[Federal Register Volume 72, Number 154 (Friday, August 10, 2007)]
[Proposed Rules]
[Pages 45116-45145]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-15506]



[[Page 45115]]

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Part IV





Securities and Exchange Commission





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17 CFR Parts 200, 230, and 239



 Revisions of Limited Offering Exemptions in Regulation D; Proposed 
Rule

  Federal Register / Vol. 72, No. 154 / Friday, August 10, 2007 / 
Proposed Rules  

[[Page 45116]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 230, and 239

[Release No. 33-8828; IC-27922; File No. S7-18-07]
RIN 3235-AJ88


Revisions of Limited Offering Exemptions in Regulation D

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules; request for additional comments.

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SUMMARY: We propose to revise Regulation D to provide additional 
flexibility to issuers and to clarify and improve the application of 
the rules. We propose to create a new exemption from the registration 
provisions of the Securities Act of 1933 for offers and sales of 
securities to ``large accredited investors.'' The exemption would 
permit limited advertising in an exempt offering where each purchaser 
meets the definition of ``large accredited investor.'' We also propose 
to revise the term ``accredited investor'' in Regulation D to clarify 
the definition and reflect developments since its adoption. In 
addition, we propose to shorten the timing required by the integration 
safe harbor in Regulation D, and to apply uniform disqualification 
provisions to all offerings seeking to rely on Regulation D. We are 
soliciting comments on possible revisions to Rule 504. Finally, we also 
solicit additional comments on the definition of ``accredited natural 
person'' for certain pooled investment vehicles in Securities Act Rules 
216 and 509 that we proposed in December 2006.

DATES: Comments should be received on or before October 9, 2007.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an e-mail to [email protected]. Please include 
File Number S7-18-07 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-18-07. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
also are available for public inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Room 1580, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. All comments received will be posted without change; we 
do not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly.

FOR FURTHER INFORMATION CONTACT: Gerald J. Laporte, Office Chief, or 
Anthony G. Barone, Special Counsel, Office of Small Business Policy, at 
(202) 551-3460, or Steven G. Hearne, Special Counsel, Office of 
Rulemaking, at (202) 551-3430, Division of Corporation Finance, or, in 
connection with the proposed definition of accredited natural person, 
Elizabeth G. Osterman, Assistant Chief Counsel, Division of Investment 
Management, at (202) 551-6825, U.S. Securities and Exchange Commission, 
100 F Street, NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We propose to amend Rule 30-1,\1\ Rule 
144A,\2\ Rule 146,\3\ Rule 215,\4\ and Form D,\5\ and revise Regulation 
D \6\ under the Securities Act of 1933 \7\ by amending Rules 501,\8\ 
502,\9\ 503,\10\ 504,\11\ 505,\12\ 506 \13\ and 508,\14\ and replacing 
Rule 507.\15\ We also request further comment on proposed new Rules 216 
and 509 under the Securities Act.\16\
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    \1\ 17 CFR 200.30-1.
    \2\ 17 CFR 230.144A.
    \3\ 17 CFR 230.146.
    \4\ 17 CFR 230.215.
    \5\ 17 CFR 239.500.
    \6\ 17 CFR 230.501 through 230.508.
    \7\ 15 U.S.C. 77a et seq.
    \8\ 17 CFR 230.501.
    \9\ 17 CFR 230.502.
    \10\ 17 CFR 230.503.
    \11\ 17 CFR 230.504.
    \12\ 17 CFR 230.505.
    \13\ 17 CFR 230.506.
    \14\ 17 CFR 230.508.
    \15\ 17 CFR 230.507.
    \16\ See Release No. 33-8766 (Dec. 27, 2006) [72 FR 399] (the 
``Private Pooled Investment Vehicle Release'').
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Table of Contents

I. Background and Overview of Proposals
II. Proposed Revisions of Regulation D
    A. Proposed Rule 507--Exemption for Limited Offers and Sales to 
Large Accredited Investors
    1. ``Large Accredited Investor'' Standard
    2. Limited Advertising Permitted
    3. No Sales to Persons Who Do Not Qualify as Large Accredited 
Investors
    4. Authority for Exemption
    5. Covered Security Status
    B. Proposed Revisions Related to Definition of ``Accredited 
Investor''
    1. Adding Alternative Investments-Owned Standards to Accredited 
Investor Standards
    a. Proposed Definition of ``Investments''
    b. Amount of Investments Required
    2. Proposed Definition of ``Joint Investments''
    3. Future Inflation Adjustments
    4. Adding Categories of Entities to List of Accredited and Large 
Accredited Investors
    5. Proposed Definition of Accredited Natural Person
    C. Proposed Revisions to General Conditions of Regulation D
    1. Proposed Revisions to Regulation D Integration Safe Harbor
    2. Disqualification Provisions
    D. Possible Revisions to Rule 504
    E. Other Proposed Conforming Revisions
    1. Proposed Amendments to Rule 215
    2. Proposed Amendment to Rule 144A
    3. Delegated Authority
III. General Request for Comment
IV. Paperwork Reduction Act
V. Cost-Benefit Analysis
VI. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition and Capital Formation
VII. Initial Regulatory Flexibility Act Analysis
VIII. Small Business Regulatory Enforcement Fairness Act
IX. Statutory Basis and Text of Proposed Amendments

I. Background and Overview of Proposals

    Regulation D, adopted in 1982, was designed to facilitate capital 
formation while protecting investors by simplifying and clarifying 
existing exemptions for private or limited offerings, expanding their 
availability, and providing more uniformity between federal and state 
exemptions.\17\ Although Regulation D originated as an effort to assist 
small business capital formation and continues to play an important 
role in that arena, all sizes of companies use the registration 
exemptions in Regulation D.
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    \17\ See Release No. 33-6389 (Mar. 8, 1982) [47 FR 11251].
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    Regulation D consists of eight rules. Rules 501 through 503 contain 
definitions, conditions, and other provisions that apply generally 
throughout Regulation D. Rules 504 through 506 detail specific 
exemptions from registration under the Securities Act. Rules 504 and 
505 provide

[[Page 45117]]

exemptions adopted pursuant to the Commission's authority under Section 
3(b) \18\ of the Securities Act. Rule 504 provides exemptions for 
companies that are not subject to reporting requirements under the 
Securities Exchange Act of 1934 \19\ for the offer and sale of up to 
$1,000,000 of securities in a 12-month period. Rule 505 exempts offers 
by companies of up to $5,000,000 of securities in a 12-month period, so 
long as offers are made without general solicitation or advertising. 
Rule 506 is a safe harbor under Section 4(2) \20\ of the Securities Act 
and provides an exemption without any limit on the offering amount, so 
long as offers are made without general solicitation or advertising and 
sales are made only to ``accredited investors'' and a limited number of 
non-accredited investors who satisfy an investment sophistication 
standard. Rules 507 and 508 were added in 1989.\21\ Rule 507 
disqualifies issuers from relying on Regulation D, under certain 
circumstances, for failure to file a Form D notice.\22\ Rule 508 
provides a safe harbor for certain insignificant deviations from a 
term, condition, or requirement of Regulation D.
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    \18\ 15 U.S.C. 77c(b).
    \19\ 15 U.S.C. 78a et seq.
    \20\ 15 U.S.C. 77d(2).
    \21\ See Release No. 33-6825 (Mar. 14, 1989) [54 FR 11369] 
(adding 17 CFR 230.507 and 230.508).
    \22\ Rule 503 requires the filing of a Form D notice with the 
Commission no later than 15 days after the first sale of securities 
in an offering under Regulation D.
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    Following our adoption in June 2005 of comprehensive amendments to 
our rules and forms relating to registered public offerings,\23\ we 
believe it is appropriate to propose revisions to our rules applicable 
to private and limited offerings. Our objective in this effort is to 
clarify and modernize our rules to bring them into line with the 
realities of modern market practice and communications technologies 
without compromising investor protection.\24\ Action in this area also 
is timely because our Advisory Committee on Smaller Public Companies 
made a number of recommendations relating to private and limited 
offerings in its final report dated April 23, 2006.\25\ Several of the 
proposals in this release build on the Advisory Committee's 
recommendations.
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    \23\ See Release No. 33-8591 (Jul. 19, 2005) [70 FR 44722].
    \24\ The American Bar Association recently suggested that 
revisions in this area would be appropriate, in view of the 
implementation of the securities offering reform rules for 
registered offerings. See comment letter in Commission Rulemaking 
File No. S7-11-07 from American Bar Association (Mar. 22, 2007) (the 
``ABA Private Offering Letter''), available at http://www.sec.gov/comments/s7-11-07/s71107-4.pdf.
    \25\ See Final Report of the Advisory Committee on Smaller 
Public Companies to the United States Securities and Exchange 
Commission (April 23, 2006), at 74-81, 92-93, 94-96, 100-101 (the 
``Advisory Committee Final Report''), available at http://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf.
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    As discussed in detail below, we propose to make changes in the 
following four principal areas involving Regulation D:
     Creating a new exemption from the registration provisions 
of the Securities Act for offers and sales to ``large accredited 
investors'';
     Revising the definition of the term ``accredited 
investor'' to clarify it and reflect developments since its adoption;
     Shortening the length of time required by the integration 
safe harbor for Regulation D offerings; and
     Providing uniform disqualification provisions throughout 
Regulation D.
    We propose to create a new exemption to the registration 
requirements of the Securities Act under our general exemptive 
authority in Section 28 of that Act.\26\ This exemption, set forth in 
proposed new Rule 507, would be limited to sales of securities to 
``large accredited investors,'' and would permit an issuer to publish a 
limited announcement of the offering. The proposed definition of large 
accredited investor would be based on the ``accredited investor'' 
definition, but with higher and somewhat different dollar-amount 
thresholds. Large accredited investors that participate in these exempt 
offerings would be considered ``qualified purchasers'' under Section 
18(b)(3) of the Securities Act,\27\ thereby providing ``covered 
security'' status and the resulting preemption of certain state 
securities regulation.
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    \26\ 15 U.S.C. 77z-3. Section 28 states that the Commission, by 
rule or regulation, may conditionally or unconditionally exempt any 
person, security, or transaction, or any class or classes of 
persons, securities, or transactions, from any provision or 
provisions of this title or of any rule or regulation issued under 
this title, to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.
    \27\ 15 U.S.C. 77r(b)(3).
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    We also propose to update the ``accredited investor'' definition. 
First, we propose to add an alternative ``investments-owned'' standard 
for determining accredited investor and large accredited investor 
status. This standard would include definitions of ``investments'' and 
``joint investments'' similar to those we proposed in December 2006 in 
our initiative to revise Regulation D as it relates to investments by 
individuals in certain private pooled investment vehicles relying on 
Rule 506.\28\ In addition, we propose a mechanism to adjust the dollar-
amount thresholds in the definition of ``accredited investor'' to 
reflect future inflation. We propose to add categories of entities to 
the list of permitted accredited investors. We also propose to shorten 
the time frame for the integration safe harbor for Regulation D 
offerings from six months to 90 days to help provide flexibility to 
issuers. Finally, we propose to establish uniform disqualification 
provisions for all offerings under Regulation D in order to prevent 
certain issuers from relying on Regulation D exemptions.
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    \28\ See Private Pooled Investment Vehicle Release. We are 
taking the opportunity to request additional comment on that 
proposal here. See II.B.5 below.
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    In addition to these proposals, we also are soliciting comment on 
whether Rule 504 of Regulation D, the ``seed capital'' exemption, 
should be amended so that securities sold pursuant to a state law 
exemption that permits sales only to accredited investors would be 
deemed ``restricted securities'' for purposes of Rule 144.\29\
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    \29\ 17 CFR 230.144.
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    Finally, in last year's Private Pooled Investment Vehicle Release, 
we solicited comment on two new rules that would establish a new 
category of accredited investor, ``accredited natural person,'' that 
individuals would need to satisfy in order to invest in certain private 
pooled investment vehicles relying on Rule 506.\30\ We received 
approximately 600 comments on that proposal, many of which generally 
disfavored our proposal, which would raise individual investor 
thresholds for such investments. We are continuing to consider those 
comments, and solicit further comment on the proposed definition of 
accredited natural person made in the Private Pooled Investment Vehicle 
Release. The Commission may act on the new proposals in this release 
and the December 2006 proposals at the same time.
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    \30\ Proposed Rules 216 and 509 under the Securities Act.
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II. Proposed Revisions of Regulation D

A. Proposed Rule 507--Exemption for Limited Offers and Sales to Large 
Accredited Investors

    We propose to create a new exemption to the registration 
requirements of the Securities Act for offers and sales of securities 
to a new category of investors called ``large accredited investors.'' 
\31\ The exemption would permit limited advertising of

[[Page 45118]]

these offerings.\32\ Large accredited investors would consist of the 
same categories of entities and individuals that qualify for accredited 
investor status under existing Rule 506, but with significantly higher 
dollar-amount thresholds for investors subject to such thresholds.\33\ 
Legal entities that are considered accredited investors if their assets 
exceed $5 million would be required to have $10 million in investments 
to qualify as large accredited investors. Individuals generally would 
be required to own $2.5 million in investments or have annual income of 
$400,000 (or $600,000 with one's spouse) to qualify as large accredited 
investors, as compared to the current accredited investor standard of 
$1 million in net worth or annual income of $200,000 (or $300,000 with 
one's spouse). Legal entities that are not subject to dollar-amount 
thresholds to qualify as accredited investors, generally government-
regulated entities, would not be subject to dollar-amount thresholds to 
qualify as large accredited investors.
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    \31\ We propose to move the current contents of Rule 507 into 
proposed Rule 502(e) and then include the new exemption in Rule 507.
    \32\ The exemption would not, however, be available to offers 
and sales by pooled investment vehicles relying on Section 3(c)(1) 
(15 U.S.C. 80a-3(c)(1)) or Section 3(c)(7) (15 U.S.C. 80a-3(c)(7)) 
of the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.). See 
II.A.4 below.
    \33\ In II.B below, we propose to make certain changes to other 
accredited investor qualifications. These changes would apply 
equally to accredited investors in Rule 505 and 506 transactions and 
to large accredited investors in Rule 507 transactions.
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    We believe that we may exempt certain offers and sales that may 
involve limited advertising from the registration requirements of 
Section 5 of the Securities Act \34\ without compromising investor 
protection, due to the general increased sophistication and financial 
literacy of investors in today's markets, coupled with the advantages 
of modern communication technologies. Our proposal is patterned 
generally after the Model Accredited Investor Exemption adopted by the 
North American Securities Administrators Association (NASAA) in 
1997.\35\ Like the Model Accredited Investor Exemption, our proposal 
does not eliminate the prohibition on general solicitation and general 
advertising from the conditions of the exemption. Both the Advisory 
Committee on Smaller Public Companies and the American Bar 
Association's Committee on Federal Regulation of Securities recommended 
relaxing the ban on general solicitation for transactions with 
purchasers who do not need the protection of registration.\36\ Our 
proposal attempts to ease restrictions on limited offerings of 
securities in a manner that is cognizant of the potential harm of 
offerings by unscrupulous issuers or promoters who might take advantage 
of more open solicitation and advertising to lure unsophisticated 
investors to make investments in exempt offerings that do not provide 
all the benefits of Securities Act registration. We believe easing the 
restriction on limited offerings of securities as we have proposed is 
appropriate, given the additional safeguards we have proposed.
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    \34\ 15 U.S.C. 77e.
    \35\ A copy of the Model Accredited Investor Exemption is 
available on the NASAA Web site at http://www.nasaa.org/content/Files/Model%5FAccredited%5FInvestor%5FExemption.pdf.
    \36\ See Advisory Committee Final Report at 74-81; ABA Private 
Offering Letter, n. 24 above, at 26.
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    The proposed Rule 507 exemption would share the following 
characteristics with the Rule 506 exemption:
     It would allow an issuer to sell an unlimited amount of 
its securities to an unlimited number of investors who meet specified 
criteria-accredited investors in the case of Rule 506 transactions and 
large accredited investors in the case of Rule 507 transactions;
     Its availability would focus on purchasers, and not depend 
on the characteristics of offerees;
     It would place no restrictions on the payment of 
commissions or similar transaction-related compensation;
     It would be non-exclusive, meaning that the issuer could 
choose to claim any other available exemption without the benefit of 
the rule; \37\
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    \37\ An issuer engaging in the limited advertising permitted by 
Rule 507 may not be able to claim the Section 4(2) exemption if the 
activity has imparted a public character to the offering. See 
Release No. 33-7943 (Jan. 26, 2001) [66 FR 8881] (text accompanying 
n. 31), citing Release No. 33-4552 (Nov. 6, 1962) [27 FR 11316] 
(public advertising incompatible with claim of private offering).
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     Securities acquired in a transaction under the rule would 
be subject to the limitations on resale under Rule 502(d) \38\ and 
therefore would be treated as ``restricted securities'' as defined in 
Securities Act Rule 144(a)(3)(ii); \39\
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    \38\ 17 CFR 502(d).
    \39\ 17 CFR 230.144(a)(3)(ii). In a companion release, we have 
proposed changes to Rule 144. Release No. 33-8813 (June 22, 2007) 
[72 FR 36822].
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     The issuer would be required to exercise reasonable care 
to assure that the purchasers of the securities are not underwriters; 
\40\ and
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    \40\ Rule 502(d). The term ``underwriter'' is defined in Section 
2(a)(11) of the Securities Act. 15 U.S.C. 77b(a)(11).
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     The issuer would have an obligation to file a notice of 
sales in the offering with the Commission on Form D.\41\
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    \41\ In a companion release, we are proposing changes to Form D 
to simplify and update it, as well as to require electronic filing. 
Release No. 33-8814 (June 29, 2007) [72 FR 37376].
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    In addition, proposed Rule 507 would include the same 
disqualification provisions as we propose below for other Regulation D 
exemptions.\42\ Currently, Rule 506 has no bad actor disqualification 
provisions.
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    \42\ See II.C.2 below.
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    Rule 507 would differ from Rule 506 in five ways:
     Large Accredited Investor Standard. Rule 507 would be 
premised on the concept of large accredited investors. Rule 506 would 
continue to be premised on the concept of accredited investors.
     Limited Advertising Permitted. Instead of a total ban on 
general solicitation and general advertising, as is the case in Rule 
506 transactions, issuers in Rule 507 transactions could engage in 
limited advertising that satisfies the requirements of the rule. All 
other general solicitation and advertising would be prohibited.
     No Sales to Persons Who Do Not Qualify as Large Accredited 
Investors. Issuers in Rule 507 transactions would not be allowed to 
sell securities to any investor who does not qualify as a large 
accredited investor. In Rule 506 transactions, issuers may sell 
securities to an unlimited number of accredited investors and up to 35 
non-accredited investors.\43\
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    \43\ If an issuer sells to non-accredited investors in a Rule 
506 transaction, the issuer must furnish them with the information 
specified in Rule 502(b), 17 CFR 230.502(b). The issuer also must 
assure that the non-accredited investors meet the investor 
sophistication requirements of Rule 506(b)(2)(ii), 17 CFR 
230.506(b)(2)(ii). We are not proposing these kinds of requirements 
for Rule 507 transactions because issuers could not sell securities 
to any non-accredited investors in Rule 507-exempt transactions.
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     Authority for Exemption. Rule 507 would be adopted as an 
exemption primarily under the Commission's general exemptive authority 
under Section 28 of the Securities Act, while Rule 506 was adopted as a 
safe harbor under Section 4(2) of the Securities Act.
     Covered Security Status. Securities sold in accordance 
with either of these rules would be considered ``covered securities,'' 
but under different provisions of Section 18 of the Securities Act. 
Securities sold under Rule 507 would be covered securities because the 
purchasing large accredited investors would be defined as ``qualified 
purchasers'' under Section 18(b)(3) of the Securities Act. Securities 
sold under Rule 506 would continue to be covered securities under 
Section 18(b)(4)(D) of the Securities Act \44\ because Rule 506

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was issued under Section 4(2) of the Securities Act.\45\
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    \44\ 15 U.S.C. 77r(b)(4)(D).
    \45\ State securities regulation of covered securities generally 
is limited under Section 18(b) of the Securities Act to imposing 
notice filing requirements on offerings, requiring the filing of a 
consent to service of process, and assessing a filing fee. 
Securities sold in offerings that are exempt under Rule 506 are 
covered securities because Section 18(b)(4)(D) provides that 
securities sold in transactions exempt under Commission rules issued 
under Section 4(2), which includes Rule 506, are covered securities. 
Securities sold in offerings that are exempt under Rule 507 would be 
covered securities because our proposal provides for an amendment to 
Rule 146 under the Securities Act that would define the term 
``qualified purchaser'' in Section 18(b)(3) of the Act to include 
large accredited investors with respect to offers or sales in 
compliance with Rule 507. Under Section 18(b)(3), qualified 
purchasers, as defined by the Commission under the Securities Act, 
purchase covered securities in transactions so designated by the 
Commission.
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    We discuss these five areas of difference in the sections 
immediately below.
1. ``Large Accredited Investor'' Standard
    We propose to define a new category of investors, called ``large 
accredited investors,'' \46\ which we would use in Rule 507. The 
proposed definition of large accredited investor is based on the 
``accredited investor'' definition, but with higher and somewhat 
different dollar-amount thresholds.\47\ We have proposed higher 
thresholds due to what we perceive are increased investor protection 
risks relating to the limited advertising that would be allowed under 
Rule 507.\48\ The higher thresholds would provide a cushion over the 
accredited investor standards for determining eligibility for the new 
exemption. The greater public access to investors that the new 
exemption would provide warrants increased assurance of the ability of 
investors in offerings under that exemption to fend for themselves. 
Further, the higher thresholds may provide such assurance.
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    \46\ See Proposed Rule 501(a).
    \47\ See the discussion of the accredited investor definition in 
II.B below.
    \48\ While the Model Accredited Investor Exemption is limited to 
accredited investors, we propose to further limit the Rule 507 
exemption to large accredited investors. NASAA, the organization of 
state securities administrators, recently supported a similar higher 
threshold for any new federal exemption that would relax the 
prohibitions against general solicitation and general advertising. 
See comment letter in Commission File No. 265-23 from NASAA to the 
Advisory Committee (March 28, 2006) (the ``NASAA Letter''), at 2, 
available at http://www.sec.gov/rules/other/265-23/rastaples1692.pdf.
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    We propose that the entities or institutions that currently must 
have more than $5 million in assets to qualify for accredited investor 
status under Rule 501(a) would be required to have more than $10 
million in investments to qualify as large accredited investors. 
Individuals, or ``natural persons'' as the rule calls them, would be 
able to qualify as large accredited investors if they own more than 
$2.5 million in investments or have had individual annual income of 
more than $400,000 (or $600,000 with one's spouse) in the last two 
years and expect to maintain the same income level in the current 
year.\49\ We propose to have alternative investments and income tests 
for individuals because an investments test without an income test 
tends to favor investors who have had time to build investment 
portfolios.
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    \49\ We discuss our proposed use of the term ``aggregate 
income'' instead of the term ``joint income,'' which currently is 
used in Rule 501(a), 17 CFR 230.501(a), in II.B.2 below.
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    Based on estimates from our Office of Economic Analysis, 1.64 
percent of U.S. households would qualify as large accredited investors, 
compared with 8.47 percent that would qualify as accredited 
investors.\50\ Our approach in selecting the dollar-amount thresholds 
for investors to qualify as large accredited investors reflects an 
attempt to approximate the standards adopted by the Commission in the 
1980s for accredited investors in light of current knowledge and 
changed circumstances.\51\
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    \50\ These estimates are based on Federal Reserve Board of 
Governors, Survey of Consumer Finances, 2004. This survey used year-
end 2003 values. More information regarding the survey may be 
obtained at http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html.
    \51\ Our Office of Economic Analysis estimates that in 1982, 
when Regulation D was adopted, approximately 1.87 percent of U.S. 
households qualified for accredited investor status. This estimate 
is based on Federal Reserve Board of Governors, Survey of Consumer 
Finances, 1983. This survey used year-end 1982 values. More 
information regarding the survey may be obtained at http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html.
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    We selected the $10 million amount for institutions for two 
additional reasons. First, in the interest of uniformity between 
Federal and State securities regulation, we chose a standard similar to 
the standard in the Uniform Securities Act of 2002, as amended, that 
was approved by the National Conference of Commissioners of Uniform 
State Laws.\52\ The model statute, which has been adopted by several 
states, requires that most non-regulated institutional investors have 
$10 million in assets to qualify as ``institutional investors.'' In 
selecting a standard for large accredited investors, we chose to 
substitute a $10 million investments-owned standard for the $10 million 
assets-owned standard because, as discussed below, we believe that 
investments owned may be a more accurate and more easily administered 
standard than assets owned to determine whether an investor needs the 
protection of Securities Act registration. The $10 million amount also 
correlates closely with the inflation-indexed value of $5 million in 
1982, when we adopted the $5 million assets-owned standard.\53\
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    \52\ See Uniform Securities Act (2002), as amended, available at 
http://www.uniformsecuritiesact.org/usa/DesktopDefault.aspx?tabindex=2&tabid=48.
    \53\ Our Office of Economic Analysis estimates that the 
financial thresholds used in Rule 501(a), adjusted for inflation as 
of July 1, 2006, would be as follows: the $5 million asset 
requirement for certain legal entities would have increased to 
approximately $9.5 million; the $1 million individual net worth test 
would have increased to approximately $1.9 million; and the $200,000 
individual income test and $300,000 joint income test would have 
increased to approximately $388,000 and $582,000, respectively. Our 
Office of Economic Analysis estimated these levels using the 
Personal Consumption Expenditures Chain-Type Price Index, as 
published by the Department of Commerce, available at http://www.bea.gov.
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    We selected the $2.5 million investments-owned standard for 
individuals and spouses based on the $2.5 million investments-owned 
standard we proposed in December 2006 for individuals and spouses to 
invest in private pooled investment vehicles.\54\ We selected the 
$400,000 in annual income standard for individuals because it is 
approximately the inflation-indexed value of $200,000 in 1982, when the 
Commission first adopted the $200,000 in annual income standard for 
individual accredited investors. Similarly, we selected the $600,000 in 
aggregate income for spouses standard because it is approximately the 
inflation-indexed value of $300,000 in 1982. Although the $300,000 
combined standard was not adopted until 1988, it was adopted to 
complement the $200,000 individual income standard adopted in 1982.\55\
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    \54\ See Private Pooled Investment Vehicle Release.
    \55\ See Release No. 33-6758 (March 3, 1988) [53 FR 7866].
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    Individuals and entities that currently are not subject to a 
dollar-amount threshold to qualify as accredited investors also would 
qualify as large accredited investors. As such, banks, registered 
investment companies, private business development companies, and other 
regulated entities identified in Rule 501(a)(1) and (2) that are not 
subject to an assets test to qualify for accredited investor status 
also would qualify for large accredited investor status without being 
subject to an income, assets, or investments requirement.\56\ Further, 
directors and executive officers of the issuer would be considered 
large accredited investors in addition to being considered accredited 
investors, without being subject to an income, assets, or investments

[[Page 45120]]

requirement.\57\ As in the accredited investor standard, these entities 
and persons are generally deemed not to need the same level of 
protection under the Securities Act as other entities and non-
affiliated persons.
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    \56\ See 17 CFR 230.501(a)(1) and (2).
    \57\ See 17 CFR 230.501(a)(4).
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Request for Comment
     Do the standards we propose for qualifying as a large 
accredited investor provide a reasonable basis for determining that, 
under the circumstances of Rule 507, those investors do not need all of 
the protections of Securities Act registration? If not, what 
qualifications should we set? Are other levels more appropriate than 
$10 million in investments for legal entities and $2.5 million in 
investments for individuals and spouses, or annual income of $400,000 
for individuals and $600,000 with one's spouse? Should these levels be 
lower? Should they be higher, especially because of the availability of 
limited advertising? For example, would $7.5 million or $15 million in 
investments for legal entities and $1.5 million or $3.5 million in 
investments for individuals and spouses, or annual income of $300,000 
or $600,000 for individuals and $400,000 or $800,000 with one's spouse 
be more appropriate levels? Why? Should we adopt an eligible person 
threshold of $1 million in investments for individuals, as suggested by 
NASAA? \58\ If you propose thresholds, please provide the basis for 
your belief that those thresholds are more appropriate.
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    \58\ See n. 48.
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     Should we adopt a definition of ``large accredited 
investor'' that includes only an investments-owned test for individual 
investors, as we proposed in the Private Pooled Investment Vehicle 
Release for certain individual investors in private pooled investment 
vehicles, or should we adopt alternative investments and income tests 
as proposed? Please explain the reasons for your views.
     Should we retain the asset-based test instead of using an 
investment-based test for determining status as a large accredited 
investor for both individuals and legal entities? In this regard, 
should the standard for legal entities be $10 million in assets--the 
same as the requirement for institutional investors in the Uniform 
Securities Act?
     Would it be appropriate to modify proposed Rule 507 to 
include any additional safeguards in the definition of large accredited 
investor?
2. Limited Advertising Permitted
    Rule 507 would permit an issuer in an exempt transaction to publish 
a limited announcement of an offering.\59\ The announcement would be 
required to state prominently that sales will be made to large 
accredited investors only, that no money or other consideration is 
being solicited or will be accepted through the announcement, and that 
the securities have not been registered with or approved by the 
Commission and are being offered and sold pursuant to an exemption.\60\ 
At the issuer's option, the announcement also could contain the 
following additional information:
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    \59\ While the proposed statement is similar to the statement 
permitted under Rule 135c, 17 CFR 230.135c, the proposed exemption 
is substantially patterned after the Model Accredited Investor 
Exemption and differs from Rule 135c in that the advertisement is 
permitted and anticipated to be part of the offering process, 
whereas Rule 135c is limited to an announcement that is not to be 
used to condition the market or as part of the solicitation for the 
offering.
    \60\ These statements are similar to statements required by the 
Model Accredited Investor Exemption, except that the proposed 
announcement is not required to contain a statement that the 
securities have not been registered with or approved by a state 
securities agency.
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     The name and address of the issuer;
     A brief description of the business of the issuer in 25 or 
fewer words; \61\
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    \61\ The Model Accredited Investor Exemption limits an issuer's 
description of the business to 25 or fewer words. We have retained 
the 25-word limitation in the proposal, but solicit comment below on 
whether such a limitation is appropriate. We already have one 
federal exemption from Securities Act registration that permits 
offerings involving select investors and a limited amount of general 
solicitation. Our Rule 1001, 17 CFR 230.1001, exempts offerings 
conducted under Section 25102(n) of the California Corporations 
Code's ``Qualified Purchaser Exemption.'' Adopted in September 1994, 
the California provision permits offerings to specified classes of 
qualified purchasers that are similar to federal classes of 
accredited investors without state registration. The QPE allows for 
a general announcement of an offering, including a brief description 
of the issuer's business, without a word limit. California's QPE 
served as a prototype for the Model Accredited Investor Exemption.
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     The name, type, number, price, and aggregate amount of 
securities being offered and a brief description of the securities;
     A description of what large accredited investor means;
     Any suitability standards and minimum investment 
requirements for prospective purchasers in the offering; and
     The name, postal or e-mail address, and telephone number 
of a person to contact for additional information.\62\
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    \62\ The additional information permitted in the announcement is 
patterned after the Model Accredited Investor Exemption, but also 
permits a description of the meaning of the term ``large accredited 
investor'' and a discussion of suitability standards and minimum 
investment requirements. We propose to permit these latter 
statements to avoid confusion about the meaning of the term ``large 
accredited investor'' and to facilitate management of offerings 
under the exemption.
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    Publication of such an announcement would not contravene the 
prohibition on general solicitation and advertising otherwise 
applicable to the offer and sale of securities in a Rule 507 
transaction. The publication could only be ``in written form'' \63\ but 
could occur in any written medium, such as in a newspaper or on the 
Internet. We have proposed to limit the publication to written form in 
an effort to limit aggressive selling efforts made through the 
announcement. As part of this limitation, radio or television broadcast 
spots or ``infomercials'' would be prohibited.\64\
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    \63\ Proposed Rule 507 uses the term ``in written form'' to 
limit the term and differentiate the concept from ``written 
communication'' as defined in Rule 405. 17 CFR 230.405. The term 
``written communication'' is defined in Rule 405 to include a radio 
or television broadcast. Publication of an announcement under Rule 
507 would be substantially more limited.
    \64\ Limiting the use of certain types of advertisements under 
Rule 507 would be consistent with our position in Rule 433, 17 CFR 
230.433, relating to free writing prospectuses in the context of 
public offerings by non-reporting and unseasoned issuers.
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    Rule 507 also provides that an issuer or a person acting on an 
issuer's behalf may provide information in addition to the limited 
announcement only if the issuer reasonably believes that the 
prospective purchaser is a large accredited investor.\65\ Additional 
information may be provided orally or in writing, such as in the form 
of sales material or an offering circular. Information also may be 
delivered to prospective purchasers through an electronic database that 
is restricted to large accredited investors.\66\
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    \65\ For a related discussion of what measures an issuer could 
take to satisfy its obligation under Rule 501(a) to form a 
reasonable belief that a prospective purchaser satisfies the 
definition of accredited investor, see n. 99 and accompanying text.
    \66\ For a discussion of on-line private offerings under 
Regulation D, see Release No. 33-7856 (Apr. 28, 2000) [65 FR 25843].
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Request for Comment
     We propose to limit the information included in a Rule 507 
announcement and require that the information be in written form. 
Should we require or permit any other information to be included in the 
limited announcement proposed in Rule 507 offerings? If so, what 
additional information would be appropriate? Should any of the optional 
information be required? Should we eliminate or expand the 25-word 
limit on the description of the issuer's business? If we did not impose 
a limit on the business description, would

[[Page 45121]]

issuers be more or less likely to use inappropriately promotional and 
non-objective language to describe their businesses in the limited 
announcement? Should the rule require that any description of the 
issuer's business be fair and impartial?
     Should we eliminate the requirement that the Rule 507 
announcement be in written form? If so, what limitations, if any, 
should we have on the form of the announcement? Should we define the 
phrase ``in written form''? Should we limit permitted written 
announcements to publications, as opposed to, for example, flyers 
handed out on street corners? Should we allow radio or television 
broadcast announcements? Should we follow the Model Accredited Investor 
Exemption and allow the announcement to be made by any means? Should we 
require issuers to retain copies of any advertisements or to submit 
copies of the script of any radio or television broadcast to the 
Commission staff? Should they be filed with the Commission, and if so, 
should the filing be confidential?
     Proposed Rule 507 would require issuers to include in any 
permitted public announcement a prominent statement that sales will be 
made only to large accredited investors, that no money is being 
solicited or will be accepted by way of the announcement, and that the 
securities have not been registered with or approved by the Commission 
and are being offered and sold pursuant to an exemption. Are these 
appropriate requirements for the announcement? Should we require 
additional statements? Do we need to require that the statement be 
prominent? If so, should we also specify format or font sizes? How 
would such a requirement operate for electronic communications? Does 
the requirement that the announcement prominently state that ``no money 
or other consideration is being solicited or will be accepted through 
the announcement'' make it clear that an investor should not respond to 
the announcement by sending a check to the issuer? Can you suggest 
alternative wording?
     Should we allow issuers, at their option, to include in a 
Rule 507 announcement a coupon, returnable to the issuer, indicating 
interest in the offering, containing the name, address and telephone 
number of the prospective purchaser, and stating clearly and separately 
that the indication of interest is not binding and that no money should 
be sent? \67\
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    \67\ This provision could be modeled after subparagraph (c) of 
Rule 254 of Regulation A, 17 CFR 254(c). Proposed Rule 135d, 
although never adopted, had a similar provision in subparagraph (b). 
See Release No. 33-7188 (June 27, 1995) [60 FR 35648].
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     The Model Accredited Investor Exemption does not permit 
telephone solicitation unless, before placing a telephone call, the 
issuer reasonably believes the prospective purchaser to be solicited is 
an accredited investor.\68\ Should we include a similar limitation in 
Rule 507 with respect to large accredited investors?
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    \68\ Paragraph (G) of the Model Accredited Investor Exemption 
provides that no telephone solicitation is permitted unless the 
issuer reasonably believes that the person solicited is an 
accredited investor before making the telephone solicitation. 
Proposed Rule 507(b)(2)(iii) provides that any information beyond 
the announcement may be provided ``only if the issuer reasonably 
believes that the prospective purchaser is a large accredited 
investor,'' but does not address telephone solicitation explicitly.
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     The rule provides that an issuer or any person acting on 
an issuer's behalf may provide additional information if the issuer 
reasonably believes the prospective purchaser is a large accredited 
investor. Does the proposal adequately acknowledge that the reasonable 
belief of an agent of the issuer may be attributable to the issuer and 
thereby permit the issuer to satisfy the standard? What requirements, 
if any, should apply to the delivery of information to prospective 
purchasers through an electronic database that is restricted to large 
accredited investors? \69\ Should we provide additional guidance and if 
so, should the guidance be in the rule?
---------------------------------------------------------------------------

    \69\ See n. 66.
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     Should the rule provide any guidance as to how an issuer 
may arrive at a reasonable belief that a prospective purchaser is a 
large accredited investor? Should it be permitted to form the belief 
entirely on the basis of responses to a questionnaire?
     Rule 508 provides that insignificant deviations from the 
requirements of Regulation D do not result in the loss of the 
exemption.\70\ Rule 508(a)(2) provides, however, that failures with 
regard to limitations on the manner of offering are deemed to be 
significant. What should be the implications for failure to comply with 
the restrictions on permitted advertising in Rule 507 transactions? 
Should the issuer no longer be able to rely on the Rule 507 exemption? 
Are the provisions of Rule 508 sufficient to deal with situations that 
might arise?
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    \70\ We propose to amend Rule 508 to add a reference to proposed 
Rule 507.
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     Should we adopt broader amendments to Rule 508 to address 
related issues that might arise under the Rule 507 exemption, as well 
as under other exemptions in Regulation D? For example, should we 
delete the current Rule 508 carve-out of manner of sale limitations in 
the list of insignificant deviations? This carve-out has been read to 
provide that an issuer's failure to comply with a ban on general 
solicitation applicable to a Regulation D offering never can constitute 
an insignificant deviation. As a result, legal practitioners have 
expressed concern that an insignificant deviation relating to general 
solicitation could result in total loss of the Rule 508 defense. If the 
carve-out were deleted, Rule 508 would treat insignificant failures to 
comply with an applicable ban on general solicitation like most other 
deviations from the requirements of Regulation D. One effect of such a 
rule amendment would be to clearly permit issuers to raise the Rule 508 
defense with respect to complaining parties who were not generally 
solicited in an offering structured to avoid general solicitation, 
while continuing to preclude the issuer from raising the defense with 
respect to a party who was generally solicited, depending upon whether 
it is able to satisfy the other conditions to availability of the 
defense.
3. No Sales to Persons Who Do Not Qualify as Large Accredited Investors
    We propose that issuers relying on Rule 507 to exempt a transaction 
from Securities Act registration be permitted to sell securities only 
to investors who qualify as large accredited investors. This is a 
departure from the approach taken in Rule 506, where issuers are 
permitted to sell securities to up to 35 non-accredited investors, in 
addition to an unlimited number of accredited investors. Because 
limited advertising allows issuers to provide information about their 
offering to anyone, we believe it is appropriate to establish stricter 
limitations on sales to limit investors to those who do not need all of 
the protections of Securities Act registration.
    A Rule 507 offering could only be conducted simultaneously or 
``side-by-side'' with another Regulation D offering if the two 
offerings were considered as separate and distinct offerings under the 
five-factor integration test set forth in Rule 502(a) of Regulation 
D.\71\ Since Rule 506 prohibits the use of general solicitation and 
advertising and Rule 507 is limited exclusively to sales to large 
accredited investors, neither of these two exemptions would be 
available if two offerings were

[[Page 45122]]

considered as integrated where one offering used limited public 
advertising and the other offering was sold to persons who were not 
large accredited investors.\72\
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    \71\ 17 CFR 230.502(a). We are proposing a note to clarify that 
Rule 144A does not preclude an issuer or a person acting on the 
issuer's behalf from publishing a general announcement of an 
offering pursuant to Rule 507. See II.E.2 below.
    \72\ We do not propose to provide an integration safe harbor for 
Rule 507 offerings as was done, for example, in Section 3(c)(7)(E) 
of the Investment Company Act, 15 U.S.C. 80a-3(c)(7)(E), and under 
17 CFR 230.144A(e) and 17 CFR 230.701(f).
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Request for Comment
     Should we permit investors who do not qualify as large 
accredited investors to invest in Rule 507 offerings? If so, how should 
we limit the number of non-qualifying investors? Would permitting 
investors who do not qualify as large accredited investors to invest in 
Rule 507 offerings increase the potential for fraud in those offerings?
     To limit sales to large accredited investors, would it be 
appropriate to limit publication of the announcement to password-
protected Web sites that are accessible only by large accredited 
investors? Should we provide other limitations to ensure that the 
exemption is not abused?
4. Authority for Exemption
    We are proposing Rule 507 as an exemption from the registration 
provisions of Section 5 of the Securities Act under our general 
exemptive authority in Section 28 of that Act. Under Section 28, we may 
exempt any transaction from any provision of the Securities Act ``to 
the extent that such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of investors.'' 
\73\
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    \73\ 15 U.S.C. 77z-3.
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    We believe proposed Rule 507 meets the standard set forth in 
Section 28 because it safeguards investor interests by limiting both 
the advertising permitted and the types of investors that may invest in 
an exempt offering. The proposal would impose strict controls on 
advertising and would be limited to offerings that are sold only to 
investors who meet high financial qualification standards designed to 
identify investors who have less need for the protections offered by 
Securities Act registration, as they can ``fend for themselves'' with 
regard to the transaction.\74\
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    \74\ The conclusion that investors do not need all the 
protections that registration under the Securities Act would offer 
them and that they can fend for themselves is the determination that 
must be made under SEC v. Ralston Purina, 346 U.S. 119, 125 (1953), 
to establish that transactions are exempt under Section 4(2) of the 
Securities Act as transactions ``not involving any public 
offering.'' We believe the Ralston Purina standard is informative in 
analyzing whether Rule 507, as proposed, would satisfy the Section 
28 standard. As a practical matter, we believe that the use of high 
financial thresholds to qualify as a large accredited investor and 
the imposition of a ban on most general solicitation and advertising 
would tend to support a determination that Rule 507 is appropriate 
in the public interest and consistent with the protection of 
investors.
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    Proposing Rule 507 under Section 28, rather than Section 4(2),\75\ 
has certain consequences. Among these consequences is that pooled 
investment vehicles that rely on the exclusion from the definition of 
``investment company'' provided by Section 3(c)(1) or Section 3(c)(7) 
of the Investment Company Act would not be able to take advantage of 
the limited advertising proposed to be permitted under Rule 507. This 
results because those vehicles are required to sell their securities in 
transactions not involving a public offering.\76\ Such vehicles 
typically rely on Section 4(2) to meet this requirement, frequently 
through Rule 506, which expressly forbids general solicitation and 
general advertising.\77\ Accordingly, they would be precluded from 
selling their securities in reliance on Rule 507.
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    \75\ Because some advertising would be permitted in Rule 507 
transactions, we have chosen not to propose the exemption under 
Section 4(2) of the Securities Act, which the Commission in the past 
has viewed as incompatible with a non-public offering under Section 
4(2). See n. 37.
    \76\ Section 3(c)(1) of the Investment Company Act excludes from 
the definition of investment company an issuer the securities (other 
than short-term paper) of which are beneficially owned by not more 
than 100 persons and that is not making or proposing to make a 
public offering of its securities. Section 3(c)(7) of the Investment 
Company Act excludes from the definition of investment company an 
issuer the outstanding securities of which are owned exclusively by 
persons who, at the time of acquisition of such securities, are 
``qualified purchasers,'' as defined in the Investment Company Act, 
and that is not making or proposing to make a public offering of its 
securities. The term ``qualified purchaser'' is defined for purposes 
of the Investment Company Act in Section 2(a)(51) of the Investment 
Company Act, 15 U.S.C. 80a-2(a)(51). This definition applies in the 
context of the Investment Company Act; the term has a different 
meaning under the Securities Act, as provided in the proposed 
amendment to Rule 146(c).
    \77\ Compliance with Rule 506 provides a safe harbor that a 
transaction does not involve ``any public offering'' within the 
meaning of Section 4(2) of the Securities Act. See 17 CFR 
230.506(a).
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Request for Comment
     Are there other implications we should consider as a 
result of our proposed use of our exemptive authority under Section 28, 
rather than proposing Rule 507 under Section 4(2)?
5. Covered Security Status
    Securities sold under Rule 506 are ``covered securities'' under 
Section 18(b)(4)(D) of the Securities Act.\78\ To enhance the utility 
of proposed Rule 507, we propose that a large accredited investor that 
participates in a Rule 507 offering be defined in Rule 146 as a 
``qualified purchaser'' under Section 18(b)(3) of the Securities Act. 
As such, securities sold in a Rule 507-exempt offering would be 
``covered securities,'' resulting in preemption from state securities 
regulation as provided under Section 18 of the Securities Act.\79\ By 
providing ``covered security'' status to the securities, the securities 
would be primarily regulated on the federal level, with the goal of 
enhancing efficiency and reducing duplicative regulation without 
compromising investor protection. Because the dollar-amount thresholds 
for investors in Rule 507 transactions would be significantly higher 
than the dollar-amount thresholds in Rule 506 offerings, we believe the 
policy rationales for making securities in Rule 506 transactions 
``covered securities'' also support making securities in Rule 507 
transactions ``covered securities.'' \80\
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    \78\ The National Securities Markets Improvement Act of 1996, 
Pub. L. 104-290, 110 Stat. 3416 (Oct. 11, 1996) (``NSMIA''), 
preempts the state registration and review of transactions involving 
``covered securities.'' It amended Section 18 of the Securities Act 
to establish classes of covered securities, including securities 
offered or sold to ``qualified purchasers,'' as defined by 
Commission rule.
    \79\ In 2001, we proposed to define the term ``qualified 
purchaser'' in the Securities Act to equate that term with our 
definition of the term ``accredited investor'' in Rule 501(a). See 
Release No. 33-8041 (Dec. 19, 2001) [66 FR 66839]. That proposal is 
no longer under consideration by the Commission.
    \80\ These policy rationales are contained in the legislative 
history of NSMIA, especially H.R. Rep. No. 104-622, at 159-165 
(1996).
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Request for Comment
     We propose to amend Rule 146 to define the term ``large 
accredited investor'' as a ``qualified purchaser'' for purposes of 
Section 18 of the Securities Act. Is defining a ``large accredited 
investor'' as a ``qualified purchaser'' under the Securities Act 
appropriate? Should the definition of ``qualified purchaser'' be 
narrower or broader?
     Proposed Rule 146(c) includes a provision that indicates 
clearly that states may continue to impose substantially similar notice 
filing requirements as those imposed by the Commission on transactions 
with qualified purchasers. Is this provision necessary? Should we 
define ``substantially similar'' more precisely? If so, please provide 
specific language. Would the proposed language preclude states from 
requiring that certain supplemental items be attached to notice 
filings?

B. Proposed Revisions Related to Definition of ``Accredited Investor''

    We propose revisions to the definition of the term ``accredited 
investor'' in

[[Page 45123]]

Rule 501(a) of Regulation D, which sets forth the standards to qualify 
as an accredited investor. The current definition provides that a 
person who comes within, or who the issuer reasonably believes comes 
within, one of eight enumerated categories at the time of sale is an 
accredited investor. Currently, the Rule 501(a) categories include:
     Institutional investors; \81\
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    \81\ This category includes banks, savings and loan 
associations, registered brokers and dealers, insurance companies, 
registered investment companies, business development companies, and 
small business investment companies. The category also includes 
certain employee benefit plans within the meaning of the Employee 
Retirement Income Security Act (codified primarily at 29 U.S.C. ch. 
18), with total assets in excess of $5 million. See Rule 501(a)(1).
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     Private business development companies;
     Corporations, partnerships and tax exempt organizations 
with total assets in excess of $5 million;
     Directors, executive officers and general partners of the 
issuer;
     Individuals with a net worth exceeding $1 million, either 
alone or with their spouses;
     Individuals with income in excess of $200,000 in each of 
the two most recent years or joint income with the individual's spouse 
in excess of $300,000 in each of those years;
     Trusts with total assets in excess of $5 million; and
     Entities in which all of the equity owners are accredited 
investors.
    The revisions we propose to the Rule 501(a) ``accredited investor'' 
qualification standards would affect Rules 504 through 506 and, to the 
extent that the standards to qualify as a ``large accredited investor'' 
are based on the standards to qualify as an ``accredited investor,'' 
Rule 507.\82\ We believe our proposed revisions of the qualification 
standards for accredited investors will result in those standards, 
together with the substantive provisions of the exemptions in 
Regulation D, better determining who meets the requirements for 
reliance on the exemptions. Our proposed revisions would:
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    \82\ The revisions may affect offerings made by pooled 
investment vehicles under Sections 3(c)(1) and 3(c)(7) of the 
Investment Company Act, as those offerings must qualify as non-
public offerings under Section 4(2) of the Securities Act and many 
such offerings are structured to take advantage of the Rule 506 safe 
harbor for the Section 4(2) exemption. We recently proposed 
revisions to our accredited investor qualification standards for 
individuals investing in certain pooled investment vehicles. See 
II.B.5 below.
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     Add an alternative ``investments-owned'' standard to Rule 
501(a);
     Define the term ``joint investments'';
     Establish a mechanism to adjust the dollar-amount 
thresholds in the definitions in the future to reflect inflation; and
     Add several categories of permitted entities to the list 
of accredited and large accredited investors.
    In addition, in the Private Pooled Investment Vehicle Release, we 
proposed to revise Regulation D to establish a new category of 
accredited investor, ``accredited natural person,'' that individuals 
would need to satisfy in order to invest in certain private pooled 
investment vehicles relying on Rule 506.\83\ We are continuing to 
consider the comments received on that proposal. We also are taking the 
opportunity to solicit further comment on the questions we asked in 
December 2006 when we issued that proposal, especially in light of the 
new proposals in this release, and to solicit comment on additional 
questions on the proposal, as discussed below.
---------------------------------------------------------------------------

    \83\ Proposed Rules 216 and 509 under the Securities Act.
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1. Adding Alternative Investments-Owned Standards to Accredited 
Investor Standards
    Rule 501(a) currently provides generally that certain legal 
entities must have total assets in excess of $5 million to qualify as 
accredited investors, that individuals and spouses may qualify if they 
have a net worth above $1 million, that individuals also may qualify if 
they have annual income above $200,000, and that spouses also may 
qualify if they have annual income above $300,000. We propose to add 
alternative standards for these entities and for individuals and 
spouses in Rule 501(a) that reflect investments owned by the 
prospective investor as an additional and alternative method of 
establishing accredited investor status.\84\ We believe an investments-
owned standard will add another, potentially more accurate method to 
assess an investor's need for the protections of registration under the 
Securities Act. We also believe an investments-owned standard may 
reduce and simplify compliance burdens for companies by providing an 
alternative standard that may be assessed more easily than the current 
assets or net worth or annual income standards.
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    \84\ As explained above with respect to large accredited 
investors, an investments-owned standard would be an alternative to 
the income standards for establishing large accredited investor 
status for individuals and spouses and the sole method for 
establishing large accredited investor status for entities that must 
satisfy a dollar-amount threshold.
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a. Proposed Definition of ``Investments''
    We propose a definition of ``investments'' for purposes of 
qualifying for accredited investor and large accredited investor status 
that is substantively the same as the definition we proposed in 
December 2006 in the Private Pooled Investment Vehicle Release.\85\ 
However, in order to establish a uniform definition that applies 
throughout Regulation D, the newly proposed definition contains slight 
differences. The Private Pooled Investment Vehicle Release proposed 
separate definitions for the terms ``prospective accredited natural 
person,'' ``related person,'' ``investment purposes,'' ``valuation,'' 
and ``deductions.'' \86\ Our current proposal replaces the term 
``prospective accredited natural person'' with the term ``purchaser.'' 
In addition, the concepts underlying the terms ``related person,'' 
``investment purposes,'' ``valuation,'' and ``deductions'' are 
discussed in the notes to the definition of ``investments'' in our 
current proposal rather than as separate definitions, as was done in 
the Private Pooled Investment Vehicle Release.\87\ We believe including 
these concepts as notes to the definition of ``investments'' in 
proposed Rule 501(h) will provide greater clarity and ease use of the 
definition.
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    \85\ The standard proposed in December 2006 would require 
investors to satisfy a two-part test--they would be required to be 
an accredited investor, as defined in Rule 501(a)(5) or (6) for 
transactions offered under Rule 506 or Rule 215(e) or (f) for 
transactions under Section 4(6) of the Securities Act (15 U.S.C. 
77d(6)), and to own at least $2.5 million in ``investments,'' as 
that term would be defined in Rule 509 as proposed in the Private 
Pooled Investment Vehicle Release.
    \86\ Unlike in the Private Pooled Investment Vehicle Release, we 
have not here proposed a definition of ``certain retirement plans 
and trusts'' for use in our proposed definition of ``investments.'' 
We assume that investments held in retirement plans and trusts would 
be included in our proposed definition of investments.
    \87\ In order to simplify the definition of ``investments,'' we 
included the concepts of ``related person'' and ``deduction'' in the 
notes as they relate to ``investment purposes'' and ``valuation,'' 
respectively. See proposed notes 1 through 3 to paragraph (h) of 
Rule 501.
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b. Amount of Investments Required
    For legal entities required to satisfy a $5 million assets test, 
the proposed amendment would add an alternative investments standard of 
$5 million. For individuals and spouses, the proposed amendment would 
provide a new alternative standard of $750,000 in investments that 
could be used instead of the current net worth standard of $1 million 
or annual income standards of $200,000 (or $300,000 with one's

[[Page 45124]]

spouse).\88\ We proposed an investments-owned standard as part of our 
December 2006 proposal for a new category of accredited investor, the 
``accredited natural person,'' which was developed to address 
eligibility for individuals to invest in private pooled investment 
vehicles that rely on the exclusion from the definition of the term 
``investment company'' provided by Section 3(c)(1) of the Investment 
Company Act.\89\
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    \88\ We are proposing the $750,000 investments-owned standard 
because the dollar-amount threshold is the same as the dollar-amount 
threshold initially proposed in Regulation D for the assets test, 
which, as initially proposed, excluded certain assets, including 
personal residences. The assets threshold was increased to $1 
million and adopted for the sake of simplicity and reflected a 
$250,000 increase in large part to account for the value of the 
primary residence. See Release No. 33-6389, at 11255.
    \89\ See n. 76.
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    Unlike the December 2006 proposed definition, the proposed 
alternative standards would not result in a reduction in the number of 
investors eligible for accredited investor status; rather, the standard 
is intended to ease issuers' threshold determinations and provide a 
possibly more logical basis for them.\90\ In determining whether an 
investor meets the threshold under the investments-owned standard, the 
value of personal residences and places of business would not be 
included. Although we recognize that we have historically included (and 
may continue to include) personal residences and places of business as 
assets in calculating total assets for legal entities and net worth for 
individuals, we believe, consistent with our December 2006 proposed 
definition, that an accurate method of assessing an investor's need for 
the protections of registration under the Securities Act when based on 
an investments test is to exclude these real estate assets from the 
definition of investments, since they are not held for investment 
purposes.\91\ Accordingly, real estate would not be considered to be 
held for ``investment purposes'' if the real estate is used by the 
person or certain related persons for personal purposes (e.g., as a 
personal residence).\92\ The term ``personal purposes'' is derived from 
the Internal Revenue Code provision that addresses circumstances under 
which a taxpayer is allowed deductions with respect to certain 
``dwelling units.'' \93\ The proposed definition refers to the Internal 
Revenue Code because it would allow determinations of whether 
residential real estate is an investment based on the same provisions 
that would apply in determining whether certain expenses related to the 
property are deductible for purposes of completing tax returns. 
Similarly, property that has been used as a place of business or in 
connection with the conduct of a trade or business also would not be 
considered to be held for investment purposes.\94\
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    \90\ As proposed, there would be no changes to the current 
standards for accredited investors in Regulation D that would 
decrease the existing pool of potential investors. We do not believe 
these amendments would substantially change the number of investors 
now eligible for accredited investor status. Based on the 2004 
Federal Reserve survey cited in n. 50, our Office of Economic 
Analysis estimates that adding an alternative $750,000 investments 
standard to the current accredited investor standard for natural 
persons (net worth in excess of $1 million or individual income in 
excess of $200,000 (or $300,000 with the person's spouse)) would 
result in 8.69 percent of households qualifying for accredited 
investor status in 2003, as opposed to 8.47 percent of households 
qualifying for accredited investor status without the proposed 
alternative.
    \91\ This approach follows the proposed approach in the Private 
Pooled Investment Vehicle Release. Commenters generally preferred 
including the primary residence in the valuation of investments. We 
continue to consider those comments, but are again proposing to 
exclude the primary residence when determining the value of 
investments, as the value of an individual's primary residence may 
have little relevance with regard to the individual's need for the 
protections of Securities Act registration.
    \92\ See proposed Note 1 to Rule 501(h).
    \93\ The proposed rule would treat residential real estate as an 
investment if it is not treated as a dwelling unit used as a 
residence in determining whether deductions for depreciation and 
other items are allowable under the IRC. Section 280A of the IRC 
provides, among other things, that a taxpayer uses a dwelling unit 
during the taxable year as a residence if he or she uses such unit 
for personal purposes for a number of days that exceeds the greater 
of 14 days or 10 percent of the number of days during which the unit 
is rented at a fair rental. 26 U.S.C. 280A.
    \94\ See proposed Note 1 to Rule 501(h).
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Request for Comment \95\
     Are the dollar-amount thresholds for the proposed 
investments-owned standard appropriate? Are other levels more 
appropriate than the $5 million in investments for legal entities and 
$750,000 in investments for individuals and spouses? Should these 
levels be higher or lower? For example, would $4 million in investments 
for legal entities and $500,000 in investments for individuals and 
spouses be more appropriate levels? Why?
---------------------------------------------------------------------------

    \95\ We intend to consider comments we receive in response to 
this request for comment along with the comments on the Private 
Pooled Investment Vehicle Release.
---------------------------------------------------------------------------

     Is there a better way to define ``investments'' to meet 
the goals of the standard in Regulation D? Is our proposed definition 
of investments too complicated? Should we specifically include 
additional types of investment asset classes in the definition of 
investments? Should we exclude or limit any of the investment asset 
classes we have proposed for inclusion?
     We are proposing a definition of ``investments'' in 
proposed paragraph (h) of Rule 501 that is substantially similar to the 
definition in proposed Securities Act Rule 509(b)(3) \96\ and existing 
Investment Company Act Rule 2a51-1(b).\97\ Should we adopt a less 
technical, more principles-based definition of ``investments''? Would a 
more principles-based definition be more appropriate for the many 
smaller companies and small businesses with limited resources that 
commonly use Regulation D, sometimes operating without sophisticated 
legal counsel? If a more principles-based definition would be more 
appropriate, should the rule define ``investments'' as meaning cash and 
cash equivalents, securities, real estate, commodities, and commodity 
interests held for investment purposes, provide that the value of 
investments be calculated ``net of investment indebtedness,'' and 
provide that investment purposes would not include use of real estate 
by a prospective purchaser as a primary or secondary residence or 
primary place of business?
---------------------------------------------------------------------------

    \96\ See the Private Pooled Investment Vehicle Release.
    \97\ 17 CFR 270.2a51-1(b).
---------------------------------------------------------------------------

     Should we specifically exclude from the definition of 
investments real estate used as a primary residence or primary place of 
business? Should we exclude secondary residences? Is it appropriate to 
include secondary residences that are not held for investment purposes? 
Would it be appropriate to specify in the rule that residential real 
estate that currently qualifies for the home mortgage interest 
deduction under the Internal Revenue Code is the type of residential 
real estate that would be excluded for purposes of determining 
investments owned? Commenters are asked to discuss why they believe 
that real estate of the kind excluded should or should not be counted 
as an investment under the rules and why.
     Our proposed definition of ``investments'' excludes 
securities that constitute a ``control interest'' in an issuer. 
Limiting the definition in this manner is designed to exclude, among 
other things, controlling ownership interests in family-owned and other 
closely-held businesses.\98\ Such holdings may not demonstrate the lack 
of need for protection of the Securities Act registration provisions. 
Proposed

[[Page 45125]]

Rule 501(h) and proposed Rule 509(b)(3) and the underlying existing 
rule upon which these two proposals are based, Rule 2a51-1(b)(1), all 
contain the same exceptions from the control interest exclusion--
interests in ``investment vehicles,'' ``public companies'' and ``large 
private companies''--all of which are defined in Rule 2a51-1. Should 
these three exceptions be omitted from the definition of investments or 
referred to in Rule 501(h) in a shorter, more principles-based 
definition so as to be easier to comprehend?
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    \98\ For a more in-depth discussion of the concept of 
investments as used in proposed Rule 501(h), proposed Rule 509(b)(3) 
and Rule 2a51-1(b)(1), see the adopting release for Rule 2a51-1, 
Release No. IC-22597 (Apr. 3, 1997) [62 FR 17511].
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     Note 3 to proposed Rule 501(h) indicates that the value of 
investments is the fair market value on the most recent practicable 
date or their cost and that the determination is made net of any 
outstanding indebtedness incurred to acquire or for the purpose of 
acquiring the investments. Would it be appropriate to provide that the 
test be the higher or lower of fair market value or cost, or solely 
fair market value? Should we simply use the concept of net of 
investment indebtedness or is it more helpful to have a more detailed 
explanation of the deductions?
     Does an investments-owned standard serve as a better proxy 
than a net worth or total assets standard for determining whether an 
investor is among those investors who do not need the protections of 
Securities Act registration? Would an investments-owned standard be a 
more appropriate determinant of accredited investor status than the 
current net worth standard?
     Our experience indicates that some issuers may not have 
taken appropriate measures to satisfy their obligation under Rule 
501(a) to form a reasonable belief that a prospective purchaser 
satisfied the definition of accredited investor. What additional 
measures could and should we take to improve issuers' understanding and 
practices in this area? Should we create a safe harbor in Regulation D 
that sets forth the type of investigation required for an issuer to 
reach a reasonable belief? Would it be appropriate to set forth in the 
safe harbor that an issuer must conduct a reasonable investigation in 
order to come to a reasonable belief? Are there other modifications to 
the existing requirements under Regulation D that would improve 
issuers' practices in forming a reasonable belief that prospective 
purchasers satisfy the definition of accredited investor? Should we 
provide specific details as to what kind of investigation an issuer can 
rely upon to form a reasonable belief, as we did in Rule 144A(d)(1)? 
\99\ What other criteria or methods could be used by issuers to form a 
reasonable belief that an investor is accredited? Or would any of the 
foregoing render the rule less usable for capital formation?
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    \99\ 17 CFR 230.144A(d)(1). In determining whether a prospective 
purchaser is a qualified institutional buyer, Rule 144A(d) provides 
that a seller and any person acting on its behalf are entitled to 
rely upon the following non-exclusive methods of establishing the 
prospective purchaser's ownership and discretionary investment of 
securities: (i) The prospective purchaser's most recent publicly 
available financial statements; (ii) the most recent publicly 
available information appearing in documents filed by the 
prospective purchaser with the Commission or another U.S. federal, 
state, or local government agency or self-regulatory organization, 
or with a foreign governmental agency or self-regulatory 
organization; (iii) the most recent publicly available information 
appearing in a recognized securities manual; or (iv) a certification 
by the chief financial officer, a person fulfilling an equivalent 
function, or other executive officer of the purchaser, specifying 
the amount of securities owned and invested on a discretionary basis 
by the purchaser as of a specific date on or since the close of the 
purchaser's most recent fiscal year.
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2. Proposed Definition of ``Joint Investments''
    Our rules currently allow issuers to count all of the assets that 
an individual owns jointly with a spouse or that are part of a shared 
community interest in the calculation of whether the individual is an 
accredited investor under Rule 501(a)(5) because the individual has a 
``joint net worth'' with the spouse of more than $1 million. In the 
Private Pooled Investment Vehicle Release, we proposed to take a 
different approach to determining eligibility for accredited investor 
status by reason of assets owned by a spouse or as part of a shared 
community interest in calculating ``joint investments.'' \100\ We 
propose to take that same approach in calculating ``joint investments'' 
to apply throughout Regulation D. We propose a simplified definition of 
the term ``joint investments'' to apply throughout Regulation D that 
retains the substantive meaning of the definition proposed in the 
Private Pooled Investment Vehicle Release.
---------------------------------------------------------------------------

    \100\ Private Pooled Investment Vehicle Release at 407.
---------------------------------------------------------------------------

    The definition of ``joint investments'' that we propose provides 
that investments of an individual seeking to make an investment in a 
Regulation D-exempt offering without obtaining the signature and 
binding commitment of his or her spouse may include only 50 percent of:
     Any investments held jointly with the individual's spouse; 
and
     Any investments in which the individual shares a community 
property or similar shared ownership interest with the individual's 
spouse.
    Where spouses both sign and are bound by the investment 
documentation, the full amount of their investments (whether made 
jointly or separately) may be included for purposes of determining 
whether the investors are either accredited or large accredited 
investors.\101\
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    \101\ We received substantial comment on this issue in response 
to the Private Pooled Investment Vehicle Release, urging that we 
permit a spouse's assets to be included in any calculation for 
determining an investor's accreditation. See, e.g., comment letters 
in Commission Rulemaking File No. S7-25-06 from American Bar 
Association (Mar. 12, 2007) (the ``ABA Private Pooled Investment 
Vehicle Letter''), available at http://www.sec.gov/comments/s7-25-06/s72506-584.pdf, and New York State Bar Association (Mar. 14, 
2007), available at http://www.sec.gov/comments/s7-25-06/s72506-597.pdf. We continue to consider this issue.
---------------------------------------------------------------------------

    To avoid confusion and clarify language in other parts of Rule 501 
in connection with the ``joint investments'' proposal, we propose to 
change the words used to describe the threshold for spouses to qualify 
for accredited investor status on the basis of net worth under Rule 
501(a)(5) from ``joint net worth'' to ``aggregate net worth'' and to 
change the words used to describe the income threshold for spouses to 
qualify as accredited investors under Rule 501(a)(6) from ``joint 
income'' to ``aggregate income.'' We also would use the ``aggregate 
income'' terminology in the definition of large accredited investor. We 
believe these changes are advisable to avoid confusion between the 
interpretation of the word ``joint'' in the context of the term ``joint 
investments'' and in the context of the terms ``joint net worth'' and 
``joint income.'' Our previous releases and staff interpretations in 
this area have used the terms ``joint net worth'' and ``joint income'' 
to mean aggregate net worth and aggregate income, and we do not intend 
for these changes to alter the meaning of the rules.\102\
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    \102\ For a discussion of ``joint net worth,'' see Release No. 
33-6389, at n. 14 (Mar. 8, 1982) [47 FR 11251]. For a discussion of 
``joint income,'' see Release No. 33-6683 (Jan. 16, 1987) [52 FR 
3015] and Release No. 33-6758 (Mar. 3, 1988) [53 FR 7866].
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Request for Comment
     Does the proposed joint investments approach properly 
address the application of the accredited investor standard to marital 
assets? Should we base the determination as to whether marital assets 
may be considered in determining the accredited investor status of 
individual spouses on something other than whether both spouses sign 
and are bound by the investment documentation?
     Under Rule 501(a)(5) as we propose to amend it, an issuer 
could count 100

[[Page 45126]]

percent of the assets held jointly with an individual's spouse or as 
part of a shared community interest in determining, on the basis of net 
worth, the eligibility for accredited investor status of an individual 
investing without his or her spouse but only 50 percent of those same 
assets (if they are investments) in determining eligibility on the 
basis of investments owned. Is this approach workable? Should we treat 
assets of a spouse the same regardless of whether an individual 
investor is qualifying on the basis of net worth or investments owned? 
For instance, should we permit an issuer to include only 50 percent of 
an individual investor's marital assets in calculating both net worth 
and investments owned? Or should we permit the issuer to include 100 
percent or some other part of the marital assets?
     We believe that the definition of joint investments 
proposed today does not reflect any material change in substance from 
the definition of joint investments proposed in the Private Pooled 
Investment Vehicle Release. Would adopting both definitions, with their 
immaterial differences, create confusion, and why? Would it create less 
confusion and be more appropriate to modify the definition of joint 
investments in proposed Rule 216 and proposed Rule 509 to mirror the 
definition we propose today?
3. Future Inflation Adjustments
    Our staff recently indicated that ``inflation, along with the 
sustained growth in wealth and income of the 1990s, has boosted a 
substantial number of investors past the `accredited investor 
standard.' '' \103\ By not adjusting these dollar-amount thresholds 
upward for inflation, we have effectively lowered the thresholds in 
terms of real purchasing power.\104\ We recognize, however, that 
raising the accredited investor standards of Regulation D too high may 
result in some issuers returning to pre-1982 practices of effecting 
private placements under the statutory exemption in Section 4(2) and 
forgoing the Regulation D safe harbor. This result may not be desirable 
for issuers or for the health of our private capital markets because 
issuers would be required to incur the expenses and complications of 
multi-state securities law compliance and the uncertainty of case law 
interpretations of the Section 4(2) exemption, as was the case before 
the adoption of Regulation D.\105\ In addition, regulators and 
investors would no longer be provided with Form D filings, which help 
in monitoring private placement activity.\106\ Accordingly, we are 
reluctant at this time to immediately adjust upward for inflation the 
current income requirements and investment thresholds in Rule 501(a).
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    \103\ See Implication of the Growth of Hedge Funds, Staff Report 
to the U.S. Securities and Exchange Commission (Sept. 2003) 
available at http://www.sec.gov/news/studies/hedgefunds0903.pdf.
    \104\ See n. 53 and the discussion in II.A.1.
    \105\ For transactions that are exempt under Rule 506, the 
federal preemption of most state securities regulation under Section 
18(b)(4)(D) of the Securities Act would apply.
    \106\ The current version of Form D was developed by the 
Commission and NASAA as a uniform form to be filed with both the 
Commission and the States. See Release No. 33-6663 (Oct. 2, 1986) 
[51 FR 36385]. Form D continues to be accepted and used by many 
states to monitor private placement activity.
---------------------------------------------------------------------------

    Instead, at this time we propose to adjust for inflation all 
dollar-amount thresholds set forth in Rule 501 of Regulation D on a 
going forward basis, starting on July 1, 2012, and every five years 
thereafter, to reflect any changes in the value of the Personal 
Consumption Expenditures Chain-Type Price Index (or any successor index 
thereto), as published by the Department of Commerce, from December 31, 
2006.\107\ We propose to round the adjusted dollar amounts to the 
nearest multiple of $10,000. By adjusting the thresholds for inflation 
in the future, we intend to retain the income, assets, and investments 
requirements in real terms so that the accredited investor standards 
will not erode over time.\108\
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    \107\ This index was selected based on discussions with the 
Federal Reserve Bank and wide use of the index as an indicator of 
inflation in the U.S. economy. Adjusting thresholds every five years 
ensures that the thresholds stay current while limiting the 
disruption caused by changing the threshold.
    \108\ This is the same method we have proposed to apply to the 
accredited natural person standards we proposed for private pooled 
investment vehicles. See the Private Pooled Investment Vehicle 
Release, at 406.
---------------------------------------------------------------------------

Request for Comment
     We have noted the effects of inflation on the total 
assets, net worth, and income thresholds currently used in the 
accredited investor qualification standards. Should we make a one-time 
adjustment now to the thresholds to increase them to take into account 
the effects of inflation?
     Is our proposal to adjust the dollar-amount thresholds in 
Regulation D every five years in the future and the methodology that we 
have proposed for this purpose appropriate? Should the time period 
between adjustments be longer or shorter than five years? Should the 
adjusted dollar amounts be rounded to the nearest multiple of $10,000, 
as proposed, or to a different nearest multiple, such as $50,000 or 
$100,000? What would the impact of this inflation adjustment be on the 
ability of companies to raise capital, particularly small businesses?
     Is there more appropriate data to use that would support 
different conclusions as to our proposal to adjust Regulation D dollar-
amount thresholds for inflation? Is there a more appropriate way to 
interpret the data that we have provided?
     Is another index more appropriate for our purposes than 
the Personal Consumption Expenditures Chain-Type Price Index (or any 
successor index thereto), as published by the Department of Commerce?
4. Adding Categories of Entities to List of Accredited and Large 
Accredited Investors
    The definition of accredited investor in Rule 501(a)(3) currently 
includes a list of legal entities that may qualify as accredited 
investors, assuming they satisfy other conditions. The list includes 
organizations described in Section 501(c)(3) of the Internal Revenue 
Code,\109\ corporations, Massachusetts or similar business trusts, and 
partnerships. It does not include limited liability companies, Indian 
tribes, labor unions, governmental bodies, and similar legal entities, 
leading to some degree of uncertainty as to whether these types of 
entities may qualify as accredited investors.
---------------------------------------------------------------------------

    \109\ 26 U.S.C. 501(c)(3).
---------------------------------------------------------------------------

    Accordingly, we propose to amend the Rule 501(a)(3) list of legal 
entities so that it includes any corporation (including any non-profit 
corporation), Massachusetts or similar business trust, partnership, 
limited liability company, Indian tribe, labor union, governmental body 
or other legal entity with substantially similar legal attributes. We 
also would add a definition of the term ``governmental body'' to Rule 
501(a), similar to the definition of that term that appears commonly in 
transactional financing documents.\110\ Our staff is regularly asked 
questions about which entities may qualify as accredited investors, and 
has provided guidance that limited liability companies and certain 
governmental units may so qualify.\111\ We hope these changes will

[[Page 45127]]

reduce uncertainty and legal costs and promote more efficient private 
capital formation.
---------------------------------------------------------------------------

    \110\ See, e.g., Section of Business Law, American Bar 
Association, Model Stock Purchase Agreement with Commentary, at 15-
16 (1995). Our proposed definition of ``governmental body'' would 
apply only to the definition of ``accredited investor'' in Rule 215 
and Rule 501(a), which apply only in the context of exempt offerings 
under Section 4(6) and Regulation D.
    \111\ In this regard, see Division of Corporation Finance no-
action letter to Wolf, Block, Schorr and Solis-Cohen (Dec. 11, 1996) 
(limited liability companies), and Release No. 33-6455 (Mar. 4, 
1983) [48 FR 10045] at Q & A 19, citing Division of Corporation 
Finance no-action letter to Voluntary Hospitals of America, Inc. 
(Dec. 30, 1982) (governmental unit that falls within the substantive 
description of 26 U.S.C. 501(c)(3)).
---------------------------------------------------------------------------

Requests for Comment
     Should we add or delete types of legal entities from the 
list in paragraph (a)(3) of Rule 501? For example, should we 
specifically include ``joint venture'' or ``college or university 
endowment'' in the list, or is it clear that they would be covered by 
the proposed language of the rule? \112\ Should we delete the list 
entirely and simply say that any legal entity that can sue or be sued 
in the United States, assuming it meets the other standards for 
becoming an accredited investor, can qualify as an accredited investor?
---------------------------------------------------------------------------

    \112\ As originally proposed, the definition of ``accredited 
investor'' in Regulation D specifically included college or 
university endowment funds. See Release No. 33-6339 (Aug. 7, 1981) 
[46 FR 41791]. Upon adoption, college or university endowment funds 
were intended to be included within the category ``organization[s] 
described in Section 501(c)(3) of the Internal Revenue Code.'' See 
Release No. 33-6389 (Mar. 8, 1982) [47 FR 11251]. Since we now 
propose to replace the phrase ``organization described in Section 
501(c)(3) of the Internal Revenue Code'' with a reference to non-
profit corporations, we seek to assure that college and university 
endowment funds will still be considered accredited investors if 
they satisfy the applicable financial standard.
---------------------------------------------------------------------------

     Should we define the terms ``Indian tribe'' and ``labor 
union'' and, if so, how? For example, should we define ``Indian tribe'' 
in terms of a tribe, band, nation, pueblo, village, or community that 
the Secretary of the Interior acknowledges to exist as an Indian tribe 
under the Federally Recognized Indian Tribe List Act of 1994? \113\ 
Should we include state-recognized Indian tribes? Should we make any 
special provision for labor union pension funds?
---------------------------------------------------------------------------

    \113\ 25 U.S.C. 479a.
---------------------------------------------------------------------------

     When we first proposed Rule 144A, we noted that the type 
of ``qualified institutional buyers'' contemplated under that rule 
would generally include ``very large institutions, long involved in the 
resale market for restricted securities, as to which there has been 
little concern with respect to Section 5 implications.'' \114\ As a 
result, we looked to the list of institutional accredited investors 
contained in Rule 501(a)(3) to develop the Rule 144A(a)(1)(i)(H) list 
of qualified institutional buyers. Because we are now proposing to 
amend Rule 501(a)(3) by expanding the list of institutional accredited 
investors, we are seeking comment on whether the Rule 144A(a)(1)(i)(H) 
list of qualified institutional buyers should be expanded in a similar 
manner. Is it appropriate to consider all institutions that would come 
under Rule 501(a)(3) and that meet the $100 million investment size 
threshold under Rule 144A as having sufficient experience with the 
resale market for restricted securities? Should any or all of the 
categories of institutional accredited investors contained in Rule 
501(a)(3) be included in the Rule 144A(a)(1)(H) list of qualified 
institutional buyers? Are there any categories of institutions included 
in proposed Rule 501(a)(3) that should not be included in the 
definition of qualified institutional buyer under Rule 144A?
---------------------------------------------------------------------------

    \114\ See Release No. 33-6806 (Oct. 25, 1988) [53 FR 33147].
---------------------------------------------------------------------------

     Rule 144A contains few procedural restrictions relating to 
the transferability of restricted securities sold under Rule 144A. Do 
we need to make any modifications in light of the possibility that, if 
we were to expand the definition of qualified institutional buyer under 
Rule 144A, these restrictions would lead to a greater likelihood of 
restricted securities flowing into the public market?
5. Proposed Definition of Accredited Natural Person
    In the Private Pooled Investment Vehicle Release, we expressed our 
concerns about the increased number of individual investors who may 
today be eligible as accredited investors to make investments in pooled 
investment vehicles relying on Section 3(c)(1) of the Investment 
Company Act. We noted that the existing $1 million net worth and 
$200,000 ($300,000 with one's spouse) income tests provide some 
investor protection for individuals seeking to invest in pooled 
investment vehicles relying on Section 3(c)(1) of the Investment 
Company Act, but expressed our concern that some further level of 
protection may be necessary to safeguard investors seeking to make an 
investment in such vehicles in light of their unique risks, including 
risks with respect to undisclosed conflicts of interest, complex fee 
structures, and the higher risk that may accompany such vehicles' 
anticipated returns. Accordingly, we proposed for comment a standard 
that would require individual investors to satisfy a two-part test to 
qualify as accredited investors for purposes of investing in certain 
private pooled investment vehicles--they would be required to satisfy 
the current standard to qualify as accredited investors, as defined in 
(i) Rule 501(a)(5) or (6) for transactions under Rule 506 or (ii) Rule 
215(e) or (f) for transactions under Section 4(6) of the Securities 
Act, and also to own at least $2.5 million in ``investments,'' as that 
term would be defined in proposed Rule 509 or proposed Rule 216, as 
applicable.
    We recognize that if we adopt the alternative investments-owned 
standard for individuals in the definition of accredited investor in 
proposed Rule 215(e) and Rule 501(a)(5) ($750,000) and the investments-
owned standard for the definition of accredited natural person in 
proposed Rule 216 and Rule 509 ($2.5 million), an individual who meets 
the investment test as an accredited natural person would also meet the 
investments test as an accredited investor. We believe that the 
different amounts applicable under the definitions are targeted to 
address concerns about the nature of different types of offerings. As 
noted, the alternative investments-owned standards proposed under the 
definition of accredited investor are designed to add another method to 
assess an investor's need for the protections of registration under the 
Securities Act. The additional and higher investments-owned standard 
proposed in the definition of accredited natural person is intended to 
provide a more objective and clearer standard to use in ascertaining 
whether an individual is likely to have sufficient knowledge and 
experience in financial and business matters to enable that investor to 
evaluate the merits and risks of a prospective investment in certain 
private pooled investment vehicles, or to be able to hire someone with 
such knowledge and experience who may help the individual to make such 
an evaluation.
    We received numerous comments disagreeing with the proposed 
definition of accredited natural person. Most of those submitting 
comments argued that the proposal limits investor access to private 
pooled investment vehicles and questioned the dollar amount of the 
investments standard. In light of those comments, we are soliciting 
additional comments on the following points.
Requests for Comment
     We request comment on whether we should revise the 
proposed definition of accredited natural person to include alternative 
income and investment standards similar to those used in the definition 
of ``large accredited investor'' in proposed Rule 507 (income of 
$400,000 (or $600,000 with one's spouse) or investments of $2.5 
million). Would such a revision address some of the concerns noted by 
those who submitted comments on the

[[Page 45128]]

Private Pooled Investment Vehicle Release? Would a higher (e.g., 
$500,000 (or $700,000 with one's spouse)) or lower (e.g., $300,000 (or 
$400,000 with one's spouse)) income standard be more appropriate, and 
why? Would a higher (e.g. $3 million) or lower (e.g. $2 million) 
investments standard be more appropriate, and why? In responding to 
this request for comment, please also comment on any concerns you might 
have if any final definition that we may adopt includes an inflation 
adjustment provision. For example, some comment letters on the December 
2006 proposal raised a concern that the proposed inflation adjustment 
could result in the proposed standard for accredited natural persons 
ultimately being higher than the existing $5 million investments-owned 
requirement for private investment pools that rely on Section 3(c)(7) 
of the Investment Company Act.\115\ How would you propose to address 
this concern? Should we set a dollar limit above which the dollar 
amount of investments included in proposed Rule 216 and proposed Rule 
509 may not rise (for example, should we cap the investments amount at 
$4.9 million), and why?
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    \115\ See, e.g., comment letters in Commission Rulemaking File 
No. S7-25-06 from Schulte, Roth & Zabel LLP (Mar. 9, 2007), 
available at http://www.sec.gov/comments/s7-25-06/s72506-549.pdf, 
and ABA Private Pooled Investment Vehicle Letter, n. 101 above.
    An individual that invests in 3(c)(7) pools must be a qualified 
person, defined in Section 2(a)(51)(A)(1) of the Investment Company 
Act as an individual who owns not less than $5 million in 
investments. Rule 2a51-1(b) under the Investment Company Act defines 
investments, and is the basis for the definition we proposed in 
December 2006 and today.
---------------------------------------------------------------------------

     We believe that the changes we propose to make in the 
definition of ``investments'' proposed today do not reflect any 
material change from the definition of ``investments'' proposed in the 
Private Pooled Investment Vehicle Release. Would adopting both 
definitions, with their immaterial differences, create confusion, and 
why? Would it create less confusion and be more appropriate to modify 
the definition of ``investments'' in proposed Rule 216 and proposed 
Rule 509 to mirror the definition we propose today?
     Would a more principles-based definition of the term 
``investments,'' like the one we have suggested as an alternative to 
the definition we are proposing for Rule 501(h), also be appropriate in 
the context of proposed Rule 509 and Rule 216? Is there any reason to 
have a definition of ``investments'' in Rule 501(h) that is different 
from the definition used in proposed Rule 509 and Rule 216, and why?
     Earlier in this release, we request specific comment on 
the treatment of real estate as an investment, the treatment of 
securities that constitute a ``control interest'' in an issuer as an 
investment, and how investments are proposed to be valued under the 
definition of ``investments'' proposed in this release. We solicit 
comment with respect to those points in connection with the definition 
of the term ``investments'' as proposed for use with the term 
``accredited natural person.'' Is there any reason to have a definition 
of the term ``investments'' under proposed Rules 216 and 509 that is 
different from the one proposed in this release? Please explain why or 
why not.
     As we have explained, we modeled the definition of 
``investments'' in proposed Rule 216 and proposed Rule 509 on the 
definition included in Rule 2a51-1(b) under the Investment Company Act. 
Would a more principles-based definition of the term ``investments,'' 
like the one we have suggested as an alternative to the definition we 
are proposing for Rule 501(h), also be appropriate in the context of 
Rule 2a51-1, and why? Should we adopt coordinated definitions of 
``investments'' for purposes of proposed Rule 501(h), proposed Rule 
216, proposed Rule 509 and Rule 2a51-1, or should there be different 
definitions applicable to these rules, and why?

C. Proposed Revisions to General Conditions of Regulation D

    Rule 502 of Regulation D sets forth conditions that are applicable 
to offers and sales made under Regulation D. We propose to make changes 
to those conditions, including shortening the amount of time issuers 
are required to wait to make offers and sales in order to rely on the 
integration safe harbor provided in Rule 502(a) and adding 
disqualification provisions for certain issuers seeking to rely on the 
exemptions in Regulation D. We also are providing guidance regarding 
the integration of concurrent public and private offerings.
    Our Advisory Committee on Smaller Public Companies advised that the 
six-month safe harbor period from integration provided in Rule 502(a) 
``represents an unnecessary restriction on companies that may very well 
be subject to changing financial circumstances, and weighs too heavily 
in favor of investor protection, at the expense of capital formation.'' 
\116\ The Committee supported ``clearer guidance concerning the 
circumstances under which two or more apparently separate offerings 
will or will not be integrated.'' \117\ The Advisory Committee 
acknowledged the difficulty, however, of modifying the five-factor test 
contained in Rule 502(a) and concluded that the issue could be more 
readily addressed through a shortening of the six-month period. Based 
on their analysis of the issue, the Advisory Committee recommended that 
we shorten the integration safe harbor from six months to 30 days.\118\
---------------------------------------------------------------------------

    \116\ Advisory Committee Final Report at 96.
    \117\ Id. at 95.
    \118\ Id. at 94.
---------------------------------------------------------------------------

    In making recommendations with respect to the integration doctrine, 
the Advisory Committee recommended, in addition to decreasing the time 
period of the integration safe harbor in Regulation D, that the 
Commission clarify the interpretation of or amend Securities Act Rule 
152 \119\ in order to permit companies to conduct a valid private 
placement immediately before the filing of a registration statement 
without concern that the two offerings would be integrated.\120\ The 
Advisory Committee also noted in making this recommendation that, in 
addition to the concerns that companies may not be able to raise 
capital privately in the time shortly before the filing of a 
registration statement, there also are continuing integration 
considerations when conducting concurrent private placements while a 
registration statement is pending with the Commission.\121\ This 
recommendation and commentary demonstrate that questions continue to 
arise in the capital raising process concerning the ability of issuers 
to conduct a private placement before a Securities Act registration 
statement is filed with the Commission, or in the period between the 
filing and effectiveness of the registration statement.
---------------------------------------------------------------------------

    \119\ 17 CFR 230.152. Rule 152 specifies that ``[t]he phrase 
`transactions by an issuer not involving any public offering' in 
Section 4(2) shall be deemed to apply to transactions not involving 
any public offering at the time of said transaction although 
subsequently thereto the issuer decides to make a public offering 
and/or files a registration statement.''
    \120\ Advisory Committee Final Report at 100-101.
    \121\ Advisory Committee Final Report at n. 207.
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    We understand that capital raising around the time of a public 
offering, in particular an initial public offering, often is critical 
if companies are to have sufficient funds to continue to operate while 
the public offering process is ongoing. For this reason, we are 
providing guidance so that companies and their counsel may have a 
better

[[Page 45129]]

framework for evaluating their particular circumstances.\122\
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    \122\ This guidance does not affect the risk that the Commission 
or a court could find a violation of Section 5 where a company 
begins an offering as a private placement and seeks to complete that 
offering pursuant to a registration statement, or where a company 
commences a registered offering and seeks to complete that offering 
through a private placement, except in those circumstances specified 
in Securities Act Rule 155. See Integration of Abandoned Offerings, 
Release No. 33-7943 (Jan. 26, 2001) [66 FR 8887].
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    Consistent with Securities Act Rule 152, the staff of the Division 
of Corporation Finance, in its review of Securities Act registration 
statements, will not take the view that a completed private placement 
that was exempt from registration under Securities Act Section 4(2) 
should be integrated with a public offering of securities that is 
registered on a subsequently filed registration statement.\123\ 
Consistent with the staff's approach to this issue, we are of the view 
that, pursuant to Securities Act Rule 152, a company's contemplation of 
filing a Securities Act registration statement for a public offering at 
the same time that it is conducting a Section 4(2)-exempt private 
placement would not cause the Section 4(2) exemption to be unavailable 
for that private placement.\124\
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    \123\ See, e.g., Division of Corporation Finance no-action 
letter to Verticom, Inc. (Feb. 12, 1986).
    \124\ In these circumstances, companies should be careful to 
avoid any pre-filing communications regarding the contemplated 
public offering that could render the Section 4(2) exemption 
unavailable for what would be an otherwise exempt private placement.
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    We recognize that a company's financing needs do not end with the 
filing of a registration statement. As a general matter, however, the 
filing of a registration statement has been viewed as a general 
solicitation of investors.\125\ Today, upon the filing of a 
registration statement, information about a company and its prospects 
is available immediately through our EDGAR filing system. The staff of 
the Division of Corporation Finance has issued interpretive letters to 
the effect that, notwithstanding the availability of the information in 
the registration statement, companies may continue to conduct 
concurrent private placements without those offerings necessarily being 
integrated with the ongoing public offering.\126\ Concerns remain, 
however, with the ability to complete such concurrent private 
placements in factual situations that were not considered previously by 
the Division staff in interpretive letters. The Division staff has not 
applied any per se approach in addressing these circumstances in its 
review of filings, but rather has requested a discussion of the 
relevant facts and in some cases an opinion of counsel when concerns 
arose as to the potential integration of the concurrent private 
offering and public offering and the availability of the Section 4(2) 
exemption after the filing of the registration statement.\127\
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    \125\ See, e.g., Division of Corporation Finance no-action 
letter to Michael Bradfield, General Counsel, Board of Governors of 
the Federal Reserve System (Mar. 16, 1984).
    \126\ See, e.g., Division of Corporation Finance no-action 
letters to Black Box Incorporated (June 26, 1990) and Squadron 
Ellenoff, Pleasant & Lehrer (Feb. 28, 1992). The guidance in this 
release does not affect the ability of issuers to continue to rely 
on the views expressed by the Division staff in these letters.
    \127\ The guidance that follows applies in the context of 
private placements conducted under existing exemptions from 
registration. If we adopt proposed Rule 507 of Regulation D, we may 
provide additional interpretive guidance on any potential 
integration issues unique to that exemption. In this regard, we note 
that, as proposed, offers and sales exempt under Rule 507 would be 
subject to a ban on general solicitation except as permitted under 
the rule and would be considered ``limited,'' rather than 
``private,'' offerings.
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    Our view is that, while there are many situations in which the 
filing of a registration statement could serve as a general 
solicitation or general advertising for a concurrent private offering, 
the filing of a registration statement does not, per se, eliminate a 
company's ability to conduct a concurrent private offering, whether it 
is commenced before or after the filing of the registration statement. 
Further, it is our view that the determination as to whether the filing 
of the registration statement should be considered to be a general 
solicitation or general advertising that would affect the availability 
of the Section 4(2) exemption for such a concurrent unregistered 
offering should be based on a consideration of whether the investors in 
the private placement were solicited by the registration statement or 
through some other means that would otherwise not foreclose the 
availability of the Section 4(2) exemption. This analysis should not 
focus exclusively on the nature of the investors, such as whether they 
are ``qualified institutional buyers'' as defined in Securities Act 
Rule 144A or institutional accredited investors, or the number of such 
investors participating in the offering; instead, companies and their 
counsel should analyze whether the offering is exempt under Section 
4(2) on its own, including whether securities were offered and sold to 
the private placement investors through the means of a general 
solicitation in the form of the registration statement. For example, if 
a company files a registration statement and then seeks to offer and 
sell securities without registration to an investor that became 
interested in the purportedly private offering by means of the 
registration statement, then the Section 4(2) exemption would not be 
available for that offering. On the other hand, if the prospective 
private placement investor became interested in the concurrent private 
placement through some means other than the registration statement that 
did not involve a general solicitation and otherwise was consistent 
with Section 4(2), such as through a substantive, pre-existing 
relationship with the company or direct contact by the company or its 
agents outside of the public offering effort, then the prior filing of 
the registration statement generally would not impact the potential 
availability of the Section 4(2) exemption for that private placement 
and the private placement could be conducted while the registration 
statement for the public offering was on file with the Commission. 
Similarly, if the company is able to solicit interest in a concurrent 
private placement by contacting prospective investors who (1) Were not 
identified or contacted through the marketing of the public offering 
and (2) did not independently contact the issuer as a result of the 
general solicitation by means of the registration statement, then the 
private placement could be conducted in accordance with Section 4(2) 
while the registration statement for a separate public offering was 
pending. While these are only examples, we believe they demonstrate the 
framework for analyzing these issues that companies and their counsel 
should apply and that the staff will consider when reviewing 
registration statements.
1. Proposed Revisions to Regulation D Integration Safe Harbor
    The integration doctrine seeks to prevent an issuer from improperly 
avoiding registration by artificially dividing a single offering into 
multiple offerings such that Securities Act exemptions would apply to 
the multiple offerings that would not be available for the combined 
offering. The integration concept was first articulated in 1933 \128\ 
and was further developed in two interpretive releases issued in the 
1960s.\129\ The interpretive releases clarified that determining 
whether a particular securities offering should be integrated with 
another offering requires an analysis of the specific facts and 
circumstances of the offerings. In our guidance, we identified five 
factors to

[[Page 45130]]

consider in making the determination of whether the offerings should be 
integrated.\130\ In 1982, we included the five factors and established 
an integration safe harbor in Rule 502(a). We stated that the five 
factors relevant to the question of integration are:

    \128\ Release No. 33-97 (Dec. 28, 1933).
    \129\ Release No. 33-4434 (Dec. 6, 1961) [26 FR 11896] and 
Release No. 33-4552 (Nov. 6, 1962) [27 FR 11316].
    \130\ Release No. 33-4552 (Nov. 6, 1962) [27 FR 11316].

    ``Whether (1) The different offerings are part of a single plan of 
financing, (2) the offerings involve issuance of the same class of 
security, (3) the offerings are made at or about the same time, (4) the 
same type of consideration is to be received, and (5) the offerings are 
made for the same general purpose.''\131\
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    \131\ Id.

Under the safe harbor, offers and sales more than six months before a 
Regulation D offering or more than six months after the completion of a 
Regulation D offering will not be considered part of the same offering. 
This provides issuers with a bright-line test upon which they can rely 
to avoid integration of multiple offerings.
    In making its recommendation that the integration safe harbor be 
shortened, the Advisory Committee noted that smaller companies' 
financing needs often are unpredictable, making the six-month waiting 
period for use of the safe harbor problematic for issuers in need of 
capital. Other commenters have made similar recommendations to decrease 
the waiting period in the safe harbor.\132\ While we recognize the 
burdens that the integration doctrine places on capital formation, 
improper reliance on exemptions from registration harms investors by 
depriving them of the benefits of full and fair disclosure and the 
civil remedies that flow from registration. Any changes that we make to 
the integration doctrine must continue to provide that issuers are 
aware of their obligation to analyze the exemptions upon which they 
rely and whether any offers and sales are, in reality, part of a single 
plan of financing.
---------------------------------------------------------------------------

    \132\ See ABA Private Offering Letter, n. 24 above, at 33. The 
ABA letter also suggested expanding the factors to consider when 
making the determination of whether an offering should be 
integrated.
---------------------------------------------------------------------------

    The current six-month time frame of the safe harbor in Rule 502(a) 
provides a substantial time period that has worked well to clearly 
differentiate two similar offerings and provide time for the market to 
assimilate the effects of the prior offering. The Advisory Committee 
has expressed concern, however, that such a long delay could inhibit 
companies, particularly smaller companies, from meeting their capital 
needs.\133\ We recognize that increased volatility in the capital 
markets and advances in information technology have changed the 
landscape of private offerings. We remain concerned, however, that an 
inappropriately short time frame could allow issuers to undertake 
serial Rule 506-exempt offerings each month to up to 35 non-accredited 
investors in reliance on the safe harbor, resulting in unregistered 
sales to hundreds of non-accredited investors in a year. Such sales 
could result in large numbers of non-accredited investors failing to 
receive the protections of Securities Act registration. Our proposal 
seeks to strike an appropriate balance between the number of non-
accredited investors allowed in an offering relying on the integration 
safe harbor and the non-public nature of that offering. It would be an 
anomalous result that an issuer could make an offering to hundreds of 
non-accredited investors in reliance on the integration safe harbor, 
triggering reporting requirements under the Exchange Act, without a 
public offering. We propose, therefore, to lower the safe harbor time 
frame to 90 days rather than the 30 days recommended by the Advisory 
Committee.\134\ We believe 90 days is appropriate, as it would permit 
an issuer to rely on the safe harbor once every fiscal quarter.\135\ 
This reduction in time should provide additional flexibility to 
issuers, while still requiring them to wait a sufficient period of time 
before initiating a substantially similar offer in reliance on the safe 
harbor.\136\
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    \133\ See Advisory Committee Final Report at 96.
    \134\ Both the Advisory Committee and the ABA recommended 
reducing the time frame for the integration safe harbor to 30 days. 
Their proposals do not address our concerns that such a short time 
frame could result in public offerings conducted under the guise of 
private offerings. See ABA Private Offering Letter, n. 24 above, at 
33 and Advisory Committee Final Report at 94.
    \135\ For issuers that provide quarterly reports, the 90-day 
requirement would provide time and transparency for investors and 
the market to take into account the offering and its results.
    \136\ The five-factor test would continue to apply, providing 
issuers with flexibility where they are making separate offerings 
within the 90-day time frame.
---------------------------------------------------------------------------

    The same integration analysis as applies to other Regulation D 
offerings would apply to offerings made under proposed Rule 507. 
Accordingly, an issuer would not be able to take advantage of the safe 
harbor in Rule 502(a) for any sales to investors that are not large 
accredited investors within the safe harbor period after the 
publication of a general announcement as permitted by Rule 507. The new 
90-day safe harbor would apply to Rule 507 offerings, allowing issuers 
to make offerings without integration concerns after waiting the 
requisite period of time.
Request for Comment
     As proposed, we would reduce the time frame for the 
integration safe harbor from six months to 90 days. Is 90 days an 
appropriate time frame for the safe harbor? Is 90 days still too long a 
delay for issuers seeking capital in reliance on the integration safe 
harbor? Would this reduction increase the possibility that issuers will 
use the safe harbor and undertake serial offerings?
     Some commentators have suggested that a 30-day integration 
safe harbor would be appropriate. We are concerned that such a short 
time period could encourage serial private offerings that would 
otherwise be integrated and effectively allow unregistered public 
offerings. If we were to reduce the time period of the safe harbor, 
should we limit the total number of non-accredited investors to whom an 
issuer may sell over the course of the year? If so, how many non-
accredited investors would be an appropriate limitation per year--100, 
140, 210 or some other number?
     The five-factor test provides issuers with an analytical 
framework to differentiate offers so that they need not be integrated. 
Does the five-factor test provide sufficient guidance for issuers to 
make their analysis? If not, how could we improve the factors to 
provide clearer guidance? Should we provide additional factors? Would 
the proposed 90-day time frame obviate the need to revise the test?
     Would the interaction between the general announcement 
permitted by proposed Rule 507 and the proposed 90-day integration safe 
harbor present opportunities for abuse? Could issuers use the general 
announcement permitted by proposed Rule 507 to test the waters before 
deciding whether to undertake either a registered public offering or 
unregistered exempt offering under Regulation D? Should we permit this 
use of a Rule 507 general announcement? Should we modify proposed Rule 
507 to prohibit such a practice?
2. Disqualification Provisions
    In conjunction with the proposed revisions to Regulation D, we have 
considered the need for general ``bad actor'' disqualification 
provisions for all offerings under Regulation D. Our concern arises 
from the number of recidivists we see in problematic Regulation D 
offerings. Before the National Securities Markets Improvement Act of 
1996,\137\ recidivists

[[Page 45131]]

were excluded from most Rule 506 offerings by state disqualification 
provisions. The National Securities Markets Improvement Act preempts 
the states from enforcing those provisions in favor of federal 
regulation, raising the question whether federal disqualification 
provisions should be adopted to replace them.
    We propose that availability of all Regulation D exemptions be 
conditioned on the application of bad actor disqualification 
provisions. By deterring recidivists from participating in our primary 
private and limited offering marketplaces, we intend to improve the 
effectiveness of Regulation D offerings for a significant majority of 
companies, especially smaller companies, that do not have bad actors 
associated with their securities offerings and will not be disqualified 
under the proposed provisions.
    Currently, in Regulation D, only Rule 505 provides disqualification 
provisions.\138\ Rule 505 refers issuers to the substantive 
disqualification provisions of Rule 262 \139\ under Regulation A,\140\ 
essentially incorporating those provisions by reference. Under those 
provisions, issuers are barred from relying on the exemption where the 
issuer, any of its predecessors, any affiliated issuers, any director, 
officer or general partner of the issuer, any beneficial owner of 10 
percent or more of any class of its equity securities, any promoter of 
the issuer presently connected with the issuer, any underwriter of the 
securities to be offered, or any partner, director or officer of the 
underwriter have committed relevant violations of laws and regulations. 
The Model Accredited Investor Exemption \141\ and the Uniform 
Securities Act of 2002 \142\ also provide for similar disqualification 
provisions for these types of issuers and associated persons.
    The exemption in proposed Rule 507 and the proposal to reduce the 
time that issuers must wait to rely on the integration safe harbor 
would provide issuers with greater flexibility in preparing and 
conducting private offerings. Given this proposed increase in 
flexibility, as well as enforcement issues we have confronted with 
recidivists involved in purported Regulation D offerings,\143\ we 
believe it is appropriate to propose that certain issuers be precluded 
from relying on any of the Regulation D exemptions if they or the 
persons designated in proposed Rule 502(e) have violated the law. We 
are proposing a rule that is based generally on the provisions in 
Regulation A, the Model Accredited Investor Exemption and the Uniform 
Securities Act of 2002.\144\ In the interests of coordination and 
uniformity, we drew extensively from the Model Accredited Investor 
Exemption, but have modified some of the provisions, taking into 
account provisions of the Uniform Securities Act. The proposed 
disqualification provisions all relate to determinations by regulators 
and courts of problematic behavior or wrongdoing. It is our intent that 
the Commission's adoption of disqualification provisions based on 
provisions in use in many states will lead to increased uniformity in 
federal and state securities regulation.\145\
    Exempt private and limited offerings under Regulation D do not 
provide the protections that registration would afford. We believe that 
registration, with its incumbent rights for investors and duties of the 
issuer, is more appropriate for offerings by issuers and persons that 
have been subject to determinations of violations of law or wrongdoing 
than offerings relying on Regulation D exemptions. Thus, we believe it 
would be prudent to preclude certain persons who have been shown to 
have acted improperly from relying on Regulation D to make or be 
involved with unregistered offers and sales of securities.
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    \137\ Pub. L. 104-290.
    \138\ 17 CFR 230.505(b)(2)(iii).
    \139\ 17 CFR 230.262.
    \140\ 17 CFR 230.251 through 230.263. Regulation A is an 
exemption from Securities Act registration, promulgated under 
Section 3(b) of the Securities Act, 15 U.S.C. 77c(b), for public 
offerings not exceeding $5 million in any 12-month period.
    \141\ According to NASAA, as of 1999, 33 states plus the 
District of Columbia and Puerto Rico had adopted a form of this 
exemption and seven more states had bills pending in their 
legislatures. See North American Securities Administrators 
Association, Written Statement before the House Small Business 
Committee, Government Programs and Oversight Subcommittee (Oct. 14, 
1999).
    \142\ See http://www.uniformsecuritiesact.org. According to the 
drafting committee, as of April 27, 2007, the Act had been enacted 
in 11 states and the U.S. Virgin Islands and is endorsed by NASAA, 
the Securities Industry and Financial Markets Association (formerly 
known as the Securities Industry Association) and the American Bar 
Association.
    \143\ See, e.g., SEC v. Calvo, 378 F.2d 1211, 1216 (11th Cir. 
2004).
    \144\ In response to the Advisory Committee's proposed 
recommendations, NASAA commented that any new exemption in 
Regulation D should ``contain at least disqualification provisions 
like those contained in Rule 505(b)(2)(iii), Rule 1.B of the NASAA 
Uniform Limited Offering Exemption (1983), and Section D of the 
Model Accredited Investor Exemption.'' See NASAA Letter, n. 48 
above.
    \145\ Several provisions of the federal securities laws call for 
greater uniformity in federal and state securities regulation. See, 
e.g., Securities Act Sec.  19(d), 15 U.S.C. 77s(d).
---------------------------------------------------------------------------

    As proposed, the disqualification provisions in new Rule 502(e) 
would apply to all offerings made in reliance on Regulation D, 
precluding reliance by the issuer on Regulation D if the issuer itself 
is disqualified or the presence of any of the enumerated persons 
disqualifies the issuer.\146\ The disqualification provisions under 
proposed Rule 502(e) would apply to:
---------------------------------------------------------------------------

    \146\ In conjunction with this proposal, we also propose to 
delete the current disqualification provisions in Rule 
505(b)(2)(iii).
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     The issuer, any predecessor of the issuer, and any 
affiliated issuer;
     Any director, executive officer, general partner, or 
managing member of the issuer;
     Any beneficial owner of 20 percent or more of any class of 
the issuer's equity securities; and
     Any promoter connected with the issuer.
    The persons and entities we propose to subject to the 
disqualification provisions are substantially similar to those in 
Regulation A and the Model Accredited Investor Exemption, except that 
we do not propose to include underwriters.\147\ Both Regulation A and 
the Model Accredited Investor Exemption include underwriters among the 
classes of persons to whom disqualification provisions apply.\148\ 
Underwriters generally do not directly control the issuer or determine 
for an issuer whether to conduct an offering. In weighing the balance 
of adding the disqualification provisions, we determined that adding 
provisions throughout Regulation D would have positive effects on the 
private and limited offering equity markets. In order to limit the 
burden of expanding these provisions, we propose to limit the 
application, and therefore the due diligence burden, to the issuer and 
those persons whom we regard as having substantial influence over the 
issuer.\149\
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    \147\ We propose to add managing members to the traditional list 
of directors, officers, and general partners to indicate clearly 
that managing members of limited liability companies are intended to 
be included in the provision. We also propose to limit the 
provisions to ``executive officers'' rather than ``officers'' and to 
20 percent beneficial owners rather than 10 percent beneficial 
owners as provided in Rule 262 of Regulation A. We believe that 
limiting the scope of these provisions to executive officers and 20 
percent beneficial owners would be appropriate, given their greater 
influence on the policies of the issuer as compared to officers and 
10 percent beneficial owners.
    \148\ The term ``underwriters'' is used in both Regulation A and 
the Model Accredited Investor Exemption. The term underwriters 
includes selling broker-dealers, who are commonly called 
underwriters in Regulation A offerings and placement agents in 
private offerings.
    \149\ We have chosen not to use in this context the concept of 
``affiliate,'' which we use in other rules under the Securities Act 
to designate certain persons with control relationships with 
issuers. Rule 505 of Regulation D currently refers issuers to the 
disqualification provisions of Rule 262 of Regulation A. Under the 
proposed disqualification provisions, Rule 505 would refer to Rule 
502(e) and not to the disqualification provisions in Regulation A.

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[[Page 45132]]

    Proposed Rule 502(e) provides six disqualification provisions that 
would preclude an issuer from relying on Regulation D. Each of the 
disqualification provisions requires a determination by a government 
official or agency or self-regulatory organization that the relevant 
person has violated the law or engaged in other wrongdoing. These 
provisions apply where the issuer or the covered persons:
     Filed a registration statement within the last five years 
that is the subject of a currently effective permanent or temporary 
injunction or an administrative stop order; \150\
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    \150\ Rule 262(a)(1) provides that the issuer, any of its 
predecessors or any affiliated issuer ``has filed a registration 
statement which is the subject of any pending proceeding or 
examination under Section 8 of the Act, or has been the subject of 
any refusal order or stop order thereunder within five years prior 
to the filing of the offering statement required by Rule 252.'' As 
proposed, the provision would not be limited to the issuer and the 
language of the provision would apply more generally to court 
injunctions and stop orders or similar orders by the Commission or 
state securities agencies. The proposed language tracks Section 
306(a)(3) of the Uniform Securities Act.
---------------------------------------------------------------------------

     Was convicted of a criminal offense in the last 10 years 
that was in connection with the offer, purchase or sale of a security 
or involved the making of a false filing with the Commission; \151\
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    \151\ Rule 262 provides disqualification provisions for ``any 
felony or misdemeanor in connection with the purchase or sale of any 
security or involving the making of any false filing with the 
Commission.'' Under Rule 262, the disqualification of issuers, 
predecessors and affiliated issuers is for five years, while for any 
director, officer or general partner of the issuer, beneficial owner 
of 10 percent or more of any class of its equity securities, any 
promoter of the issuer presently connected with it in any capacity, 
any underwriter of the securities to be offered, or any partner, 
director or officer of any such underwriter the disqualification is 
for 10 years. The proposed provision tracks Rule 262 instead of the 
Model Accredited Investor Exemption or Uniform Securities Act, 
because the language focuses on securities-related offenses while 
the other models use broader language. The proposal uses the term 
``criminal offense'' instead of specifying ``felony or misdemeanor'' 
as used in Rule 262 and uniformly applies a 10-year disqualification 
for these more egregious acts. This provision would substantially 
cover situations addressed in Rule 262(a)(3) and Rule 262(b)(3).
---------------------------------------------------------------------------

     Has been subject to an adjudication or determination 
within the last five years by a federal or state regulator that the 
person violated federal or state securities or commodities law or a law 
under which a business involving investments, insurance, banking or 
finance is regulated; \152\
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    \152\ This provision is based on Section 412(d)(6) of the 
Uniform Securities Act, but more generally includes ``federal or 
state regulator'' and ``federal or state securities or commodities 
laws or a law under which a business involving investments, 
insurance, banking, or finance is regulated'' instead of providing a 
specific list of relevant statutes. The Model Accredited Investor 
Exemption contains a similar, but more limited provision that 
disqualifies a person if they are ``currently subject to any state 
or federal administrative enforcement order or judgment * * * 
finding fraud or deceit in connection with the purchase or sale of 
any security.''
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     Is subject to an order, judgment or decree by a court 
entered within the last five years that restrains or enjoins the issuer 
or a person from engaging in any conduct or practice involving 
securities and other similar businesses, including an order for failure 
to comply with Rule 503 (the filing of Form D); \153\
---------------------------------------------------------------------------

    \153\ We sought to simplify the provisions in Rule 262(a)(2) and 
(b)(2) of Regulation A by following the Model Accredited Investor 
Exemption provision (D)(1)(d). Rather than refer to ``involving 
fraud or deceit in connection with the purchase or sale of any 
security,'' we broadened the application to a business ``involving 
securities, commodities, investments, insurance, banking, or 
finance'' as suggested by the Uniform Securities Act. We did not, 
however, include a business involving franchises as in the Uniform 
Securities Act list. We also added a specific reference to Rule 503, 
which is being moved from current Rule 507, as discussed below.
---------------------------------------------------------------------------

     Is subject to a cease and desist order entered within the 
last five years issued under federal or state securities or similar 
laws; \154\ or
---------------------------------------------------------------------------

    \154\ This provision, while similar to the provisions in Rule 
502(e)(1)(iii) and (iv), is based on Section 412(12) of the Uniform 
Securities Act.
---------------------------------------------------------------------------

     Is subject to a suspension or expulsion from membership in 
or association with a member of a national securities exchange or 
national securities association for an act or omission constituting 
conduct inconsistent with just and equitable principles of trade.\155\
---------------------------------------------------------------------------

    \155\ This provision is substantially similar to Rule 262(b)(4) 
and seeks to bar similar persons to those covered by Uniform 
Securities Act Section 412(13).
---------------------------------------------------------------------------

    The length of disqualification from reliance on Regulation D in the 
proposal is generally five years. For more egregious conduct resulting 
in a criminal conviction, we propose disqualification for 10 
years.\156\ We believe that these disqualification provisions would 
provide a deterrent effect, as well as offer protection to investors 
from recidivists who have violated securities and related laws and 
rules in the past.
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    \156\ The period of disqualification generally follows the 
periods provided in Regulation A. The disqualification period for 
issuers convicted of a criminal offense would be increased from five 
to 10 years to conform with the disqualification for other criminal 
offenders and to better conform with the Uniform Securities Act.
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    Proposed subparagraphs (i), (iii), (iv), and (v) of Rule 502(e)(1) 
enumerate the various administrative and civil orders, judgments, and 
determinations that would trigger disqualification for an issuer. 
Proposed subparagraph (ii) provides a similar disqualification 
provision for criminal convictions, and proposed subparagraph (vi) 
provides a disqualification provision that relates to decisions of 
self-regulatory organizations. Each disqualification provision relates 
to a failure to comply with laws or regulations, raising concerns that 
the person may continue to disregard laws and regulations relating to 
the offering of securities. For this reason, we believe an issuer 
should not be allowed to rely on Regulation D if the issuer or one of 
the covered persons meets the disqualification provisions in proposed 
Rule 502(e).
    In order to combine all of the disqualification provisions in the 
same rule, we propose to remove the disqualification provision relating 
to failure to comply with Rule 503 (the filing of Form D) that is found 
in current Rule 507 and replace the substance of that provision with a 
clause in proposed Rule 502(e)(1)(iv). Proposed Rule 502(e)(1)(iv) 
would specifically indicate that an order for failure to comply with 
Rule 503 of Regulation D would trigger the disqualification provision. 
Proposed Rule 502(e)(2) would expand upon the concept in current Rule 
507 and allow the Commission, upon a showing of good cause, to waive 
any of the enumerated disqualification provisions in proposed Rule 
502(e)(1).\157\ Proposed Rule 502(e)(2) also would provide a safe 
harbor for an offering by an issuer, if that issuer establishes that it 
did not know and reasonably could not have known that the 
disqualification existed.\158\
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    \157\ The waiver provision tracks the preliminary language in 
Rule 262 and provides flexibility for the Commission. The Commission 
staff has, and would continue to have, delegated authority to act on 
waiver requests under Rule 262 of Regulation A and Rule 505, and we 
are proposing a similar delegation for all other Regulation D 
disqualification waiver requests. See II.E.3 below.
    \158\ The Model Accredited Investor Exemption provides 
exemptions from disqualification where a waiver is provided or where 
the issuer establishes that it did not know and in the exercise of 
reasonable care, based on a factual inquiry, could not have known of 
the disqualification. Regulation A does not include the exemption 
where an issuer reasonably could not have known. Due to the broad 
application of the proposed Rule, we have proposed similar 
exemptions to those in the Model Accredited Investor Exemption 
providing for waiver and for an issuer that reasonably could not 
have known. We have not included the requirement for a factual 
inquiry to establish the reasonable basis as in the Model Accredited 
Investor Exemption.
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Request for Comment
     Should we limit the disqualification provisions to Rule 
505 exemptions only, as is currently the case, rather than applying 
these provisions to all Regulation D exemptions? Are there any

[[Page 45133]]

current disqualifications not included in the proposed rule that we 
should include? Are any persons not covered who should be?
     What would be the effects on disqualified issuers? How 
many issuers would be affected?
     Unlike the Regulation A, Regulation E \159\ and current 
Rule 505 disqualification provisions, proposed Rule 502(e) excludes 
selling broker-dealers, underwriters, and placement agents from the 
disqualification provisions. Should selling broker-dealers, 
underwriters, and placement agents be covered in the disqualification 
provisions? Would including selling broker-dealers, underwriters, and 
placement agents give issuers an incentive to check their backgrounds 
before engaging them for an offering? If they were included, should 
there be an exemption for persons who continue to be licensed or 
registered to conduct securities related business in the jurisdiction 
where the order, judgment, or decree creating the disqualification was 
entered, as is the case in the Model Accredited Investor Exemption?
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    \159\ 17 CFR 230.601 through 230.610a. Regulation E is an 
exemption from Securities Act registration, promulgated under 
Section 3(c) of the Securities Act, 15 U.S.C. 77c(c), for securities 
of small business investment companies.
---------------------------------------------------------------------------

     Does the proposed rule adequately cover the 
disqualification provisions of Regulation A, which currently apply to 
Rule 505? For example, proposed Rule 502(e)(1)(iii) would disqualify 
persons subject to an adjudication or determination by a federal or 
state regulator that the person violated securities or commodities laws 
or a law under which a business involving investments, insurance, 
banking, or finance is regulated. Under Rule 262(a)(5), a United States 
Postal Service false representation order and certain other orders and 
injunctions are specifically enumerated. Does the proposed rule 
adequately cover these and other related orders and injunctions? If 
not, should we revise the proposed rule to specifically cover United 
States Postal Service orders and injunctions or other specific 
circumstances?
     Should the disqualification provisions for being currently 
subject to an order, judgment, decree, or cease and desist order apply 
as long as the person is subject to the order, no matter when the order 
was entered into, or should the provisions apply only to orders entered 
into within the last five years, as proposed?
     The length of disqualification in the proposed rules 
generally is consistent with our current Rule 262 provisions in 
Regulation A. The proposal increases the length of disqualification for 
criminally convicted issuers from 5 years to 10 years. Under the 
Uniform Securities Act of 2002, a person convicted of a felony 
involving the business of securities is permanently barred from relying 
on the exemption. Should such felony convictions permanently disqualify 
a person? Is 10 years an appropriate disqualification period? Is 5 
years an appropriate length of time to protect investors adequately 
from persons who have been determined to have violated or have been 
sanctioned for violations of securities-related and similar laws and 
regulations?
     How should the Commission phase in the new 
disqualification provisions, if adopted? Should we ``grandfather'' 
individuals and entities from the consequences of the new 
disqualification provisions if an issuer commences an offering before 
the effectiveness of proposed Rule 502(e)? With respect to offerings 
commenced before the effectiveness of proposed Rule 502(e), should we 
subject individuals and entities that become newly associated with the 
issuer after effectiveness to all the consequences of the new 
disqualification provisions? In these cases, should we provide any 
special waiver provisions and/or condition any waiver on providing 
disclosure in the offering document regarding any past disqualifying 
events?
     Would mandatory disclosure of the adverse orders, 
judgments, and determinations be an adequate substitute for 
disqualification? \160\ If so, how should disclosure be mandated and 
enforced?
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    \160\ We recently proposed changes to Form D, the form required 
of issuers relying on Regulation D, that would include requiring 
each issuer submitting the form to certify that it is not 
disqualified from relying on Regulation D for one of the reasons 
stated in proposed Rule 502(e). See Release No. 33-8814 (June 29, 
2007) [72 FR 37376].
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     The proposed rule provides an exemption from the 
disqualification provisions if, in the exercise of reasonable care, the 
issuer could not have known that a disqualification existed. Is this 
appropriate? If so, should an issuer be required to establish that 
reasonable care was based on a factual inquiry, as required in the 
Model Accredited Investor Exemption? Are there circumstances where no 
factual inquiry would be necessary? Would the requirement for a factual 
inquiry be burdensome?
     Should we revise the disqualification provisions in 
Regulation A and Regulation E to conform with proposed Rule 502(e)? 
What changes specific to Regulation A or Regulation E should we make to 
the proposed disqualification provisions?

D. Possible Revisions to Rule 504

    Rule 504 of Regulation D is known as the ``seed capital'' 
exemption. It is limited to offerings by non-reporting companies that 
do not exceed an aggregate annual amount of $1 million. Rule 504 places 
substantial reliance upon state securities laws, because the size and 
local nature of these offerings has not appeared to warrant imposing 
significant federal regulation.
    Rule 504 sets forth the requirements for four separate exemptions 
from the registration requirements of the Securities Act. Among these 
is Rule 504(b)(1)(iii),\161\ which provides an exemption from 
registration for offers and sales of securities that are conducted 
``according to state law exemptions from registration that permit 
general solicitation and general advertising so long as sales are made 
only to `accredited investors' as defined in [Rule 501(a)].'' \162\ 
Securities sold without registration in reliance on this provision are 
not subject to the limitations on resale established in Rule 502(d) 
and, as such, are not ``restricted securities'' for purposes of Rule 
144(a)(3)(ii).
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    \161\ 17 CFR 230.504(b)(1)(iii).
    \162\ Rule 501(a) has been discussed at length at various places 
above. The other three Rule 504 exemptions, which would not be 
affected by the possible revisions we are discussing here, are 
contained in:
    (a) The introductory clause of Rule 504(b)(1), 17 CFR 
230.504(b)(1) (exemption for offers and sales of restricted 
securities that do not involve general solicitation and 
advertising); and
    (b) Rules 504(b)(1)(i) and 504(b)(1)(ii), 17 CFR 
230.504(b)(1)(i) and 230.504(b)(1)(ii) (exemptions for offers and 
sales of unrestricted securities that may involve general 
solicitation and advertising if the offering is registered under 
appropriate state securities laws that require the public filing and 
delivery of a disclosure document to investors before sale).
    In a companion release, we have proposed to amend Form D, the 
notice that must be filed with us when an issuer sells securities in 
a Regulation D offering, to require issuers relying on Rule 504 to 
specify the precise Rule 504 exemption on which they are relying. 
See Release No. 33-8814 (June 29, 2007) [72 FR 37376]. One of the 
purposes of this change is to provide us with better information on 
the extent of use of the different types of Rule 504 offerings.
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    We added Rule 504(b)(1)(iii) as a new exemption to Rule 504 in 
1999.\163\ It was an attempt to apply the appropriate federal 
securities law treatment to offerings made under state registration 
exemptions that satisfied its conditions. As an example of these 
exemptions, we cited the Model Accredited Investor

[[Page 45134]]

Exemption, which was a model exemption developed in 1997 by the North 
American Securities Administrators Association.\164\ It was our 
understanding at the time that securities issued under Rule 
504(b)(1)(iii) generally could not be transferred under state law, and 
that immediate resale generally would not be possible.\165\
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    \163\ See Release No. 33-7644 (Feb. 25, 1999) [64 FR 11090]. 
Previously, securities sold under Rule 504 were not deemed 
restricted securities.
    \164\ Id. A copy of the Model Accredited Investor Exemption is 
available on the NASAA Web site at http://www.nasaa.org/content/Files/Model%5FAccredited%5FInvestor%5FExemption.pdf.
    \165\ See Release No. 33-7644, n. 38.
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    The addition of Rule 504(b)(1)(iii) in 1999 was part of a series of 
changes designed to deter abusive practices in Rule 504 offerings while 
not impeding legitimate ``seed capital'' offerings. The Commission had 
been concerned for some time with abusive practices in Rule 504 
offerings, many of which involved ``pump and dump'' schemes for 
securities of non-reporting companies that traded over the counter. At 
the time, we stated that we would monitor the use of Rule 504 as 
revised and contact state securities regulators regarding their 
experience with these offerings. We further stated that if abusive 
practices involving Rule 504 continued, we would consider stronger 
measures in the future.\166\
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    \166\ Id. Other suggested measures included the expansion of 
disqualification provisions similar to those in Rule 505(b)(2)(iii) 
and Rule 262. We propose to expand such disqualification provisions 
to all Regulation D offerings in this release. See II.C.2 above.
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    In recent years, the Commission has taken enforcement action 
against numerous ``pump and dump'' schemes, most of which involve the 
securities of small companies without large market capitalization or 
significant market following.\167\ Several of these cases have involved 
claims of purported compliance with Rule 504(b)(1)(iii) and state 
securities laws that are submitted to transfer agents as the basis for 
the issuance of securities without restrictive legends to permit 
immediate resale. In informal discussions, state securities regulators 
also have raised concerns about abusive practices involving Rule 
504(b)(1)(iii) offerings. These factors lead us to question whether we 
should amend Rule 504(b)(1) to provide that the limitations on resale 
set forth in Rule 502(d) would apply to securities sold in a Rule 
504(b)(1)(iii) transaction. Such an amendment would result in those 
securities being ``restricted securities'' for purposes of Rule 144.
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    \167\ See, e.g., SEC v. Integrated Services Group Inc., Lit. 
Release No. 19476 (Nov. 29, 2005) (reporting complaint filed in S.D. 
Tex.); SEC v. Custom Designed Compressor Systems, Inc., Lit. Release 
No. 19101 (Feb. 28, 2005) (reporting complaint filed in D. N.M.).
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    In a companion release, we have proposed to amend Rule 144 to 
provide that non-affiliates receiving restricted securities of non-
reporting companies would be eligible to resell those securities after 
12 months without any restrictions.\168\ A 12-month holding period 
would be consistent with the Model Accredited Investor Exemption. If we 
adopt the Rule 144 proposal and revise Rule 504(b)(1) to provide that 
securities sold in a Rule 504(b)(1)(iii) transaction are ``restricted 
securities,'' the resale restrictions will be less stringent than under 
current Rule 144.\169\
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    \168\ See Release No. 33-8813 (June 22, 2007) [72 FR 36822].
    \169\ For resales of securities by non-affiliates of the issuer, 
current Rule 144 requires a one-year holding period followed by an 
additional year when resales are subject to manner of sale 
restrictions, volume limitations, current public information 
requirements, and notice requirements. Unlimited resales may occur 
after the second year.
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Request for Comment
     The Commission seeks comment as to whether Regulation D 
should be amended so that securities sold in reliance on Rule 
504(b)(1)(iii) pursuant to a state law exemption that permits sales 
only to accredited investors would be subject to the limitations on 
resale in Rule 502(d) and, as such, be deemed ``restricted securities'' 
for purposes of Rule 144.\170\
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    \170\ We envision that any such amendment would not affect the 
resale status of securities sold under the exemptions in Rules 
504(b)(1)(i) and 504(b)(1)(ii), which exempt certain offerings of 
securities that are registered under a state securities law that 
requires the public filing and delivery of a disclosure document to 
investors before sale. As such, the resale limitations of Rule 
502(d) would continue not to apply to securities sold in 
transactions that are exempted by those rules and those securities 
would not be ``restricted securities'' for purposes of Rule 144.
---------------------------------------------------------------------------

     If Regulation D were amended to make securities issued 
under Rule 504(b)(1)(iii) ``restricted securities,'' would the 
amendment impose a significant burden on start-up and other smaller 
companies? If you believe so, please explain your reasons, given the 
resale restrictions typically required under state securities law 
exemptions. Do any states have resale restrictions that are narrower 
than would apply to ``restricted securities''?

E. Other Proposed Conforming Revisions

1. Proposed Amendments to Rule 215
    We propose to amend Rule 215 to conform the definition of 
``accredited investor'' in Rule 215 with the definition in Rule 501(a) 
of Regulation D. Rule 215 defines accredited investor under Section 
2(a)(15) of the Securities Act \171\ for purposes of Section 4(6) of 
the Securities Act and would track the proposed definition in Rule 
501(a) of Regulation D.
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    \171\ 15 U.S.C. 77b(a)(15).
---------------------------------------------------------------------------

2. Proposed Amendment to Rule 144A
    Rule 144A currently provides a safe harbor under Section 5 of the 
Securities Act for offers and resales of securities to a qualified 
institutional buyer or to an offeree or purchaser that the seller and 
any person acting on the seller's behalf reasonably believe is a 
qualified institutional buyer. A general announcement of an offering 
published by an issuer in accordance with Rule 507 may be deemed 
inconsistent with the requirement under Rule 144A that offers be made 
solely to such persons. As a result, we propose to add a Preliminary 
Note 8 to Rule 144A to clarify that publication of a general 
announcement of an offering in accordance with Rule 507 would not 
preclude resales pursuant to Rule 144A.
Request for Comment
     As proposed, Preliminary Note 8 to Rule 144A would not 
make any distinctions based on the type of security that is being 
offered pursuant to Rule 507. Should the Preliminary Note only apply to 
debt securities, as opposed to equity, because debt securities are more 
likely to be sold to institutional investors?
3. Delegated Authority
    Under Rule 30-1,\172\ the Commission has delegated to the Director 
of the Division of Corporation Finance the authority to grant 
applications for exemptions to the disqualification provisions under 
Regulation A and Rule 505. As we are proposing to include 
disqualification provisions for all Regulation D offerings, we propose 
to revise Rule 30-1(c) to delegate authority to the Director of the 
Division of Corporation Finance to grant applications for exemptions to 
the disqualification provisions of Regulation D.
---------------------------------------------------------------------------

    \172\ 17 CFR 200.30-1(b)(1), 200.30-1(c).
---------------------------------------------------------------------------

III. General Request for Comment

    The Commission is proposing these revisions. We welcome your 
comments. We solicit comment, both specific and general, on each 
component of the proposals. We request and encourage any interested 
person to submit comments regarding:
     The proposals that are the subject of this release;

[[Page 45135]]

     Additional or different revisions to Regulation D; and
     Other matters that may have an effect on the proposals 
contained in this release.
    In December 2006, the Commission proposed to add a new category of 
accredited investor, defined as accredited natural person, under the 
Securities Act.\173\ We are taking the opportunity to solicit further 
comment on the questions we asked in connection with that proposal, 
especially in light of the new proposals in this release. Are there any 
differences in the regulation of operating and private pooled 
investment vehicles that we should consider in crafting harmonious 
rules for limited offerings? Finally, we solicit comment on whether any 
additional conforming amendments are necessary.
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    \173\ See Private Pooled Investment Vehicle Release.
---------------------------------------------------------------------------

    Comment is solicited from the point of view of both issuers and 
investors, as well as of capital formation facilitators, such as 
broker-dealers, and other regulatory bodies, such as state securities 
regulators. Any interested person wishing to submit written comments on 
any aspect of the proposal is requested to do so.

IV. Paperwork Reduction Act

    The proposals contain ``collection of information'' requirements 
within the meaning of the Paperwork Reduction Act of 1995.\174\ The 
title of these requirements is:
---------------------------------------------------------------------------

    \174\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

     ``Form D'' (OMB Control No. 3235-0076).\175\
---------------------------------------------------------------------------

    \175\ Form D was adopted pursuant to Sections 2(a)(15), 3(b), 
4(2), 19(a) and 19(c)(3) of the Securities Act (15 U.S.C. 77b(15), 
77c(b), 77d(2), 77s(a) and 77s(c)(3)).
---------------------------------------------------------------------------

    We adopted Regulation D and Form D as part of the establishment of 
a series of exemptions for offerings and sales of securities under the 
Securities Act.\176\ We are submitting these requirements to the Office 
of Management and Budget (``OMB'') for review and approval in 
accordance with the Paperwork Reduction Act and its implementing 
regulations.\177\
    We propose to make changes in four principal areas involving 
Regulation D, as well as to make other conforming changes, relating to:
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    \176\ In a companion release, Release No. 33-8814, we are 
proposing changes to Form D that would require that Form D be filed 
electronically. If Form D is required to be filed electronically, 
filers will be required to file Form ID in order to be able to file 
electronically. If the proposal to require electronic Form D is 
adopted, any increase in the number of companies filing Form D will 
result in an increase in the number of Form ID filings.
    \177\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

     Creating a new exemption from the registration provisions 
of the Securities Act for offers and sales of covered securities to 
``large accredited investors'';
     Revising the definition of the term ``accredited 
investor'' to clarify it and reflect developments since its adoption;
     Shortening the timing required by the integration safe 
harbor for Regulation D offerings; and
     Providing uniform disqualification provisions to apply 
throughout Regulation D.\178\
---------------------------------------------------------------------------

    \178\ Currently under Regulation D, only Rule 505 offerings are 
subject to disqualification provisions. The proposal would subject 
issuers making any offering in reliance on Regulation D to similar 
disqualification provisions.
---------------------------------------------------------------------------

We also are soliciting comment on whether to amend Rule 504 of 
Regulation D so that securities sold pursuant to a state law exemption 
that permits sales only to accredited investors would be deemed 
``restricted securities'' for purposes of Rule 144.

    The information collection requirements related to the filing with 
the Commission of Form D are mandatory to the extent that an issuer 
elects to make an offering of securities in reliance on the relevant 
exemption. Responses are not confidential. The hours and costs 
associated with preparing and filing forms and retaining records 
constitute reporting and cost burdens imposed by the collection of 
information requirements. An agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
requirement unless it displays a currently valid OMB control number.

A. Summary of Information Collections

    Form D contains collection of information requirements, requiring 
an issuer to file a notice of sale of securities pursuant to Regulation 
D or Section 4(6) of the Securities Act. The Form D is required to 
include basic information about the type of filing, the issuer, certain 
related persons, and the offering. Form D is filed by issuers as a 
notice of sales without registration under the Securities Act based on 
a claim of exemption under Regulation D or Section 4(6) of the 
Securities Act. The information is needed for implementing the 
exemptions and monitoring their use.
    We propose to amend Form D to add a check box to indicate an 
offering relying on the proposed Rule 507 exemption. We do not believe 
the proposed change will have any effect on the paperwork burden of the 
form. However, we believe the overall effect of the proposals will be 
to increase the number of forms that are filed with the Commission. 
While we anticipate an increase in the number of filings, we believe 
that most issuers that are seeking capital in the private equity 
markets would do so even without the proposed amendments. We believe 
the following proposals are likely to increase the number of exempt 
offerings and therefore the number of forms filed:
     The proposal to create a new exemption from the 
registration provisions of the Securities Act for offers and sales to 
large accredited investors permitting limited advertising, providing 
issuers a new option for offering securities;
     The proposals to clarify the definition of accredited 
investor will slightly increase the pool of accredited investors and, 
due to the increased pool of investors, is likely to marginally 
increase the number of offerings to those investors; \179\ and
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    \179\ We propose to add an ``investments-owned'' standard to the 
current standards under accredited investor. We anticipate that will 
increase the pool of accredited investors from 8.47 percent of U.S. 
households to 8.69 percent of U.S. households. See n. 90. Most of 
the additional clarification supports current staff positions on who 
may qualify as an accredited investor and should not significantly 
affect the size of the investor pool, though it may increase 
awareness among those groups of their ability to qualify.
---------------------------------------------------------------------------

     The proposal to shorten the timing of the integration safe 
harbor will allow issuers to conduct more frequent offerings using the 
safe harbor.\180\
---------------------------------------------------------------------------

    \180\ We anticipate the reduction in the safe harbor waiting 
period will increase the number of Forms D filed, but do not believe 
it will increase the number of Forms ID filed, as any increase in 
Forms D will be from repeat filers.

On the other hand, some of our proposals are likely to decrease the 
---------------------------------------------------------------------------
number of exempt offerings and therefore the number of forms filed:

     The proposal to revise the disqualification provisions 
applicable to Rule 505 and apply those provisions to all offerings 
relying on Regulation D may have the effect of reducing the number of 
forms filed.\181\
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    \181\ We believe that very few issuers will be subject to the 
disqualification provisions and expect the number of Forms D filed 
will be minimally affected. We believe the revisions are necessary 
in order to exclude a small number of recidivists who have been 
found by regulators and courts to have violated applicable laws and 
regulations.
---------------------------------------------------------------------------

     The proposal to require for the determination of 
accredited investors status that an individual may count only 50 
percent of any joint investments with their spouse unless both persons 
sign the investment documentation may reduce the pool of accredited 
investors where spouses decide not to invest together.

[[Page 45136]]

     To the extent that an amendment to revise Rule 504 to 
treat securities sold pursuant to a state law exemption that permits 
sales only to accredited investors as ``restricted securities'' for 
purposes of Rule 144 may result in potentially greater limitation on 
resale than may exist under state securities laws, this could have the 
effect of slightly reducing the number of forms filed.

B. Paperwork Reduction Act Burden Estimates

    According to our Office of Filings and Information Services, in 
2006, 16,829 companies made 25,329 Form D filings. The annual number of 
Form D filings rose from 17,390 in 2002 to 25,239 in 2006 for an 
average increase of approximately 2,000 Form D filings per year. 
Assuming the number of Form D filings continues to increase by 2,000 
filings per year for each of the next three years, the average number 
of Form D filings in each of the next three years would be about 
29,300.\182\
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    \182\ Our current OMB information collection estimate indicates 
that we expect 17,480 Form D filings per year. In conjunction with 
the Private Pooled Investment Vehicle Release, OMB revised the Form 
D information collection estimates to reflect an expected decrease 
in responses from 17,500 Form D filings to 17,480. However, based on 
the new data, we are increasing our estimated number of Form D 
filings.
---------------------------------------------------------------------------

    As described above, we estimate that our proposals, if adopted, 
would have mixed effects on the number of Forms D filed with the 
Commission. Use of the new exemption, the shortened delay for the 
Regulation D safe harbor, and the slight increase in the pool of 
accredited investors due to the revised accredited investor definition 
likely would raise the number of Forms D filed. The utility of the 
established exemptions, particularly Rule 506, makes large numbers of 
Regulation D-exempt offerings that otherwise would not have been filed 
unlikely. In addition, the new disqualification provisions, some 
aspects of the revised definition of accredited investor, and the 
possible revisions to Rule 504 may slightly lower the number of 
filings.
    We estimate that if the proposed rules are adopted, the burden for 
responding to the collection of information in Form D would not 
increase for most companies because the information required in the 
form would not change. Balancing the increasing and decreasing effects 
of the proposals, for purposes of the Paperwork Reduction Act, we 
estimate an annual increase in the number of Form D filings of five 
percent, or approximately 1,500 filings.\183\
---------------------------------------------------------------------------

    \183\ To arrive at this estimate, we multiplied the number of 
Form D filings estimated per year (29,300) by 5 percent and rounded 
up to the nearest 100.
---------------------------------------------------------------------------

    For purposes of the Paperwork Reduction Act, we estimate that, over 
a three-year period, the average burden estimate will be four hours per 
Form D. This burden is reflected as a one-hour burden of preparation on 
the company and a cost of $1,200 per filing. Our burden estimates 
represent the average burden for all issuers. We expect that the burden 
and costs could be greater for larger issuers and lower for smaller 
issuers. For Form D notices, we estimate that 25 percent of the burden 
of preparation is carried by the company internally and that 75 percent 
of the burden of preparation is carried by outside professionals 
retained by the issuer at an average cost of $400 per hour.\184\ The 
portion of the burden carried by outside professionals is reflected as 
a cost, while the portion of the burden carried by the company 
internally is reflected in hours. We estimate the proposals will 
incrementally increase the number of Form D filings and therefore the 
filing burden by 1,500 hours of company personnel time and $1,800,000. 
Based on this increase, we estimate that the annual compliance burden 
in the proposed collection of information requirements in hours for 
issuers making Form D filings will be an aggregate 30,800 hours of 
company personnel time and $36,960,000 for the services of outside 
professionals per year.
---------------------------------------------------------------------------

    \184\ The hourly cost estimate is based on our consultations 
with several registrants and law firms and other persons who 
regularly assist registrants in preparing and filing with the 
Commission.
---------------------------------------------------------------------------

    We request comment on the accuracy of our estimates. Pursuant to 44 
U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i) Evaluate 
whether the proposed collection of information is necessary for the 
proper performance of the functions of the agency, including whether 
the information will have practical utility; (ii) evaluate the accuracy 
of the Commission's estimate of burden of the proposed collection of 
information; (iii) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(iv) evaluate whether there are ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and should send a copy to Nancy M. Morris, Secretary, 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-1090, with reference to File No. [S7-18-07]. Requests for 
materials submitted to OMB by the Commission with regard to these 
collections of information should be in writing, refer to File No. [S7-
18-07], and be submitted to the Securities and Exchange Commission, 
Records Management, Office of Filings and Information Services, 
Washington, DC 20549. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this release. Consequently, a comment to OMB is assured of having its 
full effect if OMB receives it within 30 days of publication.

C. Paperwork Reduction Act--Accredited Natural Person

    In December 2006, the Commission proposed to add a new category of 
accredited investor, defined as accredited natural person, under the 
Securities Act.\185\ We do not believe that the additional questions 
regarding that proposal on which we solicit comment in this release 
change our analysis under the Paperwork Reduction Act provided in the 
Private Pooled Investment Vehicle Release. We solicit comment on that 
conclusion and on whether our estimates continue to be accurate.
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    \185\ See Private Pooled Investment Vehicle Release.
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V. Cost-Benefit Analysis

A. Background and Summary of Proposals

    Adopted in 1982, Regulation D was designed as a comprehensive 
scheme for exemptions from the registration provisions of the 
Securities Act for smaller companies attempting to sell securities in 
private or limited offerings. We are proposing revisions to Regulation 
D in order to clarify certain rules and definitions and to add a new 
exemption. The proposed changes include:
     Providing issuers a more flexible exemption in proposed 
Rule 507 that would allow limited advertising in offerings of covered 
securities made exclusively to large accredited investors,

[[Page 45137]]

a new category of investor proposed in Rule 501(a);
     Revising the definition of the term ``accredited 
investor'' to clarify it and reflect developments since its adoption, 
including adding alternative investments-owned standards to the 
definition, accounting for future inflation, clarifying the list of 
legal entities that may qualify as accredited investors and clarifying 
the meaning of ``joint investments'';
     Shortening the timing required by the integration safe 
harbor for Regulation D offerings from six months to 90 days; and
     Providing uniform disqualification provisions to apply 
throughout Regulation D.
    We also are soliciting comment on whether to amend Rule 504 of 
Regulation D so that securities sold pursuant to a State law exemption 
that permits sales only to accredited investors would be deemed 
``restricted securities'' for purposes of Rule 144.
    We have identified certain costs and benefits that may result from 
the proposals. We encourage commenters to identify, discuss, analyze 
and supply relevant data regarding these or any additional costs and 
benefits.

B. Benefits

    We believe the proposals will benefit investors by providing a new 
offering exemption to issuers, clarifying our existing rules and 
barring certain recidivists from offering securities in Regulation D 
exempt offerings. The benefits discussed are difficult to quantify and 
value. Generally, we believe the proposals will reduce the cost of 
Regulation D exempt offerings and thereby encourage issuers to 
substitute this form of offering for more costly alternatives, thereby 
lowering the cost of capital generally. The benefits of the proposals 
may include the following:
     Proposed Rule 507 would allow for limited advertising in 
offerings made exclusively to large accredited investors. Permitting 
limited advertising in an exempt offering would provide issuers more 
efficient access to the pool of potential investors and capital. This 
may reduce the cost of capital formation by allowing issuers to contact 
investors directly, and avoid the need for financial intermediaries to 
provide unnecessary costly assistance in the effort to raise capital. 
Finally, offerings of covered securities are preempted from state 
registration requirements permitting issuers to more readily offer 
their securities nationally.
     The proposal to revise the definition of accredited 
investor would add alternative investments-owned standards to the 
current accredited investor standards. We believe an investments-owned 
standard is both easier to establish and a more accurate indicator of 
whether an investor needs the protections afforded by registration, 
providing issuers a potentially better way of identifying accredited 
investors.\186\ We believe the proposed standards would decrease the 
cost of establishing accredited investor qualification and slightly 
expand the number of accredited investors, thereby increasing the pool 
of potential investors and thus potentially benefiting investors by 
decreasing the cost of capital.
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    \186\ If the criteria to determine accredited investor status 
are easier to apply, the cost of determining accredited investor 
status and the risk of sales to non-accredited investors would 
decrease. This would also lower the risk that the issuer may need to 
make a rescission offer or that an investor may inappropriately 
invest in an offering.
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     The proposal would revise the accredited investor 
thresholds to account for future inflation, to clarify the meaning of 
``joint investments'' and to clarify the list of legal entities that 
may qualify as accredited investors. Greater clarity in the rule would 
generally benefit investors by making the rule easier to apply and 
easing regulatory burdens on issuers.
     The proposal to shorten the Regulation D integration safe 
harbor from six months to 90 days would provide issuers greater 
flexibility to conduct more frequent offerings to meet unpredictable 
financing needs. Greater flexibility would allow issuers to better time 
their offerings, benefiting investors by potentially lowering the cost 
of capital.
     The proposal to establish uniform bad actor 
disqualification provisions to apply throughout Regulation D would 
preclude certain issuers from relying on Regulation D exemptions. We 
believe these disqualification provisions will help to keep recidivists 
out of the limited and private offering market. By deterring bad actors 
from conducting exempt offerings under Regulation D, we believe we may 
reduce fraud in the market, thereby ultimately lowering the cost of 
capital.
     An amendment to revise Rule 504 to treat securities sold 
pursuant to a state law exemption that permits sales only to accredited 
investors as ``restricted securities'' for purposes of Rule 144 would 
likely have a deterrent affect on abusive practices, such as ``pump and 
dump'' schemes for securities of non-reporting companies that trade 
over the counter.

C. Costs

    Our proposals may impose some costs on investors by placing 
additional regulatory burdens on issuers. We have estimated for our 
Paperwork Reduction Act analysis that the proposals will increase the 
number of Form D filings by 1,500, resulting in $2,062,500 in 
additional costs relating to the filing of additional Forms D.\187\ 
Many of the costs are dependent on a number of factors, but may 
include:
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    \187\ We estimate that the burden of preparation for the 1,500 
additional Form D filings carried by outside professionals will cost 
$1,800,000 and an additional 1,500 hours of company personnel time 
which we estimate to be valued at $175 per hour.
---------------------------------------------------------------------------

     Proposed Rule 507 would allow limited advertising in an 
exempt offering to large accredited investors. If the proposed rule is 
successful, issuers may substitute Rule 507 offerings for registered 
offerings, resulting in investors losing some of the informational and 
enforcement benefits of federal securities registration. Investors in 
the covered securities to be offered under Rule 507 in lieu of 
registered offerings also may incur costs due to the lost benefits of 
state registration and oversight.
     We expect that the majority of Rule 507 offerings would be 
undertaken by issuers in lieu of Rule 506 offerings, since all large 
accredited investors eligible to participate in Rule 507 offerings also 
would be eligible to participate in Rule 506 offerings. We believe the 
informational, enforcement and state registration and oversight 
benefits of Rule 507 would be the same as those of Rule 506, with no 
difference in costs to investors.
     Proposed Rule 507 may also cause certain issuers to 
undertake an offering of securities that they otherwise may not have 
undertaken in the absence of the new rule. The costs to conduct a Rule 
507 offering, including attorney and accountant fees, as well as the 
costs related to limited advertising permissible in Rule 507 offerings, 
would be in lieu of the costs of other traditional financing methods, 
such as bank loans or the costs of not raising additional capital.
     If there is an increase in fraudulent activity through the 
limited advertising and solicitation allowed under proposed Rule 507, 
such activity could discourage the use of the exemption and other 
Regulation D exemptions generally, and thereby have the unintended 
consequences of increasing the cost of capital formation above what 
would occur in the absence of the rule amendment.

[[Page 45138]]

     The proposal to account for future inflation in the 
definition of accredited investor would limit the growth and could 
shrink the pool of accredited investors, imposing costs on investors by 
increasing issuers' cost of capital relative to what would occur in the 
absence of the rule amendment.
     The proposal to establish uniform disqualification 
provisions to apply throughout Regulation D may disqualify certain 
issuers from undertaking Regulation D exempt offerings relative to what 
would occur without the rule amendment. The application of the proposed 
disqualification provisions would add an additional cost to offerings 
for investigations in order to determine whether any of the 
participants in the offering will cause the issuer to be 
disqualified.\188\ In addition, a disqualified issuer would not have 
access to Regulation D, which would likely impose costs on investors by 
increasing the cost of raising capital for the issuer.
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    \188\ Under the current rules, disqualification provisions are 
included in Rule 505, but do not apply to Rule 504 or Rule 506. As 
proposed, the new disqualification provisions would apply to all 
Regulation D exemptions. Therefore, new costs would apply to 
offerings under Rules 504, 506 and 507. Costs would likely decrease 
for Rule 505 offerings, since the proposed disqualification 
provisions would not include ``underwriters,'' which are currently 
included in the Rule 505 disqualification provisions.
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     An amendment to revise Rule 504 to treat securities sold 
pursuant to a state law exemption that permits sales only to accredited 
investors as ``restricted securities'' for purposes of Rule 144 could 
result in potentially greater limitations on resale than may exist 
under state securities laws.

D. Request for Comment

    We solicit comments on the costs and benefits of the proposed 
revisions. We request your views on the costs and benefits described 
above, as well as on any other costs and benefits that could result 
from the adoption of these proposals. We encourage commenters to 
identify, discuss, analyze, and supply relevant data regarding these or 
any additional costs and benefits. Specifically, we ask the following:
     What are the costs and benefits of limited advertising and 
greater flexibility in the proposed Rule 507 exemption?
     What are the nature and extent of the costs and benefits 
to investors that would result from amending the accredited investor 
standards as proposed? Are there costs to accredited investors relating 
to the application of the investments-owned standard?
     What are the costs and benefits of the shortened 90-day 
integration safe harbor?
     What are the costs and benefits of the disqualification 
provisions we propose for Regulation D?
     What would be the costs and benefits if we revised Rule 
504 to treat securities sold pursuant to a state law exemption that 
permits sales only to accredited investors as ``restricted securities'' 
for purposes of Rule 144?
    In general, we request comment on all aspects of this cost-benefit 
analysis, including identification of any additional costs or benefits 
of the proposals not already defined, that may result from the adoption 
of these proposed amendments and rules. We generally request comment on 
the competitive benefits or anticompetitive effects that may impact any 
market participants if the proposals are adopted as proposed. We also 
request comment on what impact the proposals, if adopted, would have on 
efficiency and capital formation. Commenters are requested to provide 
empirical data and other factual support for their views to the extent 
possible.

E. Accredited Natural Person

    In December 2006, the Commission proposed to add a new category of 
accredited investor, defined as accredited natural person, under the 
Securities Act.\189\ We do not believe that the additional questions 
regarding that proposal on which we solicit comment in this release 
change the cost-benefit analysis we provided in connection with that 
proposal. We solicit comment on that conclusion. For example, would 
changing the thresholds on who can invest materially affect investors 
in or issuers of pooled investment vehicles? We also welcome further 
comments on all aspects of that analysis.
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    \189\ See Private Pooled Investment Vehicle Release.
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VI. Consideration of Burden on Competition and Promotion of Efficiency, 
Competition and Capital Formation

A. General

    Section 2(b) of the Securities Act \190\ requires us, when engaging 
in rulemaking where we are required to consider or determine whether an 
action is necessary or appropriate in the public interest, to consider, 
in addition to the protection of investors, whether the action will 
promote efficiency, competition, and capital formation. The proposals 
are intended to modernize and streamline Regulation D without 
compromising investor protection.
---------------------------------------------------------------------------

    \190\ 15 U.S.C. 77b(b).
---------------------------------------------------------------------------

    We do not believe most of the proposals will place a significant 
burden on or otherwise affect competition. The proposed Rule 507 
exemption, the revisions to the definition of accredited investor and 
the Regulation D safe harbor would apply equally to all issuers and 
should encourage additional Regulation D offerings. The limited 
advertising permitted in the proposed Rule 507 exemption may provide 
issuers with a competitive alternative to using finders and private 
placement agents to locate prospective investors in exempt offerings. 
This may help to reduce an issuer's costs of raising capital. The 
proposed disqualification provisions may provide a competitive 
disadvantage for issuers subject to them, as such issuers would be 
required to take appropriate actions to no longer be subject to the 
disqualification, seek a waiver or raise capital through a registered 
offering rather than use Regulation D. We believe any disadvantage 
would be tempered by an issuer's ability to avoid disqualification by 
dissociating from the disqualified person or seeking a waiver.
    We believe our proposals may positively affect efficiency and 
capital formation. The proposals to provide a new exemption that allows 
limited advertising in offerings made exclusively to large accredited 
investors and to shorten the time frame of the Regulation D integration 
safe harbor should both promote more efficient allocation of resources 
and increase capital formation, by allowing issuers greater flexibility 
in their choice of the method and timing of their offerings. We believe 
the proposals to add alternative investments-owned standards and to 
clarify the definition of accredited investors would promote efficiency 
by providing clearer guidance on the application of the accredited 
investor standard. The proposal to account for future inflation may 
reduce the number of accredited investors and add complications when 
calculating new accredited investor thresholds in the future, but also 
would limit the erosion of the accredited investor threshold over time. 
Finally, the application of bad actor disqualification provisions to 
all offerings under Regulation D would require issuers to determine 
whether executive officers and other related parties would subject the 
issuer to the disqualification provisions. Issuers subject to the 
disqualification provisions would be able to seek capital through 
registered offerings, with their heightened

[[Page 45139]]

protections for investors. Although this would add costs to an issuer's 
capital formation, we believe this provision would serve more generally 
to promote capital formation by providing additional investor 
protection and inspiring greater confidence in the private equity 
markets.
    We are soliciting comment on whether to amend Rule 504 so that 
securities sold pursuant to a state law exemption that permits sales 
only to accredited investors would be deemed ``restricted securities'' 
for purposes of Rule 144. Given the resale restrictions typically 
required under state securities law exemptions, if this amendment were 
adopted, we do not believe it would have a material affect on issuers' 
ability to raise capital.
    We request comment on whether the proposed amendments, if adopted, 
would promote or burden efficiency, competition and capital formation. 
Finally, we request commenters to provide empirical data and other 
factual support for their views if possible. We believe adoption of the 
proposed revisions to Regulation D would have a minor impact on 
competition, and would have a positive impact on the efficiency of 
raising capital and on capital formation.

B. Accredited Natural Person

    In December 2006, the Commission proposed to add a new category of 
accredited investor, defined as accredited natural person, under the 
Securities Act.\191\ We do not believe that the additional questions 
regarding that proposal on which we solicit comment in this release 
change our analysis under Section 2(b) of the Securities Act with 
respect to that proposal. We solicit comment on that conclusion. For 
example, would harmonized definitions increase the efficiency of 
limited offerings? Would different investment thresholds affect capital 
formation? We also welcome further comments on all aspects of that 
analysis.
---------------------------------------------------------------------------

    \191\ See Private Pooled Investment Vehicle Release.
---------------------------------------------------------------------------

VII. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Analysis has been prepared in 
accordance with 5 U.S.C. 603. It relates to proposed revisions to 
Regulation D under the Securities Act.

A. Reasons for the Proposed Action

    Our objective in this effort is to clarify and modernize our rules 
to bring them into line with the realities of modern market practice 
and communications technologies without compromising investor 
protection. Action in this area also is timely because our Advisory 
Committee on Smaller Public Companies made a number of recommendations 
relating to private and limited offerings in its final report dated 
April 23, 2006. We propose to revise Regulation D to provide additional 
flexibility to issuers and to clarify and improve the application of 
the rules through:
     Creating a new exemption from the registration provisions 
of the Securities Act for offers and sales of covered securities to 
``large accredited investors'';
     Revising the definition of the term ``accredited 
investor'' to clarify it and reflect developments since its adoption;
     Shortening the timing required by the integration safe 
harbor for Regulation D offerings; and
     Providing uniform disqualification provisions to apply 
throughout Regulation D.

B. Objectives

    The goal of Regulation D was to facilitate capital formation 
consistent with the protection of investors through simplification and 
clarification of existing exemptions, expansion of their availability 
and greater uniformity between federal and state exemptions. Our 
proposals offer revisions that would continue to simplify and clarify 
the exemptions and facilitate capital formation for smaller issuers, 
while protecting investors.
    We propose to provide issuers with a more flexible safe harbor 
exemption in Rule 507 that would allow limited advertising in offerings 
made exclusively to large accredited investors. Proposed Rule 507 would 
permit issuers to publish a limited announcement of their offering, 
thereby providing issuers with greater access to potential investors 
and reducing their costs of raising capital. We also propose to adjust 
the definition of accredited investor:
     To add alternative investments-owned standards along with 
the current total asset and net worth standards, because an 
investments-owned standard may be easier to use and may provide a more 
accurate method to assess an investor's need for the protections of 
registration under the Securities Act;
     To adjust the dollar-amount thresholds in Rule 501 to 
account for inflation so that the thresholds will not erode over time;
     To clarify the list of legal entities that may qualify as 
accredited investors to eliminate existing uncertainty regarding the 
list;
     To clarify under the definition of ``joint investments'' 
that only 50 percent of the assets held jointly by spouses should be 
used in determining an individual's accredited investor status.

    In addition, we propose to shorten the Regulation D integration 
safe harbor from six months to 90 days to provide flexibility to 
issuers to meet financing needs, which often are unpredictable. 
Finally, we propose that certain issuers be precluded from relying on 
Regulation D if they are subject to the disqualification provisions in 
proposed Rule 502(e). We believe these disqualification provisions will 
serve to guard against fraud in exempt offerings and improve the 
market's perceptions of these offerings, thereby reducing the cost of 
capital.
    We are soliciting comment on whether to amend Rule 504 so that 
securities sold pursuant to a state law exemption that permits sales 
only to accredited investors would be deemed ``restricted securities'' 
for purposes of Rule 144. Given that Rule 504 issuers tend to be small 
entities, this amendment would affect small entities, to the extent 
that Rule 144 restrictions would be greater than current state law 
restrictions.

C. Legal Basis

    The amendments are being proposed under the authority set forth in 
Sections 2(a)(15), 3(b), 4(2), 4(6), 18, 19, and 28 of the Securities 
Act.

D. Small Entities Subject to the Proposed Rules

    The proposals would affect issuers that are small entities. For 
purposes of the Regulatory Flexibility Act under our rules, an issuer 
is a ``small business'' or ``small organization'' if it has total 
assets of $5 million or less as of the end of its most recent fiscal 
year.\192\ For purposes of the Regulatory Flexibility Act, an 
investment company is a small entity if it, together with other 
investment companies in the same group of related investment companies, 
has net assets of $50 million or less as of the end of its most recent 
fiscal year. The proposed amendments would apply to all issuers that 
rely on Regulation D for an exemption to Securities Act registration.
---------------------------------------------------------------------------

    \192\ 17 CFR 230.157.
---------------------------------------------------------------------------

    All issuers that offer securities in reliance on Regulation D must 
file a Form D with the Commission. However, the vast majority of 
companies filing Form D are not required to provide financial reports 
to the Commission. As previously noted, in 2006, 16,829 issuers filed 
Form D. We believe that many of these issuers are small entities,

[[Page 45140]]

but we currently do not collect information on total assets to 
determine if they are small entities for purposes of this analysis.

E. Reporting, Recordkeeping and Other Compliance Requirements

    None of our proposed revisions to Regulation D would increase in 
any material way the information or time required to complete the Form 
D that must be filed with the Commission in connection with a 
Regulation D transaction. Our proposed revisions would also not require 
any further disclosure than is currently required in offerings made in 
reliance on Regulation D, other than requiring each issuer submitting a 
Form D to certify that it is not disqualified from relying on 
Regulation D for one of the reasons stated in proposed Rule 
502(e).\193\
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    \193\ In a companion release, we are proposing this change to 
Form D. See Release No. 33-8814 (June 29, 2007) [72 FR 37376].
---------------------------------------------------------------------------

    Proposed Rule 507 would permit an issuer to publish a limited 
advertisement and to solicit large accredited investors. The 
limitations of the advertisement are detailed in Rule 507(b)(2)(ii). 
The exemption builds on the accredited investor definition in 
Regulation D, requiring that an issuer evaluate whether investors meet 
the large accredited investor eligibility requirements. The same 
systems and procedures an issuer would use to determine accredited 
investor eligibility would be required to determine large accredited 
investor eligibility. Issuers may need to establish new procedures if 
they intend to make an offering on their own and relied on financial 
intermediaries to establish the procedures in the past.
    Proposed Rule 502(e), establishing uniform disqualification 
provisions throughout Regulation D, would require issuers to determine 
whether the issuer, any predecessor of the issuer, any affiliated 
issuer, any director, executive officer, general partner or managing 
member of the issuer, any beneficial owner of 20 percent or more of any 
class of its equity securities, or any promoter currently connected 
with the issuer is subject to any of the disqualification provisions.

F. Duplicative, Overlapping or Conflicting Federal Rules

    We believe that there are no rules that conflict with or duplicate 
the proposed rules.

G. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish the stated objective of our 
proposals, while minimizing any significant adverse impact on small 
entities. In connection with the proposed amendments and rules, we 
considered the following alternatives:
     The establishment of different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
     The clarification, consolidation, or simplification of the 
rule's compliance and reporting requirements for small entities;
     The use of performance rather than design standards; and
     An exemption from coverage of the proposed rules, or any 
part thereof, for small entities.
    Regulation D provides exemptions to the registration requirements 
under the Securities Act. The proposed amendments to Regulation D would 
apply equally to all issuers that rely upon these exemptions. The 
regulation is designed to facilitate access to capital by providing 
exemptions to registration under the Securities Act. These exemptions 
allow issuers to raise capital without having to expend the time and 
resources necessary to undertake a registered public offering. Our 
proposals are intended to further the goals of Regulation D through 
simplification and clarification of the exemptions, expansion of their 
availability and by providing greater uniformity between federal and 
state exemptions.
    With respect to the establishment of special compliance 
requirements or timetables under the proposals for small entities, we 
do not think this is feasible or appropriate. Our proposals are 
designed to further facilitate issuers' access to capital for both 
large and small issuers. Excepting small entities from our proposals 
would increase, rather than decrease, their regulatory burden. 
Nevertheless, we request comment on whether it is feasible or 
appropriate for small entities to have special requirements or 
timetables for compliance with our proposals.
    With respect to clarification, consolidation and simplification of 
Regulation D's compliance and reporting requirements for small 
entities, we believe our proposals are designed to streamline and 
modernize Regulation D for all issuers, both large and small. 
Nevertheless, we request comment on ways to clarify, consolidate, or 
simplify any part of the proposed amendments and rules.
    With respect to the use of performance or design standards, we do 
not consider using performance rather than design standards to be 
consistent with our statutory mandate of investor protection in the 
present context. Because the proposed rules seek compliance with 
specific standards without seeking to achieve pre-determined levels of 
capital formation or offering activity, design standards are necessary 
to achieve the objective of the proposals. Nevertheless, we request 
comment on these matters.
    With respect to exempting small entities from coverage of these 
proposed rules, we believe such changes would be impracticable. These 
proposed rules are designed to facilitate an issuer's access to 
capital, regardless of the size of the issuer. We have endeavored 
throughout these proposed amendments and rules to minimize the 
regulatory burden on all issuers, including small entities, while 
meeting our regulatory objectives. Nevertheless, we request comment on 
ways in which we could exempt small entities from coverage of any 
unduly onerous aspects of our proposed amendments and rules.

H. Request for Comment

    We encourage comments with respect to any aspect of this initial 
regulatory flexibility analysis. In particular, we request comments 
regarding:
     The number of small entities that may be affected by the 
proposals;
     The existence or nature of the potential impact of the 
proposals on small entities discussed in the analysis; and
     How to quantify the impact of the proposed rules.

Commenters are asked to describe the nature of any impact and provide 
empirical data supporting the extent of the impact. Such comments will 
be considered in the preparation of the final regulatory flexibility 
analysis, if the proposals are adopted, and will be placed in the same 
public file as comments on the proposed amendments themselves.

I. Accredited Natural Person

    In December 2006, the Commission proposed to add a new category of 
accredited investor, defined as accredited natural person, under the 
Securities Act.\194\ We do not believe that the additional questions 
regarding that proposal on which we solicit comment in this release 
change our Initial Regulatory Flexibility Analysis provided on that 
proposal. We solicit comment on that conclusion and welcome further 
comments on all aspects of that analysis.
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    \194\ See Private Pooled Investment Vehicle Release.

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[[Page 45141]]

VIII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996,\195\ a rule is ``major'' if it has resulted, or is likely 
to result in:
---------------------------------------------------------------------------

    \195\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment or 
innovation.
    We request comment on whether our proposals would be a ``major 
rule'' for purposes of SBREFA. We solicit comment and empirical data 
on:
     The potential effect on the U.S. economy on an annual 
basis;
     Any potential increase in costs or prices for consumers or 
individual industries; and
     Any potential effect on competition, investment or 
innovation.

IX. Statutory Basis and Text of Proposed Amendments

    The amendments are being proposed under the authority set forth in 
Sections 2(a)(15), 3(b), 4(2), 4(6), 18, 19 and 28 of the Securities 
Act, as amended.

Text of Proposed Amendments

List of Subjects

17 CFR Part 200

    Authority delegations (Government agencies).

17 CFR Part 230 and 239

    Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

    1. The authority citation for part 200, Subpart A, continues to 
read, in part, as follows:

    Authority: 15 U.S.C. 77o, 77s, 77sss, 78d, 78d-1, 78d-2, 78w, 
78ll(d), 78mm, 80a-37, 80b-11, and 7202, unless otherwise noted.
* * * * *
    2. Amend Sec.  200.30-1 by revising paragraph (c) to read as 
follows:


Sec.  200.30-1  Delegation of authority to Director of Division of 
Corporation Finance.

* * * * *
    (c) With respect to the Securities Act of 1933 (15 U.S.C. 77a et 
seq.) and Regulation D thereunder (Sec.  230.501 et seq. of this 
chapter), to authorize the granting of applications under Rule 
502(e)(2)(ii) (Sec.  230.502(e)(2)(ii) of this chapter) upon the 
showing of good cause that it is not necessary under the circumstances 
that the exemption under Regulation D be denied.
* * * * *

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    3. The authority citation for part 230 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w, 
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, 
unless otherwise noted.
* * * * *
    4. Amend Sec.  230.144A by adding Preliminary Note 8 to read as 
follows:


Sec.  230.144A  Private resales of securities to institutions.

* * * * *
    8. The publication of a general announcement of an offering in 
accordance with Rule 507 (17 CFR 230.507) would not preclude resales 
pursuant to Rule 144A.
* * * * *
    5. Amend Sec.  230.146 by adding paragraph (c) to read as follows:


Sec.  230.146  Rules under section 18 of the Act.

* * * * *
    (c) Definition of Qualified Purchaser. For purposes of Section 
18(b)(3) of the Act (15 U.S.C. 77r(b)(3)), the term ``qualified 
purchaser'' shall mean any large accredited investor as defined in 
Sec.  230.501(k) with respect to an offer or sale in compliance with 
Sec.  230.507, but this paragraph does not prohibit a state from 
imposing notice filing requirements that are substantially similar to 
those imposed by the Commission for transactions with such investors.
    6. Revise Sec.  230.215 to read as follows:


Sec.  230.215  Accredited investor.

    The term accredited investor as used in section 2(a)(15)(ii) of the 
Securities Act of 1933 (15 U.S.C. 77b(a)(15)(ii)) shall include the 
following persons:
    (a) Any bank as defined in section 3(a)(2) of the Act, or any 
savings and loan association or other institution as defined in section 
3(a)(5)(A) of the Act, whether acting in its individual or fiduciary 
capacity; any broker or dealer registered pursuant to section 15 of the 
Securities Exchange Act of 1934; any insurance company as defined in 
section 2(a)(13) of the Act; any investment company registered under 
the Investment Company Act of 1940 or business development company as 
defined in section 2(a)(48) of that Act; any Small Business Investment 
Company licensed by the U.S. Small Business Administration under 
section 301(c) or (d) of the Small Business Investment Act of 1958; any 
plan established and maintained by a state, its political subdivisions, 
or any agency or instrumentality of a state or its political 
subdivisions, for the benefit of its employees, if such plan has total 
assets in excess of $5,000,000 or investments in excess of $5,000,000 
(each as adjusted for inflation in accordance with the Note to this 
Sec.  230.215); or any employee benefit plan within the meaning of the 
Employee Retirement Income Security Act of 1974 if the investment 
decision is made by a plan fiduciary, as defined in section 3(21) of 
such statute, which is either a bank, savings and loan association, 
insurance company, or registered investment adviser, or if the employee 
benefit plan has total assets in excess of $5,000,000 or investments in 
excess of $5,000,000 (each as adjusted for inflation in accordance with 
the Note to this Sec.  230.215) or, if a self-directed plan, with 
investment decisions made solely by persons that are accredited 
investors;
    (b) Any private business development company as defined in section 
202(a)(22) of the Investment Advisers Act of 1940;
    (c) Any corporation (including any non-profit corporation), 
Massachusetts or similar business trust, partnership, limited liability 
company, Indian tribe, labor union, governmental body, or other legal 
entity with substantially similar legal attributes, not formed for the 
specific purpose of acquiring the securities offered, with total assets 
in excess of $5,000,000 or investments in excess of $5,000,000 (each as 
adjusted for inflation in accordance with the Note to this Sec.  
230.215);
    (d) Any director, executive officer, general partner, or managing 
member of the issuer of the securities being offered or sold, or any 
director, executive officer, general partner, or managing member of a 
general partner or managing member of that issuer;
    (e) Any natural person whose individual net worth, or aggregate net 
worth with that person's spouse, at the time of purchase exceeds 
$1,000,000 or whose individual investments, or joint investments with 
that person's spouse, at the time of purchase exceeds $750,000 (each as 
adjusted for inflation in accordance with the Note to this Sec.  
230.215);
    (f) Any natural person who had an individual income in excess of 
$200,000

[[Page 45142]]

in each of the two most recent years or aggregate income with that 
person's spouse in excess of $300,000 in each of those years (each as 
adjusted for inflation in accordance with the Note to this Sec.  
230.215) and has a reasonable expectation of reaching the same income 
level in the current year;
    (g) Any trust, with total assets in excess of $5,000,000 or 
investments in excess of $5,000,000 (each as adjusted for inflation in 
accordance with the Note to this Sec.  230.215), not formed for the 
specific purpose of acquiring the securities offered, whose purchase is 
directed by a sophisticated person as described in Rule 506(b)(2)(ii); 
and
    (h) Any entity in which all of the equity owners are accredited 
investors.

    Note to Sec.  230.215: The dollar amounts of the accredited 
investor thresholds as set forth in paragraphs (a), (c), (e), (f) 
and (g) of this section shall be adjusted for inflation every five 
years, with the first adjustments effective July 1, 2012, by 
appropriate publication by the Commission in the Federal Register. 
The inflation adjustments shall be computed by: Dividing the annual 
value of the Personal Consumption Expenditures Chain-Type Price 
Index (or any successor index thereto), as published by the 
Department of Commerce, for the calendar year preceding the calendar 
year in which the adjustment is being made by the annual value of 
such index (or successor) for the calendar year ending December 31, 
2006; and multiplying the dollar amounts by the quotient obtained. 
The adjusted dollar amounts shall be rounded to the nearest multiple 
of $10,000.

    Instruction to Sec.  230.215: All terms used in the definition of 
``accredited investor'' shall have the meaning indicated in Sec.  
230.501.
    7. The general authority citation for Part 230, Regulation D--Rules 
Governing the Limited Offer and Sale of Securities Without Registration 
Under the Securities Act of 1933 is revised to read as follows:

Regulation D--Rules Governing the Limited Offer and Sale of Securities 
Without Registration Under the Securities Act of 1933

    Authority: Section 230.501 to 230.508 issued under 15 U.S.C. 
77c, 77d, 77r, 77s, and 77z-3.
* * * * *


Sec. Sec.  230.501 through 230.508  [Amended]

    8. Amend Preliminary Note 2 to Regulation D, consisting of 
Sec. Sec.  230.501 through 230.508, by revising the reference to 
``19(c)'' to read ``19(d)''.
    9. Amend Sec.  230.501 by:
    a. Revising paragraph (a).
    b. Redesignating paragraphs (g) and (h) as paragraphs (i) and (l).
    c. Revising the reference in newly redesignated paragraph 
(l)(1)(ii) that reads ``(h)(1)(i) or (h)(1)(iii)'' to read ``(l)(1)(i) 
or (l)(1)(iii)''.
    d. Revising the reference in newly redesignated paragraph 
(l)(1)(iii) that reads ``(h)(1)(i) or (h)(1)(ii)'' to read ``(l)(1)(i) 
or (l)(1)(ii)''.
    e. Revising the reference in Note 2 to newly redesignated paragraph 
(l) that reads ``paragraph (h)(3) and the disclosure required by 
paragraph (h)(4)'' to read ``paragraph (l)(3) and the disclosure 
required by paragraph (l)(4)''.
    f. Adding new paragraphs (g), (h), (j) and (k).
    The revisions and additions read as follows:


Sec.  230.501  Definitions and terms used in Regulation D.

* * * * *
    (a) Accredited investor. ``Accredited investor'' shall mean any 
person who comes within any of the following categories, or who the 
issuer reasonably believes comes within any of the following 
categories, at the time of the sale of the securities to that person:
    (1) Any bank as defined in section 3(a)(2) of the Act, or any 
savings and loan association or other institution as defined in section 
3(a)(5)(A) of the Act, whether acting in its individual or fiduciary 
capacity; any broker or dealer registered pursuant to section 15 of the 
Securities Exchange Act of 1934; any insurance company as defined in 
section 2(a)(13) of the Act; any investment company registered under 
the Investment Company Act of 1940 or business development company as 
defined in section 2(a)(48) of that Act; any Small Business Investment 
Company licensed by the U.S. Small Business Administration under 
section 301(c) or (d) of the Small Business Investment Act of 1958; any 
plan established and maintained by a state, its political subdivisions, 
or any agency or instrumentality of a state or its political 
subdivisions, for the benefit of its employees, if such plan has total 
assets in excess of $5,000,000 or investments in excess of $5,000,000 
(each as adjusted for inflation in accordance with the Note to 
paragraph (a)); or any employee benefit plan within the meaning of the 
Employee Retirement Income Security Act of 1974 if the investment 
decision is made by a plan fiduciary, as defined in section 3(21) of 
such statute, which is either a bank, savings and loan association, 
insurance company, or registered investment adviser, or if the employee 
benefit plan has total assets in excess of $5,000,000 or investments in 
excess of $5,000,000 (each as adjusted for inflation in accordance with 
the Note to paragraph (a)) or, if a self-directed plan, with investment 
decisions made solely by persons that are accredited investors;
    (2) Any private business development company as defined in section 
202(a)(22) of the Investment Advisers Act of 1940;
    (3) Any corporation (including any non-profit corporation), 
Massachusetts or similar business trust, partnership, limited liability 
company, Indian tribe, labor union, governmental body, or other legal 
entity with substantially similar legal attributes, not formed for the 
specific purpose of acquiring the securities offered, with total assets 
in excess of $5,000,000 or investments in excess of $5,000,000 (each as 
adjusted for inflation in accordance with the Note to paragraph (a));
    (4) Any director, executive officer, general partner, or managing 
member of the issuer of the securities being offered or sold, or any 
director, executive officer, general partner, or managing member of a 
general partner or managing member of that issuer;
    (5) Any natural person whose individual net worth, or aggregate net 
worth with that person's spouse, at the time of purchase exceeds 
$1,000,000 or whose individual investments, or joint investments with 
that person's spouse, at the time of purchase exceeds $750,000 (each as 
adjusted for inflation in accordance with the Note to paragraph (a));
    (6) Any natural person who had an individual income in excess of 
$200,000 in each of the two most recent years or aggregate income with 
that person's spouse in excess of $300,000 in each of those years (each 
as adjusted for inflation in accordance with the Note to paragraph (a)) 
and has a reasonable expectation of reaching the same income level in 
the current year;
    (7) Any trust, with total assets in excess of $5,000,000 or 
investments in excess of $5,000,000 (each as adjusted for inflation in 
accordance with the Note to paragraph (a)), not formed for the specific 
purpose of acquiring the securities offered, whose purchase is directed 
by a sophisticated person as described in Rule 506(b)(2)(ii); and
    (8) Any entity in which all of the equity owners are accredited 
investors.

    Note to paragraph (a): The dollar amounts of the accredited 
investor thresholds as set forth in paragraphs (a)(1), (a)(3), 
(a)(5), (a)(6) and (a)(7) of this section and the large accredited 
investor thresholds as set forth in paragraphs (k)(1) through (k)(3) 
of this section shall be adjusted for inflation every five years, 
with the first adjustments effective July 1, 2012, by appropriate 
publication by the Commission in the Federal Register. The inflation 
adjustments shall be computed by: Dividing the annual value of the 
Personal

[[Page 45143]]

Consumption Expenditures Chain-Type Price Index (or any successor 
index thereto), as published by the Department of Commerce, for the 
calendar year preceding the calendar year in which the adjustment is 
being made by the annual value of such index (or successor) for the 
calendar year ending December 31, 2006; and multiplying the dollar 
amounts by the quotient obtained. The adjusted dollar amounts shall 
be rounded to the nearest multiple of $10,000.

* * * * *
    (g) Governmental body. ``Governmental body'' shall mean any:
    (1) Nation, state, county, town, village, district or other 
jurisdiction of any nature;
    (2) Federal, State, local, municipal, foreign or other government;
    (3) Governmental or quasi-governmental authority of any nature 
(including any governmental agency, branch, department, official or 
entity and any court or other tribunal);
    (4) Multi-national organization or body; or
    (5) Body exercising, or entitled to exercise, any administrative, 
executive, judicial, legislative, police, regulatory or taxing 
authority or power of any nature.
    (h) Investments. ``Investments'' shall mean:
    (1) Securities (as defined by section 2(a)(1) of the Act), other 
than securities issued by an issuer that is controlled by the 
prospective purchaser that owns such securities, unless such issuer is:
    (i) An investment company, as defined in section 3(a) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-3(a)), or a company that 
would be an investment company under section 3(a) but for the 
exclusions from that definition provided by sections 3(c)(1) through 
3(c)(9) of the Investment Company Act (15 U.S.C. 80a-3(c)(1) through 
3(c)(9)), or the exclusions provided by Sec.  270.3a-6 or Sec.  270.3a-
7 of this chapter, or a commodity pool;
    (ii) A company that:
    (A) Files reports pursuant to section 13 or 15(d) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); or
    (B) Has a class of securities that are listed on a ``designated 
offshore securities market'' as such term is defined by Regulation S 
under the Act (Sec. Sec.  230.901 through 230.904); or
    (iii) A company with shareholders' equity of not less than $50 
million (determined in accordance with generally accepted accounting 
principles) as reflected on the company's most recent financial 
statements, provided that such financial statements present the 
information as of a date within 16 months preceding the date on which 
the prospective purchaser acquires the offered securities;
    (2) Real estate held for investment purposes;
    (3) Commodity interests held for investment purposes. For purposes 
of this section, commodity interests means commodity futures contracts, 
options on commodity futures contracts, and options on physical 
commodities traded on or subject to the rules of:
    (i) Any contract market designated for trading such transactions 
under the Commodity Exchange Act (7 U.S.C. 1 et seq.) and the rules 
thereunder (17 CFR 1.1 through 190.10); or
    (ii) Any board of trade or exchange outside the United States, as 
contemplated in Part 30 of the rules under the Commodity Exchange Act 
(17 CFR 30.1 through 30.12);
    (4) Physical commodities held for investment purposes. For purposes 
of this paragraph, physical commodities means any physical commodity 
with respect to which a commodity interest is traded on a market 
specified in paragraph (h)(3)(iii) of this section;
    (5) To the extent not securities, financial contracts (as such term 
is defined in section 3(c)(2)(B)(ii) of the Investment Company Act of 
1940 (15 U.S.C. 80a-3(c)(2)(B)(ii))) entered into for investment 
purposes; and
    (6) Cash and cash equivalents (including foreign currencies) held 
for investment purposes. For purposes of this section, cash and cash 
equivalents include:
    (i) Bank deposits, certificates of deposit, bankers acceptances and 
similar bank instruments held for investment purposes; and
    (ii) The net cash surrender value of an insurance policy.

    Note 1 to paragraph (h): Solely for the purpose of determining 
``investment purposes'' in this paragraph (h), real estate shall not 
be considered to be held for investment purposes by a prospective 
purchaser if it is used by the prospective purchaser, a sibling, 
spouse or former spouse, a direct lineal descendant by birth or 
adoption, or spouse of such lineal descendant or ancestor for 
personal purposes or as a place of business, or in connection with 
the conduct of the trade or business of the prospective purchaser or 
such related person, provided that real estate owned by a 
prospective purchaser who is engaged primarily in the business of 
investing, trading or developing real estate in connection with such 
business may be deemed to be held for investment purposes. 
Residential real estate shall not be deemed to be used for personal 
purposes if deductions with respect to such real estate are not 
disallowed by section 280A of the Internal Revenue Code (26 U.S.C. 
280A).


    Note 2 to paragraph (h): Solely for the purpose of determining 
``investment purposes'' in this paragraph (h), a commodity interest 
or physical commodity owned, or a financial contract entered into, 
by the prospective purchaser who is engaged primarily in the 
business of investing, reinvesting, or trading in commodity 
interests, physical commodities or financial contracts in connection 
with such business may be deemed to be held for investment purposes.


    Note 3 to paragraph (h): Solely for the purpose of determining 
whether a prospective purchaser meets the dollar-amount investor 
thresholds in Regulation D, the aggregate amount of investments 
owned and invested on a discretionary basis shall be the 
investments' fair market value on the most recent practicable date 
or their cost provided that in the case of commodity interests, the 
amount of investments shall be the value of the initial margin or 
option premium deposited in connection with such commodity 
interests. There shall be deducted from the amount of such 
investor's investments the amount of any outstanding indebtedness 
incurred to acquire or for the purpose of acquiring the investments 
owned by such person.

* * * * *
    (j) Joint investments. ``Joint investments'' shall mean:
    (1) In the case of a purchase binding on both spouses and where 
both spouses sign the investment documentation, the aggregate of their 
investments held individually and their investments held jointly or as 
community property or similar shared ownership interest; or
    (2) In the case of a purchase made by an individual spouse or where 
only an individual spouse signs the investment documentation, the 
aggregate of the investments held individually by the purchaser and 50 
percent of any investments held jointly with the individual's spouse or 
as community property or similar shared ownership interest.
    (k) Large accredited investor. ``Large accredited investor'' shall 
mean an accredited investor as defined in paragraph (a) of this 
section, except that:
    (1) Any person described in paragraph (a)(1), (a)(3), or (a)(7) of 
this section required to have a dollar amount of assets shall instead 
be required to have investments in excess of $10,000,000 (as adjusted 
for inflation in accordance with the Note to paragraph (a) of this 
section);
    (2) Any person described in paragraph (a)(5) of this section shall 
be required to have investments, or joint investments with that 
person's spouse, in excess of $2,500,000 (as adjusted for inflation in 
accordance with the Note to paragraph (a) of this section);
    (3) Any person described in paragraph (a)(6) of this section shall 
be required to

[[Page 45144]]

have had an individual income in excess of $400,000 in each of the two 
most recent years or aggregate income with that person's spouse in 
excess of $600,000 in each of those years (each as adjusted for 
inflation in accordance with the Note to paragraph (a) of this section) 
and have a reasonable expectation of reaching the same income level in 
the current year; and
    (4) All of the equity owners of entities described in paragraph 
(a)(8) of this section shall be required to be large accredited 
investors.
* * * * *
    10. Amend Sec.  230.502 by:
    a. Revising the references that read ``six months'' in paragraph 
(a) to read ``90 days'' and revising the reference that reads ``six 
month periods'' in paragraph (a) to read ``90-day periods''.
    b. Adding to the first sentence of paragraph (c) the phrase ``or 
Sec.  230.507(b)(2)(ii)'' after the phrase ``Except as provided in 
Sec.  230.504(b)(1)''.
    c. Adding paragraph (e).
    The addition reads as follows:


Sec.  230.502  General conditions to be met.

* * * * *
    (e) Disqualification provisions. (1) An issuer may not rely on 
Regulation D if the issuer, any predecessor of the issuer, any 
affiliated issuer, any director, executive officer, general partner, or 
managing member of the issuer, any beneficial owner of 20 percent or 
more of any class of its equity securities, or any promoter currently 
connected with the issuer:
    (i) Within the last 5 years, has filed a registration statement 
that is the subject of a currently effective permanent or temporary 
injunction of a court or an administrative stop order or similar order 
entered by the Commission or the securities commission (or any agency 
or office performing like functions) of any state;
    (ii) Within the last 10 years, has been convicted of a criminal 
offense in connection with the offer, purchase or sale of any security 
or involving the making of a false filing with the Commission;
    (iii) Within the last 5 years, has been the subject of an 
adjudication or determination, after notice and opportunity for 
hearing, by a Federal or State regulator that the person violated 
Federal or State securities or commodities law or a law under which a 
business involving investments, insurance, banking, or finance is 
regulated; or
    (iv) Is currently subject to any order, judgment or decree of any 
court of competent jurisdiction, entered within the last 5 years, 
temporarily, preliminarily or permanently restraining or enjoining such 
party from engaging in or continuing to engage in any conduct or 
practice involving securities, commodities, investments, insurance, 
banking, or finance, including an order for failure to comply with 
Sec.  230.503;
    (v) Is currently subject to a cease and desist order, entered 
within the last 5 years, issued under Federal or State securities, 
commodities, investment, insurance, banking or finance laws; or
    (vi) Is suspended or expelled from membership in, or suspended or 
barred from association with a member of, a national securities 
exchange registered under section 6 of the Exchange Act or a national 
securities association registered under section 15A of the Exchange Act 
for any act or omission to act constituting conduct inconsistent with 
just and equitable principles or trade.
    (2) Paragraph (e)(1) of this section shall not apply if:
    (i) Upon a showing of good cause and without prejudice to any other 
action by the Commission, the Commission determines that it is not 
necessary under the circumstances that the exemption be denied; or
    (ii) The issuer establishes that it did not know, and in the 
exercise of reasonable care could not have known, that a 
disqualification existed under paragraph (e)(1).


Sec.  230.503  [Amended]

    11. Amend Sec.  230.503 paragraph (a) by revising the reference 
that reads ``Sec.  230.504, Sec.  230.505, or Sec.  230.506'' to read 
``Sec.  230.504, Sec.  230.505, Sec.  230.506, or Sec.  230.507''.


Sec.  230.504  [Amended]

    12. Amend Sec.  230.504 paragraph (b)(1) by revising the reference 
that reads ``230.502(a), (c) and (d)'' to read ``230.502(a), (c), (d) 
and (e)''.


Sec.  230.505  [Amended]

    13. Amend Sec.  230.505 by removing paragraph (b)(2)(iii).
    14. Amend Sec.  230.506 by adding a Note at the end to read as 
follows:


Sec.  230.506  Exemption for limited offers and sales without regard to 
dollar amount of offering.

* * * * *

    Note to Sec.  230.506: Securities sold in compliance with Sec.  
230.506 are ``covered securities'' within the meaning of section 18 
of the Act by reason of section 18(b)(4)(D) of the Act, which limits 
state regulation as provided in section 18 of the Act.

    15. Revise Sec.  230.507 to read as follows:


Sec.  230.507  Exemption for limited offers and sales to large 
accredited investors.

    (a) Exemption. Offers and sales of securities that satisfy the 
conditions in paragraph (b) of this section by an issuer shall be 
exempt from the provisions of section 5 of the Act under section 28 of 
the Act.
    (b) Conditions to be met.-- (1) General conditions. To qualify for 
an exemption under this section, offers and sales must satisfy all the 
terms and conditions of Sec. Sec.  230.501 and 230.502(a), (c), (d) and 
(e) to the extent not superseded by paragraph (b)(2)(ii) of this 
section.
    (2) Specific Conditions.--(i) Limitation on purchasers. All 
purchasers are or the issuer reasonably believes that all purchasers 
are large accredited investors.
    (ii) Limited announcement. Notwithstanding Sec.  230.502(c), offers 
and sales of securities may qualify for exemption under this section if 
the issuer or a person acting on the issuer's behalf publishes in 
written form an announcement of a proposed offering that prominently 
states that sales will be made to large accredited investors only, no 
money or other consideration is being solicited or will be accepted 
through the announcement, and the securities have not been registered 
with or approved by the U.S. Securities and Exchange Commission and are 
being offered and sold pursuant to an exemption from registration, and 
the announcement contains no more than the following optional 
information:
    (A) The name and address of the issuer;
    (B) The name, type, number, price and aggregate amount of 
securities being offered and a brief description of the securities;
    (C) A description of what ``large accredited investor'' means;
    (D) Any suitability standards and minimum investment requirements 
for prospective purchasers in the offering;
    (E) A brief description of the business of the issuer in 25 or 
fewer words; and
    (F) The name, address and telephone number of a person to contact 
for additional information.
    (iii) Additional Information. The issuer or a person acting on the 
issuer's behalf may provide information in addition to the announcement 
permitted under subparagraph (b)(2)(ii) of this section to a 
prospective purchaser only if the issuer reasonably believes that the 
prospective purchaser is a large accredited investor. Information may 
be delivered to prospective purchasers through an electronic database 
that is restricted to large accredited investors.

    Note 1 to Sec.  230.507: Securities sold to large accredited 
investors in compliance with

[[Page 45145]]

Sec.  230.507 are ``covered securities'' within the meaning of 
section 18 of the Act by reason of section 18(b)(3) of the Act and 
Sec.  230.146(c), which limits state regulation as provided in 
section 18 of the Act.


    Note 2 to Sec.  230.507: A private pooled investment vehicle 
that would be an investment company but for the exclusion provided 
by Sec.  3(c)(1) or Sec.  3(c)(7) of the Investment Company Act may 
not rely on Sec.  230.507.

Sec.  230.508  [Amended]

    16. Amend Sec.  230.508 by:
    a. Revising the references that read ``Sec.  230.504, Sec.  230.505 
or Sec.  230.506'' in paragraph (a), (a)(3) and (b) to read ``Sec.  
230.504, Sec.  230.505, Sec.  230.506 or Sec.  230.507''.
    b. Revising the reference that reads ``and paragraph (b)(2)(i) of 
Sec.  230.506'' in paragraph (a)(2) to read ``, paragraph (b)(2)(i) of 
Sec.  230.506 and paragraph (b)(2)(i) of Sec.  230.507''.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

    17. The general authority citation for part 239 continues to read 
as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 78mm, 
80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 80a-
29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *
    18. Amend Form D (referenced in Sec.  239.500), by adding a check 
box that reads ``Rule 507'' between the ``Rule 506'' and ``Section 
4(6)'' check boxes in the ``Filing Under'' information requested in the 
forepart of the Form.

    Note: The text of Form D does not, and the amendments will not, 
appear in the Code of Federal Regulations.


    Dated: August 3, 2007.

    By the Commission.
Nancy M. Morris,
Secretary.
 [FR Doc. E7-15506 Filed 8-9-07; 8:45 am]
BILLING CODE 8010-01-P