Federal Register, Volume 85 Issue 197 (Friday, October 9, 2020)

[Federal Register Volume 85, Number 197 (Friday, October 9, 2020)]
[Rules and Regulations]
[Pages 64234-64278]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19189]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR PARTS 230 and 240

[Release Nos. 33-10824; 34-89669; File No. S7-25-19]
RIN 3235-AM19

Accredited Investor Definition

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

DATES: This final rule is effective December 8, 2020.

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

SUPPLEMENTARY INFORMATION: We are adopting amendments to 17 CFR
230.144A (``Rule 144A''), 17 CFR 230.163B (``Rule 163B''), 17 CFR
230.215 (``Rule 215''), and 17 CFR 230.501 (``Rule 501'') of 17 CFR
230.500 through 230.508 (``Regulation D'') under the Securities Act of
1933 (``Securities Act''); \1\ and 17 CFR 240.15g-1 (``Rule 15g-1'')
under the Securities Exchange Act of 1934 (``Exchange Act'').\2\
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\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
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Table of Contents

I. Introduction and Background
II. Final Amendments to the Accredited Investor Definitions
A. Proposed Amendments
B. Final Amendments
1. Natural Persons
a. Natural Persons Holding Professional Certifications and
Designations or Other Credentials
b. Knowledgeable Employees of Private Funds
2. Entities
a. Registered Investment Advisers
b. Rural Business Investment Companies
c. Limited Liability Companies
d. Other Entities Meeting an Investments-Owned Test
e. Certain Family Offices and Family Clients
3. Permitting Spousal Equivalents To Pool Finances for the
Purposes of Qualifying as Accredited Investors
4. Notes to 501(a)
a. Note to Rule 501(a)(5)
b. Note to Rule 501(a)(8)
5. Amendment to Rule 215
6. Other Comments
III. Amendments to Securities Act Rule 163B and Exchange Act Rule
15g-1
IV. Discussion of the Final Amendments to the Qualified
Institutional Buyer Definition
A. Proposed Amendments
B. Final Amendments
V. Other Matters
VI. Economic Analysis
A. Introduction and Broad Economic Considerations
B. Baseline and Affected Parties
C. Anticipated Economic Effects

[[Page 64235]]

1. Potential Benefits to Issuers
a. More Efficient Capital Raising Process in Exempt Offerings
b. Facilitate Capital Formation by Expanding the Pool of
Investors in Exempt Offerings
c. Increase Liquidity of Securities Issued in Unregistered
Offerings
d. Other Benefits
2. Potential Benefits to Investors
3. Potential Costs to Issuers
4. Potential Costs to Investors
5. Variation in Economic Effects
6. Efficiency, Competition, and Capital Formation
7. Alternatives
a. Inflation Adjustment of Financial Thresholds
b. Investment Limits
c. Geography-Specific Thresholds
d. Including Additional Categories of Natural Persons and
Entities
VII. Paperwork Reduction Act
VIII. Final Regulatory Flexibility Analysis
IX. Statutory Authority

I. Introduction and Background

On December 18, 2019, the Commission proposed amendments to the
definition of ``accredited investor'' in Securities Act Rules 215 and
501(a) and to the definition of ``qualified institutional buyer'' in
Rule 144A.\3\ The proposed amendments were intended to update and
improve the definitions to identify more effectively institutional and
individual investors that have sufficient knowledge and expertise to
participate in investment opportunities that do not have the rigorous
disclosure and procedural requirements, and related investor
protections, provided by registration under the Securities Act.
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\3\ Amending the ``Accredited Investor'' Definition, Release
Nos. 33-10734; 34-87784 (Dec. 18, 2019) [85 FR 2574 (Jan. 15, 2020)]
(``Proposing Release'').
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The Proposing Release and the amendments we are adopting are part
of a broader effort to simplify, harmonize, and improve the exempt
offering framework under the Securities Act to promote capital
formation and expand investment opportunities while maintaining and
enhancing appropriate investor protections.\4\ As we noted in the
Proposing Release, these amendments will provide a foundation for our
ongoing efforts to assess whether the exempt offering framework, in its
component parts and as a whole, is consistent, accessible, and
effective for both issuers and investors. The Securities Act contains a
number of exemptions from its registration requirements and authorizes
the Commission to adopt additional exemptions. As the Commission has
previously noted, the regulatory framework for exempt offerings has
evolved, and the significance of the exempt securities markets has
increased both in terms of the absolute amount raised and relative to
the public registered markets.\5\ In 2019, registered offerings
accounted for $1.2 trillion (30.8 percent) of new capital, compared to
approximately $2.7 trillion (69.2 percent) that we estimate was raised
through exempt offerings.\6\ Of this, the estimated amount of capital
reported as being raised in offerings under Rule 506(b) and 506(c) of
Regulation D was approximately $1.56 trillion.
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\4\ See Concept Release on Harmonization of Securities Offering
Exemptions, Release No. 33-10649 (June 18, 2019) [84 FR 30460 (June
26, 2019)] (``Concept Release'') and Facilitating Capital Formation
and Expanding Investment Opportunities by Improving Access to
Capital in Private Markets, Release Nos. 33-10763; 34-88321 (Mar. 4,
2020) [85 FR 17956 (Mar. 31, 2020)] (``Access to Capital Proposing
Release'').
\5\ See Concept Release at 30465. See also Access to Capital
Proposing Release at 17957.
\6\ Unless otherwise indicated, information in this release on
offering amounts is based on analyses by staff in the Commission's
Division of Economic Risk and Analysis (``DERA'') of data collected
from SEC filings.
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The accredited investor definition is a central component of the
Rule 506 exemptions from registration and plays an important role in
other exemptions and other federal and state securities law contexts.
Qualifying as an accredited investor, as an individual or an
institution, is significant because accredited investors may, under
Commission rules, participate in investment opportunities that are
generally not available to non-accredited investors, including certain
investments in private companies and offerings by certain hedge funds,
private equity funds, and venture capital funds. The final rules are
tailored to permit investors with reliable alternative indicators of
financial sophistication to participate in such investment
opportunities, while maintaining the safeguards necessary for investor
protection and public confidence in investing in areas of the economy
that disproportionately create new jobs, foster innovation, and provide
for growth opportunities.
Historically, the Commission has stated that the accredited
investor definition is ``intended to encompass those persons whose
financial sophistication and ability to sustain the risk of loss of
investment or fend for themselves render the protections of the
Securities Act's registration process unnecessary.'' \7\ Prior to the
adoption of these final rules, in the case of individuals, the
accredited investor definition has used wealth--in the form of a
certain level of income or net worth--as a proxy for financial
sophistication. However, as stated in the Proposing Release, we do not
believe wealth should be the sole means of establishing financial
sophistication of an individual for purposes of the accredited investor
definition. Rather, the characteristics of an investor contemplated by
the definition can be demonstrated in a variety of ways. These include
the ability to assess an investment opportunity--which includes the
ability to analyze the risks and rewards, the capacity to allocate
investments in such a way as to mitigate or avoid risks of
unsustainable loss, or the ability to gain access to information about
an issuer or about an investment opportunity--or the ability to bear
the risk of a loss.\8\ Accordingly, the final rules create new
categories of individuals and entities that qualify as accredited
investors irrespective of their wealth, on the basis that such
investors have demonstrated the requisite ability to assess an
investment opportunity.
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\7\ See Regulation D Revisions; Exemption for Certain Employee
Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015 (Jan.
30, 1987)]. See also SEC v. Ralston Purina Co., 346 U.S. 119, 125
(1953) (taking the position that the availability of the Section
4(a)(2) exemption ``should turn on whether the particular class of
persons affected needs the protection of the Act. An offering to
those who are shown to be able to fend for themselves is a
transaction `not involving any public offering' '').
\8\ The accredited investor standard is similar to, but distinct
from, other regulatory standards in Commission rules that are used
to identify persons who are not in need of certain investor
protection features of the federal securities laws. For example,
Section 3(c)(7) of the Investment Company Act excepts from the
definition of investment company any issuer, the outstanding
securities of which are owned exclusively by persons who, at the
time of acquisition of such securities, are qualified purchasers,
and which is not making and does not at that time propose to make a
public offering of securities. Congress defined qualified purchasers
as: (i) Natural persons who own not less than $5 million in
investments; (ii) family-owned companies that own not less than $5
million in investments; (iii) certain trusts; and (iv) persons,
acting for their own accounts or the accounts of other qualified
purchasers, who in the aggregate own and invest on a discretionary
basis, not less than $25 million in investments (e.g., institutional
investors). Each of these regulatory standards serves a different
regulatory purpose. Accordingly, an accredited investor will not
necessarily meet these other standards and these other regulatory
standards are not designed to capture the same investor
characteristics as the accredited investor standard. See also Report
on the Review of the Definition of ``Accredited Investor'' (Dec. 18,
2015) (``2015 Staff Report''), available at https://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf.
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The amendments we are adopting are the product of years of efforts
by the Commission and its staff to consider and analyze possible
approaches to revising the accredited investor definition. A number of
the amendments are consistent with those recommended by the Commission
staff

[[Page 64236]]

in a 2015 report on the accredited investor definition,\9\ while some
of the amendments are substantially similar to those the Commission
proposed in 2007.\10\ Many of the amendments have been recommended, in
one form or another, by the Small Business Capital Formation Advisory
Committee, the former Advisory Committee on Small and Emerging
Companies, the Investor Advisory Committee, and a wide array of public
commenters.
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\9\ See 2015 Staff Report.
\10\ Revisions of Limited Offering Exemptions in Regulation D,
Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)]
(``2007 Proposing Release'').
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The definition of ``qualified institutional buyer'' in Rule 144A is
similarly intended to ``identify a class of investors that can be
conclusively assumed to be sophisticated and in little need of the
protection afforded by the Securities Act's registration provisions.''
\11\ With the exception of registered dealers, a qualified
institutional buyer must in the aggregate own and invest on a
discretionary basis at least $100 million in securities of issuers that
are not affiliated with such a qualified institutional buyer.\12\ The
final rules expand the list of entities eligible for qualified
institutional buyer status to be consistent with the amendments to the
accredited investor definition, maintaining the $100 million threshold
for these entities to qualify for qualified institutional buyer status.
In this way, the final rules avoid inconsistencies between the entity
types eligible for each status while continuing to ensure that these
entities have sufficient financial sophistication to participate in
investment opportunities that do not have the additional protections
provided by registration under the Securities Act.
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\11\ See Resale of Restricted Securities; Changes to Method of
Determining Holding Period of Restricted Securities Under Rules 144
and 145, Release No. 33-6806 (Oct. 25, 1988) [53 FR 44016 (Nov. 1,
1988)]. Rule 144A provides a non-exclusive safe harbor exemption
from the registration requirements of the Securities Act for resales
to qualified institutional buyers of certain restricted securities.
Any person other than the issuer or a dealer who offers or sells
securities in compliance with Rule 144A is deemed not to be engaged
in a distribution of the securities and therefore not an underwriter
of the securities within the meaning of Section 2(a)(11) of the
Securities Act, such that the Section 4(a)(1) exemption is available
for the resales of the securities.
\12\ Rule 144A(a)(1)(i). A registered dealer is a qualified
institutional buyer if it owns and invests in the aggregate at least
$10 million of securities of non-affiliated issuers on a
discretionary basis or if it is acting in a riskless principal
transaction on behalf of a qualified institutional buyer. Rules
144A(a)(1)(ii) and (iii).
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We received more than 200 unique comment letters on the Proposing
Release.\13\ Many commenters supported expanding the accredited
investor definition,\14\ while some commenters did not.\15\ Other
commenters recommended eliminating the definition altogether so that
anyone could invest in exempt offerings.\16\ We also received comments
from several commenters in general support of expanding the definition
of qualified institutional buyer in Rule 144A.\17\ In addition, in
response to the Concept Release, the SEC's Small Business Capital
Formation Advisory Committee adopted a recommendation regarding changes
to the accredited investor definition,\18\ and the 2019 SEC Government-
Business Forum on Small Business Capital Formation (``SEC Small
Business Forum'') provided a recommendation on the accredited investor
definition.\19\ Prior to the Concept Release, the SEC's Investor
Advisory Committee adopted a recommendation regarding changes to the
accredited investor definition.\20\

[[Page 64237]]

After considering the public comments received and these
recommendations, we are adopting the amendments substantially as
proposed but with certain modifications in response to commenters'
feedback. Commenters' views on different aspects of the proposal, as
well as its effects, are discussed topically below.
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\13\ Unless otherwise indicated, comments cited in this release
are to comment letters received in response to the Proposing
Release, which are available at https://www.sec.gov/comments/s7-25-19/s72519.htm.
\14\ See, e.g., letters from Matt Langford dated Dec. 18, 2019
(``M. Langford''); Ben Peterman dated Dec. 18, 2019 (``B. Peterman
Letter''); SAF Financial Securities LLC dated Dec. 18, 2019 (``SAF
Financial Letter''); Calfee, Halter & Griswold LLP dated Jan. 15,
2020 (``Calfee, Halter & Griswold Letter''); Blake Delaplane dated
Jan. 13, 2020 (``B. Delaplane Letter''); Nexus Private Capital dated
Jan. 9, 2020 (``Nexus Private Capital Letter''); Private Investor
Coalition dated Mar. 9, 2020 (``PIC Letter''); Securities
Intermediary and Financial Markets Association dated Mar. 11, 2020
(``SIFMA Letter''); Morningstar dated Mar. 16, 2020 (``Morningstar
Letter''); Investment Company Institute dated Mar. 12, 2020 (``ICI
Letter''); Native American Finance Officers Association dated Mar.
16, 2020 (``NAFOA Letter''); ALTI LLC dated Mar. 13, 2020 (``ALTI
Letter''); Committee on Securities Laws of the Business Law Section
of the Maryland State Bar Association dated Mar. 16, 2020 (``Md St.
Bar Assn. Comm. on Sec. Laws Letter''); Center for Capital Markets
Competitiveness dated Mar. 16, 2020 (``CCMC Letter''); Teachers
Insurance and Annuity Association of America dated Mar. 16, 2020
(``TIAA Letter''); Rep. J. French Hill, Sen. Thom Tillis, Sen. Pat
Toomey, Rep. David Schweikert, Rep. Bryan Steil, Rep. Anthony
Gonzalez, and Rep. Warren Davidson dated Mar. 16, 2020 (``Rep. J.
French Hill et al. Letter''); Investment Adviser Association dated
Mar. 18, 2020 (``IAA Letter''); Small Business Investor Alliance
dated Mar. 16, 2020 (``SBIA Letter''); North American Securities
Administrators Association, Inc. dated Mar. 16, 2020 (``NASAA
Letter'') (NASAA does not support the proposals for natural persons
but does generally support the proposals for entities); eShares,
Inc. (d/b/a Carta) dated Mar. 16, 2020 (``Carta Letter''); OpenDeal,
Inc. (d/b/a Republic) dated Mar. 16, 2020 (``Republic Letter'')
(preferring a ``principles-based approach to assessing certain
factors of an individual's sophistication and ability to tolerate
risk''); and Federal Regulation of Securities Committee of the
Business Law Section of the American Bar Association dated May 22,
2020 (``ABA FR of Sec. Comm. Letter'').
\15\ See, e.g., letters from Mike L. dated Dec. 19, 2020 (``M.
L. Letter''); Consumer Federation of America dated Mar. 9, 2020
(``CFA Letter''); Healthy Markets Association dated Mar. 16, 2020
(``Healthy Markets Letter''); Securities Arbitration Clinic at St.
John's University School of Law dated Mar. 16, 2020 (``St. John's
Sec. Arbitration Clinic Letter''); Better Markets dated Mar. 16,
2020 (``Better Markets''); Xavier Becerra, Attorney General of the
State of California et al. dated Mar. 16, 2020 (``CA Attorney
General et al.''); Public Investors Arbitration Bar Association
dated Mar. 16, 2020 (``PIABA Letter''); and Matthew J. Trudeau dated
Mar. 13, 2020 (``M. Trudeau Letter'').
\16\ See, e.g., letters from Ryan Carpel dated Dec. 18, 2019
(``R. Carpel Letter''); Joseph Peter dated Dec. 20, 2019 (``J. Peter
Letter'') (elimination of accredited investor/non-accredited
investor distinction in Reg D offerings); Amrik Mann dated Dec. 20,
2019 (``A. Mann Letter''); Guenadi Jilevski dated Dec. 21, 2019
(``G. Jilevski Letter''); Samuel dated Dec. 23, 2019 (``S.
Letter''); Conduit Investment Advisers, LLC dated Dec. 30, 2019
(``Conduit Letter''); Stuart Kuzik dated Apr. 24, 2020 (``S. Kuzik''
Letter) (elimination of the definition); Bhavin Shah dated June 30,
2020 (``B. Shah Letter''); Kelly Wilson dated July 19, 2020 (``K.
Wilson Letter'') (replacement of the definition with an
acknowledgement-of-risk form); and Gary Freedman dated July 19, 2020
(``G. Freedman Letter''); and working paper Abandon the Concept of
Accredited Investors in Private Securities Offerings submitted as
comment letter from Andrew Vollmer, Mercatus Center at George Mason
University, Aug. 21, 2020.
\17\ See, e.g., Better Markets Letter; ICI Letter; and letter
from Fidelity Investments dated Mar. 16, 2020 (``Fidelity Letter'').
\18\ See U.S. Sec. and Exch. Comm'n Small Bus. Capital Formation
Advisory Comm., Recommendation (Dec. 11, 2019) (``SBCFAC
Recommendations''), available at https://www.sec.gov/spotlight/sbcfac/recommendation-accredited-investor.pdf. The SBCFAC
recommended that the Commission: (i) ``[l]eave the current financial
thresholds in place, subject to possibly adjusting such thresholds
downwards for certain regions of the country;'' (ii) ``[g]oing
forward, index the financial thresholds for inflation on periodic
basis;'' and (iii) ``[r]evise the definition to allow individuals to
qualify as accredited investors based on measures of sophistication.
In doing so, the Commission should create bright line rules for
qualifying as an accredited investor by sophistication, which could
include professional credentials, work experience, education, and/or
a sophistication test.''
\19\ See U.S. Sec. and Exch. Comm'n Gov't-Bus. Forum on Small
Bus. Capital Formation, Report on the 38th Annual Government-
Business Forum on Small Business Capital Formation (Aug. 14, 2019)
(``SEC Small Business Forum Report''), available at https://www.sec.gov/files/small-business-forum-report-2019.pdf. The SEC
Small Business Forum Report recommended that the Commission: (i)
``[f]or natural persons, in addition to the income and net worth
thresholds in the definition, add a sophistication test as an
additional way to qualify;'' (ii) ``[p]rovide tribal governments
parity with state governments;'' and (iii) ``[r]evise the dollar
amounts to scale for geography, lowering the thresholds in states/
regions with a lower cost of living.''
\20\ See Recommendation of the Investor Advisory Committee:
Accredited Investor Definition (Oct. 9, 2014) (``IAC
Recommendations''), available at http://www.sec.gov/spotlight/investor-advisorycommittee-2012/accredited-investor-definitionrecommendation.pdf. The IAC recommended that the
Commission (i) ``evaluate whether the accredited investor
definition, as it pertains to natural persons, is effective in
identifying a class of individuals who do not need the protections
afforded by the [Securities] Act;'' (ii) ``revise the definition to
enable individuals to qualify as accredited investors based on their
financial sophistication;'' (iii) ``consider alternative approaches
to setting such thresholds--in particular limiting investments in
private offerings to a percentage of assets or income--which could
better protect investors without unnecessarily shrinking the pool of
accredited investors;'' and (iv) ``take concrete steps [to]
encourage development of an alternative means of verifying
accredited investor status that shifts the burden away from issuers
who may, in some cases, be poorly equipped to conduct that
verification, particularly if the accredited investor definition is
made more complex.''
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II. Final Amendments to the Accredited Investor Definitions

A. Proposed Amendments

In the Proposing Release, the Commission proposed to amend the
accredited investor definition to add categories of both natural
persons and entities. For natural persons, the Commission proposed to
add new categories to the definition that would permit natural persons
to qualify as accredited investors based on certain professional
certifications or designations or other credentials or, with respect to
investments in a private fund, based on the person's status as a
``knowledgeable employee'' of the fund. Specifically, the Commission
proposed to add the following natural persons:
Natural persons holding in good standing one or more
professional certifications or designations or other credentials from
an accredited educational institution that the Commission has
designated as qualifying an individual for accredited investor status;
and
natural persons who are ``knowledgeable employees,'' as
defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940
(the ``Investment Company Act''), of the private-fund issuer of the
securities being offered or sold.\21\
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\21\ A private fund is an issuer that would be an investment
company, as defined in Section 3 of the Investment Company Act, but
for Sections 3(c)(1) or 3(c)(7) of that Act. See Section 202(a)(29)
of the Investment Advisers Act of 1940 (the ``Advisers Act'').
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For entities, the Commission proposed to add:
SEC- and state-registered investment advisers and rural
business investment companies to the list of entities specified in Rule
501(a)(1);
limited liability companies to the list of entities
specified in Rule 501(a)(3);
entities, of a type not listed in Rule 501(a)(1), (a)(2),
(a)(3), (a)(7), or (a)(8), not formed for the specific purpose of
acquiring the securities offered, owning investments in excess of
$5,000,000;
``family offices,'' as defined in Rule 202(a)(11)(G)-1
under the Advisers Act: (i) With assets under management in excess of
$5,000,000, (ii) that are not formed for the specific purpose of
acquiring the securities offered, and (iii) whose prospective
investment is directed by a person who has such knowledge and
experience in financial and business matters that such family office is
capable of evaluating the merits and risks of the prospective
investment; and
``family clients,'' as defined in Rule 202(a)(11)(G)-1
under the Advisers Act, of a family office meeting the requirements in
new Rule 501(a)(12).
In the Proposing Release, the Commission also proposed to amend the
accredited investor definition to allow spousal equivalents to pool
finances for the purpose of qualifying as accredited investors.
Finally, the Commission proposed to codify several staff
interpretations by adding notes to Rule 501 to clarify that:
The calculation of ``joint net worth'' for purposes of
Rule 501(a)(5) can be the aggregate net worth of an investor and the
investor's spouse (or spousal equivalent if ``spousal equivalent'' is
included in Rule 501(a)(5)); \22\
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\22\ Throughout this release, references to an investor's spouse
include a spousal equivalent, as applicable, in light of the
adoption of the amendments to Rule 501(a)(5) and Rule 501(a)(6).
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the securities being purchased by an investor relying on
the joint net worth test of Rule 501(a)(5) need not be purchased
jointly; and
when determining the accredited investor status of an
entity under Rule 501(a)(8), one may look through various forms of
equity ownership to natural persons.

B. Final Amendments

1. Natural Persons
a. Natural Persons Holding Professional Certifications and Designations
or Other Credentials
In the Proposing Release, the Commission proposed to designate by
order certain professional certifications and designations and other
credentials from an accredited educational institution as qualifying
for accredited investor status, with such designation to be based upon
consideration of all the facts pertaining to a particular
certification, designation, or credential. The proposed amendment
included the following non-exclusive list of attributes that the
Commission would consider in determining which professional
certifications and designations or other credentials qualify a natural
person for accredited investor status:
The certification, designation, or credential arises out
of an examination or series of examinations administered by a self-
regulatory organization or other industry body or is issued by an
accredited educational institution;
the examination or series of examinations is designed to
reliably and validly demonstrate an individual's comprehension and
sophistication in the areas of securities and investing;
persons obtaining such certification, designation, or
credential can reasonably be expected to have sufficient knowledge and
experience in financial and business matters to evaluate the merits and
risks of a prospective investment; and
an indication that an individual holds the certification
or designation is made publicly available by the relevant self-
regulatory organization or other industry body.
The Commission indicated that it preliminarily expected that the
initial Commission order accompanying the final rule would include the
following certifications or designations administered by the Financial
Industry Regulatory Authority, Inc. (FINRA): The Licensed General
Securities Representative (Series 7), Licensed Investment Adviser
Representative (Series 65), and Licensed Private Securities Offerings
Representative (Series 82).
i. Comments
Many commenters supported adding some form of professional
certifications and designations or other credentials.\23\

[[Page 64238]]

Some of these commenters noted that attaining credentials may signal a
level of sophistication exceeding that of investors who currently
qualify as accredited investors under the income or net worth
thresholds.\24\ In addition, a few commenters supported the proposal to
add professional certifications or designations to the definition, but
suggested that the Commission also require professional experience.\25\
Another commenter opposed the proposal, raising a concern that
individuals qualifying as accredited investors solely under such
criteria would not have the financial capacity to be able to bear the
financial risk of private investments.\26\ Another commenter opposed
the proposal and the existence of the accredited investor concept,
arguing that ``educational tests'' are inherently discriminatory.\27\
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\23\ See letter from Jeff LaBerge dated Jan. 17, 2020 (``J.
LaBerge Letter''); letter from Alex Naegele dated Jan. 9, 2020 (``A.
Naegele Letter''); letter from Kevin Gebert dated Mar. 4, 2020 (``K.
Gebert Letter''); letter from Adam Moehn dated Mar. 8, 2020 (``A.
Moehn Letter''); letter from Davis Treybig dated Dec. 20, 2019 (``D.
Treybig Letter''); letter from Michael Seng dated Dec. 19, 2019
(``M. Seng Letter''); letter from Corey Wangler dated Feb. 26, 2020
(``C. Wangler Letter''); letter from Mercer Global Advisors, Inc.
dated Mar. 11, 2020 (``Mercer Advisors Letter''); Morningstar
Letter; ALTI Letter; Md St. Bar Assn. Comm. on Sec. Laws Letter;
letter from National Association of Manufacturers dated Mar. 16,
2020 (``NAM Letter''); letter from Chartered Market Technicians
Association dated Mar. 16, 2020 (``CMT Letter''); letter from High
Level Working Group on Cryptocurrency and Digital Assets Self-
Regulation dated Mar. 16, 2020 (``HLWG Letter''); SBIA Letter;
Republic Letter; letter from Riley T. Maud dated Mar. 6, 2020 (``R.
Maud Letter''); letter from Investments & Wealth Institute dated
Mar. 13, 2020 (``IWI Letter''); letter from Managed Funds
Association and Alternative Investment Management Association dated
Mar. 13, 2020 (``MFA and AIMA Letter''); letter from Cornell
Securities Law Clinic dated Mar. 13, 2020 (``Cornell Sec. Clinic
Letter''); Fidelity Letter; Carta Letter; CFA Letter; Rep. J. French
Hill et al. Letter; letter from Tron Black dated Dec. 24, 2019 (``T.
Black Letter''); letter from Seyed Arab dated Dec. 18, 2019 (``S.
Arab Letter''); letter from Malcolm Douglas dated Dec. 18, 2019
(``M. Douglas Letter''); letter from James J. Angel dated Mar. 3,
2020 (``J. Angel Letter''); letter from Crowdwise, LLC dated Mar. 1,
2020 (``Crowdwise Letter''); letter from Geraci LLP dated Mar. 9,
2020 (``Geraci Letter'') and letter from American Association of
Private Lenders submitted May 27, 2020 (``AAPL Letter'') (the Geraci
Letter and the AAPL Letter are essentially identical); letter from
Leonard A. Grover dated Dec. 21, 2019 (``L. Grover Letter''); letter
from Ryan L. Doyal dated Dec. 23, 2019 (``R. Doyal Letter''); letter
from Kathreek Pulavarthi dated Dec. 29, 2019 (``K. Pulavarthi
Letter''); letter from G. Philip Rutledge dated Jan. 31, 2020 (``P.
Rutledge Letter''); letter from Inportal dated Feb. 21, 2020
(``Inportal Letter''); CCMC Letter; letter from Institute for
Portfolio Alternatives dated Mar. 16, 2020 (``IPA Letter''); letter
from Karen Salay dated Dec. 19, 2019 (``K. Salay Letter''); letter
from Gordon Hodge dated Dec. 21, 2019 (``G. Hodge Letter''); letter
from Graham Gintz dated Mar. 6, 2020 (``G. Gintz Letter''); letter
from CityVest dated Jan. 7, 2020 (``CityVest Letter''); letter from
Bryan M. Crane dated Dec. 19, 2019 (``B. Crane Letter''); letter
from National Introducing Brokers Association dated Mar. 3, 2020
(``NIBA Letter''); M. Langford Letter; letter from Timothy E.
Messenger dated Dec. 19, 2019 (``T. Messenger Letter''); letter from
Ruthlynn E. Black dated Dec. 30, 2019 (``R. Black Letter'') (the R.
Doyal Letter and the R. Black Letter are essentially identical);
letter from Chris Lakumb dated Dec. 18, 2019 (``C. Lakumb Letter'');
letter from Ashley Wunderlich dated Feb. 7, 2020 (``A. Wunderlich
Letter''); letter from Kurt Wunderlich dated Feb. 7, 2020 (``K.
Wunderlich Letter''); letter from Kevin King dated Jan. 23, 2020
(``K. King Letter''); letter from Michael Bernstein dated Dec. 19,
2019 (``M. Bernstein Letter''); letter from Luke Denlinger dated
Dec. 22, 2019 (``L. Denlinger Letter''); CFA Letter; B. Peterman
Letter; letter from American Bankers Association dated Mar. 16, 2020
(``Am. Bankers Assn. Letter''); letter from Raymond Wu dated Feb.
21, 2020 (``R. Wu Letter'); letter from Joseph Caruso dated Jan. 28,
2020 (``J. Caruso Letter''); letter from Cody L. West dated Feb. 23,
2020 (``C. West Letter''); letter from American Investment Council
dated Mar. 16, 2020 (``AIC Letter''); letter from Jared Smith dated
Feb. 10, 2020 (``J. Smith Letter''); letter from Angel Capital
Association dated Mar. 9, 2020 (``ACA Letter''); letter from Rudolph
Langenbach dated Jan. 10, 2020 (``R. Langenbach Letter''); letter
from Association of Trust Organizations, Inc. dated Apr. 15, 2020
(``ATO Letter''); letter from Brian Seelinger dated Dec. 18, 2019
(``B. Seelinger Letter''); letter from Artivest dated Apr. 23, 2020
(``Artivest Letter''); letter from David R. Burton dated May 1, 2020
(``D. Burton Letter''); letter from CFA Institute dated May 4, 2020
(``CFA Institute Letter''); ABA FR of Sec. Comm. Letter; letter from
Biotechnology Innovation Organization dated June 16, 2020 (``BIO
Letter''); and letter from Brandon Andrews et al. dated May 4, 2020
(``B. Andrews et al. Letter'').
\24\ See Morningstar Letter (indicating that ``[p]utting an
emphasis on allowing investors with knowledge and expertise to
participate in private capital markets is sensible. These investors,
by definition, should be better able to cope with the opacity and
limited availability of comparable measures in our private
markets''); M. Seng Letter (positing that ``someone who has
professional certification(s) is far more qualified to determine if
the investment is right for them or not far better than someone who
doesn't understand the investment but has money looking to
invest''); and C. Wangler Letter (stating that ``professional
licensing is more indicative of investment knowledge than how much
money one has'').
\25\ See NASAA Letter (noting that a level of years of
experience should be required); letter from Nasdaq, Inc. dated May
18, 2020 (``Nasdaq Letter'') (noting that ``most professional
designations or certifications alone [do not] suffice to establish
the financial sophistication and independent judgment required to
evaluate private investments that are inherently risky and illiquid.
An examination of knowledge, without an additional requirement of
industry experience, is not a satisfactory means to determine
whether an investor can bear the risk of and evaluate a potential
investment in an exempt offering without the benefit of a
registration statement or similar disclosure''); and Geraci Letter
and AAPL Letter (supporting inclusion of Series 7, 65, and 82
license holders without an experience requirement, but conditioning
support for the inclusion of CPAs, JDs, CFAs, and CAIAs on having
three years of experience, and noting that the experience
requirement ``protect[s] newly licensed individuals, who may not be
familiar with the real world applications of their education, from
partaking in inappropriate investment opportunities'').
\26\ See St. John's Sec. Arbitration Clinic Letter.
\27\ See B. Shah Letter (stating that income and wealth
requirements are also discriminatory).
---------------------------------------------------------------------------

A number of commenters specifically responded on the use of FINRA-
administered exams. Several commenters expressed support for inclusion
of the Series 7,\28\ Series 65,\29\ and/or Series 82 exams.\30\ One
commenter noted that these exams test important investing concepts,\31\
while another stated that individuals qualified to advise others on
whether to invest in private offerings should be able to invest
themselves.\32\ One commenter opposed the inclusion of these exams,\33\
while another stated that a person should be required to pass all three
exams to be considered an accredited investor.\34\
---------------------------------------------------------------------------

\28\ See T. Black Letter; S. Arab Letter; M. Douglas Letter; J.
Angel Letter; Crowdwise Letter; L. Grover Letter; R. Doyal Letter
and R. Black Letter; K. Pulavarthi Letter; P. Rutledge Letter;
Inportal Letter; Md St. Bar Assn. Comm. on Sec. Laws Letter; NAM
Letter; CCMC Letter; IPA Letter; HLWG Letter; SBIA Letter; R. Maud
Letter (indicating that ``professional certifications such as the
[Series 7], [Series 65], and [Series 82] are exactly the types of
certifications that indicate financial sophistication which in turn
would satisfy the accredited investor definition''); Artivest
Letter; ABA FR of Sec. Comm. Letter; and Geraci Letter and AAPL
Letter (noting that ``those who hold a Series 7, 65, or 82 license
should be permitted to qualify as accredited investors without any
additional approval by the Commission as obtaining such a license
enables them to evaluate investments on behalf of third parties,
thus qualifying them to effectively evaluate investment
opportunities on their own behalf as well'').
\29\ See T. Black Letter; S. Arab Letter; M. Douglas Letter; J.
Angel Letter; Crowdwise Letter; K. Salay Letter; G. Hodge Letter; L.
Grover Letter; R. Doyal Letter and R. Black Letter; K. Pulavarthi
Letter; P. Rutledge Letter; Inportal Letter; Md St. Bar Assn. Comm.
on Sec. Laws Letter; NAM Letter; CCMC Letter; IPA Letter; HLWG
Letter; SBIA Letter; R. Maud Letter; Artivest Letter; ABA FR of Sec.
Comm. Letter; and Geraci Letter and AAPL Letter.
\30\ See M. Douglas Letter; Crowdwise Letter; L. Grover Letter;
R. Doyal Letter and R. Black Letter; K. Pulavarthi Letter; P.
Rutledge Letter; Inportal Letter; Md St. Bar Assn. Comm. on Sec.
Laws Letter; NAM Letter; CCMC Letter; IPA Letter; HLWG Letter; SBIA
Letter; R. Maud Letter; Artivest Letter; ABA FR of Sec. Comm.
Letter; and Geraci Letter and AAPL Letter.
\31\ See HLWG Letter (noting that the Series 7, 65, and 82 exams
``are sufficiently rigorous, effectively assess the degree of
knowledge and understanding of key investment subjects and concepts,
and result in the development of competent and capable investment
professionals. Thus, they render the protections of the Securities
Act unnecessary'').
\32\ See J. Angel Letter (stating that ``[i]t certainly makes
sense that licensed people in the securities industry who are
allowed to sell private offerings to their clients should also be
allowed to invest in those same offerings as accredited
investors'').
\33\ See letter from Al Hemmingsen dated Dec. 29, 2019 (``A.
Hemmingsen Letter'').
\34\ See Cornell Sec. Clinic Letter (positing that ``one of
these examinations alone is [not] enough to test an individual's
financial sophistication. Instead, the SEC should require an
investor to pass all three of these exams'').
---------------------------------------------------------------------------

One commenter supported including all FINRA exams.\35\ A number of
commenters also specifically supported including the following
examinations: Series 3 (National Commodities Futures Examination),\36\
Series 6 (Investment Company and Variable Contracts Products
Representative Examination),\37\ Series 22 (Direct Participation
Programs Limited Representative Examination),\38\ Series 66 (Uniform
Combined State Law Examination),\39\ Series 79 (Investment Banking
Representative Examination),\40\ and Series 86 and 87 (Research Analyst

[[Page 64239]]

Examination).\41\ A few commenters supported inclusion of the FINRA
``Securities Industry Essentials'' (SIE) examination,\42\ while a few
other commenters opposed its inclusion.\43\
---------------------------------------------------------------------------

\35\ See P. Rutledge Letter (noting that ``[i]f the SEC and
relevant state securities regulators think [FINRA license holders]
sufficiently qualified to render investment-related services to the
public, those individuals should be able to purchase investments of
their choice'').
\36\ See P. Rutledge Letter; NIBA Letter; IPA Letter; Artivest
Letter; and ABA FR of Sec. Comm. Letter.
\37\ See P. Rutledge Letter; IPA Letter; Artivest Letter; and
ABA FR of Sec. Comm. Letter.
\38\ See P. Rutledge Letter and ABA FR of Sec. Comm. Letter.
\39\ See P. Rutledge Letter; A. Naegele Letter; IPA Letter;
Artivest Letter; D. Burton Letter; and ABA FR of Sec. Comm. Letter.
\40\ See P. Rutledge Letter and CCMC Letter.
\41\ See P. Rutledge Letter; R. Wu Letter; CCMC Letter; CMT
Letter (86 only); and ABA FR of Sec. Comm. One commenter
specifically did not support including the Series 86 and 87
examinations. See A. Naegele Letter.
\42\ See J. Angel Letter (noting its belief that ``[w]hile the
SIE is clearly less rigorous than the CFA, CFP[supreg], Series 7, or
Series 65 exams,'' Regulation Best Interest reduces the risk of bad
products being marketed to unsophisticated investors); Crowdwise
Letter; SBIA Letter; and D. Burton Letter (indicating that it
``probably'' should be included but noting that ``[t]he sample test,
however, seems more concerned with the regulation of investment
professionals than investment knowledge. Moreover, the investment
knowledge tested for appears to be primarily the nature of various
public securities other than common stock and investment products
rather than an understanding of business, enterprise, accounting or
finance'').
\43\ See A. Naegele Letter; NASAA Letter; and HLWG Letter
(supporting consideration of the exam but stating that ``since this
exam is not particularly rigorous or tailored to private fund
investments, additional training and education may be required, such
as investment-related courses from an accredited institution'').
---------------------------------------------------------------------------

Commenters also responded to the Proposing Release's request for
comment on what other professional certifications and designations or
other credentials should be included in a Commission order designating
qualifying credentials. We received a diverse range of comments
relating to the inclusion of certain professional credentials,
educational experience, and professional experience. With respect to
professional credentials, several commenters expressed support for
including certified public accountants (CPAs),\44\ while a few
commenters were opposed to their inclusion.\45\ One commenter noted its
support for including CPAs was based on the commenter's view that the
exam process is ``rigorous'' and requires ``extensive'' education and
that the license is granted by the states.\46\ Commenters who were
opposed expressed their view that the CPA credential is not focused on
investing,\47\ and does not reliably demonstrate an individual's
comprehension and sophistication in the areas of securities and
investing.\48\ Some commenters also supported including Chartered
Financial Analyst (CFA),\49\ Chartered Alternative Investment Analyst
(CAIA),\50\ Certified Financial Planner (CFP),\51\ Certified Trust and
Financial Advisor (CTFA),\52\ and Certified Investment Management
Analyst (CIMA) and Certified Private Wealth Advisor (CPWA)
certifications.\53\ One commenter expressed concern with such an
approach, noting that ``private designation conferring organizations
are not subject to [C]ommission oversight.'' \54\
---------------------------------------------------------------------------

\44\ See M. Langford Letter; S. Arab Letter (noting that the
designation is ``issued through a rigorous examination process'' and
is ``licensed by state regulatory bodies,'' which may mean the CPA
is subject to ``more oversight than many other types of
certifications''); CityVest Letter; Geraci Letter and AAPL Letter
(these commenters would also require three years of experience and
good standing); T. Messenger Letter; G. Hodge Letter; R. Doyal
Letter and R. Black Letter; B. Crane Letter; IPA Letter; HLWG
Letter; Carta Letter; Artivest Letter; and D. Burton Letter.
\45\ See P. Rutledge Letter; Md St. Bar Assn. Comm. on Sec. Laws
Letter (noting that ``[w]e do not believe that even the most
thorough understanding of accounting and auditing standards provides
the individual who possesses such knowledge with any degree of
financial sophistication in the sense of being able to make
knowledgeable investment decisions''); NASAA Letter; and CFA Letter.
\46\ See S. Arab Letter (noting that ``CPA certifications are
not only issued through a rigorous examination process and require
extensive education, they are also licensed by state regulatory
bodies and are under more oversight than many other types of
certifications'').
\47\ See NASAA Letter.
\48\ See CFA Letter.
\49\ See C. Lakumb Letter; A. Wunderlich Letter; K. Wunderlich
Letter; P. Rutledge Letter; K. King Letter; J. Angel Letter; A.
Naegele Letter; CityVest Letter; A. Moehn Letter; Geraci Letter and
AAPL Letter (these commenters would also require three years of
experience and good standing); M. Bernstein Letter; L. Denlinger
Letter; CFA Letter; IPA Letter; Mercer Advisors Letter; HLWG Letter;
Fidelity Letter; Carta Letter; ATO Letter; B. Seelinger Letter;
Artivest Letter; D. Burton Letter; and CFA Institute Letter (the CFA
designation is awarded by the CFA Institute).
\50\ See B. Peterman Letter; C. Lakumb Letter; A. Wunderlich
Letter; K. Wunderlich Letter; CityVest Letter; Geraci Letter and
AAPL Letter (these commenters would also require three years of
experience and good standing); HLWG Letter; Fidelity Letter; Carta
Letter; and Artivest Letter.
\51\ See C. Lakumb Letter; P. Rutledge Letter; J. Angel Letter;
Mercer Advisors Letter; HWLG Letter; CFP Letter; Carta Letter; ATO
Letter; and D. Burton Letter (positing that ``[t]he CFA Charter and
CFP certification generally require the mastery of a broader range
of material at a deeper level than the series 7 exam and, therefore,
better equip a person to evaluate investments'').
\52\ See Am. Bankers Assn. Letter (the CTFA designation is
awarded by the Am. Bankers Assn.) and ATO Letter.
\53\ See IWI Letter (the CIMA and CPWA designations are awarded
by the Investments & Wealth Institute).
\54\ See A. Hemmingsen Letter.
---------------------------------------------------------------------------

Commenters also responded on whether the Commission should include
certain educational attributes. We received several comments in support
of including law degrees,\55\ and a similar number of comments opposing
their inclusion.\56\ Two commenters supported the inclusion of lawyers
with legal experience,\57\ while another noted that some level of
financial experience should be required.\58\ Several commenters
supported including a master's degree in business administration from
an accredited educational institution; \59\ while others were
opposed.\60\ Similarly, several commenters supported including various
graduate degrees,\61\ while a few commenters expressed opposition.\62\
Commenters also expressed support for including various other
educational programs.\63\ One commenter did not

[[Page 64240]]

support including any educational experience, citing disparities in
educational quality.\64\
---------------------------------------------------------------------------

\55\ See CityVest Letter; Geraci Letter and AAPL Letter
(positing that ``[t]hese individuals have received significant
training on evaluating complex legal and financial concepts, and
given experience practicing in their given fields, we believe they
are more than capable of making complex investment decisions on
their own behalf,'' but also stating that the Commission should
include a three year experience and licensing requirement); A.
Naegele Letter; J. Caruso Letter (supporting inclusion of
concentrations, legal certifications, and master of laws programs in
securities law); C. West Letter; and AIC Letter.
\56\ See P. Rutledge Letter; CFA Letter (noting that ``[a]bsent
some additional investment-specific experience or expertise,
individuals with [a law degree] cannot reasonably be expected to
have sufficient knowledge or experience to evaluate the merits and
risks of a prospective investment absent the protections afforded in
the public markets (access to comprehensive and reliable information
about the offering)''; letter from Sarah H. Moller dated Mar. 13,
2020 (``S. Moller Letter''); Md St. Bar Assn. Comm. on Sec. Laws
Letter (noting that ``[e]ven a thorough understanding of the federal
securities laws and how they operate in practice does not provide a
person with such sophistication and knowledge when applied to
evaluating `the merits and risks of a prospective investment''');
NASAA Letter; and Cornell Sec. Clinic Letter.
\57\ See Geraci Letter and AAPL Letter.
\58\ See A. Naegele Letter.
\59\ See G. Gintz Letter; CityVest Letter; J. Angel Letter; B.
Crane Letter; Artivest Letter; and Geraci Letter and AAPL Letter.
The Geraci Letter and AAPL Letter would also require ``verification
of graduation from a nationally accredited university.''
\60\ See S. Arab Letter; P. Rutledge Letter; A. Naegele Letter;
Md St. Bar Assn. Comm. on Sec. Laws Letter; CMT Letter; NASAA
Letter; Cornell Sec. Law Clinic Letter; and CFA Letter.
\61\ See CityVest Letter (supporting masters level degree in
business, accounting, economics, or law); J. Smith (supporting
advanced finance degrees); J. Angel Letter (supporting Master of
Science in Finance); B. Crane Letter (supporting Ph.D. in a
``business related discipline''); CCMC Letter (supporting doctoral
degrees in accounting, finance, or economics); Cornell Sec. Clinic
Letter (supporting advanced degrees in finance); AIC Letter
(supporting mathematics, science (e.g., physics or computer
science), business, accounting, finance, economics, or law); and D.
Burton Letter (supporting advanced degrees in business, business
administration or business management, entrepreneurship, economics,
finance, or accounting).
\62\ See CFA Letter and S. Moller Letter.
\63\ See ACA Letter (certifications from Angel Capital
Association's ACA University); J. Angel Letter (undergraduate degree
in business); letter from Christy Logan dated Dec. 20, 2019 (``C.
Logan Letter'') (``reasonable education''); R. Langenbach Letter
(``some certain education/certification''); AIC Letter (bachelor's,
bachelor's equivalent, or higher degree (such as a master's or J.D.)
from an accredited educational institution in a discipline that
requires a significant amount of statistical or quantitative
analysis or acquaintance with business and legal issues); D. Burton
Letter (medical and advanced scientific, engineering, or technology
degrees); BIO Letter (proposing to include ``Doctor of Philosophy
(Ph.D.) in the hard sciences, Medical Doctor degrees (MD), or Master
of Science (MS) in hard sciences for the specific purpose of
participating in the seed and early stage funding of biotechnology
companies'').
\64\ See S. Arab Letter.
---------------------------------------------------------------------------

Commenters also responded to a request for comment in the Proposing
Release on whether the Commission should include professional
experience in areas such as finance and investing, apart from
professional certifications and designations, as another means for
qualifying for accredited investor status. Several commenters supported
using professional experience,\65\ some of whom also recommended
including investing experience.\66\ No commenters specifically opposed
including professional experience.
---------------------------------------------------------------------------

\65\ See ABA FR of Sec. Comm. Letter (stating that expanding the
accredited investor definition to include investors with relevant
experience in respect of the particular investment ``would increase
investment opportunities with little or no impact on investor
protection''); letter from Hunter Todd dated Dec. 19, 2019 (``H.
Todd Letter''), letter from Omar Plummer dated Dec. 20, 2019 (``O.
Plummer Letter'') (would extend accredited investor status to
individuals who ``have participated in investment banking and can
prove they did, or do in fact, still have a license''); letter from
Jeffrey P. Jacobson dated Feb. 7, 2020 (``J. Jacobson Letter'');
letter from Andrew Rea dated Jan. 2, 2020 (``A. Rea Letter'') (would
extend accredited investor status to ``people with a certain amount
of years working in venture-backed startups or venture capital funds
themselves''); letter from Dar'shun Kendrick dated Dec. 19, 2019
(``D. Kendrick Letter''); letter from Timo Muro dated Dec. 19, 2019
(``T. Muro Letter''); letter from Thomas Englis dated Dec. 19, 2019
(``T. Englis Letter'') (noting that ``[h]aving worked in the venture
capital industry for 4 years, I have a very high level of knowledge
of technology startups . . . [t]he existing law does not accurately
measure an individual's knowledge of risk''); CCMC Letter; AIC
Letter; Artivest Letter; BIO Letter (stating that ``[s]cientific
professionals are uniquely knowledgeable and experienced in [early
stage biotechnology companies] and can more accurately assess the
risks of a scientific endeavor than the vast majority of
investors''); and K. Wilson Letter.
\66\ See letter from Matthew Youngs dated Feb. 4, 2020, (``M.
Youngs Letter''); A. Naegele Letter; letter from Michael Penn Smith
dated Dec. 20, 2019 (``M. Smith Letter'') (positing that ``there's
no good reason to deny knowledgeable retail investors access to
venture investments''); letter from Matthew M. Peterson dated Dec.
26, 2019; SIFMA Letter; ABA FR of Sec. Comm.; and K. Wilson Letter.
---------------------------------------------------------------------------

The Proposing Release also solicited comment on whether the
Commission should develop an accredited investor examination and
whether the Commission should allow individuals to self-certify that
they have the requisite financial sophistication to be an accredited
investor. Of the commenters responding to the request for comment on an
accredited investor examination, most supported an accredited investor
examination,\67\ while a few did not.\68\ One commenter expressed a
preference for an accredited investor exam due to concerns about the
cost of the Series 7, 65, and 82 exams.\69\ Regarding self-
certification, although some commenters were in favor,\70\ some were
opposed.\71\ One commenter cited the difficulty of procuring necessary
documentation for foreign nationals to prove net worth as a reason to
allow self-certification of financial sophistication.\72\ Another
supported self-certification only as a component of a broader
certification regime that would also include a qualifying examination
and attaining sufficient private market and/or early-stage investing
experience.\73\ One commenter who opposed self-certification argued
that it would not be subject to any standards,\74\ while another
commenter argued that ``the average investor will be in no position to
make unbiased determinations regarding their own financial
sophistication.'' \75\
---------------------------------------------------------------------------

\67\ See T. Black Letter; letter from Einar Vollset dated Dec.
18, 2019 (``E. Vollset Letter''); B. Delaplane Letter; letter from
Mark Headrick dated Feb. 7, 2020 (``M. Headrick Letter''); M. Youngs
Letter; Crowdwise Letter; letter from Josh Kelner dated Jan. 10,
2020 (``J. Kelner Letter''); A. Naegele Letter; letter from Wiebke
Zuch dated Jan. 8, 2020 (``W. Zuch Letter''); letter from Tony
Sparks dated Jan. 2, 2020 (``T. Sparks Letter'') (supporting an
accredited investor exam because ``it's wise for people to be
somewhat informed on how investments work before they invest'');
letter from Bruce A. Wallick dated Dec. 19, 2019 (``B. Wallick
Letter'') (positing that ``[w]hat's really needed to evaluate
various investments and avoid endangering one's wealth is adequate
analytical skill . . . [p]erhaps requiring some case study
investment analysis as part of the test would be sufficient to
determine level of understanding''); letter from Patrick Poole dated
Dec. 20, 2019 (``P. Poole Letter''); A. Hemmingsen Letter; Mercer
Advisors Letter; Md St. Bar Assn. Comm. on Sec. Laws Letter; Carta
Letter; R. Doyal Letter and R. Black Letter; letter from Ben
Lawrence dated Apr. 15, 2020 (``B. Lawrence Letter''); and D. Burton
Letter.
\68\ See P. Rutledge Letter (preferring FINRA-administered exams
because ``FINRA is subject to SEC oversight and has existing
mechanisms for making examination-related information publicly
available'') and J. Angel Letter.
\69\ See E. Vollset Letter (noting that the Series 7, 65, and 82
exams ``likely would cost more to obtain than a lot of people are
willing to invest'').
\70\ See M. Douglas Letter; J. Angel Letter; K. Pulavarthi
Letter; D. Burton Letter; letter from Gregory S. Fryer dated March
16, 2020 (``G. Fryer Letter'') (supporting self-certification for
investors investing less than $15,000); and G. Freedman Letter.
\71\ See P. Rutledge Letter; Crowdwise Letter; Mercer Advisors
Letter; Md St. Bar Assn. Comm. on Sec. Laws Letter; NASAA Letter; R.
Maud Letter; and CFA Institute Letter (noting that ``[b]ehavioral
science has long recognized overconfidence bias in general and has
specifically documented individuals' overconfidence in their
investing skills and financial knowledge'').
\72\ See K. Pulavarthi Letter.
\73\ See Crowdwise Letter.
\74\ See NASAA Letter.
\75\ See Md St. Bar Assn. Comm. on Sec. Laws Letter.
---------------------------------------------------------------------------

Under the proposed approach, individuals with certain professional
certifications and designations or other credentials would qualify as
accredited investors regardless of their net worth or income. The
Proposing Release requested comment on whether additional conditions,
such as investment limits, for individuals with these certifications,
designations, or credentials should be considered. A few commenters
supported investment limits,\76\ while others did not.\77\ One
commenter who recommended imposing investment limits expressed the view
that individuals who do not meet the current net worth or income
thresholds, ``while possibly financially sophisticated, could not
sustain larger losses from these types of investments,'' and favorably
noted the investment limits in place under Regulation A and Regulation
Crowdfunding.\78\ Conversely, another commenter expressed concern about
the administrative burden of investment limits and stated that it would
``substantially reduce the attractiveness of this approach (as it has
for Regulation A and Regulation CF).'' \79\ Another commenter stated
that such limits may ``continue to propagate the disparate impact that
the current standards have on women, minority and rural investors.''
\80\
---------------------------------------------------------------------------

\76\ See A. Naegele Letter; Mercer Advisors Letter; and Artivest
Letter.
\77\ See L. Glover Letter; HLWG Letter; CCMC Letter; and D.
Burton Letter.
\78\ See Mercer Advisors Letter.
\79\ See D. Burton Letter.
\80\ See CCMC Letter.
---------------------------------------------------------------------------

As proposed, individuals who obtain the designated professional
credentials would be required to maintain these certifications or
designations in good standing in order to qualify as accredited
investors. Several commenters supported a good-standing
requirement.\81\ One of these commenters based its support of a good-
standing requirement on the need to maintain up-to-date knowledge.\82\
In contrast, another commenter opposed such a requirement, suggesting
that a good standing requirement would impose a ``needless barrier'' to
investment.\83\
---------------------------------------------------------------------------

\81\ See letter from Da Kui dated Jan. 10, 2020 (``D. Kui
Letter''); A. Naegele Letter; Mercer Advisors Letter; HLWG Letter;
R. Maud Letter; letter from Jiaxin Na dated Mar. 13, 2020 (``J. Na
Letter''); and Geraci Letter and AAPL Letter.
\82\ See D. Kui Letter (noting that, without a good standing
requirement ``the investor may no longer have up-to-date knowledge
and information about the related fields, especially when
considering the increasingly changing world of finance and
investment'').
\83\ See D. Burton Letter (stating that ``[t]he general
investment knowledge imparted by these programs will not materially
dissipate or decline, particularly if the person is making
investments. The Commission should not erect needless barriers
reducing access to these investments. It should not actively create
an advantage for those it regulates (i.e. those in the securities
industry) by requiring that a person be associated with a broker-
dealer'').

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[[Page 64241]]

The Proposing Release also requested comment on whether individuals
who obtain the designated professional credentials should also be
required to practice in the fields related to the certifications or
designations, or to have practiced for a minimum number of years. A few
commenters suggested that the Commission require professional
experience,\84\ with one expressing the view that the ``ability to pass
a test is no substitute for demonstrable investing or financial
services experience.'' \85\ One commenter opposed a work experience
requirement for individuals who pass the Series 7 and 65 exams, noting
that such individuals ``can practice as securities professionals
without an apprenticeship or relevant experience.'' \86\
---------------------------------------------------------------------------

\84\ See NASAA Letter (noting that a level of years of
experience should be required); letter from Nasdaq, Inc. dated May
18, 2020 (``Nasdaq Letter'') (noting that ``most professional
designations or certifications alone [do not] suffice to establish
the financial sophistication and independent judgment required to
evaluate private investments that are inherently risky and illiquid.
An examination of knowledge, without an additional requirement of
industry experience, is not a satisfactory means to determine
whether an investor can bear the risk of and evaluate a potential
investment in an exempt offering without the benefit of a
registration statement or similar disclosure''). See also Geraci
Letter and AAPL Letter (supporting inclusion of Series 7, 65, and 82
license holders without an experience requirement, but conditioning
support for the inclusion of CPAs, JDs, CFAs, and CAIAs on having
three years of experience, and noting that the experience
requirement ``protect[s] newly licensed individuals, who may not be
familiar with the real world applications of their education, from
partaking in inappropriate investment opportunities'').
\85\ See NASAA Letter.
\86\ See L. Grover Letter.
---------------------------------------------------------------------------

The proposed amendments included a mechanism by which the
Commission would designate qualifying professional credentials by order
and noted that the Commission ``anticipate[d] that the Commission
generally would provide public notice and an opportunity for public
comment before issuance of such order.'' \87\ Two commenters raised
Administrative Procedure Act (``APA'') concerns with this approach.\88\
Both commenters indicated that the Commission should provide the public
with the opportunity to comment on any additional categories of
qualifying professional credentials before issuing a final order.
Another commenter similarly encouraged the Commission to provide public
notice and an opportunity for public comment before issuance of such an
order.\89\ Other commenters were generally supportive of the proposal
to designate the professional credentials by order.\90\
---------------------------------------------------------------------------

\87\ See Proposing Release at 2581.
\88\ See NASAA Letter (suggesting that the ``policy would also
potentially violate the Administrative Procedure Act, as the new
accredited investor standards would likely constitute legislative
rules, for which public notice and comment are required'') and CA
Attorney General et al. Letter (``[t]he proposed process fails to
afford stakeholders an opportunity to provide valuable insight on
proposed changes and violates the Administrative Procedures Act'').
See also 5 U.S.C. 551 et seq.
\89\ See IWI Letter.
\90\ See ABA FR of Sec. Comm. Letter and D. Burton Letter.
---------------------------------------------------------------------------

We also requested comment on the proposed non-exclusive list of
attributes that the Commission would consider in determining which
professional certifications and designations or other credentials
qualify for accredited investor status. A few commenters expressed
support for the proposed list.\91\ One proposed attribute was an
indication that an individual holds the certification or designation is
made publicly available by the relevant self-regulatory organization or
other industry body. One commenter expressed support for this attribute
but suggested that it be broadened to include not only publicly
available certifications, but also those relevant certifications that
may be ``otherwise independently verifiable.'' \92\ In addition, one
commenter urged the Commission to establish a routine review of the
defined list of eligible designations, certifications, and
licenses.\93\
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\91\ See Fidelity Letter; CFA Institute Letter (noting that
``[w]e believe the Release articulates sound principles in its non-
exclusive list of attributes that it would consider in determining
which professional certifications and designations or other
credentials qualify for accredited investor status''); and ABA FR of
Sec. Comm. Letter (``[t]he Committee supports this approach, which
would be based on criteria that are verifiable and provide ongoing
flexibility for the Commission to add further appropriate investor
categories'').
\92\ See Fidelity Letter (noting that such approach ``[p]rovides
the SEC flexibility as it considers additions to the list of
professional certifications that meet its specified criteria in the
future, which may not necessarily be searchable on a public website,
but would be otherwise verifiable, such as on an access-controlled
website'').
\93\ See Carta Letter (``[t]he final rule should provide the
Commission with flexibility to reevaluate previously designated
certifications, designations, or credentials if they change over
time, and also designate other, possibly new, certifications,
designations, or credentials that meet specified criteria'').
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ii. Final Amendments

After considering the comments, we are adopting the amendment
substantially as proposed. We continue to believe that certain
professional certifications and designations or other credentials
provide a reliable indication that an investor has a sufficient level
of financial sophistication to participate in investment opportunities
that do not have the additional protections provided by registration
under the Securities Act. We note that many commenters agreed with our
conclusion in this regard. Further, we continue to believe that relying
solely on financial thresholds as an indication of financial
sophistication is suboptimal, including because it may unduly restrict
access to investment opportunities for individuals whose knowledge and
experience render them capable of evaluating the merits and risks of a
prospective investment--and therefore fending for themselves--in a
private offering, irrespective of their personal wealth. While certain
of these individuals may have fewer financial resources and, as a
result, be less able to bear the financial risk of private investments,
as one commenter suggested,\94\ we believe their professional
credentials and experience should enable these investors to assess
investment opportunities, appropriately allocate capital based on their
individual circumstances, including whether to reallocate investment
capital between private investments and other equivalent-sized
investments, and otherwise make appropriately informed decisions
regarding their financial interests, including their ability to bear
the financial risk.
---------------------------------------------------------------------------

\94\ See supra note 26.
---------------------------------------------------------------------------

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

[[Page 64242]]

designating credentials by order is consistent with the APA. The rules
provide specific standards by which the Commission will evaluate
additional qualifying credentials. Moreover, consistent with
commenters' suggestions, we are revising the final rules to clarify
that, in connection with any future designations of qualifying
credentials, the Commission will provide notice and an opportunity for
public comment before issuing any final order. To assist members of the
public, the professional certifications and designations and other
credentials currently recognized by the Commission as satisfying the
adopted criteria will be posted on the Commission's website.
We agree with the commenter's suggestion that the non-exclusive
attribute requiring that an indication that the individual holds the
certification or designation be made publicly available by the relevant
self-regulatory organization or other industry body should be expanded
to include that the certification or designation could also be
otherwise independently verifiable.\95\ This addition will provide the
Commission with flexibility as it considers whether to add future
certifications or designations that are not publicly available but
would be independently verifiable.
---------------------------------------------------------------------------

\95\ See supra note 92.
---------------------------------------------------------------------------

We are also adopting a good-standing requirement, which was
supported by many commenters addressing the requirement, but are not
requiring that the individual practice in the fields related to the
certification, except to the extent that continued affiliation with a
firm is required to maintain the certification, designation, or
credential.\96\ We continue to believe that passing the requisite
examinations and maintaining an active certification, designation, or
license is sufficient to demonstrate the individual's financial
sophistication to invest in exempt offerings, even when the individual
is not practicing in an area related to the certification or
designation. We also continue to believe that an inactive
certification, designation, or license, particularly when the
certification or designation has been inactive for an extended period
of time, could lessen the validity of the certification or designation
as a measure of financial sophistication. We are not, however, adopting
a requirement that individuals holding qualifying credentials must
practice in the fields related to the certifications or designations or
that such individuals have practiced for a minimum number of years. We
are concerned that adding such additional criteria would make it more
difficult for financially sophisticated investors to demonstrate, and
issuers and other market professionals to verify, accredited investor
status, but would not provide significant additional protection for
investors.
---------------------------------------------------------------------------

\96\ For example, an individual's registration as a general
securities representative will lapse two years after the date that
his or her employment with a FINRA member has been terminated. See
FINRA Rule 1210.08. An individual who ceases to be employed by a
FINRA member but whose registration remains current will continue to
qualify as an accredited investor until such registration lapses.
---------------------------------------------------------------------------

In connection with the adoption of this amendment, in a separate
order, we are designating the General Securities Representative license
(Series 7), the Private Securities Offerings Representative license
(Series 82), and the Licensed Investment Adviser Representative (Series
65) as the initial certifications, designations, or credentials
designated by the Commission under Rule 501(a)(10). Of the various
professional certifications, designations, and credentials on which we
received comment, these received significant support. The Series 7
license qualifies a candidate ``for the solicitation, purchase, and/or
sale of all securities products, including corporate securities,
municipal securities, municipal fund securities, options, direct
participation programs, investment company products, and variable
contracts.'' \97\ The Series 65 exam is designed to qualify candidates
as investment adviser representatives and covers topics necessary for
adviser representatives to understand to provide investment advice to
retail advisory clients.\98\ The Series 82 license qualifies candidates
seeking to effect the sales of private securities offerings.\99\
---------------------------------------------------------------------------

\97\ FINRA developed and administers the Series 7 examination.
An individual must be associated with a FINRA member firm or other
applicable self-regulatory organization member firm to be eligible
to take the exam and be granted a license. See https://www.finra.org/registration-exams-ce/qualification-exams/series7.
\98\ NASAA developed the Series 65 examination, and FINRA
administers it. An individual does not need to be sponsored by a
member firm to take the exam, and successful completion of the exam
does not convey the right to transact business prior to being
granted a license or registration by a state. See https://www.nasaa.org/exams/study-guides/series-65-study-guide.
\99\ FINRA developed and administers the Series 82 examination.
An individual must be associated with and sponsored by a FINRA
member firm or other applicable self-regulatory organization member
firm to be eligible to take the exam. See https://www.finra.org/registration-exams-ce/qualification-exams/series82.
---------------------------------------------------------------------------

In light of the subject matter encompassed by these exams, and for
the reasons stated above and in the Proposing Release, we believe that
individuals who have passed these examinations and hold their
certifications or designations in good standing have demonstrated a
sufficient level of financial sophistication to participate in
investment opportunities that do not have the additional protections
provided by registration under the Securities Act. In this regard, we
note that these certifications and designations are required in order
to represent or advise others in connection with securities market
transactions.\100\ To comply with the good standing requirement, the
General Securities Representative license holder, the Private
Securities Offerings Representative license holder,\101\ and the
Licensed Investment Adviser Representative must have passed the
required examinations and must maintain the individual's license or
registration, as applicable, in good standing.\102\
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\100\ See Geraci Letter and AAPL Letter (noting that ``such a
[Series 7, 65, or 82] license enables them to evaluate investments
on behalf of third parties, thus qualifying them to effectively
evaluate investment opportunities on their own behalf as well'').
\101\ To maintain their certifications and designations in good
standing, General Securities Representatives and Private Securities
Offerings Representatives are subject to continuing education
requirements under FINRA rules.
\102\ As noted in note 98, the successful completion of the
Series 65 exam does not convey the right to transact business prior
to being granted a license or registration by a state. See also
Proposing Release at 2581. To qualify as an accredited investor, a
Licensed Investment Adviser Representative must maintain, in good
standing, the individual's state-granted license or registration.
---------------------------------------------------------------------------

Issuers must take reasonable steps to verify whether an investor in
a Rule 506(c) offering is an accredited investor. As a result, readily
available information on whether an individual actively holds a
particular certification or designation is useful in determining
accredited investor status under Rule 501(a)(10). These certifications
and designations have the advantage of being relatively easy to verify,
while some other certifications and designations may be more difficult
to verify. Issuers and other market participants will be able to obtain
registration and licensing information about registered representatives
and investment adviser representatives easily through FINRA's
BrokerCheck \103\ or the Commission's Investment Adviser Public
Disclosure database.\104\
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\103\ See https://brokercheck.finra.org.
\104\ See https://www.adviserinfo.sec.gov/IAPD/Default.aspx.
---------------------------------------------------------------------------

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

[[Page 64243]]

Table 1--Estimated Number of Individuals Holding Specified
Certifications and Designations
------------------------------------------------------------------------
Number of
Certification/designation individuals
------------------------------------------------------------------------
Registered Securities Representative.................... \105\ 691,041
State Registered Investment Adviser Representative...... \106\ 17,543
------------------------------------------------------------------------

The final rules will initially result in an increase in the number
of individuals that qualify as accredited investors. However, we cannot
estimate how many individuals that hold the relevant certifications and
designations may already qualify as accredited investors under the
current financial thresholds, and therefore we are unable to predict
how many individuals will be newly eligible under the final rules.\107\
As discussed below in Section VI.B, (1) we do not expect that number of
newly eligible individual accredited investors to be significant
compared to the number of individual investors that currently are
eligible to participate in private offerings, and (2) we expect the
amount of capital invested by such newly eligible individual investors
to have minimal effects on the private offering market generally.\108\
Moreover, as we stated in the Proposing Release, for purposes of
updating the accredited investor definition, we believe it is less
relevant to focus on the number of individuals that will qualify and
more relevant to consider whether the criteria applied appropriately
capture the attributes of financial sophistication that is a touchstone
of the definition.
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\105\ As of December 2019. Of this number, 334,860 individuals
were registered only as broker-dealers, 294,684 were dually
registered as broker-dealers and investment advisers, and 61,497
were registered only as investment advisers. Because FINRA-
registered representatives can be required to hold multiple
professional certifications, this aggregation likely overstates,
potentially significantly, the actual number of individuals that
hold a Series 7 or Series 82, and we have no method of estimating
the extent of overlap.
\106\ As of December 2019.
\107\ We also are not able to estimate how many newly-eligible
individuals will seek to make investments as accredited investors.
\108\ We note that new investment from newly eligible individual
accredited investors may be significant in certain small offerings.
See discussion in Section VI.C.5.
---------------------------------------------------------------------------

Although other professional certifications, designations, and
credentials, such as other FINRA exams, a specific accredited investor
exam, other educational credentials, or professional experience
received broad commenter support, we are taking a measured approach to
the expansion of the definition and including only the Series 7, 65,
and 82 in the initial order. While we recognize that there may be other
professional certifications, designations, and credentials that
indicate a similar level of sophistication in the areas of securities
and investing, we believe it is appropriate to consider these other
credentials after first gaining experience with the revised rules.
However, as described above, the process we are adopting, by which the
Commission may designate qualifying professional certifications,
designations, and credentials by order, will provide the Commission
with flexibility to designate other certifications, designations, or
credentials if new certifications, designations, or credentials develop
or are identified that are consistent with the specified criteria and
that the Commission determines are appropriate. As a result, if an
accredited educational institution, self-regulatory organization, or
other industry body believes that it has a program of study or
credential that fulfills the non-exclusive list of attributes
enumerated in 501(a)(10), such institution or body may apply to the
Commission for consideration as a qualifying professional certification
or designation or credential under 501(a)(10). Similarly, members of
the public may wish to propose to the Commission that a specific degree
or program of study should be included in the accredited investor
definition.\109\ Any such proposal does not need to be limited to a
degree or program of study at a specific educational institution. Any
such request for Commission consideration must address how a particular
certification, designation, or credential satisfies the nonexclusive
list of attributes set forth in the new rule, and may include
additional information that the requestor believes the Commission may
wish consider.
---------------------------------------------------------------------------

\109\ In addition, the Commission's Investor Advisory Committee,
Small Business Capital Formation Advisory Committee, and other
advisory committees might assess the effectiveness of our approach
and make further recommendations, including additional
certifications, designations, or credentials that further the
purpose of the accredited investor definition.
---------------------------------------------------------------------------

In addition, we are not adopting an amendment that would permit
individuals to self-certify that they have the requisite financial
sophistication to be an accredited investor. We agree with some of the
concerns raised by commenters with respect to the lack of standards
applicable to such an approach. We note that the Commission will have
an opportunity to evaluate its experience with the revised rules in
connection with its quadrennial review of the accredited investor
definition.\110\
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\110\ Section 413(b)(2)(A) states that this Commission review
must be conducted not earlier than four years after the enactment of
the Dodd-Frank Act and not less frequently than once every four
years afterward. The next review is required to be conducted in or
by 2023.
---------------------------------------------------------------------------

We expect that such reviews will examine not only professional
certifications, designations, and credentials, but also the
Commission's existing wealth tests. In this regard, to the extent that
these certifications, designations, and credentials prove to be
effective at capturing the attributes of financial sophistication that
is the touchstone of the accredited investor definition, they may
influence future consideration of any appropriate adjustment to the
wealth tests.
b. Knowledgeable Employees of Private Funds
In the Proposing Release, the Commission proposed to add a category
to the accredited investor definition that would enable ``knowledgeable
employees,'' as defined in Rule 3c-5(a)(4) under the Investment Company
Act, of a private fund to qualify as accredited investors for
investments in the fund.\111\ Rule 3c-5(a)(4) under the Investment
Company Act defines a ``knowledgeable employee'' with respect to a
private fund as: (i) An executive officer, director, trustee, general
partner, advisory board member, or person serving in a similar
capacity, of the private fund or an affiliated management person (as
defined in Rule 3c-5(a)(1)) of the private fund; and (ii) an employee
of the private fund or an affiliated management person of the private
fund (other than an employee performing solely clerical, secretarial or
administrative functions with regard to such company or its
investments) who, in connection with his or her regular functions or
duties, participates in the investment activities of such private fund,
other private funds, or investment companies the investment activities
of which are managed by such affiliated management person of the
private fund, provided that such employee has been performing such
functions and duties for or on behalf of the private fund or the
affiliated management person of the private fund, or substantially
similar

[[Page 64244]]

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

\111\ Private funds, such as hedge funds, venture capital funds,
and private equity funds, are issuers that would be an investment
company, as defined in Section 3 of the Investment Company Act, but
for the exclusion from the definition of ``investment company'' in
Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
Private funds generally rely on Section 4(a)(2) and Rule 506 to
offer and sell their interests without registration under the
Securities Act.
---------------------------------------------------------------------------

i. Comments
Commenters generally supported the proposal to add knowledgeable
employees of private funds to the definition of accredited
investor,\112\ with one commenter opposed to expanding the accredited
investor definition to include these individuals.\113\
---------------------------------------------------------------------------

\112\ See P. Rutledge Letter; J. LaBerge Letter; A. Naegele
Letter; Geraci Letter; A. Hemmingsen Letter; letter from Stephen
Clossick dated Dec. 31, 2019 (``S. Clossick Letter''); letter from
Shaun Jolley dated Mar. 10, 2020 (``S. Jolley Letter''); IPA Letter;
S. Moller Letter; ALTI Letter; CCMC Letter; SBIA Letter; Republic
Letter; Better Markets Letter; AIC Letter: J. Na Letter; MFA and
AIMA Letter; Cornell Sec. Clinic Letter; letter from Institutional
Limited Partners Association dated Mar. 14, 2020 (``ILPA Letter'');
Artivest Letter; ABA FR of Sec. Comm. Letter; and Geraci Letter and
AAPL Letter.
\113\ See CA Attorney General et al. Letter (opposing the
expansion of the accredited investor definition to include more
individual investors).
---------------------------------------------------------------------------

Several commenters recommended that we expand the definition of
knowledgeable employee for purposes of determining accredited
investors. For example, some commenters recommended that we include a
broader pool of employees in the definition, such as analysts and
contract administrators.\114\ Two commenters requested that we expand
the definition of knowledgeable employee to include knowledgeable
employees of managing entities.\115\ Another commenter stated that
employees often invest in or through entities affiliated with their
employer other than the fund itself, including, for example, the
general partner or equivalent entity of the fund. This commenter
requested that we permit knowledgeable employees to be accredited
investors when acquiring securities of any affiliated management person
of a private fund and any entity or vehicle that, directly or
indirectly, primarily owns an interest in such private fund or
affiliated management person.\116\ This commenter also recommended
expanding the definition of accredited investor to cover individuals
investing in privately offered pooled investment vehicles that rely on
an exemption other than Section 3(c)(1) or Section 3(c)(7) of the
Investment Company Act, where such individuals would be knowledgeable
employees with respect to such vehicles (as defined in Rule 3c-5 under
the Investment Company Act) if the vehicles were relying on Section
3(c)(1) or 3(c)(7). Several commenters also recommended expanding the
definition of accredited investor to include all ``qualified
purchasers'' as defined in Section 2(a)(51)(A) of the Investment
Company Act.\117\
---------------------------------------------------------------------------

\114\ See letter from S. Laughlin Letter dated Feb. 6, 2020
(``S. Laughlin Letter'') and S. Clossick Letter. In addition, one
commenter suggested allowing knowledgeable employees of non-fund
issuers to meet the definition of accredited investor (see P.
Rutledge Letter), while others were opposed to including such
employees (see D. Kui Letter and A. Naegele Letter).
\115\ See Geraci Letter and AAPL Letter. See also Republic
Letter (supporting including knowledgeable employees of private
funds in the definition and requesting clarification that principals
and knowledgeable employees of investment advisers (whether
registered or exempt) to private funds are included in the expanded
definition).
\116\ See AIC Letter.
\117\ See AIC Letter; Calfee Letter; IAA Letter; ABA FR of Sec.
Comm. Letter; and MFA and AIMA Letter.
---------------------------------------------------------------------------

The Proposing Release requested comment on whether a knowledgeable
employee's accredited investor status should be attributed to his or
her spouse and/or dependents when making joint investments in private
funds for purposes of the accredited investor definition. Commenters
that responded to this question generally supported this approach.\118\
For example, one commenter suggested attributing accredited investor
status to joint investments with spouses or dependents, family
corporates, or estate-planning vehicles.\119\ Another commenter
suggested attributing accredited investor status to a knowledgeable
employee's spouse and/or dependents only when such investment decisions
are jointly made with the agreement of all persons in the particular
joint investment.\120\
---------------------------------------------------------------------------

\118\ See A. Hemmingsen Letter; AIC Letter; and J. Na Letter.
One commenter opposed attributing a knowledgeable employee's
accredited investor status to his or her spouse and/or dependents
when making joint investments in private funds. See A. Naegele
Letter.
\119\ See AIC Letter.
\120\ See J. Na Letter.
---------------------------------------------------------------------------

ii. Final Amendments
We are adopting, as proposed, the addition of a category to the
accredited investor definition that will enable ``knowledgeable
employees'' of a private fund to qualify as accredited investors for
investments in the fund. The new category of accredited investor will
be the same in scope as the definition of ``knowledgeable employee'' in
Rule 3c-5(a)(4).\121\ It includes, among other persons, trustees and
advisory board members, or persons serving in a similar capacity, of a
Section 3(c)(1) or 3(c)(7) fund or an affiliated person of the fund
that oversees the fund's investments, as well as employees of the
private fund or the affiliated person of the fund (other than employees
performing solely clerical, secretarial, or administrative functions)
who, in connection with the employees' regular functions or duties,
have participated in the investment activities of such private fund for
at least 12 months.\122\ This category will be similar to the existing
category for directors, executive officers, or general partners of the
issuer (or directors, executive officers, or general partners of a
general partner of the issuer).\123\
---------------------------------------------------------------------------

\121\ See Rule 501(a)(11).
\122\ The scope of the term ``knowledgeable employee'' in Rule
3c-5(a)(4) also includes executive officers, directors, and general
partners, or persons serving in a similar capacity, of a Section
3(c)(1) or 3(c)(7) fund or an affiliated person of the fund that
oversees the fund's investments. For these persons, the new category
for ``knowledgeable employees'' in the definition of ``accredited
investor'' will overlap with the existing category in Rule
501(a)(4). A person is determined to be a knowledgeable employee at
the time of investment. See Rule 3c-5(b)(1).
\123\ Rule 501(a)(4). We are not modifying the definition to
include knowledgeable employees of non-fund issuers, as suggested by
one commenter, in light of this existing category set forth in Rule
501(a)(4), which is applicable to non-fund and fund issuers.
---------------------------------------------------------------------------

As discussed in the Proposing Release, we believe that such
employees, through their knowledge and active participation of the
investment activities of the private fund, are likely to be financially
sophisticated and capable of fending for themselves in evaluating
investments.\124\ These employees, by virtue of their position with the
fund, are presumed to have meaningful investing experience and
sufficient access to the information necessary to make informed
investment decisions about the fund's offerings. Allowing these
employees to invest in the funds for which they work (and other funds
managed by their employer) as accredited investors also may help to
align their interests with those of other investors in the fund.
---------------------------------------------------------------------------

\124\ As is the case under Rule 3c-5(a)(4), the scope of
``knowledgeable employees'' under this proposed amendment will not
include employees who simply obtain information but do not
participate in the investment activities of the fund.
---------------------------------------------------------------------------

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

[[Page 64245]]

company the investment activities of which are managed by the fund's
affiliated management person. We believe that participating in the
management of a fund's investments is what gives the employee
sufficient knowledge and expertise to participate in investment
opportunities that do not have the additional protections provided by
registration under the Securities Act. Whether any particular employee
is one who participates in the investment activities of a fund is a
determination that must be made on a case-by-case basis.
We generally believe that many employees of managing entities are
likely included in the knowledgeable employee definition through the
concept of ``affiliated management persons'' (as defined by Rule 3c-5
under the Investment Company Act) and existing language in the
knowledgeable employee definition that includes persons who in
connection with their regular functions or duties, participate in the
investment activities of the fund, or other funds or investment
companies the investment activities of which are managed by affiliated
management persons of the fund.\125\ Rule 501(a)(11) does not limit
accredited investor status to only those knowledgeable employees making
investments in the private fund of which they participate in the
management. In addition, because the definition of knowledgeable
employee is intended to capture individuals who do not need the
protection of the Securities Act when investing in private funds, we do
not see a need to expand the definition to accommodate arrangements
where employees invest in entities other than private funds.
---------------------------------------------------------------------------

\125\ See Rule 3c-5(a)(1) (defining ``affiliated management
person''). For purposes of Rule 3c-5(a)(1), an investment adviser to
a private fund is an affiliated management person of the fund to the
extent that the investment adviser, whether registered or not,
manages the fund's investment activities.
---------------------------------------------------------------------------

The inclusion of knowledgeable employees in the definition of
``accredited investor'' will also allow these employees to invest in
the private fund without the fund itself losing accredited investor
status when the fund has assets of $5 million or less. Under Rule
501(a)(8), private funds with assets of $5 million or less may qualify
as accredited investors if all of the fund's equity owners are
accredited investors.\126\ Unless they qualify as accredited investors,
these small private funds could be excluded from participating in some
offerings under Rule 506 that are limited to accredited investors.
Amending the accredited investor definition in this manner will allow
knowledgeable employees to invest in these small private funds as
accredited investors, while permitting the funds to remain eligible to
qualify as accredited investors under Rule 501(a)(8) and potentially
participate in certain offerings under Rule 506 in which they would not
otherwise be eligible to participate.
---------------------------------------------------------------------------

\126\ A private fund may qualify as an accredited investor if it
holds total assets in excess of $5 million and is a corporation,
Massachusetts or similar business trust, or partnership, not formed
for the specific purpose of acquiring the securities offered. A
private fund may also be able to qualify as an accredited investor
if it is a trust with total assets in excess of $5 million that was
not formed for the specific purpose of acquiring the securities
offered, and the purchase is directed by a sophisticated person.
---------------------------------------------------------------------------

We believe Congress's intent to apply the spousal joint interest
position in Section 2(a)(51)(A)(i) of the Investment Company Act should
also apply to a knowledgeable employee and his or her spouse in the
context of accredited investor status under Rule 501(a)(11).\127\ We
therefore believe it is appropriate to attribute a knowledgeable
employee's accredited investor status to his or her spouse with respect
to joint investments made by the knowledgeable employee and his or her
spouse in a private fund.\128\
---------------------------------------------------------------------------

\127\ This is consistent with the American Bar Association
Section of Business Law, SEC Staff No-Action Letter (Apr. 22, 1999)
(``ABA Letter''). In the ABA Letter, staff stated that it would not
recommend enforcement action under Section 7 of the Investment
Company Act if a knowledgeable employee and his or her spouse who is
not a knowledgeable employee (or a qualified purchaser) invest
jointly in a Section 3(c)(7) fund. The staff took this position
because it believed Congress's intent to apply the spousal joint
interest position should apply in the context of Rule 3c-5.
\128\ We do not believe it is appropriate to attribute a
knowledgeable employee's accredited investor status to joint
investments other than those held with the knowledgeable employee's
spouse. This is consistent with the Commission's position with
respect to qualified purchasers. Under Section 2(a)(51)(A)(i) of the
Investment Company Act, a spouse who is not a qualified purchaser
can hold a joint interest in a Section 3(c)(7) fund with his or her
qualified purchaser spouse. However, dependents of a qualified
purchaser who are not themselves qualified purchasers may not hold a
joint interest in a Section 3(c)(7) fund with the qualified
purchaser. See ABA Letter. See also Privately Offered Investment
Companies, Release No. IC-22597 (Apr. 3, 1997) [62 FR 17512 (Apr. 9,
1997).]
---------------------------------------------------------------------------

After considering comments, we are not modifying the definition of
accredited investor to include ``qualified purchasers'' as defined in
Section 2(a)(51)(A) of the Investment Company Act. Most qualified
purchasers already meet the definition of accredited investor by virtue
of the higher financial thresholds required to qualify as a qualified
purchaser.\129\ While there may be limited circumstances where this is
not the case, we do not believe it is appropriate at this time to
further extend the accredited investor definition to include qualified
purchasers, given that the ``accredited investor'' standard and
``qualified purchaser'' standard are distinct standards that each
serves a different regulatory purpose.\130\
---------------------------------------------------------------------------

\129\ See Section 2(a)(51) of the Investment Company Act.
\130\ See supra note 8.
---------------------------------------------------------------------------

We are not able to estimate the number of individuals that will
qualify as accredited investors under the amendment to the definition.
Using data on private fund statistics compiled by the Commission's
Division of Investment Management, we estimate that there were 32,620
private funds as of second quarter 2019.\131\ However, we lack data on
the number of knowledgeable employees per fund. We also cannot estimate
how many individuals that meet the definition of ``knowledgeable
employee'' may already qualify as accredited investors under the
current financial thresholds.
---------------------------------------------------------------------------

\131\ See https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2019-q2.pdf.
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2. Entities
In the Proposing Release, the Commission proposed to amend the
definition of accredited investor to add several categories of
entities: SEC- and state-registered investment advisers, rural business
investment companies, limited liability companies, family offices,
family clients, and a catch all category.
a. Registered Investment Advisers
The Commission proposed to include in Rule 501(a)(1) investment
advisers registered under Section 203 of the Advisers Act \132\ and
investment advisers registered under the laws of the various states.
The Proposing Release also requested comment on whether exempt
reporting advisers should qualify as accredited investors.\133\
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\132\ See Section 203 of the Advisers Act (15 U.S.C. 80b-3).
\133\ An exempt reporting adviser is an investment adviser that
qualifies for the exemption from registration under Section 203(l)
of the Advisers Act because it is an adviser solely to one or more
venture capital funds, or under Rule 203(m)-1 of the Advisers Act
because it is an adviser solely to private funds and has assets
under management in the United States of less than $150 million. See
Exemptions for Advisers to Venture Capital Funds, Private Fund
Advisers With Less Than $150 Million in Assets Under Management, and
Foreign Private Advisers, Investment Advisers Act Release No. 3222
(June 22, 2011) [76 FR 39646 (July 6, 2011)].
---------------------------------------------------------------------------

i. Comments
Several commenters supported adding SEC- and state-registered
investment

[[Page 64246]]

advisers to the definition of accredited investor.\134\ Commenters
supporting their inclusion generally stated that registered investment
advisers have the investment acumen to make allocations of capital and
discern among investments, including in the private placement
market.\135\ While no commenters indicated they opposed this addition,
one commenter recommended that the Commission narrow the definition to
include only advisory firms, and not natural persons who are registered
investment advisers.\136\ This commenter expressed the view that
natural persons should be evaluated under the wealth tests that apply
to individuals. Other commenters, on the other hand, recommended that
the Commission expand the definition to include exempt reporting
advisers, noting that exempt reporting advisers are professionals
managing either venture capital funds or small investment funds as a
business.\137\
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\134\ See P. Rutledge Letter; A. Hemmingsen Letter; CFA Letter;
Mercer Advisors Letter; CCMC Letter; SBIA Letter; NASAA Letter;
letter from Financial Planning Coalition dated Mar. 16, 2020 (``FPC
Letter''); IWI Letter; and D. Burton Letter.
\135\ See, e.g., CCMC Letter and A. Hemmnigsen Letter.
\136\ See NASAA Letter.
\137\ See P. Rutledge Letter and A. Hemmingsen Letter.
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ii. Final Amendments
We are adopting the amendment with certain modifications from our
proposal. We believe that registered investment advisers, including
those that are sole proprietorships, have the requisite financial
sophistication needed to conduct meaningful investment analysis. As
discussed in the Proposing Release, registered investment advisers are
generally considered to be institutional investors under state law, and
we see no compelling reason to distinguish SEC- and state-registered
investment advisers acting for their own account from other
institutional investors already treated as accredited investors.\138\
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\138\ See Proposing Release at 2586 (describing the inclusion of
certain institutional investors in the definition of accredited
investor, including banks, insurance companies, certain employee
benefit plans, investment companies, small business investment
companies (``SBICs''), savings and loan associations, credit unions,
and registered broker-dealers).
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As a result, we believe it is appropriate to extend accredited
investor status to all SEC- and state-registered investment advisers.
We estimate that there are currently approximately 13,400 SEC-
registered investment advisers and approximately 17,500 state-
registered investment advisers.\139\ We are not able to estimate,
however, how many of those SEC- or state-registered investment advisers
meet the $5 million assets test under Rule 501(a)(3) and therefore
currently qualify as accredited investors.
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\139\ Of these, 72 SEC-registered investment advisers are sole
proprietorships and 1,712 advisers registered with one or more
states are sole proprietorships. We do not believe sole
proprietorships should be distinguished from other registered
investment advisers for purposes of determining accredited investor
status.
---------------------------------------------------------------------------

After considering comments, we also believe it is appropriate to
include exempt reporting advisers in the definition of accredited
investor. We believe exempt reporting advisers, as advisers to private
funds, have the requisite financial sophistication needed to conduct
meaningful investment analysis. To qualify as an exempt reporting
adviser under Section 203(m) or Section 203(l) of the Advisers Act, an
adviser would otherwise be required to register as an investment
adviser with the Commission and thereby meet the minimum asset
thresholds triggering such requirement.\140\ Additionally, private
funds themselves are institutional investors and all investors therein
are presumed to be financially sophisticated. We estimate that there
are currently approximately 4,244 exempt reporting advisers.\141\ We
are not able to estimate, however, how many of those exempt reporting
advisers may meet the $5 million assets test under Rule 501(a)(3) and
therefore currently qualify as accredited investors.
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\140\ Advisers must apply for registration with the SEC if their
regulatory assets under management are at least $110 million or if
they have regulatory assets under management of at least $25 million
but less than $100 million and meet one of the requirements to be
classified as a ``mid-sized adviser.'' See Section 203A(a)(2) of the
Advisers Act. See also Form ADV: Instructions for Part 1A, instr.
2.b.
\141\ Exempt reporting advisers are required to submit, and
periodically update, reports on Form ADV. See Rule 204-4 under the
Advisers Act.
---------------------------------------------------------------------------

b. Rural Business Investment Companies
The Commission proposed to include rural business investment
companies (``RBIC'') in Rule 501(a)(1). A RBIC is defined in Section
384A of the Consolidated Farm and Rural Development Act \142\ as a
company that is approved by the Secretary of Agriculture and that has
entered into a participation agreement with the Secretary.\143\ RBICs
are intended to promote economic development and the creation of wealth
and job opportunities in rural areas and among individuals living in
such areas.\144\ Their purpose is similar to the purpose of small
business investment companies (``SBICs''), which are intended to
increase access to capital for growth stage businesses.\145\ Because
SBICs and RBICs share the common purpose of promoting capital formation
in their respective sectors, advisers to SBICs and RBICs are treated
similarly under the Advisers Act in that they have the opportunity to
take advantage of expanded exemptions from investment adviser
registration.\146\ SBICs are already accredited investors under Rule
501(a)(1) and the Commission proposed to include RBICs as accredited
investors under Rule 501(a)(1).
---------------------------------------------------------------------------

\142\ 7 U.S.C. 2009cc.
\143\ See Public Law 115-417 (2019). To be eligible to
participate as an RBIC, the company must be a newly formed for-
profit entity or a newly formed for-profit subsidiary of such an
entity, have a management team with experience in community
development financing or relevant venture capital financing, and
invest in enterprises that will create wealth and job opportunities
in rural areas, with an emphasis on smaller enterprises. See 7
U.S.C. 2009cc-3(a).
\144\ See http://www.rd.usda.gov/programs-services/rural-business-investment-program.
\145\ A SBIC is a type of privately owned and managed investment
fund that is licensed and regulated by the U.S. Small Business
Administration (``SBA''). A SBIC uses its own capital, plus funds
borrowed with an SBA guarantee, to make equity and debt investments
in qualifying small businesses. See https://www.sba.gov/partners/sbics.
\146\ Advisers to solely RBICs and advisers to solely SBICs are
exempt from investment adviser registration. See Advisers Act
Sections 203(b)(8) and 203(b)(7), respectively. The venture capital
fund adviser exemption deems RBICs and SBICs to be venture capital
funds for purposes of the exemption. See 15 U.S.C. 80b-3(l). The
private fund adviser exemption excludes the assets of RBICs and
SBICs from counting towards the $150 million threshold. 15 U.S.C.
80b-3(m). See also Exemptions from Investment Adviser Regulation for
Advisers to Certain Rural Business Investment Companies, Investment
Advisers Act Release No. 5454 (Mar. 2, 2020) [85 FR 13734 (Mar. 10,
2020)].
---------------------------------------------------------------------------

i. Comments
Several commenters supported adding RBICs to the definition of
accredited investor,\147\ while no commenters opposed the addition.
Some commenters stated that including RBICs would serve as a critical
source of capital for rural communities.\148\ One commenter further
stated that including RBICs would reduce a significant burden that has
limited their ability to invest in private businesses.\149\ Commenters
also agreed that RBICs and SBICs should be treated in the same manner
and therefore agreed that RBICs also should be accredited
investors.\150\
---------------------------------------------------------------------------

\147\ See P. Rutledge Letter; SBIA Letter; NASAA Letter; CCMC
Letter; D. Burton Letter; and ABA FR of Sec. Comm. Letter.
\148\ See CCMC Letter and SBIA Letter.
\149\ See SBIA Letter.
\150\ See SBIA Letter and D. Burton Letter.

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[[Page 64247]]

ii. Final Amendments
We are adopting the amendment as proposed. Because of their common
purpose and similar treatment under other federal securities laws, we
believe that SBICs and RBICs should be treated similarly under the
Securities Act. As SBICs are already accredited investors under Rule
501(a)(1), we continue to believe that RBICs should be included as
accredited investors under Rule 501(a)(1).
c. Limited Liability Companies
Rule 501(a)(3) sets forth the following types of entities that
qualify for accredited investor status if they have total assets in
excess of $5 million and were not formed for the specific purpose of
acquiring the securities being offered: Organizations described in
Section 501(c)(3) of the Internal Revenue Code, corporations,
Massachusetts or similar business trusts, and partnerships.\151\ Though
this list does not include limited liability companies, which have
become a widely adopted corporate form since the Commission last
updated the accredited investor rules in 1989 to include additional
entities,\152\ a longstanding staff position has been that limited
liability companies satisfying the other requirements of the definition
are eligible to qualify as accredited investors under Rule
501(a)(3).\153\
---------------------------------------------------------------------------

\151\ See Rule 501(a)(3).
\152\ See Regulation D, Release No. 33-6825 (Mar. 15, 1989) [54
FR 11369 (Mar. 20, 1989)].
\153\ See Division of Corporation Finance interpretive letter to
Wolf, Block, Schorr and Solis-Cohen (Dec. 11, 1996); and question
number 255.05 of Securities Act Rules Compliance and Disclosure
Interpretations, available at https://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm.
---------------------------------------------------------------------------

i. Comments
Several commenters supported adding LLCs,\154\ while no commenters
opposed the addition. One commenter also suggested that the Commission
include ``any similar business entity in order to encompass any new
form of entity that might be created in the future and thus avoid the
problem that has existed with respect to LLCs.'' \155\ The Proposing
Release also requested comment on whether the Commission should amend
its rules to specifically include all managers of limited liability
companies as executive officers under Rule 501(f) or whether the rule
should be limited to managing members, thereby precluding third-party
managers from being considered executive officers under Rule 501(f).
Several commenters supported allowing any manager of a limited
liability company to qualify as an ``executive officer'' under Rule
501(f).\156\ One commenter stated that it did not believe naming
managers was necessary because ``they are already covered, to the
extent appropriate, by the term `executive officer' as a `person who
performs similar policy making functions.' '' \157\
---------------------------------------------------------------------------

\154\ See P. Rutledge Letter; letter from Farrell Fritz PC dated
Jan. 13, 2020 (``Farrell Fritz Letter''); Md St. Bar Assn. Comm. on
Sec. Laws Letter; CCMC Letter; SBIA Letter; NASAA Letter; MFA and
AIMA Letter (stating that ``[w]e believe these changes[, including
adding LLCs and the catch-all provision,] are appropriate and will
provide objective, bright-line standards for issuers to determine
whether certain types of entities qualify as accredited
investors''); D. Burton Letter; ABA FR of Sec. Comm. Letter.
\155\ See ABA FR of Sec. Comm. Letter (positing that ``the
concern identified in the Proposing Release regarding other
entities, like government bodies for which an asset would not be
meaningful, would be addressed'').
\156\ See Farrell Fritz Letter; CCMC Letter; D. Burton Letter;
and ABA FR of Sec. Comm. Letter.
\157\ See ABA FR of Sec. Comm. Letter.
---------------------------------------------------------------------------

ii. Final Amendments
We are adopting the amendment as proposed. We continue to believe
that limited liability companies that meet the requirements of Rule
501(a)(3), including the assets test, should be considered to have the
requisite financial sophistication to qualify as accredited investors.
Based on data from the Internal Revenue Service, there were 2,696,149
limited liability companies at the end of 2017.\158\ However, due to a
lack of more detailed publicly available information about limited
liability companies, such as the distribution of total assets across
companies, we are unable to estimate the number of these limited
liability companies that meet the requirements of Rule 501(a)(3). As
this amendment is a codification of a long standing staff
interpretation, we do not expect that the pool of accredited investors
will change significantly as a result of this amendment.
---------------------------------------------------------------------------

\158\ See IRS, Statistics of Income Division, Partnerships, May
2019, Table 8, available at https://www.irs.gov/pub/irs-soi/17pa08.xlsx. See also D. Burton Letter.
---------------------------------------------------------------------------

As the Commission noted in the Proposing Release, Rule 501(a)(4)
includes as an accredited investor any director, executive officer, or
general partner of the issuer of the securities being offered or sold.
The term ``executive officer'' is defined in Rule 501(f) as ``the
president, any vice president in charge of a principal business unit,
division or function, as well as any other officer who performs a
policy making function, or any other person who performs similar policy
making functions for the issuer.'' Regarding whether to list managers
in 501(f) or which managers should be included, while we continue to
believe that managers of limited liability companies, through their
knowledge and management of the issuer, are likely to be financially
sophisticated and capable of fending for themselves in evaluating
investments in the limited liability company's securities, we also
continue to believe that such a manager performs a policy making
function for the issuer equivalent to that of an executive officer of a
corporation under Rule 501(f), and therefore we do not believe it is
necessary to amend Rule 501(a)(4) or Rule 501(f) to specifically
include managers of limited liability companies. Further, consistent
with the views of commenters on this issue, we do not believe that it
is necessary to distinguish between member managers and third-party
managers, as either could be considered an executive officer under Rule
501(f).
We are not expanding Rule 501(a)(3) to include any similar business
entity, as suggested by a commenter. As discussed below, we believe the
new catch-all category for entities in Rule 501(a)(9), which includes
an investments test, appropriately addresses new entity types that may
be created in the future.
d. Other Entities Meeting an Investments-Owned Test
Certain types of entities, such as Indian tribes, labor unions,
governmental bodies and funds, and entities organized under the laws of
a foreign country, are not included in the accredited investor
definition. The Commission proposed to add a new category in the
accredited investor definition for any entity owning ``investments,''
as that term is defined in Rule 2a51-1(b) under the Investment Company
Act, in excess of $5 million that is not formed for the specific
purpose of acquiring the securities being offered.\159\ The Commission
indicated in the Proposing Release that the intent of this new category
was to capture all existing entity forms not already included within
Rule 501(a), such as Indian tribes and governmental bodies, as well as
those entity types that may be created in the future.
---------------------------------------------------------------------------

\159\ Rule 501(a)(9).
---------------------------------------------------------------------------

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

[[Page 64248]]

equivalents.\160\ By using an existing definition, the Commission
indicated that it hoped to alleviate confusion and facilitate
compliance.
---------------------------------------------------------------------------

\160\ See Rule 2a51-1(b), which was adopted by the Commission in
Privately Offered Investment Companies, Release No. IC-22597 (Apr.
3, 1997) [62 FR 17512 (April 9, 1997)].
---------------------------------------------------------------------------

i. Comments
Many commenters supported adding a catch-all category for entities
to the definition.\161\ No commenter specifically objected, although
one commenter indicated that it opposed including governmental bodies
and Indian tribes in the catch-all category because entities funded by
taxpayers should not be given accredited investor status when
``[t]axpayers themselves would not likely qualify under existing
restrictions.'' \162\ A few commenters suggested that the Commission
clarify the types of entities to be included in the catch-all
category,\163\ with two commenters suggesting specific enumerated lists
that include Indian tribes and their various instrumentalities.\164\ To
maintain flexibility and to allow for new entity types to be included
within the accredited investor definition, another commenter suggested
that the Commission describe in the text of the release the types of
entities to be included instead of enumerating entity types in the
rule.\165\ One commenter suggested that the Commission use the term
``person,'' as defined in Section 2(a)(2) of the Securities Act instead
of ``entity,'' in order to clarify that governmental funds would be
included in this new category.\166\
---------------------------------------------------------------------------

\161\ See letter from California Municipal Treasurers
Association Legislative Committee dated Feb. 12, 2020 (``CMTA
Letter''); letter from Arnold Porter Kaye Scholer LLP dated Feb. 14,
2020 (``Arnold & Porter Letter''); letter from National Association
of State Treasurers et al. dated Feb. 27, 2020 (``NAST et al.
Letter''); A. Hemmingsen Letter; letter from Southern Ute Indian
Tribe dated Mar. 3, 2020 (``Southern Ute Letter''); NAFOA Letter;
ICI Letter; TIAA Letter (stating that the Commission should
``clarify in its final rule that the phrase ``governmental bodies''
should be construed broadly to include a comprehensive range of
state, territorial, and local governmental entities, as well as U.S.
government agencies and departments, sovereign governments
recognized by the United States and sovereign investment funds, and
funds, pools, and endowments established by U.S. federal, state, and
local governments for a specified purpose and subject to control by
a government officer, board, or similar body''); NASAA Letter;
letter from PFM Asset Management LLC dated Mar. 16, 2020 (``PFM
Letter''); MFA and AIMA Letter; Better Markets Letter; SIFMA Letter;
CCMC Letter; SBIA Letter; letter from California Association of
County Treasurers and Tax Collectors dated Feb. 14, 2020 (``CACTTC
Letter''); Artivest Letter; and ABA FR of Sec. Comm. Letter.
\162\ See letter from Vulcan Consultants, LLC dated Feb. 17,
2020 (``Vulcan Letter'') (stating that ``adding to the risk profile
in hopes of increased returns only serves to encourage government
entities to keep more taxpayer funds in city hall rather than
returning them to their rightful owner-the taxpayer'').
\163\ See Arnold & Porter Letter; ICI Letter; PFM Letter;
Southern Ute Letter; and NAFOA Letter.
\164\ See Southern Ute Letter and NAFOA Letter.
\165\ See Arnold & Porter Letter (suggesting the following list:
``State, Commonwealth or Territory of the United States, the
District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands,
and any county or subdivision thereof; `Municipal government entity'
as that term is defined in Section 15B(8) of the Securities Exchange
Act of 1934 and regulations thereunder, including, without
limitation, a state government, county government or city
government; United States government branch, agency, department or
unit; Federal or state-recognized tribe within the United States;
Foreign sovereign government recognized by the United States
government; Multi-lateral agency such as those listed in 17 CFR
230.902(k)(2)(vi); Subdivision, department, agency, bureau or other
formally-constituted body of a municipal government entity, United
States federal government entity, or foreign sovereign entity that
is recognized by the United States; Sovereign investment fund; or
Fund, pool or endowment, established by a federal, state, local,
tribal or foreign government pursuant to a Constitution, statute,
regulation, executive order, or treaty, for a specified use or
purpose, subject to oversight and control by a government officer,
board or similar governing body with the powers to contract and to
litigate'').
\166\ See letter from Oregon State Treasury dated Mar. 16, 2020
(``OST Letter'') (recommending the use of Section 2(a)(2)'s
``person'' because it ``is not wholly clear whether all state and
local governmental funds are completely separate `entities' in a
legal sense''). In the alternative, this commenter suggested that
``unincorporated organization, or governmental or political
subdivision thereof'' be added after ``entity.''
---------------------------------------------------------------------------

The Proposing Release requested comment on whether any restrictions
should be applied with respect to entities covered by proposed Rule
501(a)(9), such as restrictions on entities organized or incorporated
under the laws of a foreign country. Two commenters responded that they
did not support restrictions,\167\ one of whom noted that international
investment should not be discouraged.\168\ In addition, two commenters
noted that Indian tribes are not foreign governments or countries.\169\
---------------------------------------------------------------------------

\167\ See Arnold & Porter Letter and D. Burton Letter.
\168\ See D. Burton Letter.
\169\ See NAFOA Letter and Southern Ute Letter.
---------------------------------------------------------------------------

Regarding the use of an investments test for this category of
institutional investors, the Proposing Release sought comment on
several topics. The Commission requested comment on whether an
investments test or an asset test was appropriate. A few commenters
supported an asset test over an investments test,\170\ noting that an
asset test is already used in the accredited investor definition. One
commenter supported an investment test, noting that an investment test
``demonstrates that an entity has sufficient investment experience and
financial sophistication,'' \171\ and a few other commenters supported
either test.\172\ The Commission also requested comment on whether $5
million in investments is the appropriate threshold. A few commenters
stated that $5 million is an appropriate threshold,\173\ while one
commenter supported a $10 million threshold.\174\ One commenter took no
position on a threshold but noted that it did not support a
``substantial increase'' in the amount proposed,\175\ and no commenters
indicated support for a lower threshold.
---------------------------------------------------------------------------

\170\ See Southern Ute Letter; MFA and AIMA Letter; and D.
Burton Letter.
\171\ See Artivest Letter (noting that ``[w]e agree with the
Commission's view, with respect to the $5 million catch-all for
entities described above, that an investment test is appropriate as
it demonstrates that an entity has sufficient investment experience
and financial sophistication to automatically qualify as an
accredited investor'').
\172\ See Arnold & Porter Letter (stating that ``[i]n the case
of governmental entities, the test (whether investments or assets)
should include investment (or assets) of related governmental
entities if either: (a) They are consolidated into the same
financial reporting unit for governmental accounting standards; or
(b) they are managed by the same office or officer of the broader
government of which they are a part'') and NAFOA Letter.
\173\ See Arnold & Porter Letter; NAFOA Letter; and Artivest
Letter.
\174\ See NASAA Letter.
\175\ See Southern Ute Letter (noting that the ``Tribe does not
take a position on whether $5 million in investments or assets is
the appropriate threshold, although it would not support a
substantial increase in the threshold'').
---------------------------------------------------------------------------

The Commission also requested comment on whether using the
definition of investments from Rule 2a51-1(b) under the Investment
Company Act was appropriate. A few commenters stated that using the
definition from Rule 2a51-1(b) was appropriate,\176\ while a few
commenters indicated it was not.\177\ Two commenters noted that the use
of the terms ``Prospective Qualified Purchaser'' and ``qualified
purchaser'' in the definition of investments has the

[[Page 64249]]

potential to confuse.\178\ Given the presence of the qualified-
purchaser-specific terminology in the definition of ``investments,''
these commenters sought clarification on the use of the term
``investments'' in the accredited investor context.
---------------------------------------------------------------------------

\176\ See P. Rutledge Letter (noting that the use of the term
``gives certainty as to what assets held by the entity qualify for
purposes of being deemed an accredited investor'') and A. Hemmingsen
Letter (stating that ``[a]n important feature of Rule 2a51-1(b) is
its inclusion of binding capital commitments. This inclusion is an
important facilitator for funds structured as draw down vehicles'').
\177\ See Southern Ute Letter (noting that ``the definition of
`investments' from Section 270.2a51-1 currently applies in the
context of establishing status as a `qualified purchaser' under the
[Investment Company Act],'' which ``complicates the application of
this definition to a determination of `accredited investor' status .
. .'') and D. Burton Letter (noting that ``[u]sing assets [instead
of investments] as defined by generally accepted accounting
principles would eliminate most ambiguity'').
\178\ See Southern Ute Letter and NAFOA Letter.
---------------------------------------------------------------------------

ii. Final Amendments
We are adopting the amendment as proposed. Consistent with the
support of many commenters, we are adopting the amendment to add a new
category to the accredited investor definition that includes any entity
owning ``investments,'' as that term is defined in Rule 2a51-1(b) under
the Investment Company Act, in excess of $5 million that is not formed
for the specific purpose of acquiring the securities being
offered.\179\ While we agree with some commenters that clarification of
the types of entities included in the new category is warranted, we do
not believe that enumerating a list of entities in the rule is
necessary. Instead, we reiterate that the intent of this new category
is to capture all entity types not already included in the definition
of accredited investor as well as those entity types that may be
created in the future. We believe the term ``entity'' is sufficiently
broad in this context to encompass Indian tribes and the divisions and
instrumentalities thereof, federal, state, territorial, and local
government bodies, funds of the types identified by commenters, and
entities organized or under the laws of foreign countries.
---------------------------------------------------------------------------

\179\ Rule 501(a)(9).
---------------------------------------------------------------------------

We do not agree with commenters who suggested substituting an asset
test for the investment test. We continue to believe that requiring
more than $5 million in investments instead of assets for this catch-
all category of entities may better demonstrate that the investor has
experience in investing and is therefore more likely to have a level of
financial sophistication similar to that of other institutional
accredited investors. Certain types of entities covered by the
amendment, such as governmental entities, may have more than $5 million
in non-financial assets such as land, buildings, and vehicles, but not
have any investment experience. We continue to believe that an
investments test may be more likely than an assets-based test to serve
as a reliable method for ascertaining whether an entity is likely to
require the protections of Securities Act registration. We also believe
that $5 million in investments is an appropriate threshold that
demonstrates the investor's experience in investing. Although one
commenter suggested a $10 million threshold, we are not persuaded that
setting the threshold at double the amount applicable under the assets
test for other institutional accredited investors is warranted in order
to illustrate a similar level of financial sophistication.
We are applying the definition of investments from Rule 2a51-1(b)
under the Investment Company Act to Rule 501(a)(9), as proposed. We
believe that the use of an existing definition will facilitate
compliance and alleviate confusion. We do not believe that additional
guidance is necessary to enable market participants to apply this
definition in the accredited investor context, notwithstanding the use
of the terms ``Prospective Qualified Purchaser'' and ``qualified
purchaser'' in the definition of ``investments.''
e. Certain Family Offices and Family Clients
In the Proposing Release, the Commission proposed to add new
categories to the accredited investor definition for certain ``family
offices'' and ``family clients of family offices.'' ``Family offices''
are entities established by families to manage their assets, plan for
their families' financial future, and provide other services to family
members. The Commission has previously observed that single family
offices generally serve families with at least $100 million or more of
investable assets.\180\ Family offices generally meet the definition of
``investment adviser'' under the Advisers Act, as the Commission has
interpreted the term, because, among the variety of services provided,
family offices are in the business of providing advice about securities
for compensation. However, the Commission adopted the ``family office
rule'' \181\ in 2011 to exclude single family offices from regulation
under the Advisers Act under certain conditions.\182\ Under that rule,
a family office generally is a company that has no clients other than
``family clients.'' \183\ ``Family clients'' generally are family
members, former family members, and certain key employees of the family
office, as well as certain of their charitable organizations, trusts,
and other types of entities.\184\
---------------------------------------------------------------------------

\180\ See Family Offices, Release No. IA-3098 (Oct. 12, 2010)
[75 FR 63753 (Oct. 18, 2010)] (``Family Office Proposing Release'').
See also Proposing Release at note 158.
\181\ 17 CFR 275.202(a)(11)(G)-1.
\182\ See Family Offices, Release No. IA-3220 (June 22, 2011)
[76 FR 37983 (June 29, 2011)] (``Family Office Adopting Release'').
See also Family Office Proposing Release (``We viewed the typical
single family office as not the sort of arrangement that Congress
designed the Advisers Act to regulate. We also were concerned that
application of the Advisers Act would intrude on the privacy of
family members. . . . The Act was not designed to regulate the
interactions of family members in the management of their own
wealth'').
\183\ A family office also (1) must be wholly owned by family
clients and exclusively controlled (directly or indirectly) by one
or more family members or family entities (each as defined in the
rule), and (2) must not hold itself out to the public as an
investment adviser. See Rule 202(a)(11)(G)-1(b) under the Advisers
Act.
\184\ For a full list of family clients, see 17 CFR
275.202(a)(11)(G)-1(d)(4). The family office rule defines a ``family
member'' to include ``all lineal descendants (including by adoption,
stepchildren, foster children, and individuals that were a minor
when another family member became a legal guardian of that
individual) of a common ancestor (who may be living or deceased),
and such lineal descendants' spouses or spousal equivalents;
provided that the common ancestor is no more than 10 generations
removed from the youngest generation of family members.'' 17 CFR
275.202(a)(11)(G)-1(d)(6).
---------------------------------------------------------------------------

In the Proposing Release, the Commission proposed that for a family
office to qualify as an accredited investor, it would need to have more
than $5 million in assets under management and its investments would
need to be directed by a person who has such knowledge and experience
in financial and business matters that such family office would be
capable of evaluating the merits and risks of the prospective
investment.
i. Comments
Commenters generally supported the proposed amendments to the
definition of accredited investor to include any ``family office'' with
more than $5 million in assets under management,\185\ and no commenters
opposed the amendments. One commenter noted that under the current
regulatory scheme, depending on their organizational structure, many
family offices are already able to meet the definition of an accredited
investor, and establishing a clear standard would allow family offices
to manage family assets more prudently and make issuers more
comfortable working with family office investors.\186\
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\185\ See J. LaBerge Letter; M. Trudeau Letter; SBIA Letter;
ILPA Letter; CCMC Letter; Carta Letter; AIC Letter; PIC Letter;
Artivest Letter. One commenter also recommended that the Commission
provide an exemption from the definition of ``investment company''
under the Investment Company Act for family offices and their family
clients. See PIC Letter. This rulemaking is intended to amend the
definition of accredited investor under the Securities Act.
Accordingly, the suggested exemption from the definition of
investment company is beyond the scope of this rulemaking.
\186\ See M. Trudeau Letter. See also PIC Letter.
---------------------------------------------------------------------------

Several commenters supported the proposed requirement that
qualifying family offices have more than $5 million in assets under
management.\187\ While

[[Page 64250]]

no commenters disagreed with the proposal to require that family
offices have a minimum amount of assets under management, one commenter
proposed increasing the minimum to $10 million.\188\ The commenter
stated that this higher threshold would be more likely to capture
investors who can reasonably be expected to have the sophistication and
ability to withstand economic losses as to enable them to fend for
themselves.
---------------------------------------------------------------------------

\187\ See J. LaBerge Letter; M. Trudeau Letter; A. Hemmingsen
Letter (noting it would be appropriate to impose a financial
threshold for a family office to qualify as an accredited investor
as proposed); Carta Letter; PIC Letter; Artivest Letter; and ILPA
Letter.
\188\ See NASAA Letter.
---------------------------------------------------------------------------

Commenters generally supported the requirement that the family
office's prospective investments be directed by a person who has such
knowledge and experience in financial and business matters that such
family office is capable of evaluating the merits and risks of the
prospective investment,\189\ noting that the underlying premise of the
amendments is that family offices and their professionals have the
knowledge, experience and sophistication to apply to investment
decisions, even though a family client may not.\190\
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\189\ See M. Trudeau Letter (adding a sophistication requirement
for family office managers is integral to the rationale of the
accredited investor definition); ILPA Letter; and PIC Letter.
\190\ See PIC Letter. The commenter also noted structural
similarities of this requirement with the trust category in
accredited investor definition in Rule 501(a)(7) of the Securities
Act that requires that the purchase of a trust be directed by a
sophisticated person as described in Rule 506(b)(2)(ii).
---------------------------------------------------------------------------

On the other hand, one commenter opposed the inclusion of the
knowledge and experience requirement under proposed Rule
501(a)(12)(iii).\191\ The commenter suggested that the Commission
should instead require an issuer to obtain a written representation
that the purchaser qualifies as a family office under Rule
202(a)(11)(G)-1 under the Advisers Act and, at the time of the
purchase, meets all of the requirements of that rule.
---------------------------------------------------------------------------

\191\ See P. Rutledge Letter.
---------------------------------------------------------------------------

Nearly all commenters that addressed the issue were supportive of
including in the definition of accredited investor family clients of a
family office that meets the proposed requirements of Rule
501(a)(12).\192\ One of these commenters expressed support for allowing
a family client to ``piggyback'' on the sophistication of the family
office for purposes of meeting the accredited investor requirement as
long as the family office is involved in the investment decision-making
process for the particular investment in question.\193\ One commenter
opposed including in the accredited investor definition family clients
of a family office meeting the proposed requirements of Rule
501(a)(12).\194\ The commenter raised investor protection concerns and
stated that including family clients in the definition would reduce
what it means to be a sophisticated investor to a test of familial
relationships.
---------------------------------------------------------------------------

\192\ See ILPA Letter; J. LaBerge Letter; CCMC Letter; Carta
Letter; P. Rutledge Letter; AIC Letter; PIC Letter; and Artivest
Letter.
\193\ See PIC Letter (expressing the view that the family client
should not meet the accredited investor definition unless the family
client relies on the family office for investment support with
respect to the investment in question).
\194\ See M. Trudeau Letter.
---------------------------------------------------------------------------

The Proposing Release also requested comment on whether a person
who receives assets upon the death of a family member (or other
involuntary transfer from a family member) (``a beneficiary'') should
qualify as an accredited investor during the year following such
involuntary transfer if the beneficiary would not otherwise
qualify.\195\ One commenter expressly supported this approach, noting
that it would be consistent with the family office rule.\196\ The
commenter also stated that carving out such a ``beneficiary'' from the
accredited investor definition could potentially prevent or complicate
the orderly liquidation or transition of the beneficiary from its
status as a family client.
---------------------------------------------------------------------------

\195\ The family office rule deems a person who receives assets
upon the death of family member (or other involuntary transfer from
a family member) to be a family client for one year following the
involuntary transfer. See Rule 202(a)(11)(G)-1(b) under the Advisers
Act.
\196\ See PIC Letter.
---------------------------------------------------------------------------

ii. Final Amendments
We are adopting, substantially as proposed, amendments to the
definition of accredited investor to include certain family offices and
their family clients. The definition encompasses a ``family office'' as
defined in the ``family office rule'' \197\ that meets the following
additional requirements: (i) It has more than $5 million in assets
under management,\198\ (ii) it is not formed for the specific purpose
of acquiring the securities offered,\199\ and (iii) its prospective
investment is directed by a person who has such knowledge and
experience in financial and business matters that such family office is
capable of evaluating the merits and risks of the prospective
investment.\200\ The final amendments to the definition of accredited
investor also include ``family clients'' (as defined in the family
office rule) of a family office that meets the requirements stated
above, whose prospective investment in the issuer is directed by such
family office.\201\
---------------------------------------------------------------------------

\197\ 17 CFR 275.202(a)(11)(G)-1. One commenter suggested that
we emphasize that Rule 501(a)(12) does not apply to multi-family
offices. See M. Trudeau Letter. Rule 501(a)(12) directly references
the definition of ``family office'' under the family office rule,
and as such, the amendments apply only to family offices that meet
this definition and do not apply to multi-family offices. See also
Family Office Adopting Release (noting that the family office
exclusion does not extend to family offices serving multiple
families).
\198\ Rule 501(a)(12)(i).
\199\ Rule 501(a)(12)(ii).
\200\ Rule 501(a)(12)(iii).
\201\ Rule 501(a)(13). A family client will not qualify as an
accredited investor under Rule 501(a)(13) with respect to a
prospective investment if the family client's prospective investment
is not directed by a family office meeting all the requirements of
Rule 501(a)(12).
---------------------------------------------------------------------------

We believe the policy rationale for adopting the family office rule
also supports the adoption of these amendments to the definition of
accredited investor for family offices and their family clients. We
continue to believe that family offices and their family clients can
sustain the risk of loss of investment, given their assets.\202\ We
also continue to believe that certain protections otherwise afforded to
less financially sophisticated investors by federal securities laws are
not necessary to protect family offices or their clients. Finally,
while one commenter raised concerns that including family clients in
the accredited investor definition reduces what it means to be a
sophisticated investor to a test of familial relationships, we believe
these concerns are mitigated by the requirements of the definition. In
particular, to qualify as an accredited investor, a person must be a
family client of a family office meeting the requirements of Rule
501(a)(12), including that the family office has more than $5 million
in assets under management and its investments are directed by a person
who has such knowledge and experience in financial and business matters
that such family office is capable of evaluating the merits and risks
of the prospective investment.
---------------------------------------------------------------------------

\202\ See Proposing Release at 2589.
---------------------------------------------------------------------------

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

[[Page 64251]]

withstand economic losses and fend for themselves. This threshold also
is consistent with the asset threshold required by other accredited
investor categories.\203\
---------------------------------------------------------------------------

\203\ Rule 501(a)(1), (a)(3), and (a)(7).
---------------------------------------------------------------------------

In addition, as proposed, the amendment will require that the
family office's purchase be directed by a person who has such knowledge
and experience in financial and business matters that such family
office is capable of evaluating the merits and risks of the prospective
investment. This requirement is designed to ensure that the person
directing the investments of the family office is able to evaluate the
risks and take steps to protect the interests of family clients,
particularly with respect to family clients who do not on their own
meet the definition of an accredited investor.\204\ This requirement is
similar to the financial sophistication requirement for trusts to meet
the definition of an accredited investor under Rule 501(a)(7) under the
Securities Act, and we do not believe that determining that the family
office or family client meets the relevant definition will create an
undue burden for issuers.\205\
---------------------------------------------------------------------------

\204\ Additionally, the amendments require family clients to
invest through a family office that meets the requirements of Rule
501(a)(12) to qualify as an accredited investor.
\205\ An issuer could, for example, obtain a representation that
the family office meets the requirement of Rule 501(a)(12)(iii) as
part of a traditional investor questionnaire.
---------------------------------------------------------------------------

Finally, after considering comments, we are not excluding from the
accredited investor definition a beneficiary that temporarily qualifies
as a family client under the family office rule. That is, a person who
receives assets upon the death of a family member or key employee (or
other involuntary transfer from a family member or key employee) will
qualify as a family client for purposes of the accredited investor
definition for one year. We do not believe it is appropriate to
differentiate family clients within the definition and agree with
commenters that excluding a beneficiary from the accredited investor
definition could negatively impact the family office's management and
transition of the beneficiary from its status as a family client.\206\
---------------------------------------------------------------------------

\206\ A person is determined to be an accredited investor at the
time of investment, so a beneficiary would not be required to unwind
any holdings acquired through an involuntary transfer from a family
member (or made during the period that the beneficiary is a family
client), but the beneficiary would not be able purchase additional
holdings, unless the beneficiary qualifies as an accredited investor
on another basis. See Rule 501(a).
---------------------------------------------------------------------------

3. Permitting Spousal Equivalents To Pool Finances for the Purposes of
Qualifying as Accredited Investors
In the Proposing Release, the Commission proposed to allow natural
persons to include joint income from spousal equivalents when
calculating joint income under Rule 501(a)(6), and to include spousal
equivalents when determining net worth under Rule 501(a)(5). The
proposed amendments would define spousal equivalent as a cohabitant
occupying a relationship generally equivalent to that of a spouse. The
Commission previously has used this formulation of spousal equivalent.
As discussed above, a family office is exempted from regulation under
the Advisers Act when the family office advises ``family clients.''
\207\ The Commission defined ``family clients'' to include ``family
members,'' of which ``spousal equivalents'' are a part, with ``spousal
equivalent'' defined as a cohabitant occupying a relationship generally
equivalent to that of a spouse.\208\ The crowdfunding rules adopted to
implement the requirements of Title III of the Jumpstart Our Business
Startups Act (``JOBS Act'') also use this definition of ``spousal
equivalent.'' \209\ In Regulation Crowdfunding, the Commission included
the term ``spousal equivalent'' in the definition of the term ``member
of the family of the purchaser or the equivalent,'' with ``spousal
equivalent'' having the same definition used in the Advisers Act and as
the one we proposed to use in Rule 501(a).\210\
---------------------------------------------------------------------------

\207\ See Family Office Adopting Release.
\208\ Rule 202(a)(11)(G)-1(d)(9).
\209\ Public Law 112-106, 126 Stat. 306 (2012). The JOBS Act
provides that securities issued in reliance on the crowdfunding
exemption may not be transferred by the purchaser for one year after
the date of purchase, except when transferred to, among other
persons, ``a member of the family of the purchaser or the
equivalent'' (emphasis added). See JOBS Act Section 302(e)(1)(D). In
addition, though the Commission rule governing accountant
independence also includes ``spousal equivalents,'' the term is not
defined in that rule. See 17 CFR 210.2-01.
\210\ 17 CFR 227.501(c).
---------------------------------------------------------------------------

a. Comments
Several commenters supported adding spousal equivalents,\211\ with
one commenter noting that adding spousal equivalents may allow more
investment opportunities for investors.\212\ A few commenters did not
support adding spousal equivalents,\213\ with one commenter opposed to
the addition because of potential tax consequences,\214\ and another
suggesting a different definition limited solely to ``legally-
recognized relationships besides marriage.'' \215\
---------------------------------------------------------------------------

\211\ See letter from Sean Mortensen dated Dec. 18, 2019 (``S.
Mortensen Letter''); P. Rutledge Letter; letter from Daniel Hoeller
dated Feb. 19, 2020 (``D. Hoeller Letter''); J. LaBerge Letter; A.
Hemmingsen Letter; CCMC Letter; NASAA Letter; SBIA Letter; Mercer
Advisors Letter; S. Moller Letter; Better Markets Letter; M. Trudeau
Letter; and Artivest Letter.
\212\ See D. Hoeller Letter (positing that the amendment ``would
help . . . thousands more to access potentially better investment
opportunities'').
\213\ See Md St. Bar Assn. Comm. on Sec. Laws Letter
(recommending a different definition) and Cornell Sec. Clinic
Letter.
\214\ See Cornell Sec. Clinic Letter (positing that the addition
``might encourage tax shifting because individuals who are taxed
separately could be taxed less than a married couple due to
different tax brackets between the two taxable units'').
\215\ See Md St. Bar Assn. Comm. on Sec. Laws Letter
(recommending that the definition be limited ``solely to persons in
other legally-recognized relationships besides marriage, including
domestic partnerships and civil unions, that provide legal rights to
the participants in such an arrangement that are similar to those
accorded to legal spouses (at least with respect to financial
matters)'').
---------------------------------------------------------------------------

b. Final Amendments
We are adopting the amendment as proposed for the reasons noted in
the Proposing Release. We continue to believe that there is no need to
deviate from the definition of ``spousal equivalent'' already used in
Commission rules. Revising Rule 501(a)(5) and (6) to permit spousal
equivalents to pool their financial resources will promote consistency
with these existing rules. By contrast, using a different, more limited
definition, as suggested by one commenter, would add complexity to our
rules without an obvious benefit in terms of investor protection.
4. Notes to 501(a)
The Commission proposed to amend the accredited investor definition
to incorporate three long-standing staff interpretations. The first is
the inclusion of limited liability companies in Rule 501(a)(3), which
is discussed in Section II.B.2.c above. The second relates to the term
``joint'' in Rule 501(a)(5), and the third relates to the identity of
the owners of entities seeking accreditation under Rule 501(a)(8).
a. Note to Rule 501(a)(5)
The Commission proposed to add a note to Rule 501 to clarify that
the calculation of ``joint net worth'' for purposes of Rule 501(a)(5)
can be the aggregate net worth of an investor and his or her spouse (or
spousal equivalent if ``spousal equivalent'' is included in Rule
501(a)(5)), and that the securities being purchased by an investor
relying on the joint net worth test of Rule 501(a)(5) need not be
purchased jointly.

[[Page 64252]]

The Commission noted that nothing in previous Regulation D releases
indicates that the Commission intended the term ``joint'' in Rule
501(a)(5) to require (1) joint ownership of assets when calculating the
net worth of the spouses, or (2) that an investor relying on the joint
net worth test acquire the security jointly instead of separately. The
Commission also noted that allowing spouses to own assets in various
forms for the purposes of the net worth test is consistent with how the
Commission treats spousal ownership of assets in other contexts.\216\
---------------------------------------------------------------------------

\216\ See Rule 2a51-1 under the Investment Company Act, which
permits separate ownership, joint ownership, and community property
ownership.
---------------------------------------------------------------------------

i. Comments
Every commenter that addressed this amendment supported it,\217\
with one commenter noting that the addition ``may help some investors
and practitioners to better understand the rules.'' \218\
---------------------------------------------------------------------------

\217\ See P. Rutledge Letter; Mercer Advisors Letter; CCMC
Letter; D. Burton Letter; and ABA FR of Sec. Comm. Letter.
\218\ See D. Burton Letter.
---------------------------------------------------------------------------

ii. Final Amendments
We are adopting the amendment as proposed. We continue to believe
that it does not appear necessary in the accredited investor context to
limit how an investor takes title to securities or how spouses or
spousal equivalents own assets.
b. Note to Rule 501(a)(8)
Under Rule 501(a)(8), an entity qualifies as an accredited investor
if all of the equity owners of that entity are accredited investors.
Because in some instances, an equity owner of an entity is another
entity, not a natural person, the Commission proposed to add a note to
Rule 501(a)(8) that would clarify that, in determining accredited
investor status under Rule 501(a)(8), one may look through various
forms of equity ownership to natural persons. Thus, if those natural
persons are themselves accredited investors, and if all other equity
owners of the entity are accredited investors, the entity would be an
accredited investor under Rule 501(a)(8). The Commission noted its
belief that this approach is appropriate because the intent of Rule
501(a)(8) is to qualify as accredited investors those entities that are
100% owned by accredited investors and, for this purpose, it should not
matter whether the ownership is direct or indirect.
i. Comments
Several commenters supported adding the note as written,\219\ while
two commenters supported the note but with modifications, positing that
the proposed note would have a disproportionate impact on Indian tribes
and other entities because tribes may use limited liability companies
and other entities to make investments, with the tribes, not individual
natural persons, as the owner of the entity.\220\
---------------------------------------------------------------------------

\219\ See P. Rutledge Letter; Arnold & Porter Letter (would also
add a related note stating that ``one may look through the various
forms of ownership and control of a governmental entity to the
overarching government of which a specific governmental entity is a
part when determining accredited investor status under Rule
501(a)(9)''); NAFOA Letter; CCMC Letter; NASAA Letter; and D. Burton
Letter.
\220\ See Southern Ute Letter (stating that ``[t]he Tribe
regularly invests and conducts business through state-organized
limited liability companies and other entities, and the proposed
rule that allows a look through only to natural persons would
disadvantage the Tribe and other Indian tribes'') and NAFOA Letter
(stating that ``[s]ince Indian tribes would be included as an
accredited investor[, the Commission] should add the generic
``entities'' to the ``natural persons'' to read ``natural persons or
entities'' to avoid disadvantaging Indian tribes'').
---------------------------------------------------------------------------

ii. Final Amendments
We are adopting the amendment as proposed. We do not share the
commenters' concerns that the note, as drafted, would
disproportionately disadvantage Indian tribes and other entities. The
purpose of the amendment is to clarify that it is appropriate to look
through various forms of ownership under Rule 501(a)(8) to natural
persons in those cases where an equity owner of an entity is itself an
entity, but that owner-entity does not qualify on its own merits as an
accredited investor (e.g., if the owner-entity is an LLC that does not
meet the $5 assets test). This clarification does not supersede the
application of Rule 501(a)(8) to entities; therefore, for example, if
an Indian tribe or state forms and is the sole equity owner of an LLC,
such LLC could qualify as an accredited investor either if it meets the
requirements of Rule 501(a)(3), or if the Indian tribe or state equity-
owner meets the requirements of Rule 501(a)(9).
5. Amendment to Rule 215
The Commission proposed to amend the accredited investor definition
in Rule 215 to conform to the amendments to the accredited investor
definition in Rule 501(a). Rule 215 defines the term ``accredited
investor'' under Section 2(a)(15) of the Securities Act \221\ for
purposes of Section 4(a)(5) of the Securities Act.\222\ The accredited
investor definition in Rule 215 has historically been substantially
consistent but not identical to the accredited investor definition in
Rule 501(a) of Regulation D. For example, in contrast to the definition
in Rule 501(a), the scope of the accredited investor definition in Rule
215 does not include banks, insurance companies, registered investment
companies, business development companies as defined in Section
2(a)(48) of the Investment Company Act, or SBICs. In addition, the
accredited investor definition in Rule 215 does not contain a
reasonable belief standard as in Rule 501(a).\223\
---------------------------------------------------------------------------

\221\ 15 U.S.C. 77b(a)(15). Section 2(a)(15) of the Securities
Act sets forth an enumerated list of entities that qualify as
accredited investors as well as ``any person who, on the basis of
such factors as financial sophistication, net worth, knowledge, and
experience in financial matters, or amount of assets under
management qualifies as an accredited investor under rules and
regulations which the Commission shall prescribe.''
\222\ 15 U.S.C. 77d(a)(5). Section 4(a)(5) of the Securities Act
provides an exemption for issuers for the offer and sale of
securities to accredited investors if the aggregate offering amount
does not exceed $5 million; the issuer, or anyone acting on its
behalf, does not engage in general solicitation or general
advertising; and the issuer files a notice on Form D with the
Commission. Based on DERA staff's review of Form D filings from
January 1, 2009 through December 31, 2019, no issuer reported
relying on the Section 4(a)(5) exemption during that time period.
\223\ Under Rule 501(a), natural persons and entities that come
within any of eight enumerated categories in the definition, or that
the issuer reasonably believes comes within any of the categories,
are accredited investors.
---------------------------------------------------------------------------

To ensure uniformity in the accredited investor definition in both
provisions, the Commission proposed to replace the existing definition
in Rule 215 with a cross reference to the accredited investor
definition in Rule 501(a). By including this cross reference, the
definition of ``accredited investor'' in Rule 215 as amended would be
expanded to include any amendments to the accredited investor
definition in Rule 501(a), as well as those entities that are presently
included in the definition in Rule 501(a) but not the definition in
Rule 215. As amended, the definition would also contain the same
reasonable belief standard as in Rule 501(a).
a. Comments
All of the commenters responding to this proposed amendment
supported its adoption.\224\ The Proposing Release also requested
comment on whether amending the scope of the accredited investor
definition in Rule 215 as proposed would raise concerns regarding the
application of the Section 4(a)(5) exemption. No commenters

[[Page 64253]]

indicated that the amendment would raise concerns about Section
4(a)(5), while one commenter expressly stated that it did not believe
that Section 4(a)(5) would be affected.\225\ The Commission also
requested comment on whether adding a reasonable belief standard to the
definition in Rule 215 would raise concerns. No commenters indicated
that adding a reasonable belief standard raised concerns, while two
commenters expressly stated that no concerns would exist.\226\
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\224\ See P. Rutledge Letter; Arnold & Porter Letter; CCMC
Letter; Republic Letter; D. Burton Letter; and ABA FR of Sec. Comm.
Letter.
\225\ See Arnold & Porter Letter.
\226\ See Arnold & Porter Letter and D. Burton Letter.
---------------------------------------------------------------------------

b. Final Amendments
We are adopting the amendment as proposed. We continue to believe
that the historical intended consistency between Rules 215 and 501(a)
should be maintained, and we agree with the commenter that replacing
the definition in Rule 215 with a cross-reference to Rule 501(a) would
simplify compliance.\227\
---------------------------------------------------------------------------

\227\ See Arnold & Porter Letter.
---------------------------------------------------------------------------

6. Other Comments
The Proposing Release also requested comment on other topics
related to the accredited investor definition but not the subject of
specific proposals, including whether the Commission should adjust the
financial thresholds for inflation, whether the Commission should
include geographic-specific financial thresholds, and whether investors
advised by a registered investment adviser or a registered broker-
dealer should be included as accredited investors.
a. Adjustments to Financial Thresholds
With respect to inflation adjustment, comments were mixed. Several
commenters expressed support for maintaining the thresholds as they
are,\228\ with one commenter suggesting that raising the thresholds
would adversely affect certain real estate investors \229\ and another
commenter suggesting that certain manufacturing investors would be
adversely affected.\230\
---------------------------------------------------------------------------

\228\ See IPA Letter; Morningstar Letter; Md St. Bar Assn. Comm.
on Sec. Laws Letter; CCMC Letter; NAM Letter; Republic Letter; AIC
Letter; D. Burton Letter (this commenter also believes that the
threshold could ``possibly'' be reduced); and Geraci Letter and AAPL
Letter.
\229\ See IPA Letter (noting that raising the thresholds could
affect the ability of some to accomplish like-kind exchanges under
Section 1031 of the Internal Revenue Code).
\230\ See NAM Letter (positing that ``[i]ncreasing the income or
net worth tests would reclassify many manufacturing investors as
non-accredited, disrupting the businesses that already rely on their
investment capital and reducing capital formation opportunities for
manufacturers on a going forward basis'').
---------------------------------------------------------------------------

A number of commenters supported raising the thresholds to reflect
inflation either since adoption of the rule, on a going-forward basis,
or both.\231\ One commenter noted that unadjusted thresholds have
lowered the level of sophistication required for accredited investor
status over time; \232\ while several other commenters posited that
investor protections have been weakened over time.\233\ A few
commenters supported lowering the financial thresholds,\234\ with one
commenter positing that changes in the availability of information
since the adoption of the accredited investor definition reduced the
efficacy of the financial thresholds in identifying sophisticated
investors.\235\
---------------------------------------------------------------------------

\231\ See letter from George Humm dated Jan. 29, 2020 (``G. Humm
Letter''); letter from Howard Lichtman dated Feb. 21, 2020 (``H.
Lichtman Letter''); letter from Marc. I. Steinberg dated Jan. 23,
2020; B. Delaplane Letter; M. L. Letter; ICI Letter; S. Moller
Letter; St. John's Sec. Arbitration Clinic Letter; NASAA Letter;
Better Markets Letter; CA Attorney General et al. Letter; M. Trudeau
Letter; MFA and AIMA Letter; Cornell Sec. Clinic Letter; R. Maud
Letter; PIABA Letter (suggesting that the Commission ``rais[e] the
net worth threshold to $2.5 million and income threshold to
$500,000/$750,000 for individuals and couples''); letter from Tyler
Yagman and Nicholas Bruno dated Mar. 15, 2020; and Artivest Letter.
See also SBCFAC Recommendations (recommending that the Commission
``[g]oing forward, index the financial thresholds for inflation on
periodic basis'') and IAC Recommendations (recommending that the
Commission consider ``whether financial thresholds need to be
adjusted for inflation'').
\232\ See B. Delaplane Letter.
\233\ See ICI Letter (stating that ``changes in technology that
have occurred since 1982 do not make up for the loss of investor
protection as a result of the erosion of the financial
thresholds''); S. Moller Letter (stating that ``adjustment is not
only definitively warranted but essential for the protection of
investors''); St. John's Sec. Arbitration Clinic Letter (stating
that ``the SEC's purpose in setting those monetary requirements in
1982 is undermined as inflation increases and yet the thresholds
remain the same''); M. Trudeau Letter (positing that the thresholds
should be raised to ``get back to the original intent of the
category''); PIABA Letter (stating that raising the thresholds would
``be a meaningful step forward in moving back to the original
intention of limiting the pool of accredited investors''); and
Better Markets Letter (stating that ``there may indeed now [be]
hundreds of thousands of investors who have become qualified as
Accredited Investor solely on the virtue of inflation of their asset
prices but who otherwise lack necessary financial sophistication to
carefully weigh the risks associated in investing in exempt
offerings'').
\234\ See letter from Stuart dated Dec. 19, 2019; letter from
Max Harker dated Dec. 19, 2019 (``M. Harker Letter''); letter from
Robert Hall dated Feb. 23, 2020 (``R. Hall Letter''); and B. Andrews
et al. Letter (stating that ``[t]he current income and wealth
standards that determine who can participate in private capital
markets shut out even many `wealthy' Americans from investing in
founders from their communities'').
\235\ See R. Hall Letter (noting that ``[w]e are in an age of
information where plenty of performance data is available for your
average citizen to make intelligent investments in small
companies'').
---------------------------------------------------------------------------

The Proposing Release also requested comment on whether certain
assets or liabilities should be excluded from or included in the
calculation of net worth under Rule 501(a)(5). A few commenters
responded that home equity should be included as an asset; \236\
another commenter proposed to exclude ``agricultural land and machinery
held for production;'' \237\ and a few commenters proposed to exclude
the value of certain retirement accounts.\238\ One commenter suggested
that the net worth calculation be based on ``documented liquid net
worth.'' \239\ Another commenter did not believe changes were
necessary.\240\
---------------------------------------------------------------------------

\236\ See J. Evans Letter and B. Andrews et al. Letter (stating
that ``[a]lthough there are over 600,000+ Black people that have a
$1M net worth in the US; with most of that net worth in personal
residences, Dodd Frank excludes them from meeting the [accredited
investor] rule'').
\237\ See NASAA Letter.
\238\ See NASAA Letter (recommending exclusion of ``the value of
any defined benefit or defined contribution tax-deferred retirement
accounts'') and D. Kui Letter (recommending exclusion of a portion
of the investor's ``retirement accounts'' and suggesting that the
Commission could ``(i) [set] forth a maximum amount of money from a
retirement account which can be included in the calculation of net
worth, (ii) [use] a discount or likewise formula to proportionately
include the money from a retirement account into the calculation of
net worth, and (iii) set a maximum amount that an investor may
invest by fund from his/her retirement account'').
\239\ See Mercer Advisors Letter.
\240\ See D. Burton Letter.
---------------------------------------------------------------------------

After considering these comments, we continue to believe that it is
not necessary or appropriate to modify the definition's financial
thresholds at this time. As stated in the Proposing Release, we believe
that in evaluating the effectiveness of the current thresholds, it is
appropriate to consider changes beyond the impact of inflation, such as
changes over the years in the availability of information and advances
in technologies. Information about many issuers and other participants
in the exempt markets is more readily available now to a wide range of
market participants, which was not the case at the time the accredited
investor definition was adopted. In addition, we continue to believe
that (1) at an individual level, removing investors from the current
pool, particularly those who have participated, or are currently
participating, in the private placement market would be inappropriate
on various grounds, including the imposition of costs and principles of
fairness more generally and (2) at a more general level, a significant
reduction in the accredited investor pool through an increase in the
definition's financial thresholds could have disruptive effects on
certain aspects of the Regulation D

[[Page 64254]]

market.\241\ For example, a sharp decrease in the accredited investor
pool may result in a higher cost of capital for certain companies,
particularly companies in regions of the country with lower venture
capital activity who may rely on ``angel'' or other individual
investors as a primary source of funding, as well as for regions of the
country with relatively lower wages and net worth.\242\
---------------------------------------------------------------------------

\241\ See Proposing Release at 2594. Substantially increasing
the thresholds to reflect, for example, the effect of inflation
since they were adopted, would reduce significantly the number of
individuals that currently qualify as accredited investors under
those tests. Such an increase would reduce the percentage of
qualifying households from approximately 13.0% today to
approximately 4.2%.
\242\ See, e.g., Laura Lindsey & Luke C.D. Stein, Angels,
Entrepreneurship, and Employment Dynamics: Evidence from Investor
Accreditation Rules (Working Paper, 2019) (examining the effects of
changes in angel financing stemming from the 2011 amendment to the
accredited investor definition required by the Dodd-Frank Act, which
excluded an investor's primary residence in determining an
accredited investor's net worth and finding as the pool of potential
accredited investors was reduced, there was an increase in negative
effects to firm entry, reduced employment levels at small entrants,
and a decline in relative wages for the startup sector).
---------------------------------------------------------------------------

We remain mindful of investor protection concerns raised by the
wealth tests. Notwithstanding the assertions of some commenters, we are
not persuaded that the investor protections provided by the financial
thresholds have been meaningfully weakened over time due to inflation.
Although it may be argued that an investor with an income of $200,000
or a net worth of $1 million now is not as ``wealthy'' as such an
investor would have been in 1982, we do not believe that this
correlates to a lower level of financial sophistication. It is not
clear what specific factors the Commission took into account in 1982
when it established the individual income and net worth thresholds.
Further, we note that in 1982, the calculation of net worth included
the value of the primary residence, but in 2011, the Commission amended
the net worth standard to exclude the value of the investor's primary
residence.\243\
---------------------------------------------------------------------------

\243\ Net Worth Standard for Accredited Investors, Release No.
33-9287 (Dec. 21, 2011) [76 FR .81793 (Dec. 29, 2011)].
---------------------------------------------------------------------------

In the Proposing Release the Commission noted that it was not
``aware of widespread problems or abuses associated with Regulation D
offerings to accredited investors that would indicate that an immediate
and/or significant adjustment to the rule's financial thresholds is
warranted.'' \244\ The Commission requested comment in the Proposing
Release on whether there is evidence that any fraud in the private
markets is driven or affected by the levels at which the accredited
investor definition is set, or that maintaining the current financial
thresholds would place investors at a greater risk of fraud. We also
asked whether there is any quantitative data available that shows an
increased incidence of fraud in particular types of exempt offerings or
in the market for exempt offerings as a whole. One commenter responded
with references to various Commission enforcement actions involving
private offerings,\245\ and another commenter responded that ``evidence
strongly suggests that private markets are highly risky and are fertile
environments for fraud.'' \246\ However, commenters did not provide
information that would indicate that any such incidents of fraud in the
private markets are driven or affected by the levels at which the
accredited investor definition is set.
---------------------------------------------------------------------------

\244\ See Proposing Release at 2594.
\245\ See NASAA Letter (also noting that ``private offerings are
often characterized by opaque disclosures, related party
transactions, illiquidity, minimal financial information and,
unfortunately, fraud'').
\246\ See CA Attorney General et al. Letter (also referencing
NASAA's Enforcement Reports for 2013-15 and referencing statements
on the Commission's Investor.gov website and Division of
Enforcement's Annual Report for 2018).
---------------------------------------------------------------------------

We do not believe the financial thresholds need to be adjusted at
this time. The Commission will continue to monitor the size of the
accredited investor pool, the characteristics of individual accredited
investors who participate in the private markets, the appropriateness
of the income and net worth thresholds, and, to the extent data is
available, performance and incidence of fraud in exempt offerings,
including in connection with the Commission's quadrennial review of the
accredited investor definition required by the Dodd-Frank Act.\247\
---------------------------------------------------------------------------

\247\ See supra note 110.
---------------------------------------------------------------------------

b. Geography-Specific Thresholds
A few commenters expressed support for geography-specific financial
thresholds,\248\ noting that incomes vary throughout the country. The
SBCFAC Recommendations proposed to ``possibly adjust [the financial
thresholds] downwards for certain regions of the country.'' \249\ The
SEC Small Business Forum Report proposed to ``[r]evise the dollar
amounts to scale for geography, lowering the thresholds in states/
regions with a lower cost of living.'' \250\ A few commenters were
opposed to geography-specific financial thresholds,\251\ with one
commenter highlighting that it would add complexity to the accredited
investor definition \252\ and another commenter noting that it would
add administrative complexity for issuers,\253\ which could ultimately
result in a higher cost of capital. Although we acknowledge that
geographical income and wealth disparities may lead to bunching of
accredited investors in large coastal cities, we believe the
complexities that geography-specific financial thresholds would create
for issuers and investors do not weigh in favor of adding such
geography-specific financial thresholds to the accredited investor
definition at this time. Further, we believe the new accredited
investor criteria we are adopting today may help mitigate the disparate
geographic effects of the current wealth-based criteria by including
non-wealth-based alternative criteria for natural persons to qualify
under the definition. The Commission will have the opportunity to
further consider this issue in connection with its quadrennial reviews
of the accredited investor definition.
---------------------------------------------------------------------------

\248\ See D. Kui Letter (noting that ``income levels largely
vary among different regions in the United States'') and K.
Pulavarthi Letter.
\249\ See supra note 18.
\250\ See supra note 19.
\251\ See CFA Letter and D. Burton Letter.
\252\ See D. Burton Letter.
\253\ See CFA Letter (noting that ``[g]iven the challenge small
issuers can face in verifying accredited investor status, the
Commission should avoid over-complicating the calculation,
particularly with so little evidence that a problem exists that
merits this adjustment'').
---------------------------------------------------------------------------

c. Advised by Third Parties
Regarding whether the Commission should permit an investor advised
by a registered investment adviser or broker-dealer to be deemed an
accredited investor, many commenters expressed support,\254\ with a
number of these commenters positing that the client would be able to
rely on the knowledge and the sophistication of the adviser to
determine whether an investment is appropriate.\255\ One commenter
stated

[[Page 64255]]

that the idea could merit consideration in the future once the market
gains some experience under Regulation Best Interest.\256\ Another
commenter suggested the use of the purchaser representative concept of
Regulation D as a possible means of permitting advised investors to
participate in exempt offerings.\257\ Commenters that supported
treating clients of financial intermediaries as accredited investors
did not offer additional conditions or protections that should be
considered as part of this expansion.\258\
---------------------------------------------------------------------------

\254\ See SAF Financial Letter; C. Lakumb Letter; letter from
Brian Schreiner dated Feb. 20, 2020; letter from Robert R. Champion
dated Jan. 15, 2020; letter from Seth Haymes dated Dec. 29, 2019;
letter from Dolan McEniry Capital Management, LLC dated Mar. 9,
2020; IPA Letter; ALTI Letter; letter from GW&K Investment
Management, LLC dated Mar. 16, 2020 (``GW&K Letter''); letter from
iCapital Network dated Mar. 16, 2020; Fidelity Letter; Artivest
Letter; letter from GTS Securities LLC dated May 5, 2020; and M.
Harker Letter (suggesting that investors advised by funding portals
be included).
\255\ See Fidelity Letter (indicating that ``[a] retail investor
who does not qualify as an accredited investor and yet would like to
access private offering opportunities should be able to work with,
and rely on, the knowledge and sophistication that registered
investment advisers and broker-dealers have in determining whether
such an investment is appropriate for the investor, as analyzed
under the appropriate standard of conduct'') and IPA Letter (noting
that the adviser acts as a fiduciary for the client).
\256\ See ABA FR of Sec. Comm. Letter (noting that ``this idea
may merit further consideration after there has been some experience
with Regulation Best Interest and with the rule amendments (once
adopted) proposed here'').
\257\ See D. Burton Letter (positing that ``[f]leshing out the
purchaser representative concept [of Regulation D] seems to me to be
a more fruitful path forward than treating advised investors as
accredited'').
\258\ See, e.g., Fidelity Letter (stating ``we do not believe
that additional limits would be necessary should the SEC permit this
expansion'').
---------------------------------------------------------------------------

Several commenters were opposed,\259\ with one stating that such an
amendment would expand the definition of accredited investor without
ensuring that adequate protections exist that would make the
protections of the securities laws unnecessary.\260\ Another commenter
posited that such an expansion would negate the investor protections
provided by the accredited investor definition and generally shift
capital formation efforts from the public markets to the private
markets.\261\ One commenter predicted that only intermediaries with
conflicts of interest would participate and argued that the supposed
expertise of a financial intermediary is no substitute for the
investor's own sophistication, experience, and wherewithal.\262\
Finally, one commenter stated that expanding the definition of
accredited investor to clients of financial intermediaries raises
concerns about economies of scale and adverse selection.\263\
---------------------------------------------------------------------------

\259\ See J. LaBerge Letter; A. Hemmingsen Letter; CFA Letter;
Mercer Advisors Letter; St. John's Sec. Arbitration Clinic Letter;
ICI Letter (noting that ``even if a financial intermediary has the
sophistication to make informed decisions about private market
offerings, that alone would not satisfy the Commission's
longstanding policy of considering retail investors' access to
resources to bear loss from products that lack Securities Act
protections''); NASAA Letter; CA Attorney General et al. Letter; and
PIABA Letter.
\260\ See St. John's Sec. Arbitration Clinic Letter.
\261\ See CA Attorney General et al. Letter (stating that
``broker-dealers and investment advisors often have conflicts of
interest in their relationships with individual investors . . . data
suggests that broker-dealers who market securities in private
offerings are more likely to be the subject of complaints to FINRA .
. . [and] this expansion of accredited investor status is likely to
swallow the general rule that private placements are limited to a
select pool of accredited investors'').
\262\ See NASAA Letter (indicating that ``[r]esponsible,
reputable investment advisers will be unlikely to recommend private
offerings to clients unless they are already sophisticated and
wealthy enough to qualify as accredited. The only investment
advisers who would do so are those whose business models are
conflicted in favor of private issuers. Further, a review of
suitability cases brought by NASAA members, [FINRA], and in private
FINRA arbitrations reveals that conflicted investment advice is not
uncommon'').
\263\ See, e.g., ICI Letter (stating ``[w]hile larger retail or
institutional investors with research staffs and large pools of
capital can access the more attractive investment opportunities and
negotiate pricing and access to information, smaller retail
investors and their financial intermediaries only may be able to
access less-attractive opportunities. In addition, it is possible
that at least some intermediaries will not have the expertise to
properly evaluate those investments'').
---------------------------------------------------------------------------

After considering the comments received, we are not expanding the
accredited investor definition to include customers of a broker-dealer
or clients of a registered investment adviser. We believe that neither
a recommendation by a broker-dealer nor advice by a registered
investment adviser should serve as a proxy for an individual investor's
financial sophistication or his or her ability to sustain the risk of
loss of investment or ability to fend for him or herself. Additionally,
we are concerned that allowing investors receiving recommendations or
investment advice to be considered accredited investors, regardless of
their financial sophistication, experience, or ability to bear loss,
could undermine the purpose of the accredited investor definition in
identifying investors who possess a sufficient level of financial
sophistication to participate in investment opportunities that do not
have the additional protections provided by registration under the
Securities Act and our framework for regulating the offering process.
Furthermore, as the Commission noted in the Proposing Release,
being advised by a financial professional has historically not been a
complete substitute for the protections of the Securities Act
registration requirements and, if applicable, the Investment Company
Act.\264\ The presence of a financial intermediary may not solve for
certain of the investment protection concerns associated with private
offerings, such as illiquidity, agency costs (including bargaining
power in contracting when the investor has less money to invest),
information asymmetry, as well as high transaction and search costs.
For the reasons discussed above, we are not expanding the accredited
investor definition to include investors advised by a registered
investment adviser or broker-dealer.
---------------------------------------------------------------------------

\264\ See Proposing Release at 2595.
---------------------------------------------------------------------------

d. Other Comments Received
Several commenters responded with ideas that were not responses to
specific requests for comment. A few commenters proposed a multi-level
accreditation system for natural persons \265\ allowing investors at a
lower level of income or net worth \266\ to invest either a capped
amount \267\ or invest through an investor group.\268\ Another
commenter proposed an ``investments assets'' test for natural persons
with $1 million in investments.\269\ One commenter proposed to remove
the requirement that any institutional investor not be formed for the
purposes of investing in the offered securities.\270\ Other commenters
suggested changes related to the financial thresholds, with one
commenter suggesting that accredited-investor status be maintained for
life,\271\ and another suggesting that accredited-investor status
should not need to be re-evaluated often.\272\ One commenter suggested
that ``sophisticated investors'' be allowed to invest in Rule 506(c)
offerings.\273\ A few commenters suggested changes related to how
defined contribution employee benefit plans count beneficial owners for
the purposes of compliance with the Investment Company Act.\274\ Some
commenters proposed to eliminate the accredited investor
definition,\275\ with one of these commenters recommending that the
definition be replaced with an online acknowledgement-of-risk form
\276\ and another recommending

[[Page 64256]]

elimination of the distinction between accredited and non-accredited
investors in Regulation D offerings.\277\
---------------------------------------------------------------------------

\265\ See J. Kelner Letter; Cityvest Letter; and T. Parker
Letter.
\266\ See J. Kelner Letter (did not specify thresholds);
Cityvest Letter ($100,000 in annual income or $500,000 in net
worth); and T. Parker Letter ($100,000 in annual income or $500,000
in net worth).
\267\ See J. Kelner Letter ($25,000 or $50,000) and Cityvest
Letter ($50,000).
\268\ See T. Parker Letter (proposing to allow investors to
``invest in deals through an established Angel Group that provides
education and possibly also a more experienced mentor'').
\269\ See G. Fryer Letter.
\270\ See CCMC Letter.
\271\ See G. Hodge Letter.
\272\ See K. Pulavarthi Letter.
\273\ See R. Courtney Letter.
\274\ See letters from Institute for Portfolio Alternatives
dated July 10, 2020 and from Defined Contribution Alternatives
Association dated July 20, 2020. These commenters also recommended
changes to Rule 22e-4 under the Investment Company Act.
\275\ See supra note 16.
\276\ See K. Wilson Letter (stating that ``[a]cknowledging risks
could be as simple as having a person go through an online survey,
providing a written verification or clicking an acceptance of terms
that a person understands the risks, no matter what their level of
net worth is'').
\277\ See J. Peter Letter (stating ``please treat all equal and
let everyone invest in accredited deals'').
---------------------------------------------------------------------------

After considering these comments, we do not believe additional
amendments to the definition of accredited investor are warranted at
this time. Nor are we eliminating the accredited investor definition.
We believe that the amendments we are adopting in this release provide
appropriate investor protections while facilitating capital formation.
The Commission will have the opportunity to consider these and other
matters in connection with its quadrennial review of the accredited
investor definition required by the Dodd-Frank Act.\278\
---------------------------------------------------------------------------

\278\ See supra note 110.
---------------------------------------------------------------------------

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

A. Securities Act Rule 163B

In registered offerings under the Securities Act, issuers may
engage in test-the-waters communications with qualified institutional
buyers or institutional accredited investors to gauge their interest in
a contemplated offering. Under Section 5(d) of the Securities Act, an
emerging growth company, as defined in Securities Act Rule 405,\279\ is
permitted to engage in oral or written communications with potential
investors that are either qualified institutional buyers, as defined in
Rule 144A(a)(1), or institutions that are accredited investors as
defined in Rule 501(a), to offer securities before or after the filing
of a registration statement.
---------------------------------------------------------------------------

\279\ An emerging growth company is defined in Rule 405 as an
issuer that had total annual gross revenues of less than
$1,070,000,000 during its most recently completed fiscal year.
---------------------------------------------------------------------------

In September 2019, the Commission adopted Securities Act Rule 163B,
which extends this testing-the-waters accommodation to all
issuers.\280\ Pursuant to Rule 163B, an issuer may engage in test-the-
waters communications with potential investors that are, or that the
issuer or person authorized to act on its behalf reasonably believes
are, qualified institutional buyers, as defined in Rule 144A, or
institutions that are accredited investors, as defined in Rule
501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8).
---------------------------------------------------------------------------

\280\ See Solicitations of Interest Prior to a Registered Public
Offering, Release No. 33-10699 (Sept. 25, 2019) [84 FR 53011 (Oct.
4, 2019)].
---------------------------------------------------------------------------

In connection with the amendments to the accredited investor
definition in Rule 501(a), the Commission also proposed to amend Rule
163B to include a reference to proposed Rules 501(a)(9) and (a)(12).
The proposed amendment was intended to maintain consistency between
Rule 163B and Section 5(d), in that institutional accredited investors
under proposed Rules 501(a)(9) and (a)(12) would automatically fall
within the scope of Section 5(d).
1. Comments
The Proposing Release requested comment on whether Rule 163B should
be amended to include a reference to Rules 501(a)(9) and (a)(12). Three
commenters responded, with two commenters supporting inclusion of a
reference to Rule 501(a)(9) and (a)(12).\281\ The other commenter
supported including a reference only to Rule 501(a)(9), and indicated
that he had no view on whether to include 501(a)(12).\282\ The
Commission also requested comment on whether the proposed amendments to
the accredited investor definition and the qualified institutional
buyer definition raise concerns in connection with the test-the-waters
communications that issuers may engage in pursuant to Rule 163B or
Section 5(d) of the Securities Act. One commenter responded that the
proposed amendments would raise no concerns.\283\
---------------------------------------------------------------------------

\281\ See CCMC Letter and ABA FR of Sec. Comm. Letter.
\282\ See D. Burton Letter.
\283\ Id.
---------------------------------------------------------------------------

2. Final Amendments
We are adopting the amendment as proposed with one addition. We
continue to believe that expanding the types of entities with whom an
issuer may engage in test-the-waters communications, by amending the
accredited investor definition and the qualified institutional buyer
definition,\284\ may increase the use of Rule 163B, as well as Section
5(d), and may result in issuers more effectively gauging market
interest in contemplated registered offerings. We also continue to
believe that the expanded scope of entities that would receive test-
the-waters communications under the proposed amendment to Rule 163B
have the financial sophistication to process this information and to
review the registration statement that is filed with the Commission
against the test-the-waters materials before making an investment
decision.
---------------------------------------------------------------------------

\284\ The amendments to the qualified institutional buyer
definition in Rule 144A are discussed below in Section IV.
---------------------------------------------------------------------------

Accordingly, we are amending Rule 163B to include references to
Rules 501(a)(9) and (a)(12). We are also including a reference to Rule
501(a)(13) to cover family clients that are institutions and qualify as
accredited investors under such rule. As noted above, the definition of
``family client'' includes both natural persons and institutions.
Section 5(d) of the Securities Act refers to ``institutions that are
accredited investors,'' and, unlike Rule 163B, does not specify
particular paragraphs of Rule 501(a) that refer to such institutions.
As the intent in proposing to amend Rule 163B was to maintain
consistency between Rule 163B and Section 5(d) of the Securities Act
and capture institutions that are able to newly qualify as accredited
investors, we believe including family clients that are institutions in
the list of institutional accredited investors is appropriate.

B. Exchange Act Rule 15g-1

The Proposing Release also proposed to amend Rule 15g-1(b) to
include a reference to proposed Rules 501(a)(9) and (a)(12).\285\
Pursuant to Exchange Act Rule 15g-2 through Rule 15g-6, broker-dealers
are required to disclose certain specified information to their
customers prior to effecting a transaction in a ``penny stock,'' as
defined in 17 CFR 240.3a51-1 under the Exchange Act.\286\ Rule 15g-1
under the Exchange Act exempts certain transactions from these
disclosure requirements. In particular, paragraph (b) of Rule 15g-1
exempts transactions in which the customer is an institutional
accredited investor, as defined in Rule 501(a)(1), (2), (3), (7), or
(8) of Regulation D.\287\
---------------------------------------------------------------------------

\285\ We are also adopting a technical amendment to Rule 15g-
1(c) to update the reference to Section 4(2) of the Securities Act
to reflect the current numbering scheme in Section 4.
\286\ Rules 15g-1 through 15g-9 under the Exchange Act [17 CFR
240.15g-2 through 15g-9] are collectively known as the ``penny stock
rules.'' See also Schedule 15G under the Exchange Act.
\287\ In addition, Rule 15g-1(a), (d), (e), and (f) exempt
certain other transactions from the disclosure requirements in Rules
15g-2 through 15g-6. Rule 15g-1(c) exempts transactions that meet
the requirements of Regulation D or that are exempt from the
registration requirements of the Securities Act pursuant to Section
4(a)(2). Rule 15g-1 also includes a provision the Commission can use
to exempt by order any other transactions or persons from the penny
stock rules as consistent with the public interest and the
protection of investors.
---------------------------------------------------------------------------

1. Comments
The Proposing Release requested comment on whether Rule 15g-1(b)
should be amended to include a reference to Rules 501(a)(9) and
(a)(12). A few commenters supported adding Rule 501(a)(9).\288\ No
commenters responded on whether 501(a)(12) should be added, and no
commenters indicated that neither should be added. The

[[Page 64257]]

Commission also requested comment on whether limited liability
companies should continue to be included in the exemption set forth in
Rule 15g-1(b). One commenter responded that limited liability companies
should continue to be included.\289\
---------------------------------------------------------------------------

\288\ See P. Rutledge Letter and CCMC Letter.
\289\ See D. Burton Letter.
---------------------------------------------------------------------------

2. Final Amendments
We are adopting the amendment as proposed with one addition. We
continue to believe that, like the institutional accredited investors
currently within the scope of Rule 15g-1(b), those institutions that we
are adding to the accredited investor definition in Rule 501(a)(1),
entities owning investments in excess of $5 million that are not formed
for the specific purpose of acquiring the securities being offered, and
family offices do not need the additional protections provided by Rules
15g-2 through 15g-6.\290\ We also continue to believe that, consistent
with the categories of institutional accredited investors presently
listed in Rule 15g-1(b), entities within the scope of Rule 501(a)(9),
family offices, and the other types of entities we are adding to the
accredited investor definition generally invest in speculative equity
securities as part of an overall investment plan, have a good
understanding of the risks of investing in penny stocks, and have the
ability to obtain and evaluate independent information regarding these
stocks.\291\
---------------------------------------------------------------------------

\290\ As discussed above, we are also amending a number of the
existing categories in the accredited investor definition relating
to institutional investors that fall within the scope of the
exemption in Rule 15g-1(b).
\291\ See Penny Stock Disclosure Rules, Release No. 34-29093
(Apr. 17, 1991) [56 FR 19165 (Apr. 25, 1991)] and Penny Stock
Disclosure Rules, Release No. 34-30608 (Apr. 20, 1992) [57 FR 18004
(Apr. 28, 1992)].
---------------------------------------------------------------------------

As discussed above in connection with the addition of institutional
``family clients'' to Rule 163B, we are also including institutional
family clients in the list of institutional accredited investors in
Rule 15g-1(b). We believe this addition is appropriate to capture
institutions that are newly able to qualify as accredited investors and
to prevent confusion that could arise if we do not maintain consistency
in the references to institutional accredited investors across our
rules.

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

A. Proposed Amendments

Rule 144A(a)(1)(i) specifies the types of institutions that are
eligible for qualified institutional buyer status if they meet the $100
million in securities owned and invested threshold.\292\ The Commission
proposed to expand the qualified institutional buyer definition by
adding RBICs to Rule 144A(a)(1)(i)(C) and limited liability companies
to Rule 144A(a)(1)(i)(H) to correspond to the proposed amendments to
Rule 501(a)(1) and Rule 501(a)(3). In addition, to ensure that entities
that qualify for accredited investor status also qualify for qualified
institutional buyer status when they meet the $100 million in
securities owned and invested threshold in Rule 144A(a)(1)(i), the
Commission proposed to add new paragraph (J) to Rule 144A(a)(1)(i). The
proposed new paragraph would permit institutional accredited investors
under Rule 501(a), of an entity type not already included in paragraphs
144A(a)(1)(i)(A) through (I) or 144A(a)(1)(ii) through (vi), to qualify
as qualified institutional buyers when they satisfy the $100 million
threshold.\293\ This new category in the qualified institutional buyer
definition would encompass the new category in the accredited investor
definition for entities owning investments in excess of $5 million that
are not formed for the specific purpose of acquiring the securities
being offered under Regulation D,\294\ as well as any other entities
that may be added to the accredited investor definition in the future,
although such entities would also have to meet the $100 million
threshold in order to be qualified institutional buyers under Rule
144A.
---------------------------------------------------------------------------

\292\ Rule 144A(a)(1)(i)(A)-(G) and (I).
\293\ Because Rule 144A(a)(1)(i)(J) covers entities not included
in paragraphs (A) through (I), a bank or other financial institution
specified in those paragraphs would continue to be required to
satisfy the net worth test in Rule 144A(a)(vi).
\294\ Rule 501(a)(9).
---------------------------------------------------------------------------

B. Final Amendments

1. Comments
Commenters generally supported expanding the definition of
qualified institutional buyer in Rule 144A,\295\ with several
specifically supporting the amendments to Rule 144A(a)(1)(i)(C),\296\
Rule 144A(a)(1)(i)(H),\297\ and Rule 144A(a)(1)(i)(J).\298\ No
commenter opposed the proposed amendments to Rule 144A.
---------------------------------------------------------------------------

\295\ See Better Markets Letter; ICI Letter; Fidelity Letter;
and letter from Corbyn Investment Management, Inc. dated Jul. 15,
2020 (``Corbyn Letter'').
\296\ See CCMC Letter and ABA FR of Sec. Comm. Letter.
\297\ See Arnold & Porter Letter; CCMC Letter; and ABA FR of
Sec. Comm. Letter.
\298\ See letter from Matthew L. Clark, State Investment Officer
South Dakota Investment Council dated Feb. 7, 2020 (``SD Investment
Council Letter''); letter from Income Research + Management dated
Feb. 13, 2020 (``IR+M Letter'') (positing that ``permitting
institutional accredited investors that meet the asset threshold of
$100 million to be considered qualified institutional buyers under
Rule 144A will allow for greater investment opportunities within the
fixed income markets that are already afforded to other
institutional investors of a similar nature''); CMTA Letter; Arnold
& Porter Letter; J. LaBerge Letter; PIC Letter; ICI Letter; Am.
Bankers Assn. Letter; OST Letter; TIAA Letter; CCMC Letter; Fidelity
Letter; PFM Letter; letter from Coalition of Collective Investment
Trusts dated Mar. 16, 2020 (``CCIT Letter''); Better Markets Letter;
CACTTC Letter; and ABA FR of Sec. Comm. Letter.
---------------------------------------------------------------------------

We also received comments from several commenters with specific
support for including in the definition of qualified institutional
buyer all state and local governments.\299\ A few commenters discussed
the changing nature of the commercial paper markets in which they
invest, with one commenter stating that ``[w]ith the growth of the
[Securities Act Section] 4(a)(2) and [Rule] 144A commercial paper
markets and the recent trend of public corporations replacing exempt
and registered securities programs with private placement programs,
local governments face growing challenges to invest public funds for
the benefit of our constituents.'' \300\ Another commenter noted that,
as a state government investor, it ``can only purchase commercial paper
issued under [Securities Act] Section 3(a)(3), which is relatively
rare, compared to commercial paper issued under [Securities Act]
Section 4(a)(2).'' \301\ Another commenter noted that changes have
occurred in the Rule 144A market for bond offerings in the last 20
years, with more fixed income issuers opting to rely on the Rule 144A
process for bond issuances, rather than going through the more
expensive and burdensome public offering process.\302\
---------------------------------------------------------------------------

\299\ See SD Investment Council Letter (indicating that
``[s]tate governmental entities have the expertise to evaluate the
144A securities and make prudent investments in these securities'');
letter from Amundi Pioneer Institutional Asset Management, Inc.
dated Feb. 12, 2020 (``Amundi Pioneer Letter''); NAST et al. Letter;
letter from David C. Damschen, Utah State Treasurer dated Feb. 26,
2020 (``Utah State Treasurer Letter'') (stating that ``[o]ur
investments would be greatly advantaged through increased
diversification and marginally enhanced yield by expanding the pool
of available securities to include corporate bonds and commercial
paper available only to QIBs''); TIAA Letter; and Arnold & Porter
Letter (positing that ``[a]llowing governmental entities that meet
the investment size threshold to qualify as QIBs would increase such
entities' flexibility in their investments without posing an
increased risk to the markets or investors'').
\300\ See CACTTC Letter.
\301\ See Utah State Treasurer Letter.
\302\ See IAA Letter.
---------------------------------------------------------------------------

In the Proposing Release, the Commission noted that proposed Rule
144A(a)(1)(i)(J) would encompass bank-

[[Page 64258]]

maintained collective investment trusts that include as participants
individual retirement accounts or H.R. 10 plans that are currently
excluded from the qualified institutional buyer definition pursuant to
Rule 144A(a)(1)(i)(F), so long as the collective investment trust
satisfies the $100 million threshold.\303\ A few commenters supported
the addition of Rule 144A(a)(1)(i)(J) specifically because it would
capture certain collective investment trusts.\304\ One of these
commenters supported the addition of Rule 144A(a)(1)(i)(J) because it
would allow ``bank-maintained [collective investment trusts and common
trust funds] to qualify as qualified institutional buyer[s] if they
satisfy the other requirements of Rule 144A.'' \305\
---------------------------------------------------------------------------

\303\ See Proposing Release at note 241.
\304\ See CCIT Letter and Am. Bankers Assn. Letter.
\305\ See Am. Bankers Assn. Letter.
---------------------------------------------------------------------------

The Proposing Release also requested comment on whether certain
types of entities are less likely to have experience in the private
resale market for restricted securities and may have more need for the
protections afforded by the Securities Act registration provisions. The
only commenter responding to this request for comment stated that it
was not aware of any such entities.\306\ The Proposing Release also
requested comment on whether the proposed amendments to the qualified
institutional buyer definition would result in a greater likelihood of
restricted securities sold under Rule 144A flowing into the public
market. All of the commenters responding to this request indicated that
they did not foresee such a likelihood.\307\
---------------------------------------------------------------------------

\306\ See Utah State Treasurer Letter.
\307\ See SD Investment Council Letter; Arnold & Porter Letter;
and Utah State Treasurer Letter.
---------------------------------------------------------------------------

We received comments proposing additional expansions to Rule 144A.
One commenter requested that the Commission include family clients in
addition to family offices, which could be included under proposed Rule
144A(a)(1)(i)(J).\308\ One commenter proposed adding private funds with
$100 million in gross asset value and investment advisers managing the
investments of such a private fund.\309\ A few commenters proposed to
include clients of any SEC-registered adviser that manages more than
$100 million in securities.\310\ Another commenter proposed to allow
SEC-registered investment advisers to purchase 144A securities for
clients that are not qualified institutional buyers.\311\
---------------------------------------------------------------------------

\308\ See PIC Letter.
\309\ See AIC Letter.
\310\ See IAA Letter; GW&K Letter; and Corbyn Letter.
\311\ See GW&K Letter.
---------------------------------------------------------------------------

2. Final Amendments
We are adopting the amendments as proposed and are adding a note in
response to comments. We continue to believe that the $100 million
threshold for these entities to qualify for qualified institutional
buyer status should ensure that these entities have sufficient
financial sophistication and access to resources to participate in
investment opportunities that do not have the additional protections
provided by registration under the Securities Act. The scope of Rule
144A(a)(1)(i)(J) encompasses all entity types that are not already
listed in paragraphs (a)(1)(i)(A) through (I) or paragraphs (a)(1)(ii)
through (vi) of Rule 144A, including Indian tribes, governmental
bodies, and bank-maintained collective investment trusts. We also
believe that the inclusion of Indian tribes and governmental bodies
will provide these entities with expanded access to the commercial
paper markets, which, according to the commenters discussed above, have
changed in recent years.
Regarding the requests from commenters to expand Rule 144A to
include various persons, including ``family clients,'' private funds
with $100 million in gross asset value and their investment advisers,
clients of SEC-registered advisers that manage more than $100 million
in securities, and clients of any SEC-registered investment advisers,
at this time, we are not expanding the scope of Rule 144A further than
what the Commission proposed in the Proposing Release.
We are not expanding the definition to include private funds with
$100 million in gross asset value as one commenter suggested. Although
we acknowledge that such funds likely have a high level of financial
sophistication, we do not believe it is appropriate to add a new
financial threshold to the definition exclusively for private funds. We
are concerned about the application of different thresholds to
similarly situated investors. We are also concerned about the confusion
this would create. Furthermore, we believe that most private funds with
$100 million in gross asset value will already meet the definition of a
qualified institutional buyer under Rule 144A (a)(1)(i)(H) or Rule
144A(a)(1)(i)(J).
We also are not expanding the definition to include clients of SEC-
registered advisers. As discussed above with respect to the accredited
investor definition, being advised by a financial professional has
historically not been a complete substitute for the protections of the
Securities Act registration requirements and, if applicable, the
Investment Company Act.\312\ We do not believe it is appropriate to
effectively transfer the status of an adviser to its individual
clients, or to expand the aggregation of investments managed by an
adviser in order to permit such persons to qualify as qualified
institutional buyers. We do note, however, that, if such a person is an
institutional accredited investor, then it could also qualify as a
qualified institutional buyer under Rule 144A(a)(1)(i)(J) if it meets
the requirements of Rule 144A(a)(1)(i).\313\
---------------------------------------------------------------------------

\312\ See supra note 264.
\313\ For example, a family client that is an institution and
qualifies as an accredited investor under Rule 501(a) and meets the
$100 million in securities owned and invested threshold of Rule
144A(a)(1)(i), will qualify as a qualified institutional buyer.
---------------------------------------------------------------------------

One commenter noted that the addition of Rule 144A(a)(1)(i)(J)
would import the ``not formed for the specific purpose of acquiring the
securities offered'' modifier of Rule 501(a) to several categories of
institutional accredited investors that would qualify as qualified
institutional buyers, a condition that does not appear at all in the
current definition.\314\ The provision in Rule 501(a) that the entity
not be formed for the purpose of acquiring securities does not apply in
the Rule 144A context. Consistent with the Proposing Release, we intend
that eligible purchasers under Rule 144A(a)(1)(i) will continue to
include entities formed solely for the purpose of acquiring restricted
securities under Rule 144A, provided that they satisfy the test for
qualified institutional buyer status.\315\ To address the potential for
confusion, we are adding a note to Rule 144A(a)(1)(i)(J) to clarify
that the entity seeking qualified institutional buyer status under Rule
144A(a)(1)(i)(J) may be formed for the purpose of acquiring the 144A
securities being offered.
---------------------------------------------------------------------------

\314\ See CCMC Letter.
\315\ See Proposing Release at 2598. This is in contrast to the
amendment to the accredited investor definition in Rule 501(a)(3),
which will continue to require that the entity not be formed for the
specific purpose of acquiring the securities offered.
---------------------------------------------------------------------------

V. Other Matters

If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect

[[Page 64259]]

without the invalid provision or application.
Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated these rules as a ``major rule,''
as defined by 5 U.S.C. 804(2).

VI. Economic Analysis

We are attentive to the costs imposed by and the benefits obtained
from the final amendments.\316\ The discussion below addresses the
potential economic effects of the final amendments, including the
likely benefits and costs, as well as the likely effects on efficiency,
competition, and capital formation. We also analyze the potential costs
and benefits of reasonable alternatives to the amendments.
---------------------------------------------------------------------------

\316\ Section 2(b) [15 U.S.C. 77b(b)] and Section 3(f) [15
U.S.C. 78c(f)] of the Exchange Act directs the Commission, when
engaging in rulemaking where it is 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. Further, Section 23(a)(2) [15 U.S.C. 78w(a)(2)] of the
Exchange Act requires the Commission, when making rules under the
Exchange Act, to consider the impact that the rules would have on
competition, and prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

A. Introduction and Broad Economic Considerations

As discussed above, we are adopting amendments, generally as
proposed, to the ``accredited investor'' definition in Rule 501(a) of
Regulation D to, among other things: (1) Add new categories of natural
persons that qualify as accredited investors based on certain
professional certifications or designations or other credentials, or
with respect to investments in a private fund, as a ``knowledgeable
employee'' of the private fund; (2) add certain entity types to the
current list of entities that qualify as accredited investors and a new
category for any entity with ``investments,'' as defined in Rule 2a51-
1(b) under the Investment Company Act, in excess of $5 million and that
was not formed for the specific purpose of investing in the securities
offered; (3) add family offices with more than $5 million in assets
under management and their family clients to the definition; (4) add
the term ``spousal equivalent'' to the definition, so that spousal
equivalents may pool their finances for the purpose of qualifying as
accredited investors; and (5) codify certain staff interpretive
positions that relate to the accredited investor definition. We also
are adopting an amendment to the definition of ``qualified
institutional buyer'' in Rule 144A to expand the list of entities that
are eligible to qualify as qualified institutional buyers. The final
amendments are designed to better align access to unregistered
offerings with the financial sophistication required to assess an
investment opportunity without the added investor protections that come
with registration under the Securities Act.
Registration under the Securities Act is intended to provide
certain investor protections, for example, by imposing procedural and
substantive disclosure requirements that go significantly beyond
general antifraud rules. These requirements are designed to mitigate
certain information asymmetry and principal-agent problems that can
arise when companies make public offerings of securities to investors,
and also provide other investor protections, including, for example, a
right of rescission under Section 12 of the Securities Act, if certain
procedural requirements are not followed, and rights of action under
Sections 11 and 12(a)(2) of the Securities Act, in the event of
material misstatements or omissions that in certain cases do not
require proof of intent or reliance. Registration also imposes various
costs, such as compliance costs and the risk of issuers disclosing
sensitive proprietary information to competitors. Although registration
is the default under our rules, Congress and the Commission have long
recognized that the investor protection benefits of registration may
not be necessary or appropriate in various circumstances, including in
light of the significant attendant fixed and variable costs of
registration, and have provided exemptions for certain offerings based
on various factors, including when the offerings are generally limited
to individuals and entities that do not require the protection of
registration. We note that issuers conducting larger offerings with
broad investor participation continue to rely on our public markets to
avail themselves of the various attendant benefits of being a public
company. The final amendments adjust the categories of individuals and
entities eligible for participation in certain exempt offerings in
several areas by expanding the definitions of accredited investor and
qualified institutional buyer to include additional individuals and
institutions that the Commission believes have sufficient knowledge and
expertise to participate in investment opportunities that do not come
with the additional protections provided by registration under the
Securities Act.
In 2019, the estimated amount of capital reported as being raised
in offerings under Regulation D was over $1.5 trillion,\317\ which was
larger than the $1.2 trillion raised in registered offerings.\318\ As
private capital markets have grown, the vast majority of the capital
that has been raised in unregistered offerings under Regulation D has
been through investment by accredited investors. For example, though
securities sold in offerings conducted pursuant to Rule 506(b) are
permitted to be purchased by up to 35 non-accredited investors who are
sophisticated, we estimate that, from 2009 to 2019, only between 3.4%
and 6.9% of the aggregate number of offerings conducted under Rule
506(b) included non-accredited investor purchasers.\319\ Further, these
non-

[[Page 64260]]

accredited investors in the aggregate likely accounted for a negligible
amount of the capital raised in those offerings, and any impact was
likely heavily weighted towards smaller offerings.\320\ These facts
emphasize the prominent role our private markets play, and, as a
result, accredited investors (particularly institutional accredited
investors) play, in capital formation.\321\
---------------------------------------------------------------------------

\317\ See infra Table 4 in Section VI.B. Offerings under
Regulation D include offerings under Rules 504, 506(b), and 506(c).
DERA staff analysis is based on Form D filings from 2019. These
estimates are based on the reported ``total amount sold'' at the
time of the original filing--required within 15 days of the first
sale--as well as any additional capital raised and reported in
amended filings. The data likely underreport the actual amount sold
due to two factors. First, underreporting could occur in all years
because Regulation D filings can be made prior to the completion of
the offering, and amendments to reflect additional amounts sold
generally are not required if the offering is completed within one
year and the amount sold does not exceed the original offering size
by more than 10%. Second, Rule 503 requires the filing of a notice
on Form D, but filing a Form D is not a condition to the
availability of a Regulation D exemption. Hence, it is possible that
some issuers do not file a Form D for offerings relying on
Regulation D. Finally, in their annual amendments, some funds appear
to report net asset values for total amount sold under the offering.
Net asset values could reflect fund performance as well as new
investment into, and redemptions from, the fund. For these reasons,
based on Form D data, it is not possible to distinguish between the
two impacts.
\318\ We obtain data for issuers conducting registered offerings
from SDC Platinum's New Issues database. We select all public
offerings conducted in the U.S. market during 2019, excluding IPOs
and government/federal agency offerings. For this comparison, we
consider follow-on equity offerings and debt offerings as more
appropriate benchmarks for Regulation D offerings because the
motivations for conducting an IPO extend beyond raising capital to
meet company's financial needs, such as considerations of pre-IPO
owners' diversification and liquidity needs, among others.
\319\ This estimated range is based on DERA staff analysis of
Form D data on initial Form D filing among all Rule 506(b) offerings
from 2009 to 2019. In particular, the 3.4% estimate is based on
offerings that report that at least one non-accredited investor
already have invested in the offering as of the Form D filing and
may represent a lower bound because it relies on available Form D
filings, and because a final Form D upon the conclusion of an
offering is not required to be filed. If we also include Rule 506(b)
offerings on Form D that accept non-accredited investors but
reported having zero non-accredited investors in the initial filing,
the estimated percentage of offerings involving accredited investors
during the 2009-2019 period is approximately 6.9%, which may be
viewed as an upper bound estimate.
\320\ For example, based on Form D filings during the period
2009-2019, the aggregate amount raised in offerings reporting
participation by at least one non-accredited investor in their
initial Form D filings was approximately 2.5% of the total aggregate
amount raised in 506(b) offerings. Based on offerings reporting a
non-zero amount of capital raised in their initial Form D filings,
the median amount raised in offerings that included non-accredited
investors was $463,000, whereas the median amount raised in
offerings with only accredited investors was approximately
$1,552,000.
\321\ Individual accredited investors play an important role in
certain aspects of the market, particularly for smaller, early stage
issuers. However, they likely represent a much smaller portion of
the overall investment in our private markets as a whole, including
Regulation D, Rule 144A offerings, etc.
---------------------------------------------------------------------------

We anticipate that the final amendments may, in certain
circumstances, reduce the costs of finding investors (i.e., search
costs) for issuers in private offerings, as well as reduce their
transactions costs (e.g., through a potentially lower cost of
determining and verifying accredited investor status and a potentially
lower level of intermediation) and cost of capital, thereby
facilitating capital formation in those circumstances. In general, we
expect these effects will be more meaningful for smaller private
offerings than for larger private offerings.
The final amendments will also affect investors. Investors with
specified attributes of financial sophistication who do not otherwise
qualify as accredited investors will be able to participate in
investment opportunities that historically generally have not been
available to them, such as investments in issuers that are not Exchange
Act reporting companies and offerings by certain private equity funds,
venture capital (VC) funds, and hedge funds, which are frequently
offered under Rule 506.\322\ Additionally, accredited investors are not
subject to investment limits in offerings made under Tier 2 of
Regulation A. Thus, expanding the definition of accredited investor
will permit additional investors to participate in Regulation A
offerings at higher amounts. In addition, expanding the definition of
qualified institutional buyer in the final rule will give certain
institutional investors the opportunity to participate in the Rule 144A
market, thereby giving those investors access to an expanded set of
investment opportunities.
---------------------------------------------------------------------------

\322\ See, e.g., infra Table 2 in Section VI.B.
---------------------------------------------------------------------------

As discussed in more detail below, the main anticipated benefit to
investors from the final amendments is access to a broader investment
opportunity set that can potentially improve the risk-return
characteristics of their portfolios. However, we recognize that any
potential gains in the efficiency of investors' portfolios from access
to exempt offerings may be moderated by the lower levels of investor
protection provided by these offerings as compared to registered
offerings, and factors such as information asymmetry, illiquidity, and
prevailing market practices (such as specific investor solicitation
practices across different types of issuers) that nevertheless limit
investors' opportunity set for private markets.
We generally expect the individuals and institutions that will
become newly eligible accredited investors or qualified institutional
buyers to have a level of financial sophistication that will enable
them to assess both the opportunities and risks offered by private
offerings. For example, for reasons discussed in more detail
above,\323\ we think it is reasonable to believe that individuals that
pass one or more of the Series 7, 65, and 82 exams, and meet the
requirements to represent or advise others in connection with
securities market transactions (including private securities
offerings), have demonstrated a sufficient level of financial
sophistication to be able to evaluate and participate in investment
opportunities that do not have the additional protections provided by
registration under the Securities Act.
---------------------------------------------------------------------------

\323\ See supra Section II.B.1.a.
---------------------------------------------------------------------------

The final amendments could increase the size and alter the
composition of the pool of accredited investors by providing additional
measures of financial sophistication (e.g., professional certifications
for individuals and an investments-owned threshold for entities) to
qualify for accredited investor status. If many of the individuals who
qualify as accredited investors under the final amendments already meet
the income and wealth thresholds in the current accredited investor
definition, then the impact of the change on the pool of individuals
that qualify as accredited investors could be limited. For entities, we
anticipate that the impact of the amendments could be more significant,
as we are amending the accredited investor definition to include a
broad range of entities not previously covered under the definition.
Because we believe family offices have generally qualified as
accredited investors under the existing definition, we expect that the
effect of the amendments on them will be much smaller than on other
entities.
Expanding the pool of accredited investors may have a positive
impact on capital formation in certain circumstances, such as in
offerings by issuers that are small, in development stages, or in
geographic areas that currently have lower concentrations of accredited
investors. Similarly, the final amendments to the qualified
institutional buyer definition in Rule 144A will increase the number of
entities that qualify for this status, thus improving the ability of
issuers to raise capital in the institutional investor market,
including by enhancing competition among investors in this market.\324\
Further, the final amendments will permit issuers to engage in test-
the-waters communications in registered offerings with a larger set of
investors as a result of changes to the scope of entities that qualify
as institutional accredited investors and qualified institutional
buyers, further facilitating capital formation.
---------------------------------------------------------------------------

\324\ Although Rule 144A is a non-exclusive safe harbor for
resale transactions, market participants have used Rule 144A since
its adoption in 1990 to facilitate capital raising by issuers. See,
e.g., Eliminating the Prohibition Against General Solicitation and
General Advertising in Rule 506 and Rule 144A Offerings, Release No.
33-9415 (July 10, 2013) [78 FR 44771 (July 24, 2013)].
---------------------------------------------------------------------------

Where possible, we have attempted to quantify the benefits, costs,
and effects on efficiency, competition, and capital formation expected
to result from the amendments. In many cases, however, we are unable to
quantify the economic effects because we lack the information necessary
to derive a reasonable estimate. We have incorporated feedback provided
by commenters in our analysis of the economic effects of the final
amendments. However, as explained in more detail below, because we do
not have, have not received, and, in certain cases, do not believe we
can obtain data that may inform on certain economic effects, we are
unable to quantify those effects. For example, we are unable to
quantify the costs to issuers and investors of verifying an investor's
accredited investor status and the potential capital raising and
compliance cost savings that may arise from the amendments to the
accredited investor definition. We further note that, even in cases
where we have some data or have received some data regarding certain
economic effects, the quantification of these effects is

[[Page 64261]]

particularly challenging due to the number of assumptions that we would
need to make to forecast how issuers and newly eligible (and
potentially eligible) accredited investors and qualifying institutional
buyers will respond to the final amendments, and how those responses
will, in turn, affect the broader private and public securities
markets.
Although many commenters supported expanding the accredited
investor definition,\325\ some commenters raised a number of concerns
with the proposed amendments and the analysis of their anticipated
economic effects in the Proposing Release.\326\ We have considered
those concerns and, in appropriate circumstances, have expanded our
economic analysis to address those concerns.
---------------------------------------------------------------------------

\325\ See supra note 14.
\326\ See supra note 15 for comment letters generally objecting
to expanding the definition of accredited investor.
---------------------------------------------------------------------------

The remainder of this economic analysis presents the baseline;
anticipated benefits and costs from the final amendments; potential
effects on efficiency, competition, and capital formation; and
alternatives to the final amendments.

B. Baseline and Affected Parties

The main affected parties of the final amendments to the accredited
investor definition will be investors and issuers. For example, certain
entities that are currently not designated accredited investors will
become accredited investors under the final amendments and will be
eligible to participate in an expanded array of private offerings.
Correspondingly, current accredited investors may face greater
competition from newly qualified accredited investors to participate in
investment opportunities in this market. Similarly, we anticipate that
certain issuers, such as issuers that are smaller or in early stages of
development, will need to compete less intensively and may incur fewer
costs to access accredited investors under the final amendments.
We do not have precise data on the number of individuals and
entities that currently qualify as accredited investors. Rule 501(a) of
Regulation D uses net worth and income as bright-line criteria to
identify natural persons as accredited investors.\327\ Using data on
household wealth from the Federal Reserve's Survey of Consumer Finances
(SCF) database,\328\ we estimate that under the current income and
wealth thresholds noted above, approximately 16.0 million U.S.
households representing 13% of the total population of U.S. households,
qualify as accredited investors. This estimate does not, however,
identify the precise number of accredited investors that do or could
invest in the Regulation D market or in other exempt offerings.\329\
---------------------------------------------------------------------------

\327\ Under the current definition, individuals may qualify as
accredited investors if (i) their net worth exceeds $1 million
(excluding the value of the investor's primary residence), (ii)
their income exceeds $200,000 in each of the two most recent years,
or (iii) their joint income with a spouse exceeds $300,000 in each
of those years and the individual has a reasonable expectation of
reaching the same income level in the current year.
\328\ See https://www.federalreserve.gov/econresdata/scf/scfindex.htm.
\329\ Form D data and other data available to us on private
placements do not allow us to estimate the number of unique
accredited investors that participate in exempt offerings.
---------------------------------------------------------------------------

Based on Form D filings during the period 2009-2019, we estimate
that there were on average approximately 295,069 accredited investors
participating annually in Regulation D offerings at the time of the
initial filing.\330\ However, because an investor can participate in
more than one Regulation D offering, this number likely includes
duplicate investors and therefore represents an upper bound estimate.
We lack data to estimate the actual number of unique accredited
investors who participate annually in Regulation D offerings.
Additionally, from the information reported on Form D, we cannot
distinguish accredited investors that are natural persons from
accredited investors that are institutions.\331\ The average number of
accredited investors per offering during the period 2009-2019 was 14,
and the median number was four.
---------------------------------------------------------------------------

\330\ We estimate the number of accredited investors as the
number of total investors minus the number of non-accredited
investors reported on initial Form D filings.
\331\ Other limitations of the data gathered from Form D may
reduce the accuracy of the estimated number of accredited investors.
For example, an issuer is required to file a Form D generally no
later than 15 calendar days after the first sale of securities in a
Regulation D offering, regardless of whether the offering will be
ongoing after the filing of the Form D. Further, issuers are
required to file amendments to Form D only in limited circumstances:
(i) To correct a material mistake of fact or error in a previously
filed Form D, (ii) to reflect a change in certain information
provided in a previously filed Form D, and (iii) on an annual basis
if the offering is continuing at that time. Also, because the Form D
filing requirement is not a condition to claiming an exemption under
Rule 506(b) or 506(c) but rather is a requirement of Regulation D,
it is possible that some issuers do not file Form D when conducting
Regulation D offerings.
---------------------------------------------------------------------------

Table 2 presents evidence on investor participation in Regulation D
offerings by industry type during the period 2009-2019. The
participation of accredited investors in Regulation D offerings during
that period varied by type of issuer as well, with offerings by real
estate investment trusts (REITs) having the largest average number of
accredited investors per offering, and those by operating companies
having the smallest average number.
---------------------------------------------------------------------------

\332\ The estimated percentages are based on offerings that
report that at least one non-accredited investor already invested in
the offering as of the Form D filing and may represent a lower bound
because it relies on available Form D filings, and because a final
Form D upon the conclusion of an offering is not required to be
filed.
\333\ The estimated percentages are based on offerings that
indicate on their initial Form D filing that they accept non-
accredited investors, whether or not they reported having non-
accredited investors at the time of the initial filing.

Table 2--Investors Participating in Regulation D Offerings: 2009-2019
----------------------------------------------------------------------------------------------------------------
Fraction of Fraction of
offerings with offerings
Total number Mean investors Median one or more non- accepting non-
of investors * per offering investors per accredited accredited
offering investors \332\ investors \333\
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
Hedge Fund.................. 28,875 16 2 3 7
Private Equity Fund......... 28,062 17 2 2 3
Venture Capital Fund........ 11,809 15 4 0 1
Other Investment Fund....... 38,445 22 5 2 4
Financial Services.......... 18,450 15 4 7 12
Real Estate................. 73,082 26 8 6 14
Non-financial Issuers....... 107,192 10 4 5 9

[[Page 64262]]

All offerings............... 305,915 14 4 4 8
----------------------------------------------------------------------------------------------------------------
* 2009-2019 data is annualized.

We are not able to directly estimate the number of individuals who
may newly qualify as accredited investors as a result of the initial
set of professional certifications or designations, as precise data on
the number of current holders of each professional certification or
designation are not available to us. Based on data from FINRA, we
estimate that there were 691,041 FINRA-registered individuals as of
December 2018.\334\ We estimate that 334,860 individuals were
registered only as broker-dealer representatives; 294,684 were dually
registered as broker-dealer and investment adviser representatives; and
61,497 were registered only as investment adviser representatives.
Assuming that all of these individuals represent separate households,
and none are currently accredited investors, this would represent an
approximately 4.3% increase in the number of households that qualify as
accredited investors. However, many of these individuals may already
qualify as accredited investors under the current financial thresholds.
In addition, because many FINRA-registered representatives hold
multiple professional certifications, this aggregation likely
overstates the actual number of individuals that hold a Series 7 or
Series 82, and we have no method of estimating the extent of overlap.
Therefore, the number of FINRA-registered representatives provides an
estimate of the upper bound of individuals that hold the relevant
certifications and designations and will become newly eligible
accredited investors under the final amendments. We do not have access
to data to estimate how many of these registered representatives
already qualify as accredited investors, and therefore we are unable to
more precisely estimate how many individuals will be newly eligible
under the final rules.
---------------------------------------------------------------------------

\334\ See 2019 FINRA Industry Snapshot, available at https://www.finra.org/sites/default/files/2019%20Industry%20Snapshot.pdf.
---------------------------------------------------------------------------

We are not able to directly estimate the number of knowledgeable
employees at private funds that will be immediately affected by the
final amendments, as we do not have precise data on the number of such
employees. Using data on private fund statistics compiled by the
Commission's Division of Investment Management, we estimate that there
were 32,622 private funds as of third quarter 2019.\335\
---------------------------------------------------------------------------

\335\ See U.S. Securities and Exchange Commission, Division of
Investment Management Third Quarter 2019 Private Fund Statistics,
available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2019-q3-accessible.pdf.
---------------------------------------------------------------------------

Although we are unable to provide more precise estimates of how
many individuals will become newly eligible accredited investors, and
while the upper bound estimate is modest compared to the current pool
of individuals that currently qualify as accredited investors (4%) and
the population more generally (0.2%), we are confident that the final
amendments will cause some modest increase in the number of individual
accredited investors. However, largely due to the fact that newly
eligible individual accredited investors would not have relatively
significant income or wealth (otherwise, they would have qualified as
accredited investors under the existing thresholds), it is unlikely
that these newly eligible investors will provide an additional,
meaningful source of capital in most private offerings.
Estimates for the number of family offices in the United States
vary. In 2015, an industry participant estimated that there were 3,000
family offices in the United States.\336\ In 2017, academic researchers
estimated the number of family offices in the United States to have
been between 2,500 and 5,000.\337\ In 2019, an industry group estimated
that there are 10,489 family offices in the United States.\338\
---------------------------------------------------------------------------

\336\ See Robert Elliot, Single family offices facing a
transition, Market Street Trust Company, (Dec. 2015), available at
https://www.marketstreettrust.com/usr/PDF_Files/News/SFO_Transition_Final.pdf. A single family office generally provides
services only to members of a single family.
\337\ See Elena Rivo-Lopez, Monica Villanueva-Villar, Alberto
Vaquero-Garcia & Santiago Lago-Penas, Family offices: What, why and
what for, Organizational Dynamics 46, 262-270, (2017), citing Family
Office Exchange estimates.
\338\ See How Many Family Offices are there in the United
States, available at https://www.familyoffice.com/insights/how-many-family-offices-are-there-united-states.
---------------------------------------------------------------------------

When identifying entities as accredited investors, the current
definition enumerates specific types of entities that will qualify.
Certain enumerated entities are subject to a $5 million asset threshold
to qualify as accredited investors (e.g., tax-exempt charitable
organizations, trusts, and employee benefit plans), while others are
not (e.g., banks, insurance companies, registered broker-dealers,
entities in which all equity owners are accredited investors, private
business development companies, and SBICs). Many of the entities that
are not subject to asset tests are regulated entities. An entity that
is not covered specifically by one of the enumerated categories, such
as an Indian tribe or sovereign wealth fund, is generally not an
accredited investor under the current rule.
Publicly reported information provides an indication of the number
of entities, by type, that may currently qualify as accredited
investors. There were 3,670 broker-dealers that filed Financial and
Operational Combined Uniform Single (``FOCUS'') reports with the
Commission for 2019. As of 2019, there were 4,518 FDIC-insured banks,
659 savings and loan institutions,\339\ and 299 SBICs.\340\ There were
101 business development companies (BDCs) as of December 31, 2019.
There were 5,965 insurance companies as of 2018.\341\ With respect to
the final amendments to the accredited investor definition to add other
types of institutional accredited investors, as of December 2019 there
were

[[Page 64263]]

approximately 13,479 registered investment advisers,\342\ 4,244 exempt
reporting advisers,\343\ and 17,533 state-registered investment
advisers.\344\ However, we do not have access to data that would allow
us to identify how many of these registered investment advisers and
exempt reporting advisers currently qualify as accredited investors. We
also lack data to generate precise estimates of the overall number of
other institutional accredited investors that may be newly eligible for
accredited investor status because disclosure of accredited investor
status across all institutional investors is not required and because,
while we have information to estimate the number of some categories of
institutional accredited investors, we lack comprehensive data that
will allow us to estimate the unique number of investors across all
categories of institutional accredited investors under Rule 501(a).
---------------------------------------------------------------------------

\339\ See FDIC Statistics at a Glance as of December 31, 2019,
available at https://www.fdic.gov/bank/statistical/stats/2019dec/industry.pdf.
\340\ See Small Business Administration (SBA) SBIC Program
Overview as of December 31, 2019, available at https://www.sba.gov/sites/default/files/2020-02/SBIC%20Quarterly%20Report%20as%20of%20December_31_2019.pdf.
\341\ See Insurance Information Institute Industry Overview,
available at https://www.iii.org/fact-statistic/facts-statistics-industry-overview#Insurance.
\342\ Identified from Forms ADV filed with the Commission as of
December 31, 2019.
\343\ Id.
\344\ See 2020 NASAA Investment Adviser Section Annual Report,
available at https://www.nasaa.org/wp-content/uploads/2020/04/2020-IA-Section-Report-FINAL.pdf.
---------------------------------------------------------------------------

The final amendments will include limited liability companies in
Rule 501(a)(3). Based on data from the Internal Revenue Service, there
were 2,696,149 limited liability companies at the end of 2017.\345\ Due
to a lack of more detailed publicly available information about limited
liability companies, such as the distribution of total assets across
companies, we are unable to estimate the number of these limited
liability companies that currently meet the accredited investor
requirements of Rule 501(a)(3). As this amendment is a codification of
a long standing staff interpretation, we do not expect that the pool of
accredited investors will change significantly as a result of this
amendment.
---------------------------------------------------------------------------

\345\ See IRS, Statistics of Income Division, Partnerships, May
2019, Table 8, available at https://www.irs.gov/pub/irs-soi/17pa08.xlsx. See also D. Burton Letter.
---------------------------------------------------------------------------

Based on analysis of Form D filings, we have identified
approximately 173,697 unique issuers (of which the majority were non-
fund issuers) that have raised capital through Regulation D offerings
from 2009 until 2019. This gives some indication of the scope of
issuers that could be affected by the expansion of the accredited
investor pool under the final amendments.

Table 3--Frequency of Regulation D Offerings by Unique Issuers: 2009-2019
----------------------------------------------------------------------------------------------------------------
Non-fund issuers Fund issuers
---------------------------------------------------------------- All Regulation
Number of offerings Number of Proportion Number of Proportion D issuers
issuers (percent) issuers (percent)
----------------------------------------------------------------------------------------------------------------
1............................... 80,245 75.9 58,134 95.6 138,379
2............................... 12,574 11.9 1,968 3.2 14,542
3............................... 5,361 5.1 362 0.6 5,723
4............................... 2,874 2.7 126 0.2 3,000
5............................... 1,738 1.6 68 0.1 1,806
6 or more Offerings............. 2,875 2.8 132 0.4 3,007
-------------------------------------------------------------------------------
Total: Unique Issuers....... 105,667 .............. 60,790 .............. 166,457
----------------------------------------------------------------------------------------------------------------

Lastly, the final amendments to the accredited investor definition
likely will impact the market for private offerings in terms of capital
raising in certain circumstances. As noted above, currently eligible
accredited investors, particularly institutional accredited investors,
play a prominent role in Regulation D offerings and have substantial
capital. As Table 4 shows, in 2019, issuers in the Regulation D market
raised more than $1.5 trillion. The vast majority of capital raised in
this market was raised under Rule 506(b), which has no limit on the
number of purchasers who are accredited investors but limits the number
of non-accredited investors to 35 per offering. Offerings under Rule
506(c), under which purchasers are exclusively accredited investors,
raised approximately $66 billion. Table 4 also shows that the amount of
capital raised in other exempt offerings was approximately $1.2
trillion. Most of the capital raised in these other exempt offerings
came from Rule 144A offerings, where qualified institutional buyers
constitute the ultimate purchasers of the offerings.\346\ Finally,
Table 4 shows that the total amount of capital raised under Regulation
A was approximately $1 billion in 2019 (less than 1% of the amount
raised in Rule 144A offerings). The overwhelming majority of capital
raised in these Regulation A offerings was through Tier 2 offerings,
for which accredited investors are not subject to investment limits.
---------------------------------------------------------------------------

\346\ The term ``Rule 144A offering'' refers to a primary
offering of securities by an issuer to one or more financial
intermediaries (commonly known as the ``initial purchasers'') in a
transaction exempt from registration under the Securities Act,
followed by the immediate resale of the securities by the initial
purchasers to qualified institutional buyers in reliance on Rule
144A.

[[Page 64264]]

Table 4--Overview of Amounts Raised in the Exempt Market in 2019 347
------------------------------------------------------------------------
Amounts
reported or
Exemption estimated as
raised in 2019
(billion)
------------------------------------------------------------------------
Rule 506(b) of Regulation D............................. $1,492
Rule 506(c) of Regulation D............................. 66
Regulation A: Tier 1.................................... 0.044
Regulation A: Tier 2.................................... 0.998
Rule 504 of Regulation D................................ 0.228
Regulation Crowdfunding \348\........................... 0.062
Other exempt offerings \349\............................ 1,167
------------------------------------------------------------------------

C. Anticipated Economic Effects
---------------------------------------------------------------------------

\347\ Data on Regulation D capital raising is taken from Form D
and Form D/A filings. Information on Regulation A capital raising is
taken from Form 1-A and Form 1-A/A filings.
\348\ Data on offerings under Regulation Crowdfunding were
collected from Form C filings on EDGAR. For offerings that have been
amended, the data reflects information reported in the latest
amendment as of the end of the considered period. Regulation
Crowdfunding requires an issuer to file a progress update on Form C-
U within 5 business days after reaching 100% of its target offering
amount. The data on Regulation Crowdfunding excludes withdrawn
offerings. Some withdrawn offerings may be failed offerings. Amounts
raised may be lower than the target or maximum amounts sought.
\349\ ``Other exempt offerings'' are identified from Regulation
S and Rule 144A offerings. The data used to estimate the amounts
raised in 2019 for other exempt offerings includes data on:
Offerings under Section 4(a)(2) of the Securities Act that were
collected from Thomson Financial's SDC Platinum, which uses
information from underwriters, issuer websites, and issuer SEC
filings to compile its Private Issues database; offerings under
Regulation S that were collected from Thomson Financial's SDC
Platinum service; and resale offerings under Rule 144A that were
collected from Thomson Financial SDC New Issues database, Dealogic,
the Mergent database, and the Asset[hyphen]Backed Alert and
Commercial Mortgage Alert publications to further estimate the
number of exempt offerings under Section 4(a)(2) and Regulation S.
We included amounts sold in Rule 144A resale offerings because those
securities are typically issued initially in a transaction under
Section 4(a)(2) or Regulation S but generally are not included in
the Section 4(a)(2) or Regulation S data identified above. These
amounts are accurate only to the extent that these databases are
able to collect such information and may understate the actual
amount of capital raised under these offerings if issuers and
underwriters do not make this data available.
---------------------------------------------------------------------------

In this section, we discuss the anticipated economic benefits and
costs of the final amendments to the accredited investor and qualified
institutional buyer definitions. We first analyze the potential costs
and benefits of the final amendments for each of the affected parties
and then discuss how those effects may vary based on the
characteristics of issuers and investors. We also discuss the
anticipated effects on efficiency, capital formation and competition.
Finally, we discuss the costs and benefits of reasonable alternatives
to the final amendments.
Several commenters expressed general concerns that the analysis in
the Proposing Release did not include sufficient data and evidence on
the performance of private offerings and therefore that the Commission
had not adequately assessed the benefits and costs to potentially newly
eligible individual investors from investing in exempt offerings.\350\
In the Proposing Release, the Commission acknowledged that it is
difficult to reach rigorous conclusions about the typical magnitude of
investor gains and losses in exempt offerings. Understanding the effect
of the amendments on individual investors requires more than a
consideration of exempt offerings on their own. In particular, an
equally if not more relevant consideration is how sophisticated
investors that are currently not eligible to participate in (or
significantly restricted from participating in) exempt offerings would
benefit from having access to exempt offering investment opportunities
as one part of their overall investment strategy. It is difficult to
quantify with any reasonable degree of confidence the potential
benefits to and cost that may be incurred by newly eligible accredited
investors at an individual level or on an aggregate basis. It is,
however, clear that many existing accredited investors see benefits in
participating in exempt offerings as part of their investment strategy.
---------------------------------------------------------------------------

\350\ See, e.g., CFA Letter; Healthy Markets Letter; Better
Market Letter; NASAA Letter; and CA Attorney General et al. Letter.
---------------------------------------------------------------------------

Commission staff recently completed a report to Congress on the
performance of Regulation D and Regulation A offerings. We have noted
some supplementary information contained in this report in our more
detailed discussion of the benefits and costs of the final amendments
below. This information (including, for example, data on SEC litigation
against Regulation D issuers), together with information provided by
commenters, helps to further inform our analysis of the costs and
benefits of the final amendments.
1. Potential Benefits to Issuers
We expect that issuers interested in raising capital through
unregistered offerings will benefit from the final amendments in
several ways.
a. More Efficient Capital Raising Process in Exempt Offerings
The final amendments will benefit issuers by potentially increasing
the efficiency of the process of raising capital in unregistered
offerings. Specifically, issuers interested in raising capital from
accredited investors under Regulation D must have a reasonable belief
that those investors are accredited investors. In addition, issuers
conducting offerings under Rule 506(c) are required to take reasonable
steps to verify the accredited investor status of all purchasers in the
offering. The final amendments may make it easier for issuers to assess
and verify an investor's status as an accredited investor. As discussed
in the Proposing Release, compliance with this verification requirement
has been cited as a potential impediment to the use of Rule 506(c) to
raise capital despite the ability to use general solicitation when
conducting these types of offerings.\351\ To the extent that issuers
may face challenges complying with this requirement, the final
amendments could facilitate the use of Rule 506(c) as a capital raising
option by providing issuers with additional avenues (e.g., professional
certifications and investment tests) to meet this requirement.
---------------------------------------------------------------------------

\351\ See, e.g., Proposing Release at note 281.
---------------------------------------------------------------------------

There could be other efficiency gains to issuers from the final
amendments. For example, by expanding the number of accredited
investors and qualified institutional buyers, certain issuers that are
highly uncertain of the degree of interest in their offerings may be
able to find and attract investors more easily, thereby lowering search
costs. In addition, certain issuers that rely on intermediaries when
raising capital may be able to reduce intermediation costs if there is
an increase in the number of sophisticated investors who are able to
invest directly rather than through an intermediary. Given that the
average intermediary fee in Regulation D offerings ranges from
approximately 2% (for fund issuers) to 5.5% (for non-fund issuers) of
the amount raised, the ability to raise capital without relying on an
intermediary may be a significant cost saving for some issuers.\352\
---------------------------------------------------------------------------

\352\ See Scott Bauguess, Rachita Gullapalli, & Vladimir Ivanov,
Capital Raising in the U.S.: An Analysis of the Market for
Unregistered Securities Offerings, 2009-2017 (Aug. 2018), available
at https://www.sec.gov/files/DERA%20white%20paper_Regulation%20D_082018.pdf.
---------------------------------------------------------------------------

There also may be certain efficiency gains for Rule 504 offerings
that could increase issuers' reliance on this currently rarely used
exemption. Under Rule 504 of Regulation D, issuers are permitted to use
general solicitation or general advertising to offer and sell
securities to accredited investors when

[[Page 64265]]

offers and sales are made pursuant to state law exemptions from
registration that permit general solicitation and general advertising.
Because the pool of accredited investors will increase under the final
amendments, the cost effectiveness of general solicitation and general
advertising under Rule 504 may improve (e.g., due to fixed costs of
advertising and solicitation). As a result, certain issuers may
increase their reliance on Rule 504 to meet their capital needs. Some
of these additional Rule 504 offerings may represent issuers switching
from other offering exemptions, such as Rule 506(b). To the extent that
will be the case, we expect issuers will only switch to Rule 504
offerings if such offerings are better suited to their particular facts
and circumstances.
b. Facilitate Capital Formation by Expanding the Pool of Investors in
Exempt Offerings
The final amendments will expand the pool of individual accredited
investors and institutional accredited investors compared to the
current baseline. The amendments add several new categories of entities
to the definition of accredited investor. For example, the final
amendments include all SEC- and state-registered investment advisers
and all exempt reporting advisers in the definition of accredited
investor. This constitutes a pool of approximately 45,000 entities,
some of which may not already qualify as accredited investors under the
current rules. In addition, a broad range of entities that do not
currently qualify as accredited investors will qualify if they meet the
$5 million investments threshold under the final amendments, including,
for example, Indian tribes and state and local governmental bodies.
With respect to individual investors, as discussed above, we estimate
that the upper bound percentage increase of the individual accredited
investor pool due to the addition of these individuals will be
approximately 4%. However, because many of the individuals that will
qualify as accredited investors under the amendments may already
qualify as accredited investors based on the current financial
thresholds, this percentage likely overestimates the actual increase.
In addition, because the newly eligible individuals have income and net
worth below the currently required thresholds for individual accredited
investors, we expect the increase in the capital supply provided by the
pool of individual accredited investors will be proportionately
considerably lower than the increase in the number of individual
accredited investors. For example, even in the unlikely event that (1)
all 691,041 FINRA-registered securities representatives and 17,543
state-registered investment adviser representatives were newly eligible
accredited investors (i.e., no overlap in registration and no overlap
with current eligible accredited investors), and (2) all of them
elected to invest $30,000 (which is likely over 15% of many of these
investors' income) \353\ in unregistered offerings, the aggregate
additional capital available would be approximately $21.3 billion, or
an increase of less than 1.4% of the Regulation D market in 2019.
Because this analysis assumes no overlap between these sets of
individuals and between these individuals and current accredited
investors, we expect the actual additional capital will be a small
fraction of that number. Each of the entities that will be newly
eligible accredited investors under the final amendments will have
assets or investments in excess of $5 million. Thus, we believe that
the addition of new categories of entities to the definition of
accredited investor is likely to contribute more meaningfully to the
increase in potential capital supply than the addition of new
categories of individuals.
---------------------------------------------------------------------------

\353\ To qualify based on the income threshold, an accredited
investor would require income greater than $200,000 (or joint income
greater than $300,000 with their spouse) in each of the two most
recent years and a reasonable expectation of the same income in the
current year, so the investor's income in any one year could be
greater than either threshold.
---------------------------------------------------------------------------

Generally, accredited investors, and in particular, institutional
accredited investors, supply the vast majority of capital raised under
Regulation D and are vital to the capital raising needs of issuers
conducting Regulation D offerings.\354\ Therefore, we anticipate that
expanding the pool of accredited investors under the final amendments
will lead to an increase in the aggregate potential supply of capital
available for exempt offerings under Regulation D. Because we lack data
on the total number of newly eligible accredited investors and the size
of their asset portfolios, we are not able to estimate the magnitude of
the aggregate increase in the potential capital supply, and therefore
the overall impact on the market for Regulation D offerings is
uncertain. However, as illustrated in the example above, we expect the
impact of newly eligible individual accredited investors on capital
supply to be limited. Increased capital supply from newly eligible
institutional investors may be relatively more meaningful in certain
offerings and could potentially increase competition among accredited
investors in those offerings, thereby lowering the cost of capital and
promoting capital formation.\355\ As discussed in more detail below, we
expect these benefits will, in particular, be realized by issuers that
have greater uncertainty about the interest in their prospective
offerings, particularly ones that are small, in early development
stages, or in geographic areas that currently have lower concentrations
of accredited investors.
---------------------------------------------------------------------------

\354\ See, e.g., NAM Letter (stating that ``[m]anufacturers in
every part of the country need capital for the operational
challenges they face, and strong access to capital for growing
manufacturers means job creation and economic expansion in all 50
states. As they grow, these small businesses utilize the SEC's
exemptions from registration to conduct private offerings--often
raising capital from members of the communities in which they
operate. Participation in offerings conducted under a registration
exemption is usually restricted to accredited investors, meaning
that the qualifications set by the SEC have a real-world impact on
manufacturing businesses' ability to raise capital'').
\355\ See, e.g., Nexus Private Capital Letter (stating that
``[b]y changing the Definition of Accredited Investor as proposed,
our company should realize two significant benefits: (a) Greater
access to capital to reinvest (which benefits a wide range of
stakeholders); and (b) greater confidence that we are staying within
our regulatory lanes (which is important to us)''); and J. Angel
Letter (stating that ``[t]he Commission should be generous in
awarding accredited investor status. This will both promote capital
formation by increasing the pool of capital available for private
placements, and also make it possible for more investors to reap the
rewards of investing in private deals'').
---------------------------------------------------------------------------

Similarly, the final amendments could enhance capital formation in
the Regulation A market. As accredited investors are not subject to
investment limits under Tier 2 of Regulation A, expanding the pool of
accredited investors could enable issuers that are conducting offerings
under Tier 2 of Regulation A to raise more capital and/or raise capital
at a lower cost (e.g., due to lower search and transaction costs).
Expanding the definition of qualified institutional buyer under
Rule 144A will increase the number of potential buyers of Rule 144A
securities, thereby increasing the aggregate potential supply of
capital and increasing competition among investors for Rule 144A
offerings. We expect as a result of any such increase that current and
prospective issuers of Rule 144A offerings will experience lower costs
of raising capital (e.g., due to lower search and transaction costs),
which will facilitate capital formation in this market.
Some commenters disagreed with the assessment in the Proposing
Release of the potential positive effects on capital

[[Page 64266]]

formation from the final amendments. In particular, some commenters
asserted that there is currently no evidence of scarcity of capital in
the market for exempt offerings, which suggests that positive net
present value projects can already get funded and that issuers with
economically viable projects will have low incentives to seek capital
(outside their currently established funding channels) from the
individuals that become newly eligible accredited investors.\356\
Therefore, according to these commenters, expanding the accredited
investor definition to individuals beyond the current income and wealth
thresholds could have little impact on capital formation. In addition,
these commenters suggested there may even be a negative incremental
impact on capital formation to the extent adverse selection occurs,
wherein the newly eligible individual accredited investors may only be
offered highly speculative investment opportunities.\357\
---------------------------------------------------------------------------

\356\ See, e.g., NASAA Letter and Better Markets Letter.
\357\ See, e.g., NASAA Letter (stating that '' [e]vidence that
promising and successful private companies have significant access
to institutional private capital strongly suggests that the only
companies eager to sell to accredited retail investors are
speculative and suspect enterprises''); and Better Markets Letter
(stating that ``given the glut of funding available to viable
companies (including, historically low levels of interest rates
which cause lenders and investors to compete to find viable
borrowers/issuers), companies that have challenges finding
investors, and therefore need to resort to soliciting non-Accredited
Investors, would need to have been denied by sophisticated investors
and those who know the business or company's executives well'').
---------------------------------------------------------------------------

We disagree with these commenters' assessment of the potential
effects on capital formation. Even if commenters are correct that there
will be little increased demand from issuers with positive net present
value projects for capital from the (comparatively low-capitalized)
individuals that will become newly eligible accredited investors, there
is no reason to believe this necessarily means that such issuers will
not benefit from access to capital from (more well-capitalized)
entities that will become newly eligible accredited investors or
qualified institutional buyers under the final amendments (who we
expect will be responsible for any meaningful increase in capital
supply, as we noted above). Therefore, we still anticipate that the
increased potential supply of institutional capital in the market for
exempt offerings is likely to incrementally decrease the cost of
capital (e.g., due to lower search and transaction costs) for certain
issuers that rely on capital from institutional accredited investors or
qualified institutional buyers, thereby promoting capital formation. In
addition, because we believe that the individuals that become newly
eligible accredited investors will have the financial sophistication
needed to assess the various risks of unregistered offerings, including
the risk of adverse selection, the likelihood of these individuals
investing in highly speculative and potentially negative net present
value projects may be attenuated.
c. Increase Liquidity of Securities Issued in Unregistered Offerings
We expect the final rule to have an effect on the liquidity of
securities issued in unregistered offerings. For example, the
amendments to the qualified institutional buyer definition could
facilitate resales of Rule 144A securities by holders of these
securities by expanding the pool of potential purchasers in resale
transactions. This could increase demand for Rule 144A securities and
have an impact on the price and liquidity of these securities when
offered and sold by the issuer in Rule 144A offerings and in subsequent
resale transactions. Because we do not have access to data that would
enable us to estimate the magnitude of the potential increase in demand
due to the newly eligible qualified institutional buyers, we are unable
to quantify any such potential changes in the liquidity of Rule 144A
securities as a result of the final amendments.
Moreover, investors that are seeking to resell restricted
securities and that rely on the Rule 144 safe harbor for purposes of
determining whether the sale is eligible for the Section 4(a)(1)
exemption are required to meet certain conditions under Rule 144, which
include holding the restricted securities for six months or one year,
depending on the circumstances. An expanded accredited investor pool
could make it easier to conduct a private resale of restricted
securities in a time period shorter than six months or one year. For
example, an investor may seek to rely on the Section 4(a)(7) exemption
for the resale, which requires a number of conditions to be met,
including that the purchaser is an accredited investor. If the final
amendments make it easier to conduct private resales of restricted
securities, this could possibly reduce the liquidity discount for
restricted securities when sold under Rule 506 (or another exemption),
making Rule 506 more attractive to issuers as well as investors.
Additionally, the expanded accredited investor definition could
impact resales under Rule 501 of Regulation Crowdfunding during the
one-year resale restriction period, thus potentially affecting the
liquidity discount for such securities. Securities purchased in a
Regulation Crowdfunding transaction generally cannot be resold for a
period of one year, unless they are transferred to, among others, an
accredited investor.\358\ An expanded pool of accredited investors as a
result of the final amendments could make it easier for holders of such
securities to find a potential buyer, thus potentially leading to a
lower liquidity discount at the time of issuance.
---------------------------------------------------------------------------

\358\ See Rule 501 under Regulation Crowdfunding [17 CFR
227.501]. Such securities could also be transferred (i) to the
issuer of the securities; (ii) as part of an offering registered
with the Commission; or (iii) to a member of the family of the
purchaser or the equivalent, to a trust controlled by the purchaser,
to a trust created for the benefit of a member of the family of the
purchaser or the equivalent, or in connection with the death or
divorce of the purchaser or other similar circumstance.
---------------------------------------------------------------------------

d. Other Benefits
The final amendments to the accredited investor definition will
allow knowledgeable employees of private funds to qualify as accredited
investors for purposes of investing in offerings by these funds without
the funds themselves losing accredited investor status when the funds
have assets of $5 million or less.\359\ This amendment will enable
private funds to offer knowledgeable employees additional types of
performance incentives, such as investing in the fund. Permitting
employees who participate in the investment activities of a private
fund to co-invest in the private fund may align incentives between such
employees and fund investors. Although we expect that the increase in
the capital that is supplied to private funds by knowledgeable
employees of these private funds will be relatively small, the
potential gains to the funds in incentive alignment and employee
retention could affect fund performance positively.
---------------------------------------------------------------------------

\359\ Under Rule 501(a)(8), a private fund with assets of $5
million or less may qualify as an accredited investor if all of the
fund's equity owners are accredited investors.
---------------------------------------------------------------------------

In addition, the final amendments also will increase the number of
potential investors with whom issuers undertaking a registered offering
may be able to communicate under Section 5(d) of the Securities Act and
Securities Act Rule 163B (the test-the-waters provisions). By expanding
the pool of potential institutional accredited investors and qualified
institutional buyers, the amendments will increase certain issuers'
ability to gather valuable

[[Page 64267]]

information about investor interest before a potential registered
offering. This could result in a more efficient and potentially lower-
cost and lower-risk capital raising process for such issuers.
2. Potential Benefits to Investors
We believe that the individuals and institutions that will be newly
eligible accredited investors under the final amendments have the
requisite financial sophistication for meaningful investment analysis,
and could therefore benefit from gaining broader access to investment
opportunities in private capital markets and greater freedom to make
investment decisions based on their own analysis and circumstances.
There is recent empirical evidence that, for a number of reasons,
issuers tend to stay private for longer than in the past and have been
able to grow to a size historically available only to their public
peers.\360\ This suggests that the high-growth stage of the lifecycle
of many issuers occurs while they remain private. Thus, investors that
do not qualify for accredited investor status may not be able to
participate in the high-growth stage of these issuers because it often
occurs before they engage in registered offerings.\361\ Allowing
additional financially sophisticated investors to invest in
unregistered offerings of private firms will potentially enable them to
participate in the high-growth stages of these firms.
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\360\ See Michael Ewens & Joan Farre-Mensa, The Deregulation of
the Private Equity Markets and the Decline in IPOs (Nat'l Bureau of
Econ. Research, Working Paper No. 26317, Sept. 2019) (``Ewens &
Farre-Mensa (2019)'').
\361\ For example, according to one study, the median age of a
firm that went public in 1999 was five years, and in 2018 the median
age was 10 years. See Jay R. Ritter, Initial Public Offerings:
Median Age of IPOs Through 2019, Jan. 2020, available at https://site.warrington.ufl.edu/ritter/files/2020/02/IPOs2019Age.pdf.
---------------------------------------------------------------------------

All else equal, expanding the set of investment opportunities can
increase diversification and improve the risk-return tradeoff of an
investor's portfolio. More specifically, adding private investments to
the set of investable assets could allow an investor to expand the
efficient risk-return frontier and construct an optimal portfolio with
risk-return properties that are better than, or similar to, the risk-
return properties of a portfolio that is constrained from investing in
certain asset classes, leading to a more efficient portfolio
allocation. \362\ For example, recent research has shown that
investments in funds of private equity funds can outperform public
markets.\363\ Thus, to the extent access to private offerings expands
the efficient risk-return frontier for newly eligible accredited
investors and qualified institutional buyers, we expect these investors
will potentially benefit from an improvement in portfolio efficiency.
---------------------------------------------------------------------------

\362\ See, e.g., John L. Maginn et al., Managing Investment
Portfolios: A Dynamic Process (3rd ed. 2007) (``Maginn et al.
(2007)''); and Zvi Bodie, Alex Kane, & Alan J. Marcus, Investments
(10th ed. 2013).
\363\ See, e.g., Robert S. Harris et al., Financial
Intermediation in Private Equity: How Well Do Funds of Funds
Perform?, 129 J. Fin. Econ. 287 (2018).
---------------------------------------------------------------------------

While private investments may offer the opportunity to invest in
certain early-stage or high-growth firms that are not as readily
available in the registered market, private investments, particularly
in small and startup companies, generally also pose a high level of
risk, as noted by several commenters.\364\ For example, based on Bureau
of Labor Statistics (BLS) data on establishment survival rates, the
five-year survival rates for private sector establishments formed in
March in each of the years 2010-2014 ranged between 50% and 51%.\365\
The higher risks of private investments may be mitigated by the
financial sophistication of newly eligible accredited investors or if
these investors invest in professionally managed private funds rather
than selecting private company investments directly.\366\
---------------------------------------------------------------------------

\364\ See, e.g., CA Attorney General et al. Letter; NASAA
Letter; Better Markets Letter; and CFA Letter.
\365\ See U.S. Bureau of Labor Statistics, Survival of Private
Sector Establishments by Opening Year, available at https://www.bls.gov/bdm/us_age_naics_00_table7.txt.
\366\ See, e.g., the recommendation from an independent research
organization to expand retail investor access to closed-end
registered investment funds with significant exposures to
alternatives, available at https://www.capmktsreg.org/wp-content/uploads/2018/10/Private-Equity-Report-FINAL-1.pdf.
---------------------------------------------------------------------------

Estimating the aggregate potential gains in portfolio efficiency
from investments in private offerings is difficult, because
comprehensive, market-wide data on the returns of private investments
is not available due to a lack of required disclosure about these
investment returns, the voluntary nature of disclosure of performance
information by private funds, and the very limited nature of secondary
market trading in these securities. Academic studies of the returns to
private investments acknowledge limitations and biases in the available
data.\367\ For instance, it has been shown that the data on returns of
private investments typically exhibit a survival bias due to the lack
of reporting of underperforming investments and that the use of
appraised valuations to construct returns on assets that are nontraded
can make private investments seem less risky. There is also a lack of
comprehensive data on angel investment returns \368\ and entrepreneur

[[Page 64268]]

returns on investment of their own funds and savings in starting a
private business.\369\
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\367\ Research has examined (i) private equity returns (see,
e.g., Steven N. Kaplan & Antoinette Schoar, Private Equity
Performance: Returns, Persistence, and Capital Flows, 60 J. Fin.
1791 (2005); Andrew Metrick & Ayako Yasuda, Venture Capital and
Other Private Equity: A Survey, 17 Eur. Fin. Mgmt. 619 (2011);
Christian Diller & Christoph Kaserer, What Drives Private Equity
Returns? Fund Inflows, Skilled GPs, and/or Risk?, 15 Eur. Fin. Mgmt.
643 (2009); Robert S. Harris et al., Financial Intermediation in
Private Equity: How Well Do Funds of Funds Perform?, 129 J. Fin.
Econ. 287 (2018); Robert S. Harris, Tim Jenkinson, & Steven N.
Kaplan, Private Equity Performance: What Do We Know?, 69 J. Fin.
1851 (2014); and Kasper Nielsen, The Return to Direct Investment in
Private Firms: New Evidence on the Private Equity Premium Puzzle, 17
Eur. Fin. Mgmt. 436 (2011)); (ii) VC performance (see, e.g., John H.
Cochrane, The Risk and Return of Venture Capital, 75 J. Fin. Econ. 3
(2005); Arthur Korteweg & Stefan Nagel, Risk-Adjusting the Returns
to Venture Capital, 71 J. Fin. 1437 (2016); and Axel Buchner,
Abdulkadir Mohamed, & Armin Schwienbacher, Does Risk Explain
Persistence in Private Equity Performance?, 39 J. Corp. Fin. 18
(2016)); and (iii) hedge fund returns (see, e.g., William Fung &
David A. Hsieh, Hedge Fund Benchmarks: A Risk-Based Approach, Fin.
Analysts J., Sept./Oct. 2004, at 65; William Fung & David A. Hsieh,
Measurement Biases in Hedge Fund Performance Data: An Update, Fin.
Analysts J., May/June 2009, at 36; Manuel Ammann, Otto R. Huber, &
Markus Schmid, Benchmarking Hedge Funds: The Choice of the Factor
Model (Working Paper, 2011); Zheng Sun, Ashley W. Wang, & Lu Zheng,
Only Winners in Tough Times Repeat: Hedge Fund Performance
Persistence over Different Market Conditions, 53 J. Fin. &
Quantitative Analysis 2199 (2018); Charles Cao et al., What Is the
Nature of Hedge Fund Manager Skills? Evidence from the Risk-
Arbitrage Strategy, 51 J. Fin. & Quantitative Analysis 929 (2016);
Vikas Agarwal, T. Clifton Green, & Honglin Ren, Alpha or Beta in the
Eye of the Beholder: What Drives Hedge Fund Flows?, 127 J. Fin.
Econ. 417 (2018); Turan G. Bali, Stephen J. Brown, & Mustafa O.
Caglayan, Systematic Risk and the Cross Section of Hedge Fund
Returns, 106 J. Fin. Econ. 114 (2012); Turan G. Bali, Stephen J.
Brown, & Mustafa O. Caglayan, Macroeconomic Risk and Hedge Fund
Returns, 114 J. Fin. Econ. 1 (2014); Andrea Buraschi, Robert
Kosowski, & Fabio Trojani, When There Is No Place to Hide:
Correlation Risk and the Cross-Section of Hedge Fund Returns, 27
Rev. Fin. Stud. 581 (2014); Ravi Jagannathan, Alexey Malakhov, &
Dmitry Novikov, Do Hot Hands Exist Among Hedge Fund Managers? An
Empirical Evaluation, 65 J. Fin. 217 (2010); Andrea Buraschi, Robert
Kosowski, & Worrawat Sritrakul, Incentives and Endogenous Risk
Taking: A Structural View on Hedge Fund Alphas, 69 J. Fin. 2819
(2014); Ronnie Sadka, Liquidity Risk and the Cross-Section of Hedge-
Fund Returns, 98 J. Fin. Econ. 54 (2010); and Ilia D. Dichev & Gwen
Yu, Higher Risk, Lower Returns: What Hedge Fund Investors Really
Earn, 100 J. Fin. Econ. 248 (2011)).
\368\ Studies we have identified have used small, selected
samples--sometimes from foreign markets--that do not generalize to
the entire U.S. market. See, e.g., Vincenzo Capizzi, The Returns of
Business Angel Investments and Their Major Determinants, 17 Venture
Cap. 271 (2015) (using a small sample of Italian data); and Colin M.
Mason & Richard T. Harrison, Is It Worth It? The Rates of Return
from Informal Venture Capital Investments, 17 J. Bus. Venturing 211
(2002) (using a small UK sample). Investments through AngelList and
similar platforms allow accredited investors to make VC-like
investments in startups. For some evidence on the performance of
such investments, see, e.g., Olga Itenberg & Erin E. Smith,
Syndicated Equity Crowdfunding: The Trade-Off Between Deal Access
and Conflicts of Interest (Simon Bus. Sch., Working Paper No. FR 17-
06, Mar. 2017).
\369\ See, e.g., Elisabeth Mueller, Returns to Private Equity--
Idiosyncratic Risk Does Matter!, 15 Rev. Fin. 545 (2011) (``Mueller
(2011)''); Thomas Astebro, The Returns to Entrepreneurship, in
Oxford Handbook of Entrepreneurial Finance (Douglas Cumming ed.
2012) (``Astebro (2012)''); and Thomas J. Moskowitz & Annette
Vissing-J[oslash]rgensen, The Returns to Entrepreneurial Investment:
A Private Equity Premium Puzzle?, 92 a.m. Econ. Rev. 745 (2002)
(``Moskowitz & Vissing-J[oslash]rgensen (2002)''). For instance,
Moskowitz and Vissing-J[oslash]rgensen (2002) examine the returns to
investing in U.S. non-publicly traded equity and find that, although
entrepreneurial investment is extremely concentrated, the returns to
private equity are no higher than the returns to public equity. They
attribute the willingness of households to invest substantial
amounts in a single privately held firm with a seemingly far worse
risk-return trade-off to large nonpecuniary benefits, a preference
for skewness, or overestimated probability of survival.
---------------------------------------------------------------------------

The final amendments also include exempt reporting advisers in the
definition of accredited investor, in addition to SEC- and state-
registered investment advisers.\370\ Because exempt reporting advisers
are professionals managing either venture capital funds or small
investment funds as a business, we believe they also have the requisite
financial sophistication needed to conduct meaningful investment
analysis. Expanding the definition of accredited investor to encompass
this additional category of advisers will allow these professionals to
benefit from expanded access to investments in unregistered offerings.
---------------------------------------------------------------------------

\370\ See supra Section II.B.2.a.
---------------------------------------------------------------------------

Other aspects of the final amendments could provide additional
benefits for investors. For example, persons that are ``knowledgeable
employees'' of a private fund may benefit from increased access to
investment opportunities with the fund as well as the availability of
additional performance incentives. If investment by knowledgeable
employees leads to better incentive alignment between the fund and
investment personnel, other investors in the private fund could
potentially benefit from enhanced fund performance.
In addition, the final amendments allowing natural persons to
include spousal equivalents when determining joint income or net worth
under Rule 501 of Regulation D will allow such investors to potentially
benefit from increased investment opportunities in private offerings
similar to the other newly eligible accredited investors, as discussed
above.
With respect to entities, including additional entity types within
the definitions of accredited investor and qualified institutional
buyer will provide equal access to investment opportunities for
entities with similar attributes of financial sophistication. The final
amendments thus could help level the playing field among institutional
investors and avoid certain inefficiencies associated with specific
corporate forms. Likewise, the proposed amendment to include a catch-
all category of accredited investor for entities with investments in
excess of $5 million would remove impediments to utilizing alternative
legal forms and permit sophisticated investors to take advantage of
different forms of business organization that may develop in the
future, without having to worry about losing their accredited investor
status.
Because the inclusion of limited liability companies in the
definition of accredited investors is a codification of a long standing
staff interpretation, we do not expect limited liability companies to
receive incremental benefits as a result of the final amendments.
Similarly, because most family offices likely already are considered
accredited investors, we do not expect them to realize significant
benefits as a result of the final amendments. However, family clients
that are part of a family office will also qualify as accredited
investors under the final amendments. To the extent such family clients
do not currently qualify as accredited investors based on the financial
thresholds for natural persons, we expect them to benefit from
increased access to investment opportunities in unregistered offerings.
3. Potential Costs to Issuers
The final amendments could have a potential impact on the market
for registered offerings, but in light of the relatively small amount
of incremental capital that would become potentially available in the
private markets for issuers of sufficient size and sophistication to
conduct a registered offering, we would expect the impact, if any, to
be modest. However, certain commenters suggested that newly eligible
accredited investors and qualifying institutional buyers may shift
capital away from registered offerings and towards unregistered
offerings as a result of the amendments.\371\ To the extent such a
switch in investment focus occurs, it could in theory decrease the
amount of capital flowing into registered offerings and hence
negatively affect issuers in this market through a potential increase
in capital raising costs. However, as discussed above, the amount of
incremental capital that would become potentially available for
investment in exempt offerings is expected to be relatively small,
particularly when compared to the aggregate amount of institutional
capital that currently is eligible to participate in registered and
exempt offerings. Moreover, the amendments seek to identify financially
sophisticated individual and institutional accredited investors and
qualified institutional buyers with the knowledge and investment
experience to assess the differences in the risk-return profiles of
public and private market investments and other asset classes and
appropriately allocate their investments to diversify those risks.
Accordingly, these newly eligible accredited investors and qualified
institutional buyers will not necessarily shift their investment
allocations from the registered offerings market but instead may
increase investments in unregistered offerings by diverting capital
from other investment opportunities (e.g., savings, real estate). They
also may shift their investments from indirect investments in exempt
securities (for example, through financial products) to direct
investments. We are unable to quantify the potential impact on the
market for registered offerings because we do not have access to data
on these investors' investment portfolios or their preferences for
different asset classes that would allow us to estimate how investors
may choose to reallocate their investments as a result of the final
amendments. However, because of the specific risk characteristics and
relative illiquidity of private offerings, we believe the new
investment opportunities in private offerings are more likely to be
viewed as complements to current investments in registered offerings
than substitutes. In addition, the investors that will become newly
eligible accredited investors and qualified institutional buyers under
the final amendments represent only a small fraction of currently
invested capital in registered offerings. For these reasons, we do not
expect any meaningful effect on the market for registered offerings.
---------------------------------------------------------------------------

\371\ See, e.g., NASAA Letter (stating that ``[a] clear effect
of the Proposal would be to further diminish the public markets by
drawing investors away into riskier, illiquid private
alternatives'').
---------------------------------------------------------------------------

4. Potential Costs to Investors
Newly eligible accredited investors will have access to more
investment options under the final amendments.

[[Page 64269]]

However, these investment options come without the additional investor
protections of registration under the Securities Act and could entail
greater costs related to illiquidity, agency costs, adverse selection,
and higher business risk as compared to investments in the public
capital markets. Thus, to the extent newly eligible accredited
investors allocate more capital to private offerings, they could face
greater overall investment risk.
We anticipate that some natural-person investors who do not meet
the income and wealth thresholds under the current definition, but who
will qualify as accredited investors under the final amendments, may
not be able to sustain a loss of an investment in an unregistered
offering. For example, an individual who has obtained a Series 7
license may possess experience in investing but may be less able to
withstand investment losses of the same nominal size than an accredited
investor qualifying on the basis of personal wealth.\372\ However, we
believe the relatively high level of financial sophistication
demonstrated by professional certifications and designations or other
credentials increases the likelihood that such individuals will be able
to assess the risk of loss and avoid losses they cannot sustain through
various actions, including, for example, calibrating investment size.
---------------------------------------------------------------------------

\372\ See, e.g., CA Attorney General et al. Letter and NASAA
Letter.
---------------------------------------------------------------------------

Several commenters expressed concerns that the Commission had not
appropriately considered the various risks individual investors face in
private offerings, such as risks related to low levels of disclosure,
poor oversight, illiquidity, increased adverse selection, and outright
fraud, which can make private offerings less valuable and more risky to
individual investors.\373\ We agree with commenters that certain
private offerings have distinct and in some case more substantial risks
than public offerings. These risks and potential costs were recognized
in the economic analysis in the Proposing Release,\374\ and we have
expanded our discussion of these potential costs below. In addition, we
recognize that in some cases private offerings may not be appropriate
investments for individual investors who lack the knowledge and
financial sophistication to recognize or evaluate the risks of the
offerings, including the risk of over-allocating capital to such
investments in light of their income or net worth. However, as
discussed previously, we believe that certain professional
certifications and designations or other credentials can provide an
appropriate indication of the level of financial sophistication that
renders individual investors capable of evaluating the merits and risks
of a prospective investment in an exempt offering.\375\ We also believe
that, to the extent accredited investors are financially sophisticated,
they will generally not participate in an exempt offering unless they
think it has a favorable risk-return profile, and that they will also
consider their ability to sustain a loss before investing.
---------------------------------------------------------------------------

\373\ See, e.g., CA Attorney General et al. Letter; Better
Markets Letter; CFA Letter; Healthy Markets Letter; NASAA Letter;
and PIABA Letter.
\374\ See Section VI.D.4 of the Proposing Release.
\375\ See supra Section II.B1.a.
---------------------------------------------------------------------------

We also note that an assessment of the economic effects of the
final amendments on newly eligible accredited investors should consider
the source of the funds for investment in private offerings. Any
increase in overall portfolio risk from investments in private
offerings by newly eligible accredited investors and qualified
institutional buyers may be mitigated to the extent some of the new
capital invested in exempt offerings would have otherwise been
allocated to other high-risk assets that also may require additional
due diligence and other analysis,\376\ or to the extent the investors
will reallocate some other portfolio capital to less risky assets.
However, due to data limitations, we are unable to quantify the extent
of potential portfolio reallocation and the resulting effect on overall
portfolio risk.
---------------------------------------------------------------------------

\376\ These could be investments both in other parts of the
securities market (e.g., leveraged investments in individual listed
securities; short positions; holdings of registered securities of
foreign, small-cap, and over-the-counter (OTC) issuers; and holdings
of registered nontraded securities, including REITs and structured
notes) and outside of the securities market (e.g., holdings of
futures, foreign exchange, real estate, individual small businesses,
and peer-to-peer lending).
---------------------------------------------------------------------------

Investing in securities that are acquired in exempt offerings could
reduce investors' liquidity while increasing their transaction costs,
compared to alternative investments in registered securities.\377\ This
illiquidity is generally related to legal restrictions on the
transferability of securities issued in many exempt offerings; a lack
of--or limited--trading market for the securities; \378\ long-term
horizon for exits for private issuers; and, in cases of private funds
investing in private issuers, standard contractual terms designed to
enable a long-term horizon for the portfolio.\379\ However, we believe
that the cost of accredited investors not being able to manage their
liquidity risk will be mitigated to the extent these investors are
financially sophisticated, and therefore able to identify and avoid
risks they cannot sustain. We also note that such liquidity
considerations may be reflected in the priority of the securities and
to the extent these investors are financially sophisticated, we believe
they will be able to take these factors into account in making
investment decisions.
---------------------------------------------------------------------------

\377\ See, e.g., Better Markets Letter (stating that ``the
[private] securities themselves--to the extent they can even be
traded--are very illiquid); CFA Institute letter (stating that
``Current conditions heighten the illiquidity risks that are
inherent in private markets); Healthy Markets Letter (stating that
``[l]iquidity risks and trading costs for public securities are
often significantly lower than for similarly-situated private
securities); and Nasdaq Letter (stating that ``private investments
that are inherently risky and illiquid'').
\378\ See, e.g., David F. Larcker, Brian Tayan, & Edward Watts,
Cashing It In: Private-Company Exchanges and Employee Stock Sales
Prior to IPO, Stanford Closer Look Series (Sept. 12, 2018).
\379\ See, e.g., Private Equity: Fund Types, Risks and Returns,
and Regulation (Douglas Cumming ed., 2011).
---------------------------------------------------------------------------

All else being equal, the more limited disclosure requirements for
unregistered offerings may make them more risky investments compared to
registered offerings.\380\ For example, more limited disclosure makes
it harder for prospective investors to evaluate business prospects or
the financial health of the issuer and may result in investors spending
more resources on due diligence or other analysis. In addition, as
suggested by some commenters,\381\ individual accredited investors and
institutional accredited investors with low amounts of assets under
management who lack the ability to perform more extensive due diligence
on their own, or lack the bargaining power to extract more disclosure
from the private issuers,\382\ may be subject to adverse selection, in
the sense that they may be offered highly speculative investment
opportunities that are rejected by more sophisticated investors with
the ability to perform extensive due diligence or have the bargaining

[[Page 64270]]

power to demand more disclosure.\383\ However, we believe that
financially sophisticated investors, such as the newly eligible
accredited investors under the final amendments, can take these factors
into account in making investment decisions.
---------------------------------------------------------------------------

\380\ For example, issuers of securities in unregistered
offerings generally are not required to provide information
comparable to that included in a registration statement, and
Commission staff does not review any information that may be
provided to investors in these offerings. See 2015 Staff Report. See
also, e.g., NASAA Letter and Healthy Markets Letter.
\381\ See, e.g., Better Markets Letter and NASAA Letter.
\382\ See, e.g., NASAA Letter (stating that ``[r]etail investors
generally will not have the leverage or bargaining power to obtain
the information needed to make informed decisions about private
offerings'') and Healthy Markets Letter (stating that ``in the
private markets, investor rights--much as access to key information
about the companies themselves--are left to the bargaining power of
the parties. This will naturally favor those with greater economic
clout and access over those with less, such as smaller institutions
or retail investors'').
\383\ Because we do not have access to detailed data that allows
us to identify the risk characteristics of exempt offerings that are
available to different types of accredited investors, we are not
able to quantify the extent to which different types of accredited
investors are subject to adverse selection problems in exempt
offerings.
---------------------------------------------------------------------------

Further, investing in securities of private companies for which
less information is publicly available, also could increase the agency
costs for investors. Because investors will potentially have less
information about these private companies on an ongoing basis compared
to similar public companies, they may be less able to effectively
monitor the management of these companies. As a result, investors in
securities of private companies may bear a heightened risk that
management may take actions that reduce the value of their stakes in
such companies.\384\ Further, the combined presence of small individual
investors without control rights and insiders or large private
investors with concentrated control rights is likely to exacerbate
agency conflicts. Such agency conflicts, as well as potentially an
inability to negotiate preferential terms (such as downside protection
options, liquidation preferences, and rights of first refusal) might
place individual accredited investors, dollar-for-dollar, at a
disadvantage to insiders and large investors.\385\ The impact of agency
conflicts on minority investors in private companies might be
relatively more significant than at exchange-listed companies because
private companies generally are not subject to the governance
requirements of exchanges or various proxy statement disclosures.
---------------------------------------------------------------------------

\384\ See, e.g., Healthy Markets Letter.
\385\ Id.
---------------------------------------------------------------------------

The risks related to limited disclosure in private offerings are
mitigated for accredited investors that participate in Regulation A
offerings because they have access to information comparable to that
accompanying registered offerings--e.g., publicly available offering
circulars on Form 1-A (for both Tier 1 and Tier 2 offerings), ongoing
reports on an annual and semiannual basis (Tier 2 offerings), and
additional requirements for interim current event updates (Tier 2
offerings).
Regarding some commenters' specific concerns that individuals that
become newly eligible accredited investors will be deliberately
targeted by the lowest quality private issuers or be targets for
outright fraud,\386\ we note that these investors largely will be
registered representatives of investment advisers and broker-dealers or
knowledgeable employees of private funds, and therefore they are likely
on average to have a greater awareness of the risk of fraud and greater
ability to identify fraudulent private offerings compared to individual
investors who are not such financial professionals.\387\ We also note
that investors will continue to be protected by the general antifraud
provisions of the federal and state securities laws.
---------------------------------------------------------------------------

\386\ See e.g., NASAA Letter; CA Attorney General et al. Letter;
and PIABA Letter.
\387\ In addition, based on staff experience, many fraudulent
private offerings are performed outside the exempt offering
framework altogether, making the issue of investor accreditation
unlikely to be a deciding factor in the choice to commit fraud.
---------------------------------------------------------------------------

One commenter also asserted that the analysis in the Proposing
Release failed to consider evidence on fraud in private offerings and
referenced reports providing survey results on state securities
enforcement activities.\388\ The reports show that Regulation D
offerings were among the most common types of offerings that led to or
were the focus of enforcement investigations by the surveyed state
securities regulators.\389\ We agree that there is misconduct in some
exempt offerings, and we believe accredited investors need to be aware
of and consider the risk of misconduct in private offerings when making
investment decisions. However, we do not think that the currently
available evidence on misconduct necessarily suggests that misconduct
in exempt offerings is widespread, given that the number of detected
misconduct cases is low relative to the number of exempt offerings. For
example, a recently completed analysis by Commission staff of publicly
available information on SEC litigation against Regulation D issuers
found that there were relatively few SEC civil court cases involving
Form D filers over the 2009-2019 period compared to the total number of
filers.\390\ Not all misconduct is detected, and the number of
undetected cases is inherently unobservable. It is therefore not
possible to ascertain whether undetected misconduct in exempt offerings
is more widespread than undetected misconduct in registered offerings
or other investment options.
---------------------------------------------------------------------------

\388\ See CA Attorney General et al. Letter.
\389\ See NASAA Enforcement Section, NASAA Enforcement Report:
2015 Report on 2014 Data 7 (2015), available at https://www.nasaa.org/wp-content/uploads/2011/08/2015-Enforcement-Report-on-2014-Data_FINAL.pdf; NASAA Enforcement Section, NASAA Enforcement
Report: 2014 Report on 2013 Data 7 (2014), available at https://www.nasaa.org/wp-content/uploads/2011/08/2014-Enforcement-Report-on-2013-Data_110414.pdf; and NASAA Enforcement Section, NASAA
Enforcement Report: 2013 Report on 2012 Data 7-8 (2013), available
at https://www.nasaa.org/wp-content/uploads/2013/10/2013-Enforcement-Report-on-2012-data.pdf.
\390\ Based on Ives Group's Audit Analytics data on litigation
and private placements from 2009 through 2019, Commission staff
identified 227 SEC-related civil complaints involving Form D filers
(221 for non-fund filers and six for fund filers), some of which did
not involve securities offerings, and excluding cases that were
dismissed or ruled in favor of the defendant. By comparison,
Commission staff estimated from Audit Analytics data that there were
108,158 (69,642) unique non-fund (fund) Form D filers during this
period. As a caveat, these estimates are affected by the coverage of
individual CIKs in the Audit Analytics litigation database and do
not distinguish offering fraud from financial reporting and other
violations that resulted in SEC litigation. In particular, the data
reveal misconduct, whether related to offerings or to disclosure
violations, that is detected and results in litigation against the
issuer, which underestimates the rate of misconduct to the extent
that detection is difficult. See DERA's Report to Congress on
Regulation A/Regulation D Performance (``DERA Report'') available at
https://www.sec.gov/files/Report%20to%20Congress%20on%20Regulation%20A.pdf.
---------------------------------------------------------------------------

One commenter stated that brokers selling private offerings to
retail investors appear to be more likely to be associated with
customer complaints and potential misconduct.\391\ We believe that the
individuals who will qualify as newly accredited investors based on
certain professional certifications or designations or other
credentials are more likely to be able to protect themselves from
potential broker misconduct. These individuals largely will be
registered representatives of investment advisers or broker-dealers
that can give investment advice or recommendations to other investors,
and therefore should have the professional knowledge and financial
sophistication to be able to identify and evaluate the conditions and
conflicts of interest that may incentivize brokers to sell excessively
risky or lower quality private offerings. We also note that, as a
result of Regulation Best Interest, a broker-dealer's recommendation of
a private offering to a retail customer is required to be in the retail
customer's best interest, without putting the financial or other
interest of the broker ahead of the interest of the retail customer,
which we expect will lead to a reduction of unmitigated conflicts of
interests.\392\
---------------------------------------------------------------------------

\391\ See CA Attorney General et al. Letter.
\392\ See Regulation Best Interest: The Broker-Dealer Standard
of Conduct, Release No. 34-86031 (Jun. 5, 2019) [84 FR 33318 (Jul.
12, 2019)].
---------------------------------------------------------------------------

While investing in securities acquired in exempt offerings may
increase an investor's diversification (as discussed above), there are
practical frictions that can make it difficult for an investor to
diversify risk using these investments. For example, investment
minimums

[[Page 64271]]

demanded by certain issuers may decrease or eliminate the
diversification benefits of incorporating private investments in an
individual investor's portfolio, which is likely to be a concern
especially for those individuals who will be newly eligible accredited
investors under the amendments as they have comparatively lower levels
of income or net worth. Further, it has been shown that the data on
returns of private investments typically exhibits smoothing due to the
infrequent nature of observation of returns and/or the use of appraised
valuations and other methods to construct returns on assets that are
nontraded.\393\ This can result in an investor significantly
overestimating the diversification benefits of private investments and
underestimating the risk of private investments.\394\ Additionally,
when compared to traded securities of public companies, private
investments may be characterized by considerable downside and tail risk
due to the frequently non-normally distributed returns.\395\ Overall,
given their financial sophistication, we think that the likelihood that
the newly accredited investors under the final amendments will
misunderstand the risk profile and associated portfolio constraints of
securities acquired in exempt offerings is relatively low.
---------------------------------------------------------------------------

\393\ See, e.g., Gregory W. Brown, Oleg R. Gredil, & Steven N.
Kaplan, Do Private Equity Funds Manipulate Reported Returns?, 132 J.
Fin. Econ. 267 (2019); Arthur Korteweg, Risk Adjustment in Private
Equity Returns (Working Paper, 2018) (``Arthur Korteweg (2018)'').
\394\ See, e.g., Maginn et al. (2007), supra note 362. See also
Kenneth Emery, Private Equity Risk and Reward: Assessing the Stale
Pricing Problem, J. Private Equity, Spring 2003, at 43; Arthur
Korteweg & Morten Sorensen, Risk and Return Characteristics of
Venture Capital-Backed Entrepreneurial Companies, 23 Rev. Fin. Stud.
3738 (2010); Gregory W. Brown, Oleg R. Gredil, & Steven N. Kaplan,
Do Private Equity Funds Manipulate Reported Returns?, 132 J. Fin.
Econ. 267 (2019); and Arthur Korteweg, Risk Adjustment in Private
Equity Returns (Working Paper, 2018).
\395\ See, e.g., supra note 369.
---------------------------------------------------------------------------

Additionally, the increased competition amongst investors under an
expanded accredited investor definition could lower investors' expected
returns for private assets. That is, as more capital is available in
the unregistered markets, investors could receive lower returns due to
the entry of newly-accredited investors with a lower required rate of
return or reduced search frictions associated with finding accredited
investors.
5. Variation in Economic Effects
The magnitudes of the benefits and costs discussed above are
expected to vary depending on the particular attributes of the affected
issuers and investors.
With respect to issuers, we expect the final amendments to
facilitate capital formation particularly for certain businesses that
have greater uncertainty about the interest in their prospective
offerings. The issuers most likely to benefit are small, in development
stages, in geographic areas that currently have lower concentrations of
accredited investors, or without a wealthy friends and family network.
Small businesses typically do not have access to registered capital
markets and commonly rely on personal savings, business profits, home
equity loans, and friends and family as initial sources of
capital.\396\ Data on unregistered offerings suggest that they can be
an important source of capital for smaller issuers. For example, while
the aggregate amount of capital raised through Rule 506 offerings in
2019 ($1.5 trillion) is large, Commission staff analysis show that the
median offering size was only $1.7 million, indicating that offerings
in the Regulation D market typically involve relatively small issues.
In addition, recent Commission staff analysis of Regulation D offerings
for the 2009-2019 time period find that 63% of non-fund issuers were
incorporated for less than three years when they initiated their
offering, and among issuers that report size, a majority reported
revenues of $1 million or less,\397\ which is consistent with these
offerings being undertaken by smaller and growth-stage firms. Because a
significant share of businesses that establish new funding
relationships continue to experience unmet credit need,\398\ we expect
that small issuers that face more challenges in raising external
financing may benefit more from expanding the pool of accredited
investors.
---------------------------------------------------------------------------

\396\ See A Financial System That Creates Economic Opportunities
Capital Markets, U.S. Dept. of the Treasury (Oct. 2017), available
at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf.
\397\ See DERA Report.
\398\ See 2015 Staff Report.
---------------------------------------------------------------------------

In particular, small businesses owned by underrepresented
minorities may benefit from a larger pool of accredited investors. For
example, based on the 2014 Annual Survey of Entrepreneurs, 28.4% of
Black entrepreneurs and 17.5% of Hispanic entrepreneurs cited limited
access to financial capital as having a negative impact on their firms'
profitability.\399\ Additionally, despite being more likely to seek new
sources of funding, businesses owned by underrepresented minorities
were more likely to demonstrate unmet credit needs relative to other
groups,\400\ which suggests that these businesses may benefit from
amendments intended to facilitate private market capital raising.
---------------------------------------------------------------------------

\399\ Alicia Robb, ``Financing Patterns and Credit Market
Experiences: A Comparison by Race and Ethnicity for U.S. Employer
Firms,'' a study for the Office of Advocacy, U.S. Small Bus. Admin.
(Feb. 2018), available at https://www.sba.gov/sites/default/files/Financing_Patterns_and_Credit_Market_Experiences_report.pdf.
\400\ Id.
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Additionally, issuers located in geographic areas with lower
concentrations of accredited investors may benefit relatively more from
the amendments. For example, household income and net worth tend to be
higher in the Northeast and West regions of the United States, which
leads to higher concentrations of individual investors that qualify as
accredited investors by meeting the financial threshold requirements.
Thus, issuers that are outside those regions may currently find it
relatively more difficult to identify and solicit accredited investors.
Recent research has examined the importance of the pool of accredited
investors for the entry of new businesses and employment and finds that
geographic areas experiencing a larger reduction in the number of
potential accredited investors experienced negative effects on new firm
entry and employment levels at small entrants.\401\ Thus, because we
expect the final amendments to expand the pool of accredited investors,
the incremental benefits of this expansion to issuers may be
comparatively greater for issuers in geographic areas with currently
lower concentrations of accredited investors.\402\
---------------------------------------------------------------------------

\401\ See Lindsey & Stein (2019). This study examines the
effects on angel finance stemming from the Dodd-Frank Act's
elimination of the value of the primary residence in the
determination of net worth for purposes of accredited investor
status.
\402\ We do not have access to detailed data on entities and
individuals that would allow us to estimate the distribution of
newly qualified accredited investors by region.
---------------------------------------------------------------------------

We expect that issuers that predominately offer and sell securities
in registered offerings or that market their offerings to non-
accredited investors would be less likely to be affected by the final
amendments. We expect the incremental benefits of the proposed
amendments also to be smaller for large and well-established issuers
with low information asymmetry and a history of public disclosures, as
these issuers likely have ready access to accredited investors,
especially institutional accredited investors. Similarly, issuers with
low costs of proprietary disclosure (e.g., low research and development
intensity and limited reliance on proprietary

[[Page 64272]]

technology) may be less likely to benefit from the final amendments as
they may be less reliant on exempt offerings.
With respect to investors, we expect the benefits and costs of the
final amendments to be most immediately realized by new entrants to the
pool of accredited investors, particularly entities that are not
included in the current accredited investor definition and individuals
that have professional certifications that do not meet the current
income and net worth thresholds. We also expect that providing
additional measures of financial sophistication, other than personal
wealth, could expand investment opportunities for individual investors
in geographic regions with lower levels of income and net worth.
6. Efficiency, Competition, and Capital Formation
The anticipated impacts of the final amendments on efficiency,
competition, and capital formation are discussed throughout this
section and elsewhere in this release. The following discussion
highlights several such impacts.
As discussed above, we expect there will be efficiency gains from
the final amendments in the process for raising capital, such as
increased ease for issuers of verifying accredited investor status,
improved ability of issuers to gather valuable information about
investor interest before a potential registered offering, and
potentially decreased investor demands for liquidity discounts in some
unregistered offerings.\403\ Such efficiency gains will improve the
overall allocative efficiency of the securities markets. In addition,
if the newly eligible accredited investors and qualified institutional
buyers under the final amendments bring new and uncorrelated
information signals to the market (e.g., because of their specialized
knowledge and skills), it could improve the price discovery process and
make the market for private offerings more efficient. The increased
pool of accredited investors and qualified institutional buyers could
also enhance competition among investors in the market for private
offerings, thus reducing the cost of capital for issuers in that market
and improving allocative efficiency.
---------------------------------------------------------------------------

\403\ See supra Sections VI.C.1.a and VI.C.1.c.
---------------------------------------------------------------------------

Additionally, as discussed above, expanding the accredited investor
definition to include knowledgeable employees of a private fund could
lead to better alignment between private funds and investors. The
improved alignment could enable private funds to perform investment
services more efficiently and effectively, thus potentially improving
investor protection and market efficiency over the long term.
Several commenters expressed concerns that expanding the definition
of accredited investor would serve to promote the market for private
offerings at the expense of the market for public offerings, which they
expect to cause harm to investors by exposing them to riskier and more
illiquid investments.\404\ Some commenters further stated that a shift
of capital raising from public to private markets could potentially
lead to a reduction in the allocative efficiency of capital in the
economy, for example, by worsening the overall information and
governance environment for investment and impairing price
discovery.\405\ We acknowledge that expanding the pool of accredited
investors may increase the availability of capital to private firms,
which could allow them to stay private longer, thus reducing the number
of companies going public. Less reliance on public markets to raise
capital could have further implications for informational efficiency--
to the extent that an efficient market incorporates firm-specific
information quickly and correctly into asset prices, such an expansion
could reduce the efficiency of public markets if there are fewer
companies making disclosures into those markets. There could also be an
increase in agency costs from less reliance in public markets, as
minority shareholders may have less protection in private offerings, as
discussed above.\406\
---------------------------------------------------------------------------

\404\ See, e.g., CFA Letter (stating that ``[a]s their already
expansive ability to raise capital in private markets is further
expanded, companies will have even less reason than they do today to
go public, further eroding our already shrinking public markets'');
Healthy Markets Letter; NASAA Letter; and letter from Center for
American Progress dated May 27, 2020 (``CAP Letter'').
\405\ See, e.g., Healthy Markets Letter; NASAA Letter; and CAP
Letter.
\406\ See discussion supra in Section VI.C.4.
---------------------------------------------------------------------------

However, the extent of substitution between private and public
securities is not well established. For example, although some academic
studies suggest that the expanding role of private markets has
contributed to the decline in the number of public companies in the
U.S.,\407\ other studies have focused on the increased flexibility to
deregister provided by recent U.S. regulatory reforms.\408\ Yet other
studies note the cyclical nature of offering activity more
generally.\409\ We do not expect the final amendments' effect on the
private-public choice to be significant, as there are a number of
other, more relevant factors (e.g., liquidity, cost of capital,
ownership structure, compliance costs, valuations) that an issuer would
consider when determining to go public or stay private.
---------------------------------------------------------------------------

\407\ See Ewens & Farre-Mensa (2019), supra note 360, and Craig
Doidge et al., Eclipse of the Public Corporation or Eclipse of the
Public Markets?, J. Applied Corp. Fin., Winter 2018, at 8.
\408\ See Nuno Fernandes, Ugur Lel, & Darius P. Miller, Escape
from New York: The market impact of loosening disclosure
requirements, 95 J. Fin. Econ. 2 (2010) (focusing on ``Rule 12h-6,
which has made it easier for foreign firms to deregister with the
SEC and thereby terminate their U.S. disclosure obligations'') and
Craig Doidge et al., Why Do Foreign Firms Leave U.S. Equity
Markets?, 65 J. Fin. 4, 1507-1553.
\409\ See, e.g., Michelle Lowry, Why does IPO Volume fluctuate
so much?, 67 J. Fin. Econ. 1 (2003), 3-40; Aydo[gbreve]an Alti, IPO
Market Timing, 18 Rev. Fin. Stud. 3 (2005), 1105-1138; and Chris
Yung et al., Cycles in the IPO Market, 89 J. Fin. Econ. 1 (2008),
192-208.
---------------------------------------------------------------------------

The final amendments will expand the pool of accredited investors
and qualified institutional buyers beyond the current baseline. As
discussed above, we expect that the increased pool of accredited
investors and qualified institutional buyers could result in increased
amounts of capital available to private issuers and a lower cost of
capital, thus potentially increasing capital formation, primarily for
issuers with limited access to capital, such as ones that are small, in
early development stages, or in geographic areas or communities that
currently have lower concentrations of accredited investors.\410\
---------------------------------------------------------------------------

\410\ See supra section VI.C.1.b.
---------------------------------------------------------------------------

7. Alternatives
In this section, we evaluate reasonable alternatives to the final
amendments.
a. Inflation Adjustment of Financial Thresholds
The current accredited investor definition uses bright line income
and net worth thresholds to identify natural persons as accredited
investors. The Commission established the $200,000 individual income
and $1 million net worth threshold in 1982 and the $300,000 joint
income threshold in 1988 and has not updated them since, with the
exception of amending the net worth standard to exclude the value of
the investor's primary residence in 2011. In the Proposing Release, the
Commission used data from the SCF to estimate that the number of U.S.
households that qualify as accredited investors has grown from
approximately 2% of the population of U.S. households in 1983 to 13% in
2019 as a result of inflation.\411\ Several commenters expressed a
concern that because there has been a substantial growth in the

[[Page 64273]]

number of accredited investors through inflation alone, many households
currently qualifying as accredited investors in the commenters' view
are neither financially sophisticated enough nor wealthy enough to be
exposed to the risk of exempt offerings.\412\ Because of this concern,
some commenters suggested that we should adjust the bright-line income
and wealth thresholds upwards and/or index them to inflation going
forward.\413\ However, other commenters were in favor of leaving the
thresholds at current levels,\414\ or supported lowering the
thresholds.\415\
---------------------------------------------------------------------------

\411\ See Proposing Release at 2593.
\412\ See e.g., B. Delaplane Letter; CA Attorney General et al.
Letter; Better Markets Letter, CFA Letter; and NASAA Letter.
\413\ See e.g., CA Attorney General et al. Letter; CFA Letter;
NASAA Letter; and PIABA Letter.
\414\ See supra notes 228-230 and accompanying text.
\415\ See supra notes 234 and 235 and accompanying text.
---------------------------------------------------------------------------

We considered increasing the individual income thresholds from
$200,000 to $538,000 and the net worth threshold from $1 million to
$2.7 million to reflect the impact of inflation since 1982. Because
keeping the financial thresholds at their initial (1982) levels has
over time effectively reduced the level of income or net worth needed
to qualify as accredited investors, this alternative could provide
further assurance that individuals eligible for accredited investor
status are those investors who are able to sustain the risk of loss of
investment or fend for themselves without the additional protections
provided by registration under the Securities Act.
Using the SCF, we estimate that an immediate catch-up inflation
adjustment would shrink the accredited investor pool to 5.3 million
households (representing 4.2% of the population of U.S. households)
from the current pool of approximately 16 million households
(representing 13% of the population of U.S. households). Thus,
increasing the individual income and net worth thresholds to reflect
the cumulative effects of inflation would greatly reduce the number of
natural persons who would qualify as accredited investors. Moreover, an
immediate catch-up inflation adjustment would likely reduce the number
of accredited investors to a proportionately greater extent in
geographic areas with lower levels of income and net worth.
Although such a reduction in the number of individuals that would
qualify as accredited investors would potentially increase the
likelihood that the remaining individuals can sustain the risk of loss
of similarly sized investments, there would also be potentially
significant costs. In particular, adjusting the income and wealth
thresholds may reduce private issuers' access to capital and would
reduce investors' access to private investment opportunities. As
discussed above in Section VI.B, from 2009 to 2019, only between 3.4%
and 6.9% of the offerings conducted under Rule 506(b) included non-
accredited investors. Significantly reducing the pool of accredited
investors through an immediate catch-up inflation adjustment could thus
have disruptive effects on capital raising activity in the Regulation D
market not justified by the incremental investor protection benefits.
Moreover, as discussed in Section II.B., we acknowledge investor
protection concerns raised by the wealth test and recognize that in the
case of individuals, higher income or net worth does not necessarily
correlate to a higher level of financial sophistication. Therefore, it
also is unclear that a catch-up inflation adjustment would result in a
pool of qualified accredited investors that would on average be more
sophisticated than the current pool, and would likely eliminate some
currently eligible investors who are sophisticated. However, we also
believe that the investor protections provided by the financial
thresholds have not been meaningfully weakened over time due to
inflation. Specifically, we note that under the 1982 definition, the
calculation of net worth included the value of the primary residence,
but since 2011, the net worth standard excludes the value of the
investor's primary residence.\416\
---------------------------------------------------------------------------

\416\ For example, based on analysis of data from the SCF, if
the value of the primary residence was still included in the
calculation of an investor's net worth, we estimate that
approximately 2.5 million (2%) additional households would have
qualified as accredited investors in 2019.
---------------------------------------------------------------------------

We also considered indexing the financial thresholds in the
definition for inflation on a going-forward basis, rounded to the
nearest $10,000 every four years following the effective date of the
final rule amendment. This alternative likely would reduce the change
in the number of accredited investors relative to the baseline of
leaving the thresholds fixed, holding all else constant. Using the 2016
SCF, we estimate that in 2019, had the current wealth and income
thresholds been adjusted for inflation since 2015 and 2010, the
proportion of U.S. households that would qualify as accredited
investors would have been 11.4% and 10.4%, respectively, which is
consistent with an inflation adjustment reducing the pool of accredited
investors relative to the baseline. Although indexing on a going-
forward basis would be less disruptive to the market for exempt
offerings compared to adjusting the thresholds based on inflation since
1982, it would still reduce the potential aggregate capital supply
available for exempt offerings going forward compared to the baseline.
The potential benefit of this alternative would be that by reducing the
future growth of the number of individuals that qualify as accredited
investors on the basis on income or net worth, it may reduce the risk
of loss for some individuals that may not be able to bear such a risk.
However this benefit would be attenuated to the extent individuals that
would no longer qualify in the future as accredited investors are
financially sophisticated and can bear the risk of loss, and would
therefore lose any potential gains from expanded access to private
offerings.
In considering whether to modify the accredited investor definition
as described above, we also considered allowing issuers' current
investors who meet and continue to meet the current accredited investor
standards to continue to qualify as accredited investors with respect
to future offerings of the securities of issuers in which they are
invested at the time of the inflation adjustment. This type of
provision could provide protection from investment dilution for current
investors who no longer would be accredited investors because of any
changes to the definition, assuming the issuer was willing to incur the
time and expense to accommodate such an exception. Such a provision
could apply to future investments in the same issuer only, and not to
future investments in affiliates of the issuer. In either event, there
would be administrative and other burdens. Allowing current investors
to continue to qualify for certain existing investments would help to
mitigate--although it likely would not completely eliminate--the
potential disruptive effect on those investors of an immediate catch-up
inflation adjustment. Similarly, it could help to mitigate a potential
reduction in the capital supply for existing issuers in the Regulation
D market in certain cases, such as small businesses.
b. Investment Limits
We considered imposing investment limits for individuals who will
become newly eligible accredited investors under the final amendments
but who do not meet the current income or net

[[Page 64274]]

worth thresholds.\417\ Limiting investment amounts for individuals who
do not meet the current income or net worth thresholds could provide
protections for those individuals who are less able to bear financial
losses. For example, we could have limited investments for such
individuals to a percentage of their income or net worth (e.g., 10% of
prior year income or 10% of net worth, as applicable, per issuer, in
any 12-month period). This alternative, however, would reduce the
amount of capital available from these newly eligible accredited
investors, make capital formation more difficult, and likely increase
the implementation costs associated with verifying an investor's status
as an accredited investor and her eligibility to participate in an
offering. We also believe the individuals who will become newly
eligible to qualify as accredited investors under the final amendments
have the financial sophistication to assess investment opportunities
and avoid allocating an inappropriately large fraction of their income
or wealth in exempt offerings.
---------------------------------------------------------------------------

\417\ While some commenters supported investment limits (see
supra note 76), others did not (see supra note 77).
---------------------------------------------------------------------------

c. Geography-Specific Thresholds
Income and net worth levels vary throughout the country, and lower
levels of income and net worth do not preclude a relatively high degree
of financial sophistication. Therefore, the current financial
thresholds likely result in geographic areas with lower average levels
of income and net worth having a relatively lower proportion of
individuals that qualify as accredited investors even if the same
proportion of individuals are financially sophisticated. In turn, this
may lead to comparatively reduced access to accredited investors for
issuers in such areas, which may negatively affect capital formation.
To mitigate a geographically disparate impact of the current uniform
financial thresholds, we, as an alternative, could have adopted
geography-specific financial thresholds for those areas with lower
average levels of income and net worth. Some commenters expressed
support for including geography-specific financial thresholds in the
definition of accredited investors.\418\ However, other commenters were
opposed to such an alternative, raising concerns that it would add
costly complexities to the accredited investor definition.\419\ In
particular, for issuers with prospective accredited investors
throughout the country, such an approach could increase the costs of
verifying the accredited investor status of those individuals. Given
these complexities, we have determined not to adopt this approach at
this time.
---------------------------------------------------------------------------

\418\ See supra note 248.
\419\ See supra notes 251-253 and accompanying text.
---------------------------------------------------------------------------

d. Including Additional Categories of Natural Persons and Entities
We considered as an alternative that the Commission could permit an
investor advised by a registered investment adviser or broker-dealer to
be deemed an accredited investor. As discussed above, several
commenters supported this alternative, suggesting that clients and
customers of registered investment advisers and broker dealers would be
able to rely on the knowledge and the sophistication of their financial
professional to determine whether an investment is appropriate.\420\
However, several commenters opposed this alternative, based on concerns
related to, for example, investor protection, conflict of interests of
financial professionals, erosion of public markets, and adverse
selection risks.\421\
---------------------------------------------------------------------------

\420\ See supra notes 254-258 and accompanying text.
\421\ See supra notes 259-263 and accompanying text.
---------------------------------------------------------------------------

Including investors advised by registered financial professionals
in the definition of accredited investor would significantly expand the
number of investors that would have the opportunity to participate in
unregistered offerings, as there are many investors advised by a
registered investment adviser or broker dealer that do not currently,
and would not under the amendments, qualify as accredited investors,
leading to a potentially meaningful increase in aggregate capital
supply in the market for unregistered offerings. In turn, this could
lower capital costs for issuers and promote capital formation. However,
there could be significant costs to the newly eligible accredited
investors under this alternative. Neither a recommendation by a broker-
dealer nor advice by a registered investment adviser is a complete
substitute for an investor's own financial sophistication, nor does it
ensure that investors have the ability to sustain the risk of loss of
investment or fend for themselves. Therefore, the newly eligible
accredited investors that would invest in private offerings under this
alternative would be more exposed to the risks of not having the
investor protections of registration under the Securities Act, and thus
more likely to bear the potential costs of private offerings, such as
costs related to illiquidity, information asymmetry and agency costs
(including bargaining power when the investor has less money to
invest).
As another alternative to the final amendments, we considered
permitting individuals with experience investing in exempt offerings to
qualify as accredited investors. For example, we could have added a new
category to the accredited investor definition that includes
individuals who have invested in at least ten private securities
offerings, each conducted by a different issuer, under Securities Act
Section 4(a)(2), Rule 506(b), or Rule 506(c). Expanding the accredited
investor definition to include individuals with relevant investment
experience would recognize an objective indication of financial
sophistication. These individuals presumably have developed knowledge
about the private capital markets, including their inherent risks. This
experience may include performing due diligence, negotiating investment
terms, and making valuation determinations. This alternative would
increase the pool of accredited investors, although by less than the
final amendments. At the same time, this alternative could
significantly increase the costs of conducting offerings under
Regulation D or other exemptions that rely on the accredited investor
definition, as verifying an individual's relevant investment experience
likely would be difficult.
We also considered permitting certain knowledgeable employees of a
non-fund issuer to qualify as accredited investors in securities
offerings of that issuer. This would be an expansion of the current
definition, which permits directors, executive officers, or general
partners of the issuer (or of a general partner of issuer) to qualify
as an accredited investor. For example, certain employees that are not
executive officers of a company may still have access to the necessary
information about that company to make an informed investment in that
company's securities. Expanding the accredited investor definition to
include certain knowledgeable employees of a non-fund issuer would
increase the pool of accredited investors relative to the baseline, and
could make it easier for non-fund issuers to raise capital and
potentially increase incentive alignments between employees and
shareholders. On the other hand, this alternative could reduce investor
protections, to the extent that a knowledgeable employee may have
information about a company's business operations, but not possess the
relevant financial sophistication to assess the company's offerings
that a more senior

[[Page 64275]]

officer or director or another type of accredited investor would have.
We also considered limiting the additional entity types to the
enumerated entity types in Rule 501(a), instead of including all
entities that meet an investments-owned test. For example, we could
have expanded the enumerated entity types in Rule 501(a) to include
additional entity types such as Indian tribes and sovereign wealth
funds. Including additional specific entity types to the enumerated
entity types in Rule 501(a) would expand the pool of accredited
investors relative to the baseline. On the other hand, depending on
what type of specific entities this alternative would include, it may
result in a smaller number of new institutional accredited investors
compared to the final amendments. Also, without an investments-owned
test, some of these entities may be more exposed to lower investor
protection compared to the final amendments.
Another alternative would be to apply an asset test for the new
entities instead of an investments-owned test. An asset test would help
to level the playing field among institutional investors and would
reduce inefficiencies associated with specific corporate forms that
could develop in the future relative to the current baseline. Moreover,
an asset test would likely increase the number of new institutional
investors that would qualify as accredited investors relative to an
investments-owned test, because, all else being equal, we expect more
entities to have in excess of $5 million in assets than would have in
excess of $5 million in investments. At the same time, to the extent
that an investments-owned test is a better indicator than an asset test
of those investors who have sufficient financial sophistication to
participate in investment opportunities that do not have the additional
protections provided by registration under the Securities Act, this
alternative could result in lower levels of market efficiency and
investor protection compared to the final amendments.

VII. Paperwork Reduction Act

The amendments do not impose any new ``collection of information''
requirement, as defined by the Paperwork Reduction Act of 1995,\422\
nor do they amend any existing filing, reporting, recordkeeping, or
disclosure requirements. As discussed above, by expanding the pool of
accredited investors, the amendments could facilitate exempt offerings
conducted pursuant to Regulation D or Regulation A and/or enable some
companies to defer becoming a public reporting company, which may
impact the number of annual responses under associated collections of
information.\423\ It is difficult to estimate the magnitude of these
effects as they would depend on a number of factors. Overall, however,
for the reasons discussed in Section VI, we expect any impact on the
annual number responses for associated collections of information to be
relatively minor, and therefore we are not adjusting the burden
estimates for these collections of information at this time. We note,
however, that the Commission will reassess the number of responses for
these associated collections of information every three years in
accordance with the Paperwork Reduction Act \424\ and will make
adjustments, as needed, to reflect any impact from the final
amendments.
---------------------------------------------------------------------------

\422\ 44 U.S.C. 3501 et seq.
\423\ These collections of information include: Form D (3235-
0076), Form 1-A (3235-0286), Form 1-K (3235-0720), Form 1-SA (3235-
0721), and Form 1- U (3235-0722).
\424\ 44 U.S.C. 3507(h).
---------------------------------------------------------------------------

We requested comment on our assessment that the proposed amendments
would not create any new, or revise any existing, collection of
information requirement pursuant to the Paperwork Reduction Act. We
also requested comment on whether the proposed amendments would impact
the number of annual responses for any associated collections of
information and, if so, how we should adjust our Paperwork Reduction
Act burden estimates to reflect this impact. We did not receive any
comments specifically addressing our assessment that the proposed
amendments would not create any new, or revise any existing, collection
of information pursuant to the Paperwork Reduction Act.

VIII. Final Regulatory Flexibility Analysis

The Regulatory Flexibility Act (``RFA'') \425\ requires us, in
promulgating rules under Section 553 of the Administrative Procedure
Act,\426\ to consider the impact of those rules on small entities. We
have prepared this Final Regulatory Flexibility Analysis (``FRFA'') in
accordance with Section 604 of the RFA.\427\ This FRFA relates to
amendment to Rules 215 and 501(a) under the Securities Act.\428\ An
Initial Regulatory Flexibility Analysis (``IRFA'') was prepared in
accordance with the RFA and was included in the Proposing Release.
---------------------------------------------------------------------------

\425\ 5 U.S.C. 601 et seq.
\426\ 5 U.S.C. 553.
\427\ 5 U.S.C. 604.
\428\ Because the changes to Rule 144A of the Securities Act
relate to entities that in the aggregate own and invest on a
discretionary basis at least $100 million in securities of issuers
that are not affiliated with the entity, we do not believe the
changes to Rule 144A would have an impact on small entities.
---------------------------------------------------------------------------

A. Need for, and Objectives of, the Final Rules

The primary objective of the amendments to which this FRFA relates
is to update and improve the definition of ``accredited investor.'' The
reasons for, and objectives of, the amendments are discussed in more
detail in Section II above.

B. Significant Issues Raised by Public Comments

In the Proposing Release, we requested comment on all aspects of
the IRFA, including the number of small entities that would be affected
by the proposed amendments, 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 amendments. We did not
receive any comments specifically addressing the IRFA.
We did, however, receive comments from members of the public on
matters that could potentially impact small entities. These comments
are discussed by topic in the corresponding subsections of Section II
above, and we have considered these comments in developing the FRFA.

C. Small Entities Subject to the Amendments

The final amendments will affect some registrants that are small
entities. The RFA defines ``small entity'' to mean ``small business,''
``small organization,'' or ``small governmental jurisdiction.'' \429\
For purposes of the RFA, under 17 CFR 230.157, an issuer, other than an
investment company, is a ``small business'' or ``small organization''
if it had total assets of $5 million or less on the last day of its
most recent fiscal year and is engaged or proposing to engage in an
offering of securities not exceeding $5 million. Under 17 CFR 240.0-
10(a), an investment company, including a business development company,
is considered to be 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.
---------------------------------------------------------------------------

\429\ 5 U.S.C. 601(6).
---------------------------------------------------------------------------

The amendments allow more investors to qualify as accredited
investors, which will permit issuers of all types, including small
entities, to offer and sell securities in the private

[[Page 64276]]

markets to more investors. As discussed in Section VI.C.5 above, we
expect that small businesses owned by underrepresented minorities and
issuers located in geographic areas with lower concentrations of
accredited investors may particularly benefit from the amendments.
Because potentially affected issuers include both reporting and non-
reporting companies, we lack data to estimate the number of such
issuers that qualify as small issuers that would be eligible to rely on
the amendments.

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

The amendments do not impose any new reporting or recordkeeping
requirement, although issuers conducting an unregistered offering
involving accredited investors may incur certain compliance burdens,
such as the need to file a Form D with the Commission when conducing an
offering under the exemptions provided in Regulation D. While small
entities will have the option to offer and sell securities to newly
qualified accredited investors, they are not required to do so and may
continue to comply with existing Commission rules to raise capital. As
a result, we do not expect small issuers would seek to offer securities
to newly qualified accredited investors unless they determine the
benefits of doing so justify any accompanying compliance burdens. We
therefore do not expect the amendments to significantly impact
reporting, recordkeeping, or other compliance burdens. Small entities
choosing to avail themselves of the amendments may seek the advice of
legal or accounting professionals in connection with offers and sales
to accredited investors. We discuss the economic impact, including the
estimated costs and benefits, of the amendments to all issuers,
including small entities, in Section VI above.

E. Agency Action To Minimize Effect on Small Entities

The RFA directs us to consider alternatives that would accomplish
our stated objectives, while minimizing any significant adverse
economic impact on small entities. In connection with the amendments,
we considered the following alternatives:
Establishing different compliance or reporting
requirements that take into account the resources available to small
entities;
Clarifying, consolidating, or simplifying compliance and
reporting requirements under the rules for small entities;
Using performance rather than design standards; and
Exempting small entities from all or part of the
requirements.
As noted above, the amendments do not establish any new reporting,
recordkeeping, or compliance requirements for small entities. Small
entities are not required to offer and sell securities to newly
qualified accredited investors. Accordingly, we do not believe the
amendments will impose a significant adverse economic impact on small
entities. It is therefore not necessary to exempt small entities from
all or part of the amendments or to provide different or simplified
compliance requirements for these entities. To the extent that issuers
may face challenges verifying an accredited investor's status, the
amendments provide issuers, including small entities, with additional
ways to meet this verification requirement that are objective and
readily verifiable.

IX. Statutory Authority

The amendments contained in this release are adopted under the
authority set forth in Sections 2(a)(11), 2(a)(15), 4(a)(1),
4(a)(3)(A), 4(a)(3)(C), 19(a), and 28 of the Securities Act and in
Sections 3(a)(51)(B), 3(b), 15(c), 15(g), and 23(a) of the Exchange
Act.

List of Subjects in 17 CFR Parts 230 and 240

Reporting and recordkeeping requirements, Securities.

Text of the Amendments

For the reasons set out above, the Commission amends title 17,
chapter II of the Code of Federal Regulations, as follows:

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

0
1. The authority citation for part 230 continues to read in part as
follows:

Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126
Stat. 313 (2012), unless otherwise noted.
* * * * *

0
2. Amend Sec. 230.144A by:
0
a. Revising paragraph (a)(1)(i)(C) and (H);
0
b. Removing the period from the end of paragraph (a)(1)(i)(I) and
adding in its place ``; and''; and
0
c. Adding paragraph (a)(1)(i)(J) and a note to paragraph (a)(1)(i)(J).
The revisions and addition read as follows:

Sec. 230.144A Private resales of securities to institutions.

* * * * *
(a) * * *
(1) * * *
(i) * * *
(C) 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 or any Rural Business Investment
Company as defined in section 384A of the Consolidated Farm and Rural
Development Act;
* * * * *
(H) Any organization described in section 501(c)(3) of the Internal
Revenue Code, corporation (other than a bank as defined in section
3(a)(2) of the Act or a savings and loan association or other
institution referenced in section 3(a)(5)(A) of the Act or a foreign
bank or savings and loan association or equivalent institution),
partnership, limited liability company, or Massachusetts or similar
business trust;
* * * * *
(J) Any institutional accredited investor, as defined in rule
501(a) under the Act (17 CFR 230.501(a)), of a type not listed in
paragraphs (a)(1)(i)(A) through (I) or paragraphs (a)(1)(ii) through
(vi).

Note 1 to paragraph (a)(1)(i)(J): An entity seeking qualified
institutional buyer status under Rule 144A(a)(1)(i)(J) may be formed
for the purpose of acquiring the securities being offered under this
section.

* * * * *

0
3. Amend Sec. 230.163B by revising paragraph (c)(2) and adding a note
to paragraph (c)(2) to read as follows:

Sec. 230.163B Exemption from section 5(b)(1) and section 5(c) of the
Act for certain communications to qualified institutional buyers or
institutional accredited investors.

* * * * *
(c) * * *
(2) Institutions that are accredited investors, as defined in
Sec. Sec. 230.501(a)(1), (a)(2), (a)(3), (a)(7), (a)(8), (a)(9),
(a)(12), or (a)(13).

Note 1 to paragraph (c)(2): Though the definition of ``family
client'' from Rule 501(a)(13) includes both natural persons and
institutions, only family clients that are institutions may be
considered institutional accredited investors.

0
4. Revising 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 have the same
meaning as the

[[Page 64277]]

definition of that term in rule 501(a) under the Act (17 CFR
230.501(a)).

0
5. Amend Sec. 230.501 by:
0
a. Revising paragraphs (a)(1) and (3);
0
b. Revising paragraph (a)(5) introductory text;
0
c. Adding a note to paragraph (a)(5);
0
d. Revising paragraph (a)(6);
0
e. Removing the word ``and'' from the end of paragraph (a)(7);
0
f. Removing the period from the end of paragraph (a)(8) and adding in
its place a semicolon;
0
g. Adding a note to paragraph (a)(8);
0
h. Adding paragraphs (a)(9) through (13) with notes to paragraphs
(a)(9) and (10); and
0
i. Adding paragraph (j).
The revisions and additions read as follows:

Sec. 230.501 Definitions and terms used in Regulation D.

* * * * *
(a) * * *
(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 investment adviser registered
pursuant to section 203 of the Investment Advisers Act of 1940 or
registered pursuant to the laws of a state; any investment adviser
relying on the exemption from registering with the Commission under
section 203(l) or (m) of the Investment Advisers Act of 1940; 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 a 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 Rural Business Investment Company
as defined in section 384A of the Consolidated Farm and Rural
Development Act; 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; 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 act, 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, if a self-directed plan, with investment decisions made
solely by persons that are accredited investors;
* * * * *
(3) Any organization described in section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust,
partnership, or limited liability company, not formed for the specific
purpose of acquiring the securities offered, with total assets in
excess of $5,000,000;
* * * * *
(5) Any natural person whose individual net worth, or joint net
worth with that person's spouse or spousal equivalent, exceeds
$1,000,000;
* * * * *

Note 1 to paragraph (a)(5): For the purposes of calculating
joint net worth in this paragraph (a)(5): Joint net worth can be the
aggregate net worth of the investor and spouse or spousal
equivalent; assets need not be held jointly to be included in the
calculation. Reliance on the joint net worth standard of this
paragraph (a)(5) does not require that the securities be purchased
jointly.

(6) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that
person's spouse or spousal equivalent in excess of $300,000 in each of
those years and has a reasonable expectation of reaching the same
income level in the current year;
* * * * *
(8) * * *

Note 1 to paragraph (a)(8): It is permissible to look through
various forms of equity ownership to natural persons in determining
the accredited investor status of entities under this paragraph
(a)(8). If those natural persons are themselves accredited
investors, and if all other equity owners of the entity seeking
accredited investor status are accredited investors, then this
paragraph (a)(8) may be available.

(9) Any entity, of a type not listed in paragraph (a)(1), (2), (3),
(7), or (8), not formed for the specific purpose of acquiring the
securities offered, owning investments in excess of $5,000,000;

Note 1 to paragraph (a)(9): For the purposes this paragraph
(a)(9), ``investments'' is defined in rule 2a51-1(b) under the
Investment Company Act of 1940 (17 CFR 270.2a51-1(b)).

(10) Any natural person holding in good standing one or more
professional certifications or designations or credentials from an
accredited educational institution that the Commission has designated
as qualifying an individual for accredited investor status. In
determining whether to designate a professional certification or
designation or credential from an accredited educational institution
for purposes of this paragraph (a)(10), the Commission will consider,
among others, the following attributes:
(i) The certification, designation, or credential arises out of an
examination or series of examinations administered by a self-regulatory
organization or other industry body or is issued by an accredited
educational institution;
(ii) The examination or series of examinations is designed to
reliably and validly demonstrate an individual's comprehension and
sophistication in the areas of securities and investing;
(iii) Persons obtaining such certification, designation, or
credential can reasonably be expected to have sufficient knowledge and
experience in financial and business matters to evaluate the merits and
risks of a prospective investment; and
(iv) An indication that an individual holds the certification or
designation is either made publicly available by the relevant self-
regulatory organization or other industry body or is otherwise
independently verifiable;

Note 1 to paragraph (a)(10): The Commission will designate
professional certifications or designations or credentials for
purposes of this paragraph (a)(10), by order, after notice and an
opportunity for public comment. The professional certifications or
designations or credentials currently recognized by the Commission
as satisfying the above criteria will be posted on the Commission's
website.

(11) Any natural person who is a ``knowledgeable employee,'' as
defined in rule 3c-5(a)(4) under the Investment Company Act of 1940 (17
CFR 270.3c-5(a)(4)), of the issuer of the securities being offered or
sold where the issuer would be an investment company, as defined in
section 3 of such act, but for the exclusion provided by either section
3(c)(1) or section 3(c)(7) of such act;
(12) Any ``family office,'' as defined in rule 202(a)(11)(G)-1
under the Investment Advisers Act of 1940 (17 CFR 275.202(a)(11)(G)-1):
(i) With assets under management in excess of $5,000,000,
(ii) That is not formed for the specific purpose of acquiring the
securities offered, and
(iii) Whose prospective investment is directed by a person who has
such knowledge and experience in financial and business matters that
such family office is capable of evaluating the merits and risks of the
prospective investment; and
(13) Any ``family client,'' as defined in rule 202(a)(11)(G)-1
under the

[[Page 64278]]

Investment Advisers Act of 1940 (17 CFR 275.202(a)(11)(G)-1)), of a
family office meeting the requirements in paragraph (a)(12) of this
section and whose prospective investment in the issuer is directed by
such family office pursuant to paragraph (a)(12)(iii).
* * * * *
(j) Spousal equivalent. The term spousal equivalent shall mean a
cohabitant occupying a relationship generally equivalent to that of a
spouse.
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
6. The authority citation for part 240 continues to read in part as
follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and
Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602,
Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *

0
7. Amend Sec. 240.15g-1 by revising paragraph (b), adding a note to
paragraph (b), and revising paragraph (c) to read as follows:

Sec. 240.15g-1 Exemptions for certain transactions.

* * * * *
(b) Transactions in which the customer is an institutional
accredited investor, as defined in 17 CFR 230.501(a)(1), (2), (3), (7),
(8), (9), (12), or (13).

Note 1 to paragraph (b): Though the definition of ``family
client'' from rule 501(a)(13) includes both natural persons and
institutions, only family clients that are institutions may be
considered institutional accredited investors.

(c) Transactions that meet the requirements of Regulation D (17 CFR
230.500 et seq.), or transactions with an issuer not involving any
public offering pursuant to section 4(a)(2) of the Securities Act of
1933.
* * * * *

By the Commission.

Dated: August 26, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-19189 Filed 10-8-20; 8:45 am]
BILLING CODE 8011-01-P