continuing education requirements under FINRA rules.

102

As noted in note 98, the successful completion of the Series 65 exam does not convey the right to transact business prior to being granted a license or registration by a state.

See also

Proposing Release at 2581. To qualify as an accredited investor, a Licensed Investment Adviser Representative must maintain, in good standing, the individual's state-granted license or registration.

Issuers must take reasonable steps to verify whether an investor in a Rule 506(c) offering is an accredited investor. As a result, readily available information on whether an individual actively holds a particular certification or designation is useful in determining accredited investor status under Rule 501(a)(10). These certifications and designations have the advantage of being relatively easy to verify, while some other certifications and designations may be more difficult to verify. Issuers and other market participants will be able to obtain registration and licensing information about registered representatives and investment adviser representatives easily through FINRA's BrokerCheck

103

or the Commission's Investment Adviser Public Disclosure database.

104

103

See https://brokercheck.finra.org.

104

See https://www.adviserinfo.sec.gov/IAPD/Default.aspx.

The following table sets out an estimate of the number of individuals that may hold the certifications and designations described above:

Table 1—Estimated Number of Individuals Holding Specified Certifications and Designations

Certification/designation

Number of

individuals

Registered Securities Representative

105

691,041

State Registered Investment Adviser Representative

106

17,543

The

final rules will initially result in an increase in the number of individuals that qualify as accredited investors. However, we cannot estimate how many individuals that hold the relevant certifications and designations may already qualify as accredited investors under the current financial thresholds, and therefore we are unable to predict how many individuals will be newly eligible under the final rules.

107

As discussed below in Section VI.B, (1) we do not expect that number of newly eligible individual accredited investors to be significant compared to the number of individual investors that currently are eligible to participate in private offerings, and (2) we expect the amount of capital invested by such newly eligible individual investors to have minimal effects on the private offering market generally.

108

Moreover, as we stated in the Proposing Release, for purposes of updating the accredited investor definition, we believe it is less relevant to focus on the number of individuals that will qualify and more relevant to consider whether the criteria applied appropriately capture the attributes of financial sophistication that is a touchstone of the definition.

105

As of December 2019. Of this number, 334,860 individuals were registered only as broker-dealers, 294,684 were dually registered as broker-dealers and investment advisers, and 61,497 were registered only as investment advisers. Because FINRA-registered representatives can be required to hold multiple professional certifications, this aggregation likely overstates, potentially significantly, the actual number of individuals that hold a Series 7 or Series 82, and we have no method of estimating the extent of overlap.

106

As of December 2019.

107

We also are not able to estimate how many newly-eligible individuals will seek to make investments as accredited investors.

108

We note that new investment from newly eligible individual accredited investors may be significant in certain small offerings.

See

discussion in Section VI.C.5.

Although other professional certifications, designations, and credentials, such as other FINRA exams, a specific accredited investor exam, other educational credentials, or professional experience received broad commenter support, we are taking a measured approach to the expansion of the definition and including only the Series 7, 65, and 82 in the initial order. While we recognize that there may be other professional certifications, designations, and credentials that indicate a similar level of sophistication in the areas of securities and investing, we believe it is appropriate to consider these other credentials after first gaining experience with the revised rules. However, as described above, the process we are adopting, by which the Commission may designate qualifying professional certifications, designations, and credentials by order, will provide the Commission with flexibility to designate other certifications, designations, or credentials if new certifications, designations, or credentials develop or are identified that are consistent with the specified criteria and that the Commission determines are appropriate. As a result, if an accredited educational institution, self-regulatory organization, or other industry body believes that it has a program of study or credential that fulfills the non-exclusive list of attributes enumerated in 501(a)(10), such institution or body may apply to the Commission for consideration as a qualifying professional certification or designation or credential under 501(a)(10). Similarly, members of the public may wish to propose to the Commission that a specific degree or program of study should be included in the accredited investor definition.

109

Any such proposal does not need to be limited to a degree or program of study at a specific educational institution. Any such request for Commission consideration must address how a particular certification, designation, or credential satisfies the nonexclusive list of attributes set forth in the new rule, and may include additional information that the requestor believes the Commission may wish consider.

109

In addition, the Commission's Investor Advisory Committee, Small Business Capital Formation Advisory Committee, and other advisory committees might assess the effectiveness of our approach and make further recommendations, including additional certifications, designations, or credentials that further the purpose of the accredited investor definition.

In addition, we are not adopting an amendment that would permit individuals to self-certify that they have the requisite financial sophistication to be an accredited investor. We agree with some of the concerns raised by commenters with respect to the lack of standards applicable to such an approach. We note that the Commission will have an opportunity to evaluate its experience with the revised rules in connection with its quadrennial review of the accredited investor definition.

110

Section 413(b)(2)(A) states that this Commission review must be conducted not earlier than four years after the enactment of the Dodd-Frank Act and not less frequently than once every four years afterward. The next review is required to be conducted in or by 2023.

We expect that such reviews will examine not only professional certifications, designations, and credentials, but also the Commission's existing wealth tests. In this regard, to the extent that these certifications, designations, and credentials prove to be effective at capturing the attributes of financial sophistication that is the touchstone of the accredited investor definition, they may influence future consideration of any appropriate adjustment to the wealth tests.

b. Knowledgeable Employees of Private Funds

In the Proposing Release, the Commission proposed to add a category to the accredited investor definition that would enable “knowledgeable employees,” as defined in Rule 3c-5(a)(4) under the Investment Company Act, of a private fund to qualify as accredited investors for investments in the fund.

111

Rule 3c-5(a)(4) under the Investment Company Act defines a “knowledgeable employee” with respect to a private fund as: (i) An executive officer, director, trustee, general partner, advisory board member, or person serving in a similar capacity, of the private fund or an affiliated management person (as defined in Rule 3c-5(a)(1)) of the private fund; and (ii) an employee of the private fund or an affiliated management person of the private fund (other than an employee performing solely clerical, secretarial or administrative functions with regard to such company or its investments) who, in connection with his or her regular functions or duties, participates in the investment activities of such private fund, other private funds, or investment companies the investment activities of which are managed by such affiliated management person of the private fund, provided that such employee has been performing such functions and duties for or on behalf of the private fund or the affiliated management person of the private fund, or substantially similar

functions or duties for or on behalf of another company for at least 12 months.

111

Private funds, such as hedge funds, venture capital funds, and private equity funds, are issuers that would be an investment company, as defined in Section 3 of the Investment Company Act, but for the exclusion from the definition of “investment company” in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. Private funds generally rely on Section 4(a)(2) and Rule 506 to offer and sell their interests without registration under the Securities Act.

i. Comments

Commenters generally supported the proposal to add knowledgeable employees of private funds to the definition of accredited investor,

112

with one commenter opposed to expanding the accredited investor definition to include these individuals.

113

112

See

P. Rutledge Letter; J. LaBerge Letter; A. Naegele Letter; Geraci Letter; A. Hemmingsen Letter; letter from Stephen Clossick dated Dec. 31, 2019 (“S. Clossick Letter”); letter from Shaun Jolley dated Mar. 10, 2020 (“S. Jolley Letter”); IPA Letter; S. Moller Letter; ALTI Letter; CCMC Letter; SBIA Letter; Republic Letter; Better Markets Letter; AIC Letter: J. Na Letter; MFA and AIMA Letter; Cornell Sec. Clinic Letter; letter from Institutional Limited Partners Association dated Mar. 14, 2020 (“ILPA Letter”); Artivest Letter; ABA FR of Sec. Comm. Letter; and Geraci Letter and AAPL Letter.

113

See

CA Attorney General et al. Letter (opposing the expansion of the accredited investor definition to include more individual investors).

Several commenters recommended that we expand the definition of knowledgeable employee for purposes of determining accredited investors. For example, some commenters recommended that we include a broader pool of employees in the definition, such as analysts and contract administrators.

114

Two commenters requested that we expand the definition of knowledgeable employee to include knowledgeable employees of managing entities.

115

Another commenter stated that employees often invest in or through entities affiliated with their employer other than the fund itself, including, for example, the general partner or equivalent entity of the fund. This commenter requested that we permit knowledgeable employees to be accredited investors when acquiring securities of any affiliated management person of a private fund and any entity or vehicle that, directly or indirectly, primarily owns an interest in such private fund or affiliated management person.

116

This commenter also recommended expanding the definition of accredited investor to cover individuals investing in privately offered pooled investment vehicles that rely on an exemption other than Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, where such individuals would be knowledgeable employees with respect to such vehicles (as defined in Rule 3c-5 under the Investment Company Act) if the vehicles were relying on Section 3(c)(1) or 3(c)(7). Several commenters also recommended expanding the definition of accredited investor to include all “qualified purchasers” as defined in Section 2(a)(51)(A) of the Investment Company Act.

117

114

See

letter from S. Laughlin Letter dated Feb. 6, 2020 (“S. Laughlin Letter”) and S. Clossick Letter. In addition, one commenter suggested allowing knowledgeable employees of non-fund issuers to meet the definition of accredited investor (

see

P. Rutledge Letter), while others were opposed to including such employees (

see

D. Kui Letter and A. Naegele Letter).

115

See

Geraci Letter and AAPL Letter.

See also

Republic Letter (supporting including knowledgeable employees of private funds in the definition and requesting clarification that principals and knowledgeable employees of investment advisers (whether registered or exempt) to private funds are included in the expanded definition).

116

See

AIC Letter.

117

See

AIC Letter; Calfee Letter; IAA Letter; ABA FR of Sec. Comm. Letter; and MFA and AIMA Letter.

The Proposing Release requested comment on whether a knowledgeable employee's accredited investor status should be attributed to his or her spouse and/or dependents when making joint investments in private funds for purposes of the accredited investor definition. Commenters that responded to this question generally supported this approach.

118

For example, one commenter suggested attributing accredited investor status to joint investments with spouses or dependents, family corporates, or estate-planning vehicles.

119

Another commenter suggested attributing accredited investor status to a knowledgeable employee's spouse and/or dependents only when such investment decisions are jointly made with the agreement of all persons in the particular joint investment.

120

118

See

A. Hemmingsen Letter; AIC Letter; and J. Na Letter. One commenter opposed attributing a knowledgeable employee's accredited investor status to his or her spouse and/or dependents when making joint investments in private funds.

See

A. Naegele Letter.

119

See

AIC Letter.

120

See

J. Na Letter.

ii. Final Amendments

We are adopting, as proposed, the addition of a category to the accredited investor definition that will enable “knowledgeable employees” of a private fund to qualify as accredited investors for investments in the fund. The new category of accredited investor will be the same in scope as the definition of “knowledgeable employee” in Rule 3c-5(a)(4).

121

It includes, among other persons, trustees and advisory board members, or persons serving in a similar capacity, of a Section 3(c)(1) or 3(c)(7) fund or an affiliated person of the fund that oversees the fund's investments, as well as employees of the private fund or the affiliated person of the fund (other than employees performing solely clerical, secretarial, or administrative functions) who, in connection with the employees' regular functions or duties, have participated in the investment activities of such private fund for at least 12 months.

122

This category will be similar to the existing category for directors, executive officers, or general partners of the issuer (or directors, executive officers, or general partners of a general partner of the issuer).

123

121

See

Rule 501(a)(11).

122

The scope of the term “knowledgeable employee” in Rule 3c-5(a)(4) also includes executive officers, directors, and general partners, or persons serving in a similar capacity, of a Section 3(c)(1) or 3(c)(7) fund or an affiliated person of the fund that oversees the fund's investments. For these persons, the new category for “knowledgeable employees” in the definition of “accredited investor” will overlap with the existing category in Rule 501(a)(4). A person is determined to be a knowledgeable employee at the time of investment.

See

Rule 3c-5(b)(1).

123

Rule 501(a)(4). We are not modifying the definition to include knowledgeable employees of non-fund issuers, as suggested by one commenter, in light of this existing category set forth in Rule 501(a)(4), which is applicable to non-fund and fund issuers.

As discussed in the Proposing Release, we believe that such employees, through their knowledge and active participation of the investment activities of the private fund, are likely to be financially sophisticated and capable of fending for themselves in evaluating investments.

124

These employees, by virtue of their position with the fund, are presumed to have meaningful investing experience and sufficient access to the information necessary to make informed investment decisions about the fund's offerings. Allowing these employees to invest in the funds for which they work (and other funds managed by their employer) as accredited investors also may help to align their interests with those of other investors in the fund.

124

As is the case under Rule 3c-5(a)(4), the scope of “knowledgeable employees” under this proposed amendment will not include employees who simply obtain information but do not participate in the investment activities of the fund.

We are not modifying this definition to include additional types of employees as suggested by commenters. We continue to believe that the existing definition of knowledgeable employee accurately captures non-executive employees with sufficient knowledge and expertise to participate in investment opportunities that do not have the additional protections provided by registration under the Securities Act. We also believe issuers will benefit from the consistency with the current knowledgeable employee definition. The definition is intended to cover non-executive employees only if they actively participate in the investment activities of the fund, any other private fund or any investment

company the investment activities of which are managed by the fund's affiliated management person. We believe that participating in the management of a fund's investments is what gives the employee sufficient knowledge and expertise to participate in investment opportunities that do not have the additional protections provided by registration under the Securities Act. Whether any particular employee is one who participates in the investment activities of a fund is a determination that must be made on a case-by-case basis.

We generally believe that many employees of managing entities are likely included in the knowledgeable employee definition through the concept of “affiliated management persons” (as defined by Rule 3c-5 under the Investment Company Act) and existing language in the knowledgeable employee definition that includes persons who in connection with their regular functions or duties, participate in the investment activities of the fund, or other funds or investment companies the investment activities of which are managed by affiliated management persons of the fund.

125

Rule 501(a)(11) does not limit accredited investor status to only those knowledgeable employees making investments in the private fund of which they participate in the management. In addition, because the definition of knowledgeable employee is intended to capture individuals who do not need the protection of the Securities Act when investing in private funds, we do not see a need to expand the definition to accommodate arrangements where employees invest in entities other than private funds.

125

See

Rule 3c-5(a)(1) (defining “affiliated management person”). For purposes of Rule 3c-5(a)(1), an investment adviser to a private fund is an affiliated management person of the fund to the extent that the investment adviser, whether registered or not, manages the fund's investment activities.

The inclusion of knowledgeable employees in the definition of “accredited investor” will also allow these employees to invest in the private fund without the fund itself losing accredited investor status when the fund has assets of $5 million or less. Under Rule 501(a)(8), private funds with assets of $5 million or less may qualify as accredited investors if all of the fund's equity owners are accredited investors.

126

Unless they qualify as accredited investors, these small private funds could be excluded from participating in some offerings under Rule 506 that are limited to accredited investors. Amending the accredited investor definition in this manner will allow knowledgeable employees to invest in these small private funds as accredited investors, while permitting the funds to remain eligible to qualify as accredited investors under Rule 501(a)(8) and potentially participate in certain offerings under Rule 506 in which they would not otherwise be eligible to participate.

126

A private fund may qualify as an accredited investor if it holds total assets in excess of $5 million and is a corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered. A private fund may also be able to qualify as an accredited investor if it is a trust with total assets in excess of $5 million that was not formed for the specific purpose of acquiring the securities offered, and the purchase is directed by a sophisticated person.

We believe Congress's intent to apply the spousal joint interest position in Section 2(a)(51)(A)(i) of the Investment Company Act should also apply to a knowledgeable employee and his or her spouse in the context of accredited investor status under Rule 501(a)(11).

127

We therefore believe it is appropriate to attribute a knowledgeable employee's accredited investor status to his or her spouse with respect to joint investments made by the knowledgeable employee and his or her spouse in a private fund.

128

127

This is consistent with the American Bar Association Section of Business Law, SEC Staff No-Action Letter (Apr. 22, 1999) (“ABA Letter”). In the ABA Letter, staff stated that it would not recommend enforcement action under Section 7 of the Investment Company Act if a knowledgeable employee and his or her spouse who is not a knowledgeable employee (or a qualified purchaser) invest jointly in a Section 3(c)(7) fund. The staff took this position because it believed Congress's intent to apply the spousal joint interest position should apply in the context of Rule 3c-5.

128

We do not believe it is appropriate to attribute a knowledgeable employee's accredited investor status to joint investments other than those held with the knowledgeable employee's spouse. This is consistent with the Commission's position with respect to qualified purchasers. Under Section 2(a)(51)(A)(i) of the Investment Company Act, a spouse who is not a qualified purchaser can hold a joint interest in a Section 3(c)(7) fund with his or her qualified purchaser spouse. However, dependents of a qualified purchaser who are not themselves qualified purchasers may not hold a joint interest in a Section 3(c)(7) fund with the qualified purchaser.

See

ABA Letter.

See also

Privately Offered Investment Companies, Release No. IC-22597 (Apr. 3, 1997) [62 FR 17512 (Apr. 9, 1997).]

After considering comments, we are not modifying the definition of accredited investor to include “qualified purchasers” as defined in Section 2(a)(51)(A) of the Investment Company Act. Most qualified purchasers already meet the definition of accredited investor by virtue of the higher financial thresholds required to qualify as a qualified purchaser.

129

While there may be limited circumstances where this is not the case, we do not believe it is appropriate at this time to further extend the accredited investor definition to include qualified purchasers, given that the “accredited investor” standard and “qualified purchaser” standard are distinct standards that each serves a different regulatory purpose.

130

129

See

Section 2(a)(51) of the Investment Company Act.

130

See supra

note 8.

We are not able to estimate the number of individuals that will qualify as accredited investors under the amendment to the definition. Using data on private fund statistics compiled by the Commission's Division of Investment Management, we estimate that there were 32,620 private funds as of second quarter 2019.

131

However, we lack data on the number of knowledgeable employees per fund. We also cannot estimate how many individuals that meet the definition of “knowledgeable employee” may already qualify as accredited investors under the current financial thresholds.

131

See https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2019-q2.pdf.

2. Entities

In the Proposing Release, the Commission proposed to amend the definition of accredited investor to add several categories of entities: SEC- and state-registered investment advisers, rural business investment companies, limited liability companies, family offices, family clients, and a catch all category.

a. Registered Investment Advisers

The Commission proposed to include in Rule 501(a)(1) investment advisers registered under Section 203 of the Advisers Act

132

and investment advisers registered under the laws of the various states. The Proposing Release also requested comment on whether exempt reporting advisers should qualify as accredited investors.

133

132

See

Section 203 of the Advisers Act (15 U.S.C. 80b-3).

133

An exempt reporting adviser is an investment adviser that qualifies for the exemption from registration under Section 203(l) of the Advisers Act because it is an adviser solely to one or more venture capital funds, or under Rule 203(m)-1 of the Advisers Act because it is an adviser solely to private funds and has assets under management in the United States of less than $150 million.

See

Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers, Investment Advisers Act Release No. 3222 (June 22, 2011) [76 FR 39646 (July 6, 2011)].

i. Comments

Several commenters supported adding SEC- and state-registered investment

advisers to the definition of accredited investor.

134

Commenters supporting their inclusion generally stated that registered investment advisers have the investment acumen to make allocations of capital and discern among investments, including in the private placement market.

135

While no commenters indicated they opposed this addition, one commenter recommended that the Commission narrow the definition to include only advisory firms, and not natural persons who are registered investment advisers.

136

This commenter expressed the view that natural persons should be evaluated under the wealth tests that apply to individuals. Other commenters, on the other hand, recommended that the Commission expand the definition to include exempt reporting advisers, noting that exempt reporting advisers are professionals managing either venture capital funds or small investment funds as a business.

137

134

See

P. Rutledge Letter; A. Hemmingsen Letter; CFA Letter; Mercer Advisors Letter; CCMC Letter; SBIA Letter; NASAA Letter; letter from Financial Planning Coalition dated Mar. 16, 2020 (“FPC Letter”); IWI Letter; and D. Burton Letter.

135

See, e.g.,

CCMC Letter and A. Hemmnigsen Letter.

136

See

NASAA Letter.

137

See

P. Rutledge Letter and A. Hemmingsen Letter.

ii. Final Amendments

We are adopting the amendment with certain modifications from our proposal. We believe that registered investment advisers, including those that are sole proprietorships, have the requisite financial sophistication needed to conduct meaningful investment analysis. As discussed in the Proposing Release, registered investment advisers are generally considered to be institutional investors under state law, and we see no compelling reason to distinguish SEC- and state-registered investment advisers acting for their own account from other institutional investors already treated as accredited investors.

138

See

Proposing Release at 2586 (describing the inclusion of certain institutional investors in the definition of accredited investor, including banks, insurance companies, certain employee benefit plans, investment companies, small business investment companies (“SBICs”), savings and loan associations, credit unions, and registered broker-dealers).

As a result, we believe it is appropriate to extend accredited investor status to all SEC- and state-registered investment advisers. We estimate that there are currently approximately 13,400 SEC-registered investment advisers and approximately 17,500 state-registered investment advisers.

139

We are not able to estimate, however, how many of those SEC- or state-registered investment advisers meet the $5 million assets test under Rule 501(a)(3) and therefore currently qualify as accredited investors.

139

Of these, 72 SEC-registered investment advisers are sole proprietorships and 1,712 advisers registered with one or more states are sole proprietorships. We do not believe sole proprietorships should be distinguished from other registered investment advisers for purposes of determining accredited investor status.

After considering comments, we also believe it is appropriate to include exempt reporting advisers in the definition of accredited investor. We believe exempt reporting advisers, as advisers to private funds, have the requisite financial sophistication needed to conduct meaningful investment analysis. To qualify as an exempt reporting adviser under Section 203(m) or Section 203(l) of the Advisers Act, an adviser would otherwise be required to register as an investment adviser with the Commission and thereby meet the minimum asset thresholds triggering such requirement.

140

Additionally, private funds themselves are institutional investors and all investors therein are presumed to be financially sophisticated. We estimate that there are currently approximately 4,244 exempt reporting advisers.

141

We are not able to estimate, however, how many of those exempt reporting advisers may meet the $5 million assets test under Rule 501(a)(3) and therefore currently qualify as accredited investors.

140

Advisers must apply for registration with the SEC if their regulatory assets under management are at least $110 million or if they have regulatory assets under management of at least $25 million but less than $100 million and meet one of the requirements to be classified as a “mid-sized adviser.”

See

Section 203A(a)(2) of the Advisers Act.

See also

Form ADV: Instructions for Part 1A, instr. 2.b.

141

Exempt reporting advisers are required to submit, and periodically update, reports on Form ADV.

See

Rule 204-4 under the Advisers Act.

b. Rural Business Investment Companies

The Commission proposed to include rural business investment companies (“RBIC”) in Rule 501(a)(1). A RBIC is defined in Section 384A of the Consolidated Farm and Rural Development Act

142

as a company that is approved by the Secretary of Agriculture and that has entered into a participation agreement with the Secretary.

143

RBICs are intended to promote economic development and the creation of wealth and job opportunities in rural areas and among individuals living in such areas.

144

Their purpose is similar to the purpose of small business investment companies (“SBICs”), which are intended to increase access to capital for growth stage businesses.

145

Because SBICs and RBICs share the common purpose of promoting capital formation in their respective sectors, advisers to SBICs and RBICs are treated similarly under the Advisers Act in that they have the opportunity to take advantage of expanded exemptions from investment adviser registration.

146

SBICs are already accredited investors under Rule 501(a)(1) and the Commission proposed to include RBICs as accredited investors under Rule 501(a)(1).

142

7 U.S.C. 2009cc.

143

See

Public Law 115-417 (2019). To be eligible to participate as an RBIC, the company must be a newly formed for-profit entity or a newly formed for-profit subsidiary of such an entity, have a management team with experience in community development financing or relevant venture capital financing, and invest in enterprises that will create wealth and job opportunities in rural areas, with an emphasis on smaller enterprises.

See

7 U.S.C. 2009cc-3(a).

144

See http://www.rd.usda.gov/programs-services/rural-business-investment-program.

145

A SBIC is a type of privately owned and managed investment fund that is licensed and regulated by the U.S. Small Business Administration (“SBA”). A SBIC uses its own capital, plus funds borrowed with an SBA guarantee, to make equity and debt investments in qualifying small businesses.

See https://www.sba.gov/partners/sbics.

146

Advisers to solely RBICs and advisers to solely SBICs are exempt from investment adviser registration.

See

Advisers Act Sections 203(b)(8) and 203(b)(7), respectively. The venture capital fund adviser exemption deems RBICs and SBICs to be venture capital funds for purposes of the exemption.

See

15 U.S.C. 80b-3(l). The private fund adviser exemption excludes the assets of RBICs and SBICs from counting towards the $150 million threshold. 15 U.S.C. 80b-3(m).

See also

Exemptions from Investment Adviser Regulation for Advisers to Certain Rural Business Investment Companies, Investment Advisers Act Release No. 5454 (Mar. 2, 2020) [85 FR 13734 (Mar. 10, 2020)].

i. Comments

Several commenters supported adding RBICs to the definition of accredited investor,

147

while no commenters opposed the addition. Some commenters stated that including RBICs would serve as a critical source of capital for rural communities.

148

One commenter further stated that including RBICs would reduce a significant burden that has limited their ability to invest in private businesses.

149

Commenters also agreed that RBICs and SBICs should be treated in the same manner and therefore agreed that RBICs also should be accredited investors.

150

147

See

P. Rutledge Letter; SBIA Letter; NASAA Letter; CCMC Letter; D. Burton Letter; and ABA FR of Sec. Comm. Letter.

148

See

CCMC Letter and SBIA Letter.

149

See

SBIA Letter.

150

See

SBIA Letter and D. Burton Letter.

ii. Final Amendments

We are adopting the amendment as proposed. Because of their common purpose and similar treatment under other federal securities laws, we believe that SBICs and RBICs should be treated similarly under the Securities Act. As SBICs are already accredited investors under Rule 501(a)(1), we continue to believe that RBICs should be included as accredited investors under Rule 501(a)(1).

c. Limited Liability Companies

Rule 501(a)(3) sets forth the following types of entities that qualify for accredited investor status if they have total assets in excess of $5 million and were not formed for the specific purpose of acquiring the securities being offered: Organizations described in Section 501(c)(3) of the Internal Revenue Code, corporations, Massachusetts or similar business trusts, and partnerships.

151

Though this list does not include limited liability companies, which have become a widely adopted corporate form since the Commission last updated the accredited investor rules in 1989 to include additional entities,

152

a longstanding staff position has been that limited liability companies satisfying the other requirements of the definition are eligible to qualify as accredited investors under Rule 501(a)(3).

153

151

See

Rule 501(a)(3).

152

See

Regulation D, Release No. 33-6825 (Mar. 15, 1989) [54 FR 11369 (Mar. 20, 1989)].

153

See

Division of Corporation Finance interpretive letter to Wolf, Block, Schorr and Solis-Cohen (Dec. 11, 1996); and question number 255.05 of Securities Act Rules Compliance and Disclosure Interpretations,

available at https://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm.

i. Comments

Several commenters supported adding LLCs,

154

while no commenters opposed the addition. One commenter also suggested that the Commission include “any similar business entity in order to encompass any new form of entity that might be created in the future and thus avoid the problem that has existed with respect to LLCs.”

155

The Proposing Release also requested comment on whether the Commission should amend its rules to specifically include all managers of limited liability companies as executive officers under Rule 501(f) or whether the rule should be limited to managing members, thereby precluding third-party managers from being considered executive officers under Rule 501(f). Several commenters supported allowing any manager of a limited liability company to qualify as an “executive officer” under Rule 501(f).

156

One commenter stated that it did not believe naming managers was necessary because “they are already covered, to the extent appropriate, by the term `executive officer' as a `person who performs similar policy making functions.' ”

157

154

See

P. Rutledge Letter; letter from Farrell Fritz PC dated Jan. 13, 2020 (“Farrell Fritz Letter”); Md St. Bar Assn. Comm. on Sec. Laws Letter; CCMC Letter; SBIA Letter; NASAA Letter; MFA and AIMA Letter (stating that “[w]e believe these changes[, including adding LLCs and the catch-all provision,] are appropriate and will provide objective, bright-line standards for issuers to determine whether certain types of entities qualify as accredited investors”); D. Burton Letter; ABA FR of Sec. Comm. Letter.

155

See

ABA FR of Sec. Comm. Letter (positing that “the concern identified in the Proposing Release regarding other entities, like government bodies for which an asset would not be meaningful, would be addressed”).

156

See

Farrell Fritz Letter; CCMC Letter; D. Burton Letter; and ABA FR of Sec. Comm. Letter.

157

See

ABA FR of Sec. Comm. Letter.

ii. Final Amendments

We are adopting the amendment as proposed. We continue to believe that limited liability companies that meet the requirements of Rule 501(a)(3), including the assets test, should be considered to have the requisite financial sophistication to qualify as accredited investors. Based on data from the Internal Revenue Service, there were 2,696,149 limited liability companies at the end of 2017.

158

However, due to a lack of more detailed publicly available information about limited liability companies, such as the distribution of total assets across companies, we are unable to estimate the number of these limited liability companies that meet the requirements of Rule 501(a)(3). As this amendment is a codification of a long standing staff interpretation, we do not expect that the pool of accredited investors will change significantly as a result of this amendment.

158

See

IRS, Statistics of Income Division, Partnerships, May 2019, Table 8,

available at https://www.irs.gov/pub/irs-soi/17pa08.xlsx.

See also

D. Burton Letter.

As the Commission noted in the Proposing Release, Rule 501(a)(4) includes as an accredited investor any director, executive officer, or general partner of the issuer of the securities being offered or sold. The term “executive officer” is defined in Rule 501(f) as “the president, any vice president in charge of a principal business unit, division or function, as well as any other officer who performs a policy making function, or any other person who performs similar policy making functions for the issuer.” Regarding whether to list managers in 501(f) or which managers should be included, while we continue to believe that managers of limited liability companies, through their knowledge and management of the issuer, are likely to be financially sophisticated and capable of fending for themselves in evaluating investments in the limited liability company's securities, we also continue to believe that such a manager performs a policy making function for the issuer equivalent to that of an executive officer of a corporation under Rule 501(f), and therefore we do not believe it is necessary to amend Rule 501(a)(4) or Rule 501(f) to specifically include managers of limited liability companies. Further, consistent with the views of commenters on this issue, we do not believe that it is necessary to distinguish between member managers and third-party managers, as either could be considered an executive officer under Rule 501(f).

We are not expanding Rule 501(a)(3) to include any similar business entity, as suggested by a commenter. As discussed below, we believe the new catch-all category for entities in Rule 501(a)(9), which includes an investments test, appropriately addresses new entity types that may be created in the future.

d. Other Entities Meeting an Investments-Owned Test

Certain types of entities, such as Indian tribes, labor unions, governmental bodies and funds, and entities organized under the laws of a foreign country, are not included in the accredited investor definition. The Commission proposed to add a new category in the accredited investor definition for any entity owning “investments,” as that term is defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million that is not formed for the specific purpose of acquiring the securities being offered.

159

The Commission indicated in the Proposing Release that the intent of this new category was to capture all existing entity forms not already included within Rule 501(a), such as Indian tribes and governmental bodies, as well as those entity types that may be created in the future.

159

Rule 501(a)(9).

To assist both issuers and investors, the Commission proposed to incorporate the definition of investments from Rule 2a51-1(b) under the Investment Company Act, which includes, among other things: Securities; real estate, commodity interests, physical commodities, and non-security financial contracts held for investment purposes; and cash and cash

equivalents.

160

By using an existing definition, the Commission indicated that it hoped to alleviate confusion and facilitate compliance.

160

See

Rule 2a51-1(b), which was adopted by the Commission in Privately Offered Investment Companies, Release No. IC-22597 (Apr. 3, 1997) [62 FR 17512 (April 9, 1997)].

i. Comments

Many commenters supported adding a catch-all category for entities to the definition.

161

No commenter specifically objected, although one commenter indicated that it opposed including governmental bodies and Indian tribes in the catch-all category because entities funded by taxpayers should not be given accredited investor status when “[t]axpayers themselves would not likely qualify under existing restrictions.”

162

A few commenters suggested that the Commission clarify the types of entities to be included in the catch-all category,

163

with two commenters suggesting specific enumerated lists that include Indian tribes and their various instrumentalities.

164

To maintain flexibility and to allow for new entity types to be included within the accredited investor definition, another commenter suggested that the Commission describe in the text of the release the types of entities to be included instead of enumerating entity types in the rule.

165

One commenter suggested that the Commission use the term “person,” as defined in Section 2(a)(2) of the Securities Act instead of “entity,” in order to clarify that governmental funds would be included in this new category.

166

161

See

letter from California Municipal Treasurers Association Legislative Committee dated Feb. 12, 2020 (“CMTA Letter”); letter from Arnold Porter Kaye Scholer LLP dated Feb. 14, 2020 (“Arnold & Porter Letter”); letter from National Association of State Treasurers et al. dated Feb. 27, 2020 (“NAST et al. Letter”); A. Hemmingsen Letter; letter from Southern Ute Indian Tribe dated Mar. 3, 2020 (“Southern Ute Letter”); NAFOA Letter; ICI Letter; TIAA Letter (stating that the Commission should “clarify in its final rule that the phrase “governmental bodies” should be construed broadly to include a comprehensive range of state, territorial, and local governmental entities, as well as U.S. government agencies and departments, sovereign governments recognized by the United States and sovereign investment funds, and funds, pools, and endowments established by U.S. federal, state, and local governments for a specified purpose and subject to control by a government officer, board, or similar body”); NASAA Letter; letter from PFM Asset Management LLC dated Mar. 16, 2020 (“PFM Letter”); MFA and AIMA Letter; Better Markets Letter; SIFMA Letter; CCMC Letter; SBIA Letter; letter from California Association of County Treasurers and Tax Collectors dated Feb. 14, 2020 (“CACTTC Letter”); Artivest Letter; and ABA FR of Sec. Comm. Letter.

162

See

letter from Vulcan Consultants, LLC dated Feb. 17, 2020 (“Vulcan Letter”) (stating that “adding to the risk profile in hopes of increased returns only serves to encourage government entities to keep more taxpayer funds in city hall rather than returning them to their rightful owner-the taxpayer”).

163

See

Arnold & Porter Letter; ICI Letter; PFM Letter; Southern Ute Letter; and NAFOA Letter.

164

See

Southern Ute Letter and NAFOA Letter.

165

See

Arnold & Porter Letter (suggesting the following list: “State, Commonwealth or Territory of the United States, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, and any county or subdivision thereof; `Municipal government entity' as that term is defined in Section 15B(8) of the Securities Exchange Act of 1934 and regulations thereunder, including, without limitation, a state government, county government or city government; United States government branch, agency, department or unit; Federal or state-recognized tribe within the United States; Foreign sovereign government recognized by the United States government; Multi-lateral agency such as those listed in 17 CFR 230.902(k)(2)(vi); Subdivision, department, agency, bureau or other formally-constituted body of a municipal government entity, United States federal government entity, or foreign sovereign entity that is recognized by the United States; Sovereign investment fund; or Fund, pool or endowment, established by a federal, state, local, tribal or foreign government pursuant to a Constitution, statute, regulation, executive order, or treaty, for a specified use or purpose, subject to oversight and control by a government officer, board or similar governing body with the powers to contract and to litigate”).

166

See

letter from Oregon State Treasury dated Mar. 16, 2020 (“OST Letter”) (recommending the use of Section 2(a)(2)'s “person” because it “is not wholly clear whether all state and local governmental funds are completely separate `entities' in a legal sense”). In the alternative, this commenter suggested that “unincorporated organization, or governmental or political subdivision thereof” be added after “entity.”

The Proposing Release requested comment on whether any restrictions should be applied with respect to entities covered by proposed Rule 501(a)(9), such as restrictions on entities organized or incorporated under the laws of a foreign country. Two commenters responded that they did not support restrictions,

167

one of whom noted that international investment should not be discouraged.

168

In addition, two commenters noted that Indian tribes are not foreign governments or countries.

169

167

See

Arnold & Porter Letter and D. Burton Letter.

168

See

D. Burton Letter.

169

See

NAFOA Letter and Southern Ute Letter.

Regarding the use of an investments test for this category of institutional investors, the Proposing Release sought comment on several topics. The Commission requested comment on whether an investments test or an asset test was appropriate. A few commenters supported an asset test over an investments test,

170

noting that an asset test is already used in the accredited investor definition. One commenter supported an investment test, noting that an investment test “demonstrates that an entity has sufficient investment experience and financial sophistication,”

171

and a few other commenters supported either test.

172

The Commission also requested comment on whether $5 million in investments is the appropriate threshold. A few commenters stated that $5 million is an appropriate threshold,

173

while one commenter supported a $10 million threshold.

174

One commenter took no position on a threshold but noted that it did not support a “substantial increase” in the amount proposed,

175

and no commenters indicated support for a lower threshold.

170

See

Southern Ute Letter; MFA and AIMA Letter; and D. Burton Letter.

171

See

Artivest Letter (noting that “[w]e agree with the Commission's view, with respect to the $5 million catch-all for entities described above, that an investment test is appropriate as it demonstrates that an entity has sufficient investment experience and financial sophistication to automatically qualify as an accredited investor”).

172

See

Arnold & Porter Letter (stating that “[i]n the case of governmental entities, the test (whether investments or assets) should include investment (or assets) of related governmental entities if either: (a) They are consolidated into the same financial reporting unit for governmental accounting standards; or (b) they are managed by the same office or officer of the broader government of which they are a part”) and NAFOA Letter.

173

See

Arnold & Porter Letter; NAFOA Letter; and Artivest Letter.

174

See

NASAA Letter.

175

See

Southern Ute Letter (noting that the “Tribe does not take a position on whether $5 million in investments or assets is the appropriate threshold, although it would not support a substantial increase in the threshold”).

The Commission also requested comment on whether using the definition of investments from Rule 2a51-1(b) under the Investment Company Act was appropriate. A few commenters stated that using the definition from Rule 2a51-1(b) was appropriate,

176

while a few commenters indicated it was not.

177

Two commenters noted that the use of the terms “Prospective Qualified Purchaser” and “qualified purchaser” in the definition of investments has the

potential to confuse.

178

Given the presence of the qualified-purchaser-specific terminology in the definition of “investments,” these commenters sought clarification on the use of the term “investments” in the accredited investor context.

176

See

P. Rutledge Letter (noting that the use of the term “gives certainty as to what assets held by the entity qualify for purposes of being deemed an accredited investor”) and A. Hemmingsen Letter (stating that “[a]n important feature of Rule 2a51-1(b) is its inclusion of binding capital commitments. This inclusion is an important facilitator for funds structured as draw down vehicles”).

177

See

Southern Ute Letter (noting that “the definition of `investments' from Section 270.2a51-1 currently applies in the context of establishing status as a `qualified purchaser' under the [Investment Company Act],” which “complicates the application of this definition to a determination of `accredited investor' status . . .”) and D. Burton Letter (noting that “[u]sing assets [instead of investments] as defined by generally accepted accounting principles would eliminate most ambiguity”).

178

See

Southern Ute Letter and NAFOA Letter.

ii. Final Amendments

We are adopting the amendment as proposed. Consistent with the support of many commenters, we are adopting the amendment to add a new category to the accredited investor definition that includes any entity owning “investments,” as that term is defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million that is not formed for the specific purpose of acquiring the securities being offered.

179

While we agree with some commenters that clarification of the types of entities included in the new category is warranted, we do not believe that enumerating a list of entities in the rule is necessary. Instead, we reiterate that the intent of this new category is to capture all entity types not already included in the definition of accredited investor as well as those entity types that may be created in the future. We believe the term “entity” is sufficiently broad in this context to encompass Indian tribes and the divisions and instrumentalities thereof, federal, state, territorial, and local government bodies, funds of the types identified by commenters, and entities organized or under the laws of foreign countries.

179

Rule 501(a)(9).

We do not agree with commenters who suggested substituting an asset test for the investment test. We continue to believe that requiring more than $5 million in investments instead of assets for this catch-all category of entities may better demonstrate that the investor has experience in investing and is therefore more likely to have a level of financial sophistication similar to that of other institutional accredited investors. Certain types of entities covered by the amendment, such as governmental entities, may have more than $5 million in non-financial assets such as land, buildings, and vehicles, but not have any investment experience. We continue to believe that an investments test may be more likely than an assets-based test to serve as a reliable method for ascertaining whether an entity is likely to require the protections of Securities Act registration. We also believe that $5 million in investments is an appropriate threshold that demonstrates the investor's experience in investing. Although one commenter suggested a $10 million threshold, we are not persuaded that setting the threshold at double the amount applicable under the assets test for other institutional accredited investors is warranted in order to illustrate a similar level of financial sophistication.

We are applying the definition of investments from Rule 2a51-1(b) under the Investment Company Act to Rule 501(a)(9), as proposed. We believe that the use of an existing definition will facilitate compliance and alleviate confusion. We do not believe that additional guidance is necessary to enable market participants to apply this definition in the accredited investor context, notwithstanding the use of the terms “Prospective Qualified Purchaser” and “qualified purchaser” in the definition of “investments.”

e. Certain Family Offices and Family Clients

In the Proposing Release, the Commission proposed to add new categories to the accredited investor definition for certain “family offices” and “family clients of family offices.” “Family offices” are entities established by families to manage their assets, plan for their families' financial future, and provide other services to family members. The Commission has previously observed that single family offices generally serve families with at least $100 million or more of investable assets.

180

Family offices generally meet the definition of “investment adviser” under the Advisers Act, as the Commission has interpreted the term, because, among the variety of services provided, family offices are in the business of providing advice about securities for compensation. However, the Commission adopted the “family office rule”

181

in 2011 to exclude single family offices from regulation under the Advisers Act under certain conditions.

182

Under that rule, a family office generally is a company that has no clients other than “family clients.”

183

“Family clients” generally are family members, former family members, and certain key employees of the family office, as well as certain of their charitable organizations, trusts, and other types of entities.

184

180

See

Family Offices, Release No. IA-3098 (Oct. 12, 2010) [75 FR 63753 (Oct. 18, 2010)] (“Family Office Proposing Release”).

See also

Proposing Release at note 158.

181

17 CFR 275.202(a)(11)(G)-1.

182

See

Family Offices, Release No. IA-3220 (June 22, 2011) [76 FR 37983 (June 29, 2011)] (“Family Office Adopting Release”).

See also

Family Office Proposing Release (“We viewed the typical single family office as not the sort of arrangement that Congress designed the Advisers Act to regulate. We also were concerned that application of the Advisers Act would intrude on the privacy of family members. . . . The Act was not designed to regulate the interactions of family members in the management of their own wealth”).

183

A family office also (1) must be wholly owned by family clients and exclusively controlled (directly or indirectly) by one or more family members or family entities (each as defined in the rule), and (2) must not hold itself out to the public as an investment adviser.

See

Rule 202(a)(11)(G)-1(b) under the Advisers Act.

184

For a full list of family clients,

see

17 CFR 275.202(a)(11)(G)-1(d)(4). The family office rule defines a “family member” to include “all lineal descendants (including by adoption, stepchildren, foster children, and individuals that were a minor when another family member became a legal guardian of that individual) of a common ancestor (who may be living or deceased), and such lineal descendants' spouses or spousal equivalents; provided that the common ancestor is no more than 10 generations removed from the youngest generation of family members.” 17 CFR 275.202(a)(11)(G)-1(d)(6).

In the Proposing Release, the Commission proposed that for a family office to qualify as an accredited investor, it would need to have more than $5 million in assets under management and its investments would need to be directed by a person who has such knowledge and experience in financial and business matters that such family office would be capable of evaluating the merits and risks of the prospective investment.

i. Comments

Commenters generally supported the proposed amendments to the definition of accredited investor to include any “family office” with more than $5 million in assets under management,

185

and no commenters opposed the amendments. One commenter noted that under the current regulatory scheme, depending on their organizational structure, many family offices are already able to meet the definition of an accredited investor, and establishing a clear standard would allow family offices to manage family assets more prudently and make issuers more comfortable working with family office investors.

186

185

See

J. LaBerge Letter; M. Trudeau Letter; SBIA Letter; ILPA Letter; CCMC Letter; Carta Letter; AIC Letter; PIC Letter; Artivest Letter. One commenter also recommended that the Commission provide an exemption from the definition of “investment company” under the Investment Company Act for family offices and their family clients.

See

PIC Letter. This rulemaking is intended to amend the definition of accredited investor under the Securities Act. Accordingly, the suggested exemption from the definition of investment company is beyond the scope of this rulemaking.

186

See

M. Trudeau Letter.

See also

PIC Letter.

Several commenters supported the proposed requirement that qualifying family offices have more than $5 million in assets under management.

187

While

no commenters disagreed with the proposal to require that family offices have a minimum amount of assets under management, one commenter proposed increasing the minimum to $10 million.

188

The commenter stated that this higher threshold would be more likely to capture investors who can reasonably be expected to have the sophistication and ability to withstand economic losses as to enable them to fend for themselves.

187

See

J. LaBerge Letter; M. Trudeau Letter; A. Hemmingsen Letter (noting it would be appropriate

to impose a financial threshold for a family office to qualify as an accredited investor as proposed); Carta Letter; PIC Letter; Artivest Letter; and ILPA Letter.

188

See

NASAA Letter.

Commenters generally supported the requirement that the family office's prospective investments be directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment,

189

noting that the underlying premise of the amendments is that family offices and their professionals have the knowledge, experience and sophistication to apply to investment decisions, even though a family client may not.

190

189

See

M. Trudeau Letter (adding a sophistication requirement for family office managers is integral to the rationale of the accredited investor definition); ILPA Letter; and PIC Letter.

190

See

PIC Letter. The commenter also noted structural similarities of this requirement with the trust category in accredited investor definition in Rule 501(a)(7) of the Securities Act that requires that the purchase of a trust be directed by a sophisticated person as described in Rule 506(b)(2)(ii).

On the other hand, one commenter opposed the inclusion of the knowledge and experience requirement under proposed Rule 501(a)(12)(iii).

191

The commenter suggested that the Commission should instead require an issuer to obtain a written representation that the purchaser qualifies as a family office under Rule 202(a)(11)(G)-1 under the Advisers Act and, at the time of the purchase, meets all of the requirements of that rule.

191

See

P. Rutledge Letter.

Nearly all commenters that addressed the issue were supportive of including in the definition of accredited investor family clients of a family office that meets the proposed requirements of Rule 501(a)(12).

192

One of these commenters expressed support for allowing a family client to “piggyback” on the sophistication of the family office for purposes of meeting the accredited investor requirement as long as the family office is involved in the investment decision-making process for the particular investment in question.

193

One commenter opposed including in the accredited investor definition family clients of a family office meeting the proposed requirements of Rule 501(a)(12).

194

The commenter raised investor protection concerns and stated that including family clients in the definition would reduce what it means to be a sophisticated investor to a test of familial relationships.

192

See

ILPA Letter; J. LaBerge Letter; CCMC Letter; Carta Letter; P. Rutledge Letter; AIC Letter; PIC Letter; and Artivest Letter.

193

See

PIC Letter (expressing the view that the family client should not meet the accredited investor definition unless the family client relies on the family office for investment support with respect to the investment in question).

194

See

M. Trudeau Letter.

The Proposing Release also requested comment on whether a person who receives assets upon the death of a family member (or other involuntary transfer from a family member) (“a beneficiary”) should qualify as an accredited investor during the year following such involuntary transfer if the beneficiary would not otherwise qualify.

195

One commenter expressly supported this approach, noting that it would be consistent with the family office rule.

196

The commenter also stated that carving out such a “beneficiary” from the accredited investor definition could potentially prevent or complicate the orderly liquidation or transition of the beneficiary from its status as a family client.

195

The family office rule deems a person who receives assets upon the death of family member (or other involuntary transfer from a family member) to be a family client for one year following the involuntary transfer.

See

Rule 202(a)(11)(G)-1(b) under the Advisers Act.

196

See

PIC Letter.

ii. Final Amendments

We are adopting, substantially as proposed, amendments to the definition of accredited investor to include certain family offices and their family clients. The definition encompasses a “family office” as defined in the “family office rule”

197

that meets the following additional requirements: (i) It has more than $5 million in assets under management,

198

(ii) it is not formed for the specific purpose of acquiring the securities offered,

199

and (iii) its prospective investment is directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment.

200

The final amendments to the definition of accredited investor also include “family clients” (as defined in the family office rule) of a family office that meets the requirements stated above, whose prospective investment in the issuer is directed by such family office.

201

197

17 CFR 275.202(a)(11)(G)-1. One commenter suggested that we emphasize that Rule 501(a)(12) does not apply to multi-family offices.

See

M. Trudeau Letter. Rule 501(a)(12) directly references the definition of “family office” under the family office rule, and as such, the amendments apply only to family offices that meet this definition and do not apply to multi-family offices.

See also

Family Office Adopting Release (noting that the family office exclusion does not extend to family offices serving multiple families).

198

Rule 501(a)(12)(i).

199

Rule 501(a)(12)(ii).

200

Rule 501(a)(12)(iii).

201

Rule 501(a)(13). A family client will not qualify as an accredited investor under Rule 501(a)(13) with respect to a prospective investment if the family client's prospective investment is not directed by a family office meeting all the requirements of Rule 501(a)(12).

We believe the policy rationale for adopting the family office rule also supports the adoption of these amendments to the definition of accredited investor for family offices and their family clients. We continue to believe that family offices and their family clients can sustain the risk of loss of investment, given their assets.

202

We also continue to believe that certain protections otherwise afforded to less financially sophisticated investors by federal securities laws are not necessary to protect family offices or their clients. Finally, while one commenter raised concerns that including family clients in the accredited investor definition reduces what it means to be a sophisticated investor to a test of familial relationships, we believe these concerns are mitigated by the requirements of the definition. In particular, to qualify as an accredited investor, a person must be a family client of a family office meeting the requirements of Rule 501(a)(12), including that the family office has more than $5 million in assets under management and its investments are directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment.

202

See

Proposing Release at 2589.

After considering comments, the amendment will require a family office to have more than $5 million in assets under management as proposed. We believe a $5 million threshold, and not a $10 million threshold as suggested by one commenter, is the appropriate level to ensure the family office has sufficient assets to sustain the risk of loss. We believe the $5 million threshold sufficiently captures investors who can reasonably be expected to have financial sophistication and the ability to

withstand economic losses and fend for themselves. This threshold also is consistent with the asset threshold required by other accredited investor categories.

203

Rule 501(a)(1), (a)(3), and (a)(7).

In addition, as proposed, the amendment will require that the family office's purchase be directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment. This requirement is designed to ensure that the person directing the investments of the family office is able to evaluate the risks and take steps to protect the interests of family clients, particularly with respect to family clients who do not on their own meet the definition of an accredited investor.

204

This requirement is similar to the financial sophistication requirement for trusts to meet the definition of an accredited investor under Rule 501(a)(7) under the Securities Act, and we do not believe that determining that the family office or family client meets the relevant definition will create an undue burden for issuers.

205

204

Additionally, the amendments require family clients to invest through a family office that meets the requirements of Rule 501(a)(12) to qualify as an accredited investor.

205

An issuer could, for example, obtain a representation that the family office meets the requirement of Rule 501(a)(12)(iii) as part of a traditional investor questionnaire.

Finally, after considering comments, we are not excluding from the accredited investor definition a beneficiary that temporarily qualifies as a family client under the family office rule. That is, a person who receives assets upon the death of a family member or key employee (or other involuntary transfer from a family member or key employee) will qualify as a family client for purposes of the accredited investor definition for one year. We do not believe it is appropriate to differentiate family clients within the definition and agree with commenters that excluding a beneficiary from the accredited investor definition could negatively impact the family office's management and transition of the beneficiary from its status as a family client.

206

A person is determined to be an accredited investor at the time of investment, so a beneficiary would not be required to unwind any holdings acquired through an involuntary transfer from a family member (or made during the period that the beneficiary is a family client), but the beneficiary would not be able purchase additional holdings, unless the beneficiary qualifies as an accredited investor on another basis.

See

Rule 501(a).

3. Permitting Spousal Equivalents To Pool Finances for the Purposes of Qualifying as Accredited Investors

In the Proposing Release, the Commission proposed to allow natural persons to include joint income from spousal equivalents when calculating joint income under Rule 501(a)(6), and to include spousal equivalents when determining net worth under Rule 501(a)(5). The proposed amendments would define spousal equivalent as a cohabitant occupying a relationship generally equivalent to that of a spouse. The Commission previously has used this formulation of spousal equivalent. As discussed above, a family office is exempted from regulation under the Advisers Act when the family office advises “family clients.”

207

The Commission defined “family clients” to include “family members,” of which “spousal equivalents” are a part, with “spousal equivalent” defined as a cohabitant occupying a relationship generally equivalent to that of a spouse.

208

The crowdfunding rules adopted to implement the requirements of Title III of the Jumpstart Our Business Startups Act (“JOBS Act”) also use this definition of “spousal equivalent.”

209

In Regulation Crowdfunding, the Commission included the term “spousal equivalent” in the definition of the term “member of the family of the purchaser or the equivalent,” with “spousal equivalent” having the same definition used in the Advisers Act and as the one we proposed to use in Rule 501(a).

210

207

See

Family Office Adopting Release.

208

Rule 202(a)(11)(G)-1(d)(9).

209

Public Law 112-106, 126 Stat. 306 (2012). The JOBS Act provides that securities issued in reliance on the crowdfunding exemption may not be transferred by the purchaser for one year after the date of purchase, except when transferred to, among other persons, “a member of the family of the purchaser

or the equivalent”

(emphasis added).

See

JOBS Act Section 302(e)(1)(D). In addition, though the Commission rule governing accountant independence also includes “spousal equivalents,” the term is not defined in that rule.

See

17 CFR 210.2-01.

210

17 CFR 227.501(c).

a. Comments

Several commenters supported adding spousal equivalents,

211

with one commenter noting that adding spousal equivalents may allow more investment opportunities for investors.

212

A few commenters did not support adding spousal equivalents,

213

with one commenter opposed to the addition because of potential tax consequences,

214

and another suggesting a different definition limited solely to “legally-recognized relationships besides marriage.”

215

211

See

letter from Sean Mortensen dated Dec. 18, 2019 (“S. Mortensen Letter”); P. Rutledge Letter; letter from Daniel Hoeller dated Feb. 19, 2020 (“D. Hoeller Letter”); J. LaBerge Letter; A. Hemmingsen Letter; CCMC Letter; NASAA Letter; SBIA Letter; Mercer Advisors Letter; S. Moller Letter; Better Markets Letter; M. Trudeau Letter; and Artivest Letter.

212

See

D. Hoeller Letter (positing that the amendment “would help . . . thousands more to access potentially better investment opportunities”).

213

See

Md St. Bar Assn. Comm. on Sec. Laws Letter (recommending a different definition) and Cornell Sec. Clinic Letter.

214

See

Cornell Sec. Clinic Letter (positing that the addition “might encourage tax shifting because individuals who are taxed separately could be taxed less than a married couple due to different tax brackets between the two taxable units”).

215

See

Md St. Bar Assn. Comm. on Sec. Laws Letter (recommending that the definition be limited “solely to persons in other legally-recognized relationships besides marriage, including domestic partnerships and civil unions, that provide legal rights to the participants in such an arrangement that are similar to those accorded to legal spouses (at least with respect to financial matters)”).

b. Final Amendments

We are adopting the amendment as proposed for the reasons noted in the Proposing Release. We continue to believe that there is no need to deviate from the definition of “spousal equivalent” already used in Commission rules. Revising Rule 501(a)(5) and (6) to permit spousal equivalents to pool their financial resources will promote consistency with these existing rules. By contrast, using a different, more limited definition, as suggested by one commenter, would add complexity to our rules without an obvious benefit in terms of investor protection.

4. Notes to 501(a)

The Commission proposed to amend the accredited investor definition to incorporate three long-standing staff interpretations. The first is the inclusion of limited liability companies in Rule 501(a)(3), which is discussed in Section II.B.2.c above. The second relates to the term “joint” in Rule 501(a)(5), and the third relates to the identity of the owners of entities seeking accreditation under Rule 501(a)(8).

a. Note to Rule 501(a)(5)

The Commission proposed to add a note to Rule 501 to clarify that the calculation of “joint net worth” for purposes of Rule 501(a)(5) can be the aggregate net worth of an investor and his or her spouse (or spousal equivalent if “spousal equivalent” is included in Rule 501(a)(5)), and that the securities being purchased by an investor relying on the joint net worth test of Rule 501(a)(5) need not be purchased jointly.

The Commission noted that nothing in previous Regulation D releases indicates that the Commission intended the term “joint” in Rule 501(a)(5) to require (1) joint ownership of assets when calculating the net worth of the spouses, or (2) that an investor relying on the joint net worth test acquire the security jointly instead of separately. The Commission also noted that allowing spouses to own assets in various forms for the purposes of the net worth test is consistent with how the Commission treats spousal ownership of assets in other contexts.

216

See

Rule 2a51-1 under the Investment Company Act, which permits separate ownership, joint ownership, and community property ownership.

i. Comments

Every commenter that addressed this amendment supported it,

217

with one commenter noting that the addition “may help some investors and practitioners to better understand the rules.”

218

217

See

P. Rutledge Letter; Mercer Advisors Letter; CCMC Letter; D. Burton Letter; and ABA FR of Sec. Comm. Letter.

218

See

D. Burton Letter.

ii. Final Amendments

We are adopting the amendment as proposed. We continue to believe that it does not appear necessary in the accredited investor context to limit how an investor takes title to securities or how spouses or spousal equivalents own assets.

b. Note to Rule 501(a)(8)

Under Rule 501(a)(8), an entity qualifies as an accredited investor if all of the equity owners of that entity are accredited investors. Because in some instances, an equity owner of an entity is another entity, not a natural person, the Commission proposed to add a note to Rule 501(a)(8) that would clarify that, in determining accredited investor status under Rule 501(a)(8), one may look through various forms of equity ownership to natural persons. Thus, if those natural persons are themselves accredited investors, and if all other equity owners of the entity are accredited investors, the entity would be an accredited investor under Rule 501(a)(8). The Commission noted its belief that this approach is appropriate because the intent of Rule 501(a)(8) is to qualify as accredited investors those entities that are 100% owned by accredited investors and, for this purpose, it should not matter whether the ownership is direct or indirect.

i. Comments

Several commenters supported adding the note as written,

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while two commenters supported the note but with modifications, positing that the proposed note would have a disproportionate impact on Indian tribes and other entities because tribes may use limited liability companies and other entities to make investments, with the tribes, not individual natural persons, as the owner of the entity.

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219

See

P. Rutledge Letter; Arnold & Porter Letter (would also add a related note stating that “one may look through the various forms of ownership and control of a governmental entity to the overarching government of which a specific governmental entity is a part when determining accredited investor status under Rule 501(a)(9)”); NAFOA Letter; CCMC Letter; NASAA Letter; and D. Burton Letter.

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See

Southern Ute Letter (stating that “[t]he Tribe regularly invests and conducts business through state-organized limited liability companies and other entities, and the proposed rule that allows a look through only to natural persons would disadvantage the Tribe and other Indian tribes”) and NAFOA Letter (stating that “[s]ince Indian tribes would be included as an accredited investor[, the Commission] should add the generic “entities” to the “natural persons” to read “natural persons or entities” to avoid disadvantaging Indian tribes”).

ii. Final Amendments

We are adopting the amendment as proposed. We do not share the commenters' concerns that the note, as drafted, would disproportionately disadvantage Indian tribes and other entities. The purpose of the amendment is to clarify that it is appropriate to look through various forms of ownership under Rule 501(a)(8) to natural persons in those cases where an equity owner of an entity is itself an entity, but that owner-entity does not qualify on its own merits as an accredited investor (

e.g.,

if the owner-entity is an LLC that does not meet the $5 assets test). This clarification does not supersede the application of Rule 501(a)(8) to entities; therefore, for example, if an Indian tribe or state forms and is the sole equity owner of an LLC, such LLC could qualify as an accredited investor either if it meets the requirements of Rule 501(a)(3), or if the Indian tribe or state equity-owner meets the requirements of Rule 501(a)(9).

5. Amendment to Rule 215

The Commission proposed to amend the accredited investor definition in Rule 215 to conform to the amendments to the accredited investor definition in Rule 501(a). Rule 215 defines the term “accredited investor” under Section 2(a)(15) of the Securities Act

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for purposes of Section 4(a)(5) of the Securities Act.

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The accredited investor definition in Rule 215 has historically been substantially consistent but not identical to the accredited investor definition in Rule 501(a) of Regulation D. For example, in contrast to the definition in Rule 501(a), the scope of the accredited investor definition in Rule 215 does not include banks, insurance companies, registered investment companies, business development companies as defined in Section 2(a)(48) of the Investment Company Act, or SBICs. In addition, the accredited investor definition in Rule 215 does not contain a reasonable belief standard as in Rule 501(a).

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15 U.S.C. 77b(a)(15). Section 2(a)(15) of the Securities Act sets forth an enumerated list of entities that qualify as accredited investors as well as “any person who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience

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