Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Proposed Rules 66839

1We do not edit personal, identifying

information, such as names or electronic mail

addresses, from electronic submissions. Submit

only information you wish to make publicly

available.

original cause was assigned to the

national aviation system, if any.

(b) When reporting the information

specified in paragraph (a) of this section

for a diverted flight, a reporting carrier

shall use the original scheduled flight

number and the original scheduled

origin and destination airport codes.

Carriers are not required to report causal

information for diverted flights.

* * * * *

(g) Reporting carriers should use the

following codes to identify causes for

cancelled flights:

CODE

1—Air Carrier

2—Extreme Weather

3—National Aviation System (NAS).

(1) Air Carrier cancellations are due to

circumstances that were within the

control of the air carrier (e.g., lack of

flight crew, maintenance, etc.).

(2) Extreme weather cancellations are

caused by weather conditions (e.g.,

significant meteorological conditions),

actual or forecasted at the point of

departure, en route, or point of arrival

that, in accordance with applicable

regulatory standards and/or in the

judgment of the air carrier, prevents

operation of that flight and/or prevents

operations of subsequent flights due to

the intended aircraft being out of

position as a result of a prior

cancellation or delay attributable to

weather.

(3) NAS cancellations are caused by

circumstances within the National

Aviation System. This term is used to

refer to a broad set of condition:

weather-non extreme, airport

operations, heavy traffic volume, air

traffic control, etc.

(h) Reporting carriers should use the

following causes to identify the reasons

for delayed flights:

CAUSE

A—Air Carrier

B—Extreme weather

C—NAS

D—Late arriving aircraft

DA—Late arriving aircraft—air carrier

DB—Late arriving aircraft—extreme

weather

DC—Late arriving aircraft—NAS.

(1) Air carrier delays are due to

circumstances within the control of the

air carrier.

(2) Extreme weather delays are caused

by weather conditions (e.g., significant

meteorological conditions, actual or

forecasted at the point of departure, en

route, or point of arrival that, in

accordance with applicable regulatory

standards and/or in the judgment of the

air carrier, prevents operation of that

flight and/or prevents operations of

subsequent flights due to the intended

aircraft being out of position as a result

of a prior cancellation or delay

attributable to weather.

(3) NAS delays are caused by

circumstances within the National

Aviation System. This term is used to

refer to a broad set of conditions:

Weather—non extreme, airport

operations, heavy traffic volume, air

traffic control, etc.

(4) Late arriving aircraft delays are the

result of a late incoming aircraft from

the previous flights. Reporting carriers

should use this code only when they are

unable to identify the root cause of the

initial delay.

(5) Late arriving aircraft—carrier

caused delays are the result of a late

incoming aircraft from the previous

flight, in which the root cause of the late

arriving aircraft was within the air

carrier’s control.

(6) Late arriving aircraft—extreme

weather delays are the result of a late

incoming aircraft from the previous

flight, in which the root cause of the late

arriving aircraft was extreme weather.

(7) Late arriving aircraft—NAS caused

delays are the result of a late incoming

aircraft from the previous flight, in

which the root cause of the late arriving

aircraft was a NAS problem.

(i) When reporting causal codes in

paragraph (a), reporting carriers are

required to code delays only when the

arrival delay is 15 minutes or greater;

and reporting carriers must report each

causal component of the reportable

delay when the causal component is 5

minutes or greater.

3. Section 234.5 would be revised to

read as follows:

§ 234.5 Form of reports.

Except where otherwise noted, all

reports required by this part shall be

filed within 15 days of the end of the

month for which data are reported. The

reports must be submitted to the Office

of Airline Information in a format

specified in accounting and reporting

directives issued by the Assistant

Director for Airline Information.

Ashish Sen,

Director, Bureau of Transportation Statistics.

[FR Doc. 01–31725 Filed 12–26–01; 8:45 am]

BILLING CODE 4910–62–P

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 230

[Release No. 33–8041; File No. S7–23–01]

RIN 3235–AI25

Defining the Term ‘‘Qualified

Purchaser’’ Under the Securities Act of

1933

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed rule.

SUMMARY: The Securities and Exchange

Commission today proposes a definition

for the term ‘‘qualified purchaser’’

under the Securities Act of 1933 to

implement a provision of the National

Securities Markets Improvement Act of

1996. The proposed definition mirrors

the definition of accredited investor

under Regulation D of the Securities

Act. Thus, the new qualified purchaser

definition identifies well-established

categories of persons we have

previously determined to be financially

sophisticated and therefore not in need

of the protection of state registration

when they are offered or sold securities.

This proposal should facilitate capital

formation, especially for small

businesses. It will implement the

Congressional intent, impose uniformity

in the regulation of transactions to these

financially sophisticated persons and

reduce burdens on capital formation.

DATES: Public comments are due

February 25, 2002.

ADDRESSES: Please send three copies of

your comment letter to Jonathan G.

Katz, Secretary, U.S. Securities and

Exchange Commission, and 450 Fifth

Street, NW, Washington DC 20549–

0609. You may send comment letters

electronically to the following e-mail

address: Rule-comments@sec.gov.

Comment letters should refer to File No.

S7–23–01; if you use e-mail, please

include the file number on the subject

line. We will make all comments

available for public inspection and

copying in our public reference room at

the same address. Comment letters

(submitted electronically) will be posted

on our Internet site (http://

www.sec.gov).1

FOR FURTHER INFORMATION CONTACT:

Marva Simpson, Office of Small

Business Policy, at (202) 942–2950,

Division of Corporation Finance, U.S.

Securities and Exchange Commission,

66840 Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Proposed Rules

2Pub. L. 104–290, 11 Stat. 3416 (Oct. 11, 1996). 3 15 U.S.C. 77r.

4 15 U.S.C. 77a et seq. 5Section 18(b)(3) [15 U.S.C. 77c(b)(3)].

6 17 CFR 230.146.

7See the House-Senate Conference Report, H.R.

Rep. No. 864, 104th Cong. 2d Sess. at 40 (1996) (the

‘‘Conference Report’’). In these cases, the states may

not prohibit, limit or impose any conditions on the

use of any offering document. In addition, they may

not prohibit, limit, or impose any conditions on the

offer or sale of a covered security based on the

merits of the offering or the issuer. See Section

18(a)(2) and (3) of the Securities Act [15 U.S.C.

77r(a)(2) and (3)]. The states retain limited authority

over offerings of some covered securities: they may

require notice filings and fees. Also, they continue

to be able to investigate and bring fraud cases

involving securities and securities transactions. See

Section 18(c)(1) and (2) of the Securities Act [15

U.S.C. 77r(c)(1) and (2)].

8This category also includes securities that are

senior, or equal in seniority, to those listed

securities. Companies that offer securities listed on

these national markets need not register with the

states. We have expanded this category to include

securities listed on Tier 1 of the Pacific Exchange,

Tier I of the Philadelphia Stock Exchange, and the

Chicago Board Options Exchange. See Securities

Act Rule 146(b) [17 CFR 230.146(b)].

9 15 U.S.C. 89a–1 et seq.

10 15 U.S.C. 77c(a).

11 15 U.S.C. 77d(1) and (3).

12 15 U.S.C. 78a et seq.

13 15 U.S.C. 77d(4).

14 17 CFR 230.506.

15See Section 18(b)(3) [15 U.S.C. 77r(b)(3)].

16They may require registration of offerings of

securities listed on markets other than the national

markets, such as the regional exchanges, the Nasdaq

SmallCap market, the NASD’s over-the-counter

(‘‘OTC’’) Electronic Bulletin Board and the OTC

‘‘pink sheets.’’ The pink sheets are published by the

National Quotation Bureau, Inc.

17For instance, the states may regulate exempt

offerings under Section 3(b) of the Securities Act

[15 U.S.C. 77c(b)], including Rule 504 and 505

offerings [17 CFR 230.504 and 230.505] and

Regulation A offerings [17 CFR 230.251–263],

offerings under Section 4(6) of the Securities Act

[17 U.S.C. 77d(6)], and offerings under Section 4(2)

of the Securities Act [15 U.S.C. 77d(2)] that do not

satisfy the Rule 506 safe harbor requirements.

18H.R. Rep. No. 622, 104th Cong. 2d Sess. at 31

(1996) (‘‘House Report’’). See also S. Rep. No. 293,

104th Cong. 2d Sess. at 15 (1996) (‘‘Senate Report’’).

These committee reports relate to bills that were

eventually enacted as NSMIA.

19 17 CFR 230.501(a). Rule 215 [17 CFR 230.215],

along with Section 2(a)(15) of the Securities Act [15

U.S.C. 77b(a)(15)(i)], provides the same definition

for accredited investors as Rule 501(a), but for

purposes of Section 4(6) of the Securities Act.

20See note 18 above. Congress deemed accredited

persons as sophisticated and able to protect their

financial interests without regulatory assistance.

See also the Small Business Investment Incentive

Act of 1980, Pub.L. 96–477 (Oct. 21, 1980), and

Senate Report at 15 (‘‘based on their level of wealth

and sophistication, investors who come within the

definition of qualified purchaser do not require the

protection of registration.’’)

21 15 U.S.C. 77d(2).

22SEC v. Ralston Purina Co., 346 U.S. 119 (1953).

At the time of the Ralston Purina decision, Section

4(1) contained the non-public offering exemption.

450 Fifth St., NW., Washington, DC

20549–0310.

SUPPLEMENTARY INFORMATION: The

National Securities Markets

Improvement Act of 1996 (‘‘NSMIA’’) 2

preempts the state registration and

review of transactions involving

‘‘covered securities.’’ It amended

Section 18 3 of the Securities Act of

1933 (‘‘Securities Act’’) 4 to establish

seven classes of ‘‘covered securities.’’

All but one of these classes is selfexecuting. The one that is not—

securities offered or sold to qualified

purchasers—requires Commission

rulemaking to adopt a definition of the

term ‘‘qualified purchaser.’’ 5 We are

proposing for comment a definition to

be contained in Rule 146 6 of the

Securities Act.

I. Background

A. NSMIA

In NSMIA, Congress realigned the

federal and state regulatory partnership

governing registration of securities

offerings, thus changing the dual system

of securities offering registration that

has prevailed in this country since the

1930s. While the Commission retains

authority to require that securities

offerings be registered, the states may

not require registration of offerings

involving ‘‘covered securities.’’ 7 Section

18 of the Securities Act now specifies

the classes of covered securities:

• Securities that are listed on the New

York Stock Exchange (‘‘NYSE’’),

American Stock Exchange (‘‘Amex’’) or

Nasdaq National Market System

(‘‘Nasdaq NMS’’); 8

• Securities issued by an investment

company registered under the

Investment Company Act of 1940 9 (the

‘‘1940 Act’’);

• Most exempt securities listed in

Section 3(a) of the Securities Act; 10

• Securities issued in exempt

transactions under Section 4(1) or (3) of

the Securities Act 11 where the issuer

files reports under the Securities

Exchange Act of 1934 (‘‘Exchange

Act’’); 12

• Securities issued in exempt

transactions under Section 4(4) of the

Securities Act; 13

• Securities issued in exempt

offerings under Rule 506 of Regulation

D; 14 and

• Any security offered or sold to a

‘‘qualified purchaser.’’ 15

The states retain authority to require

the registration of other types of

securities offerings, including certain

offerings registered with us.16 They also

retain authority to regulate, through

registration or exemption, securities

offerings made under certain federal

exemptions from registration,17 except

to the extent offers or sales are made to

qualified purchasers.

Congress authorized us to define the

term ‘‘qualified purchaser’’ under the

Securities Act to include ‘‘sophisticated

investors, capable of protecting

themselves in a manner that renders

regulation by State authorities

unnecessary,’’ 18 thus preempting

securities transactions with these

persons from state ‘‘blue sky’’ law.

Although the states may not require

registration of offers and sales of

securities to qualified purchasers, offers

and sales to those persons must be

registered with us under the Securities

Act, unless a federal registration

exemption is available.

Our proposal is to define ‘‘qualified

purchaser’’ to mean an accredited

investor as defined in Rule 501(a) of

Regulation D.19 We believe that it is

appropriate to equate qualified

purchasers with accredited investors

because the regulatory and legislative

history of both terms are based upon

similar notions of the financial

sophistication of investors,20 and

accredited investor is a long-standing

concept familiar to the small business

community and other industry

participants. Thus, unifying the

definition for financially sophisticated

investors simplifies the regulatory

structure for issuers and should

facilitate the capital formation process.

Moreover, our considerable regulatory

experience with the use of the term

‘‘accredited investor’’ leads us to believe

it strikes the appropriate balance

between the necessity for investor

protection and meaningful relief for

issuers offering securities, especially

small businesses.

B. The Development of the Accredited

Investor Concept

Transactions that do not involve any

public offering are exempt from federal

registration under Section 4(2) of the

Securities Act.21 Because the Securities

Act does not define these transactions,

the Courts and the Commission have

interpreted this exemption. Long ago,

the U.S. Supreme Court set the basic

criteria for the Section 4(2) exemption

in SEC v. Ralston Purina Co.22 The

Court indicated that the application of

the non-public offering exemption

depended on whether the offerees were

able to fend for themselves and had

access to the same kind of information

that would be disclosed in registration.

The Court noted that such persons, by

virtue of their knowledge, would not

need to rely on the protections afforded

by registration.

After the Ralston Purina decision, we

provided guidance on the Section 4(2)

Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Proposed Rules 66841

23Rule 506 of Regulation D replaced former Rule

146. See the adopting release for Regulation D, note

31 below.

24Rule 505 of Regulation D replaced Rule 242.

See the adopting release for Regulation D, note 31

below.

25See Release No. 33–6180 (Jan. 17, 1980) [45 FR

6362].

26Congress added the accredited investor concept

and Section 4(6) to the Securities Act as part of the

Small Business Investment Incentive Act of 1980,

Pub. L. 96–477 (Oct. 21, 1980).

27Rule 242 defined ‘‘accredited person’’ as any

bank as defined in Section 3(a)(2) of the Securities

Act whether acting individually or as a fiduciary;

an insurance company as defined in Section

2(a)(13) of the Securities Act; an employee benefit

plan within the meaning of Title I of the Employee

Retirement Income Security Act of 1974 [29 U.S.C.

1002] where the plan fiduciary is a bank, insurance

company, registered investment company or

investment advisor or a licensed small business

investment company; any person purchasing

$100,000 or more; and any director or executive

officer of the issuer. Release No. 33–6180 (Jan. 17,

1980) [45 FR 6362].

28Release No. 33–6683 (Jan. 16, 1987) [52 FR

3015].

29Section 4(6) of the Securities Act provides

issuers an exemption for offers and sales of

securities to accredited investors if they offer no

more than $5 million of securities and do not

engage in general solicitation. The exemption

provides for no reasonable belief standard as to

investors accreditation. Building on this legislative

construction, the Commission created Rules 505

and 506 of Regulation D, which limit the number

of unaccredited investors in offerings under these

rules to no more than 35. Accredited investors,

however, are excluded from the 35-purchaser limit

in these exempt offerings. Issuers relying on Rules

505 and 506 also must provide specific disclosure

to unaccredited investors. The rules do not require

issuers to provide that disclosure to accredited

investors.

30 15 U.S.C. 77b(a)(15)(i) and (ii).

31Regulation D, initially adopted in 1982,

contains a definition of accredited investor that

includes the statutory categories of accredited

investors plus the additional categories the

Commission created. See Release No. 33–6389 (Mar.

8, 1982) [47 FR 11251]. The Regulation D definition

applies to offerings under Rules 505 and 506 of

Regulation D. The definition for purposes of Section

4(6) is contained partly in Section 2(a)(15)(i) of the

Securities Act and partly in Securities Act Rule 215.

Rule 215 contains the categories of accredited

investors adopted by the Commission. Taken

together, the accredited investor categories under

Section 4(6) are the same as under Regulation D.

32Securities Act Rule 501(a)(5) and (6) [17 CFR

230.501(a)(5) and (6)].

33Securities Act Rule 501(a)(1), (3) and (7) [17

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

34Securities Act Rule 501(a)(1), (2) and (3) [17

CFR 230.501(a)(1), (2) and (3)].

35Securities Act Rule 501(a)(1), (4) and (8) [17

CFR 230.501(a)(1), (4) and (8)].

36See Senate Report at 15 and House Report at

31.

37 17 CFR 230.144A. See Release No. 33–6862

(Apr. 23, 1990) [55 FR 17933].

criteria in our rules and interpretations.

For instance, former Rule 146, which

was rescinded in 1982, provided a test

for determining whether persons were

financially sophisticated enough to be

offered or purchase securities in nonpublic offerings.23 That test, however,

still required issuers to make a

subjective determination concerning the

sophistication of each offeree and

purchaser. Further, it created

uncertainty about whether the

exemption was available and thus posed

problems for issuers, primarily small

issuers, about potential rescission

liability should the exemption turn out

to be unavailable. In response to these

concerns, the accredited investor

concept was created in 1979 as a part of

former Rule 242.24 There, specific

classes of investors were designated as

accredited investors based on their

ability to obtain information upon

which to make an informed investment

decision.25

Shortly after we adopted Rule 242,

Congress added the accredited investor

concept to the Securities Act.26 The

statutory definition was similar to Rule

242, although not identical.27 It defines

types of purchasers that, based on

objective criteria indicating financial

sophistication and ability to fend for

themselves, do not require the

protections of registration under the

federal securities laws.28 Congress

determined that companies offering and

selling securities in non-public

transactions solely to these investors

should be exempt from Securities Act

registration.29

Congress itself established several

categories of accredited investors in

Section 2(a)(15)(i) of the Securities Act

and in Section 2(a)(15)(ii) authorized us

to adopt additional categories based on

‘‘such factors as financial sophistication,

net worth, knowledge, and experience

in financial matters, or amount of assets

under management.’’ 30 This authority

has been used to expand the variety and

number of persons classified as

accredited investors.31

The definitions accredit some

investors based on their income, net

worth, and assets. Natural persons

qualify as accredited investors if they

meet certain income or net worth tests.

Accredited investors, for instance,

include natural persons with individual

incomes in excess of $200,000 (or joint

spousal incomes of $300,000) for the

two most recent years, if they

reasonably expect to earn at least the

same amount in the current year.

Natural persons with individual (or

joint, with a spouse) net worths over $1

million also are considered to be

accredited investors.32

Other investors are accredited if they

have more than $5 million of assets.

These generally include state or ERISA

employee benefit plans, charitable

organizations or business entities if they

were not formed for the specific purpose

of investing in the securities offered,

and trusts if they were not formed for

the specific purpose of acquiring the

securities offered and their purchase is

directed by a sophisticated person.33

The current accredited investor

definition also includes investors that

are financially sophisticated by their

nature. These include various

institutional investors and employee

benefit plans where sophisticated

fiduciaries make investment

decisions.34 Directors, executive

officers, and general partners of

securities issuers also are accredited,

due to their relationship with the issuer,

and any entity where all of its equity

owners are accredited investors.35

C. Possible Alternative Definitions for

Securities Act Qualified Purchasers

NSMIA’s legislative history indicates

that qualified purchasers for purposes of

the Securities Act preemption of state

regulation should include investors that,

by virtue of their financial

sophistication and ability to fend for

themselves, do not require the

protections of registration under the

state securities laws.36 As set forth

below, there are a number of existing

definitions in the federal securities

regulatory framework, other than

‘‘accredited investor,’’ concerning

financially sophisticated investors that

could be used to implement the

qualified purchaser concept under the

Securities Act. Of course, a wholly new

definition could be crafted. Given the

legislative intent which looks to

simplification, conforming different

state standards governing sophisticated

investors, eliminating redundancy and

working a meaningful preemption in the

area of disparate securities registration

systems to reduce unnecessary costs to

issuers, we believe using ‘‘accredited

investor’’ is more appropriate than any

of the alternatives. We solicit comment

on whether any of the other definitions

would be appropriate for purposes of

Section 18(b)(3).

1. Qualified Institutional Buyers

In April 1990, as part of Rule 144A

under the Securities Act,37 the

Commission created another category of

financially sophisticated investors—

qualified institutional buyers or QIBs.

Rule 144A provides a safe harbor

exemption from federal registration

requirements for resales of restricted

securities to QIBs. QIBs generally are

institutions or other entities owning and

investing large amounts of securities,

ranging from $10 million up to $100

million depending on the type of QIB.

These investors would undoubtedly fall

within the definition of accredited

66842 Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Proposed Rules

38 15 U.S.C. 80a–3(c)(7). This section creates an

exclusion from the definition of an investment

company for privately offered investment

companies, such as ‘‘hedge funds,’’ owned solely by

qualified purchasers.

39Section 3(a)(51) of the 1940 Act [15 U.S.C. 80a–

3(a)(51)]. The Division of Investment Management

has developed a detailed definitional scheme in

Commission regulations under the 1940 Act in Rule

2a51–1 [17 CFR 270.2a51–1].

40 17 CFR 275.205–3.

41 15 U.S.C. 80b–1 et seq.

42 Gramm-Leach-Bliley Act, Pub. L. No. 106–102,

113 Stat. 1338 (Nov.12, 1999).

43 15 U.S.C. 78c(a)(4).

44 15 U.S.C. 78c(a)(5).

45The definition includes 1940 Act registered

investment companies, banks, savings and loan

associations, brokers, dealers, business

development companies, licensed small business

investment companies, certain employee benefit

plans, related trusts, certain market intermediaries,

associated persons of a broker or dealer other than

a natural person, foreign banks, foreign

governments, companies or individuals owning and

investing on a discretionary basis at least $25

million ($10 million for asset-backed securities),

governments or political subdivisions owning or

investing on a discretionary basis at least $50

million, and multinational entities. The

Commission also was given authority to define

‘‘qualified investor’’ as any other person based upon

such factors as the individual’s financial

sophistication, net worth, knowledge and

experience in financial matters. Section 3(a)(54) of

the Exchange Act [15 U.S.C. 78c(a)(54)].

46Additionally, certain asset-backed securities

transactions between the bank and a qualified

investor do not make the bank a ‘‘dealer.’’ The

Commission has adopted interim final regulations.

Release No. 34–44291 (May 11, 2001) [66 FR

27760]. The comment period for the interim final

regulations was extended from July 17, 2001 until

September 4, 2001. The effective date of the

statutory amendments, originally set for May 12,

2001, has been extended until May 12, 2002.

Release No. 34–44569; 34–44570 (July 18, 2001) [66

FR 38370].

47We stress, however, that persons making these

offers and sales, or otherwise participating in

effecting securities transactions, must continue to

consider whether their activities require them to

register with the Commission as broker-dealers.

Broker-dealer registration generally is required to

effect transactions in securities, even if those

transactions are exempt from registration under the

Securities Act. Release No. 34–42728 (April 28,

2000) [65 FR 25843]. The ‘‘exempted securities’’ for

which broker-dealer registration is not required are

strictly limited and do not include securities issued

under Regulations A, D, or S or privately placed

securities that would be ‘‘restricted’’ securities

under Securities Act Rule 144. Id.

Broker-dealer registration under the Exchange Act

provides protections to investors and the securities

markets that are not present under the Securities

Act. Release No. 34–27017 (July 18, 1989) [54 FR

30013]; see also Release No. 34–30608 (April 20,

1992) [57 FR 18004]. For example, regulations

promulgated under the Exchange Act require

registered broker-dealers to comply with extensive

net capital, recordkeeping, and reporting

obligations. In addition, registered broker-dealers

must be members of a self-regulatory organization

and the Securities Investor Protection Corporation.

They are also subject to fiduciary duties and special

antifraud rules, as well as the Commission’s broad

enforcement authority over broker-dealers. Release

No. 34–27017.

48The eight categories of accredited investors

under Rule 501(a) include:

(1) Banks, insurance companies, registered

investment companies; business development

companies; savings and loan associations and

similar institutions; registered broker-dealers

purchasing for their own accounts; employee plans

subject to ERISA advised by a bank, savings and

loan association, insurance company or registered

investment advisor; any employee plan subject to

ERISA with total assets in excess of $5 million; any

self-directed plan where investment decisions are

made solely by accredited investors; employee

plans established and maintained by governments

of the states or their political subdivisions, as well

as their agencies and instrumentalities, if they have

total assets in excess of $5 million.

(2) Private business development companies

meeting the definition in Section 202(a)(22) of the

Investment Advisers Act of 1940 [15 U.S.C. 80b–

2(a)(22)].

(3) Any organization described as exempt in

Section 501(c)(3) of the Internal Revenue Code [26

U.S.C. 501(c)(3)], corporation, Massachusetts or

similar business trust, limited partnership, if not

formed for the purpose of the offered investment

and having total assets in excess of $5 million.

(4) Directors, executive officers and general

partners of general partners.

(5) Natural persons whose individual or joint net

worth with a spouse exceeds $1 million.

(6) Natural persons with individual income in

excess of $200,000 in each of the past two years,

or joint income with his or her spouse in excess of

$300,000 in each of those years, with the

expectation for the same income levels in the

current year.

(7) Any trust with total assets in excess of $5

million, if not formed for the offered investment,

where a sophisticated person directs the purchase.

investor and transactions with them

would be with qualified purchasers

under our proposed definition. Defining

qualified purchaser as a QIB would

significantly reduce the number of

transactions preempted by Section

18(b)(3). Such a high threshold might

make this Section 18 preemption less

meaningful and thus not consistent with

what we see as Congress’ intent.

2. 1940 Act Qualified Purchasers

NSMIA also uses the term ‘‘qualified

purchaser’’ under Section 3(c)(7) of the

1940 Act.38 There, the concept is tied to

a person owning a certain dollar amount

of investments.39 Congress determined

that the level of a person’s investments

should be used to measure the person’s

financial sophistication in the context of

the 1940 Act. The levels were

Congressionally set at $5 million for

individuals and $25 million for entities

and are consistent with the 1940 Act

objective of addressing special risks

associated with investments in pooled

vehicles. Because of the high dollar

levels established in the statute, the

specific purpose for the provision and

the Congressional reluctance to use

them for the securities registration

preemption, this alternative is not as

appropriate as accredited investor.

3. Investment Advisers Act of 1940

Qualified Clients

Rule 205–3 40 under the Investment

Advisers Act of 1940 41 provides a

limited exemption from that statute’s

prohibition on charging performance

fees to clients. Such a person is one who

has at least $750,000 under management

with the adviser or in excess of $1.5

million net worth; or is a ‘‘qualified

purchaser’’ as defined for purposes of

the 1940 Act or is a highly

knowledgeable employee of the adviser.

This relief from general prohibitions in

the Advisers Act regarding the linking

of adviser compensation to the gains or

appreciation of the assets under

management recognizes that certain

clients may want to use performance

fees as a technique of dealing with an

adviser and that they are sufficiently

sophisticated that the prohibitions in

the Advisers Act can be modified. We

think that these purposes are quite

different from those sought to be

addressed in our proposed definition of

a covered security.

4. Exchange Act Qualified Investors

Recently, the Congress adopted

amendments to the Exchange Act 42

definitions of broker 43 and dealer 44 to

include a list of specific exceptions from

these definitions for banks. Included in

this amendment is a new concept of

‘‘qualified investor.’’ 45 When a bank

participates in the issuance or sale of

certain ‘‘identified banking products’’ to

qualified investors, the bank is excepted

from both the new broker and dealer

definitions.46 Because of the high dollar

levels in the provision and the special

purpose for the provision, this

alternative is not as appropriate as

accredited investor.

We solicit comment on these existing

standards in our regulations which we

use to measure financial sophistication

and whether concepts used there might

be transposed or modified for purposes

of Section 18(b)(3). In particular, we ask

whether the value of a person’s

investments would serve as a basis for

who is a ‘‘qualified purchaser.’’ If so,

what are the appropriate amounts? Are

there assets that should be included or

excluded from this definition if we were

to use this model? For example, how

should personal residences,

automobiles, and retirement accounts be

treated?

II. Proposed Definition

The new qualified purchaser

definition would have the same

meaning as accredited investor. Offers

and sales to these persons would not be

subject to state registration.47 Proposed

Rule 146(c) under the Securities Act

would refer to Rule 501(a) of Regulation

D.48 We believe that the harmonization

Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Proposed Rules 66843

(8) Any entity where all of the equity owners are

accredited investors.

The rule also covers persons the issuer reasonably

believes come within any of the foregoing

descriptions at the time of sale.

49 In keeping with the legislative purpose cited in

the Senate Report, the uniformity of these

definitions would reduce the confusing and

conflicting nature caused by the overlapping and

costly federal and state registration processes. See

Senate Report at 2.

50See Senate Report at 32.

51CCH NASAA Reporter Para 361. MAIE restricts

subsequent resales for 12 months after issuance,

except to other accredited investors. Also, written

solicitations may consist of a 25-word description

of the issuer’s business, but is limited to a kind of

‘‘tombstone ad.’’ MAIE is a NASAA guideline; in

order to establish a functional exemption, state

legislative or regulatory action is necessary.

52Therefore, 10 states have no special exemptive

provision related to accredited investor purchases.

53The Senate Report notes that the bill ‘‘codifies

another exemption existing in most states—the

preemption from state ‘blue sky’ registration for

offers and sales to qualified purchasers.’’ Senate

Report at 15.

54The House Report states, ‘‘the qualified

purchaser provision allows State preemption, State

exemptions and State registrations to be tacked

together to comply with State requirements. Thus,

sales to qualified purchasers would qualify for

preemption without regard to whether, in the same

offering, offers and sales are also made to nonqualified purchasers.’’ House Report at 32.

55 If the issuer complies with the requirements of

the Rule 506 safe harbor in the offering, the

securities would be covered securities for that

reason alone, and the states would be preempted

from regulating the offering.

56Of course, to rely on the Section 4(2) exemption

federally, the issuer cannot conduct a public

offering in any state.

57 15 U.S.C. 77r(c)(1).

58 15 U.S.C. 77r(c)(2)(A). States may not, however,

assess fees for any nationally traded securities. See

Section 18(c)(2)(D) [15 U.S.C. 77r(c)(2)(D)].

59See Rule 504(A) of Regulation D [17 CFR

230.504(a)].

of the terms qualified purchaser and

accredited investor will simplify the

regulation of securities offerings. This

uniformity would reduce burdens and

costs on the capital formation process,

given that state regulation of these

transactions would be greatly reduced.49

The qualified purchaser definition

should reduce the regulatory burdens on

companies that seek to raise capital,

without compromising investor

protection. First, the definition should

increase issuers’ ability to offer and sell

securities without state registration.

Second, a nationwide, uniform

definition of qualified purchaser would

override diverse state exemptions for

financially sophisticated investors. The

federal definition permits issuers to

conduct offerings in several states

without having to comply with different

state exemptions. This uniformity

would simplify the securities

registration and offering process, and

possibly cause more companies to sell

their securities to accredited investors

because of the smaller burdens upon

and costs of capital formation. It also

promotes capital formation by

permitting issuers to conduct offerings

in more states.

Your comments are invited on this

proposed approach in defining qualified

purchasers. Should the definitions of

accredited investor and qualified

purchaser under the Securities Act be

the same? Are there reasons for us to

develop different definitions? If so, what

are they?

A. Effects of Proposed Qualified

Purchaser Definition

1. State Preemption

With the objective of streamlining the

registration process, Congress intended

to preempt the states in offers and sales

to qualified purchasers in securities

offerings registered or exempt from

registration under the Securities Act.50

Accordingly, the qualified purchaser

definition would apply in registered

offerings and in all exempt offerings.

In April 1997, the North American

Securities Administrators Association,

Inc. (‘‘NASAA’’) adopted the Model

Accredited Investor Exemption

(‘‘MAIE’’). Offerings made exclusively to

accredited investors, as defined by Rule

501 of Regulation D under limitations

and specified conditions established in

MAIE, are exempt from state

registration.51 Forty states have adopted

the provision or some variation of it

exempting accredited investor

transactions.52 As a result, the

coordination of the qualified purchaser

definition with accredited investor

would have little effect on the

registration programs of many states and

would work to enforce uniformity here

by eliminating variations in state

provisions.53 Further, it will implement

Congress’ intent that states cease the

review of registration statements for

transactions involving qualified

purchasers.

We solicit comment on the potential

impact of our proposal on state law.

MAIE contains conditions and

restrictions not included in our

proposed definition. The preemption

however would apply to all transactions

involving accredited investors. Your

comments should address any

implications the preemption would

have on the states’ ability to regulate

generally, for example, intrastate

offerings and secondary transactions.

Under the proposed definition,

issuers would be able to offer and sell

securities to qualified purchasers

without compliance with state

registration requirements and, in the

same offering, register with the states or

rely on state exemptions in offers and

sales to non-qualified purchasers.54 For

example, an issuer whose securities are

quoted on the Nasdaq SmallCap market

could conduct a private securities

offering exempt from federal registration

under Section 4(2) of the Securities Act,

but not satisfying the Rule 506 safe

harbor requirements.55 At the state

level, the issuer could offer and sell

securities to qualified purchasers

privately in any state it wishes without

either registration or reliance upon any

state exemption. Also, the issuer could

offer and sell securities in the same

offering to non-qualified purchasers in

any state where the offering satisfies a

state exemption, such as a limited

offering exemption or isolated purchaser

exemption.56 If the same issuer desired

to register a securities offering with the

Commission, one not otherwise

preempted from state regulation, it

could offer and sell to qualified

purchasers in any state without

registration or exemption. At the same

time, if the issuer desired to include

non-qualified purchasers in the same

offering, it could register or rely on an

available state exemption for offers and

sales to those purchasers.

Congress preserved the states’

authority to investigate and bring

enforcement actions for fraud or

unlawful conduct by broker-dealers.57

States also are permitted to require

notice filings in certain instances and

require filings of consent to service of

process. States may also collect any

associated fees with such filings.58

2. Interaction With Rule 504 Public

Offering Exemption

Rule 504 of Regulation D provides an

exemption from registration for

securities offerings up to $1 million

made by non-reporting companies.59 An

offering under Rule 504 may be either

public or private in nature. An issuer

doing an offering publicly under Rule

504 has two significant advantages: it

may generally solicit and advertise in

the offering, and the securities it issues

are freely tradeable. A Rule 504 public

offering depends upon state oversight.

In order to enjoy the benefits of a public

offering an issuer must register with the

states where the offering is conducted,

or, in the alternative, the issuer must

rely on a state exemption that permits

public offerings exclusively to

accredited investors. If the issuer

neither registers nor relies on the

accredited investor exemption at the

state level, its Rule 504 offering must be

conducted privately. As a result, the

issuer cannot generally advertise or

66844 Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Proposed Rules

60Where state accredited investor exemptions use

definitions different from the one contained in Rule

501(a), states could continue to regulate

transactions with such investors.

61Private Rule 504 offerings would not be

affected by the proposed preemption because the

availability of the exemption does not depend on

state regulation. Therefore, isssuers could continue

to make private Rule 504 offerings to accredited

investors regardless of the approach adopted with

respect to public Rule 504 offerings.

62See note 51 above.

63These are the so-called ‘‘bad body’’

disqualification provisions used under the

Regulation A exemption. 17 CFR 230.262. 64Rule 504(b)(1)(i) and (ii). 65House Report at 31. (‘‘First, many States

currently exempt such securities from registration

solicit in the offering and the securities

issued in the offering are restricted and

not freely tradeable.

We are concerned about one

implication of preempting state

regulation of transactions involving

accredited investors: the accredited

investor prong of the Rule 504 public

offering exemption may no longer be

usable. By preempting transactions with

qualified purchasers from state

registration requirements, we would

make state accredited investor

exemptions a nullity.60 Accordingly, we

propose as a first step to rescind Rule

504(b)(1)(iii) if the proposed definition

of qualified purchaser is adopted. We

ask whether the state accredited

investor exemption prong can or should

be retained because states use

definitions different than the

Commission’s definition of accredited

investor. If the provision should be

retained, describe the transactions it

would continue to cover.

We are concerned, nonetheless, that if

we adopt the proposed definition,

issuers, especially small ones, might be

disadvantaged in their ability to raise

capital under Rule 504 because they

would no longer be able to publicly

offer securities to accredited investors

by relying on the availability of a state

exemption. It is not our intention to

change the existing ability of issuers to

reach investors under Rule 504. Would

our proposed definition of qualified

purchaser significantly restrict small

businesses’ access to capital since these

issuers could not generally solicit and

advertise to find accredited investors?

We are considering two alternative

approaches to preserving the ability of

issuers to offer and sell to accredited

investors without the need to register

the offerings—exclude accredited

investors purchasing in public Rule 504

offerings from the definition of qualified

purchaser, or create a new, uniform

federal accredited investor exemption,

either with or without conditions. We

seek comment on these two approaches

and any other approach that preserves

this capital-raising mechanism without

jeopardizing investor protection.

As a first approach, we ask whether

offerees and purchasers in public Rule

504 offerings who fall within the

accredited investor exemption(s) of the

relevant state(s) should be excluded

from the qualified purchaser definition

and therefore from the preemption. If

we do this, state registration of these

offerings would not be preempted for

the purpose of Rule 504 and Rule 504

offerings could continue to be made in

reliance on the state accredited investor

exemptions.61 The benefits that inure to

investors and states from state

regulation of public Rule 504 offerings

would be unchanged. We solicit

comment on whether maintaining this

benefit justifies the cost to those raising

capital. Would there be new or

additional costs and benefits through

this approach?

We are also considering a second

approach to the interaction between the

qualified purchaser definition and

public Rule 504 offerings. Under this

second approach, the accredited

investor prong of Rule 504 would be

replaced with a uniform, federal

exemption from Securities Act

registration that substantially replicates

the current state exemptions, as

represented, for example, by MAIE.62

Rule 504 therefore would continue to be

available for public offerings and sales

to accredited investors, but pursuant to

federal rather than state regulation. We

want to preserve the ability of small

businesses to raise up to $1 million of

capital in offerings to accredited

investors. We solicit comment on how,

in conjunction with defining qualified

purchaser as proposed, we can be

helpful to small businesses raising

capital and not undermine investor

protections.

We contemplate that if we adopted

this second approach, the exemption

could impose conditions similar to

those found in MAIE and in typical state

accredited investor exemptions. These

would include limits on the extent to

which general solicitation may be used,

for example, not permitting written

public communications except for

tombstone ads containing a brief

description of the issuer’s business (25

words or less), name, address, telephone

number, brief description of the

securities to be sold, type, number and

aggregate dollar amount of securities to

be sold and the name, address and

telephone number of a contact person.

Do these conditions make sense for a

federal exemption? Are there additional

or alternative conditions we should

impose? Would a legend indicating that

the securities are being offered and sold

solely to accredited investors pursuant

to an exemption from federal

registration requirements be needed?

Are other cautionary legends necessary?

Should certain types of issuers, in

addition to those currently ineligible to

use Rule 504, be excluded, such as those

within the scope of disqualification

provisions like Rule 262 63? Is it

necessary to be this restrictive? Should

any free writing be permitted? MAIE

also limits the extent to which securities

may be resold, not permitting resales

within a year except to other accredited

investors. Is it necessary to impose

resale restrictions, or should securities

purchased under the exemption be

freely tradeable?

Finally, we solicit comment on the

interaction of the qualified purchaser

definition with another aspect of Rule

504—the exemption for public offerings

that are registered or qualified with the

states.64 The preemption of accredited

investor transactions also reaches these

offerings to the extent offers and sales

involve such investors, raising the same

concerns we have with state accredited

investor exemptions. The states would

no longer be permitted to register or

review any accredited investor

transactions. We believe, however, that

if an issuer registers with a state an

offering targeted to both accredited and

non-accredited investors, the exemption

under Rule 504 should continue to be

available. Otherwise, issuers would be

unduly restricted in their ability to raise

capital in a state-registered offering

including accredited investors. In order

to make this clear, should the definition

of qualified purchaser exclude

purchasers in state-registered offerings?

Should we also include these accredited

investor transactions within any federal

exemption we might develop, as

suggested above? Would it be

appropriate to permit both parts of the

Rule 504 public exemption to work in

tandem? For example, should a stateregistered offering to non-qualified

purchasers be permitted

contemporaneously with a public

tombstone ad solicitation to qualified

purchasers?

B. The Proposed Definition and the

Legislative History

The legislative history of NSMIA

makes it clear that Congress intended to

preempt state registration in offers and

sales to financially sophisticated

investors for the purpose of providing a

nationwide, uniform definition, thereby

eliminating the variations found among

the states.65

Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Proposed Rules 66845

requirements, but the qualification standard can

vary from State to State. This provision will result

in uniform national rule for qualified purchasers,

which should greatly facilitate the ability of issuers

to use it.’’)

In addition to the variations among accredited

investor exemptions, many sates provide separate

exemptions from registration for offers and sales to

institutional investors, such as banks, savings

institutions, trust companies, insurance companies,

investment companies, pension or profit-sharing

trust, and dealers, but the states have various

exemptions for other types of financially

sophisticated investors.

Most states have adopted the exemption included

in the 1956 Uniform Securities Act (‘‘1956 USA’’).

The 1956 USA is a model state securities law

statute drafted by the National Conference of

Commissioners on Uniform State Laws. About 37

states have adopted part or all of that Act. Section

402(b)(8) of the 1956 USA exempts offers or sales

to ‘‘a bank, savings institution, trust company,

insurance company, investment company as

defined in the Investment Company Act of 1940,

pension or profit-sharing trust, or other financial

institution or institutional buyer, or to a brokerdealer, whether the purchaser is acting for itself or

in some fiduciary capacity.’’ Some states have

adopted a modified version of the 1956 exemption,

some states use the exemption contained in the

1985 Revised Uniform Securities Act (‘‘1985 USA’’),

and other states have unique institutional investor

exemptions. The 1985 USA is a revised version of

the model state securities law act drafted by the

National Conference. It has been adopted in full or

in part by nine jurisdictions.

66See House Report at 31.

67 Id.

68 Id. The House Report noted that trusts or other

special purpose vehicles that offer asset-backed,

mortgage-backed or other structured securities

generally are unable to list on the national markets.

Consequently, their securities would not qualify for

state preemption as national market securities. By

preempting offers and sales to qualified purchasers,

Congress intended to provide these issuers with a

way to avoid state securities registration.

69See Exchange Act Rule 3a51–1 [17 CFR

240.3a51–1].

70 17 CFR 230.254. A free writing is permitted,

but it must identify the issuer’s chief executive

officer and the business and products of the

company and must indicate that no money is being

solicited and will not be accepted and that the offer

involves no obligation or commitment of any kind.

The material is subject to the Commission’s antifraud provisions.

71See, e.g., Securities Act Rule 701 [17 CFR

230.701] where offers are exempt and only sales are

subject to specified regulatory requirements.

72See Section 7(b) of the Securities Act [15 U.S.C

77g(b)]; Securities Act Rule 419(a)(2) [17 CFR

230.419(a)(2)].

73 44 U.S.C. 3501 et seq.

The House Commerce Committee

gave two other reasons for preempting

offers and sales of securities to qualified

purchasers from state registration

requirements.66 The Committee noted

that certain securities are

‘‘fundamentally national in character

and generally (though not always)

subject to regulation at the Federal

level.’’ 67 The Committee said it

expected us to define qualified

purchaser to include purchasers of these

fundamentally national securities. The

Committee listed mortgage-backed,

asset-backed and other structured

securities, and securities issued in

connection with project financings as

examples of fundamentally national

securities. Other language in the House

Report makes clear that the primary

factor for our consideration in defining

qualified purchaser must be the

financial sophistication of these

investors. The House Report states ‘‘[i]n

all cases, however, the Committee

intends that the Commission’s

definition be rooted in the belief that

‘‘qualified purchasers’’ are sophisticated

investors, capable of protecting

themselves in a manner that renders

regulation by State authorities

unnecessary.’’ 68

Although Section 18 expressly

permits us to define qualified purchaser

differently with respect to different

categories of securities, the proposal is

to define qualified purchaser the same

regardless of the nature of the security

being offered or sold. For instance, there

is no limitation in the proposed

definition to only offerees and

purchasers of ‘‘fundamentally national’’

securities. We believe that the nature of

the investor rather than the investment

is the critical feature in the

determination of whether transactions

with qualified purchasers should be

exempt from state registration. Your

views and comments are requested on

this approach. Should the definition be

restricted to include investors in certain

securities only? How would a definition

of ‘‘fundamentally national’’ securities

be formulated, consistent with the

direction to limit the definition to

financially sophisticated persons?

Should only certain kinds of securities

be included, such as debt securities, or

both debt and equity securities? Please

describe the criteria that these securities

should meet and explain why these

criteria are necessary. Should certain

types of securities be excluded? For

example, should all securities that are

considered ‘‘penny stock’’ under the

Exchange Act be excluded? 69 Should

securities issued in initial public

offerings be excluded? Should certain

types of securities registered with the

Commission, such as asset-backed ones,

and offered and sold pursuant to

effective registration statements be

deemed to be ‘‘covered securities’’

under the qualified purchaser rubric?

Are there segments of offerings that

are so essentially national that they

should be construed in a way to

preempt state regulation and

registration, i.e., the offer but not the

sale? For example, under Rule 254 of

Regulation A,70 an issuer is permitted to

make a public solicitation to determine

whether there would be any interest in

a proposed securities offering before

incurring the expense of developing the

required offering materials. In this way,

federal regulation provides an offer

exemption pursuant to Regulation A,

but regulates, in a different way, other

later offers and sales. Could the offer

pursuant to this Commission exemption

be deemed to be made to qualified

purchasers so that it would be

preempted from state regulation, even

though other later offers and the sale

might have to be state qualified? Are

there other situations where this

approach might be appropriate? 71 Are

there particular conditions that should

be applicable to deregulate a particular

offer but not the sale; or vice versa?

Should issuer requirements be

imposed? For example, should the

issuer be a reporting company under the

Exchange Act that has filed its reports

for a specified period of time on a

timely basis? Should the issuer meet

specified asset or revenue tests? Should

certain issuers be disqualified, such as

issuers that are ‘‘blank check’’

companies,72 or that have past securities

laws violations?

What criteria should be applied to

ensure that investors in these securities

are financially sophisticated? Is the

nature of these securities such that no

additional investor-specific criteria are

needed? Should securities be classified

in some other manner and then have

qualified purchasers defined differently

based on those classes? If so, what

classifications should be made and

why? How should qualified purchasers

be defined differently based on those

classes?

III. Request for Comment

We request your comments on the

proposal and on the matters discussed

in Sections IV through VII, including

the application of the Paperwork

Reduction Act, the preliminary analysis

of costs and benefits and effects on

competition, and the Initial Regulatory

Flexibility Analysis. Comment is

solicited from the point of view of both

issuers and investors, as well as

facilitators of capital formation, such as

underwriters and placement agents, and

other regulatory bodies, such as state

securities regulators.

IV. Paperwork Reduction Act

We have not prepared a submission to

the Office of Management and Budget

under the Paperwork Reduction Act of

1995 73 because the proposed rule does

not impose recordkeeping or

information collection requirements, or

other collections of information

requiring the approval of the Office of

66846 Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Proposed Rules

Management and Budget. (We note that,

if adopted, the definition would reduce

the paperwork burden imposed by state

registration requirements. We do not

impose these requirements and they are

not otherwise subject to the Paperwork

Reduction Act.)

V. Cost-Benefit Analysis

Congress realigned the federal and

state regulatory partnership to promote

investment, eliminate duplicative

regulation, decrease the cost of capital,

and encourage competition, while

protecting investors. Consistent with

legislative intent and the protection of

investors, the proposals would benefit

companies and their investors in a

number of ways.

We believe that the proposed

qualified purchaser definition would

reduce costs for issuers by expanding

the number of investors to whom issuers

may offer and sell securities without

complying with state registration

requirements. The proposal also would

eliminate the need for issuers to comply

with different state exemptions for

financially sophisticated investors. This

nationwide uniform definition would

permit issuers to expand the geographic

scope of their offerings. These effects

should facilitate the capital formation

process. These benefits are difficult to

quantify.

It appears that a consequence of our

proposed definition will be a reduction

in state registration and other

transaction-related fees. This result is a

product of the Congressional directive

to include as a ‘‘covered security’’

preempted from state registration,

transactions with qualified purchasers.

There also may be a cost to investors

through the loss of the benefits of state

registration and oversight, although this

cost is also difficult to quantify. In

addition, we do not think this cost will

be significant for the following reasons.

The proposed qualified purchaser

definition should not reduce investor

protection. It is designed to encompass

only those financially sophisticated

investors who are considered to have

access to information and fend for

themselves. Transactions with these

persons are currently exempt from

federal registration under specified

conditions as well as many state laws.

We are not aware of any diminution in

investor protection as a result of our

current definition of accredited investor.

They do not benefit from state

regulation in a way that justifies the

costs to the issuers subject to state

registration requirements. To fully

evaluate the benefits and costs

associated with the proposed new

qualified purchaser definition and the

revised accredited investor definition,

we request commenters to provide

views and supporting information as to

the costs and benefits associated with

these proposals. We request comments

on any potential costs to the states from

adopting this particular definition

(being mindful that Congress assumed

there would be some cost from

preempting transactions with qualified

purchasers.)

VI. Initial Regulatory Flexibility

Analysis

We have prepared this Initial

Regulatory Flexibility Analysis under 5

U.S.C. § 603 concerning the rule

proposed today.

A. Reasons for and Objectives of the

Proposed Action

The proposed rule would comply

with the mandate of NSMIA to preempt

from state securities registration and

regulation transactions involving

qualified purchasers. That Act makes

these transactions ‘‘covered securities,’’

which are not subject to certain state

‘‘blue sky’’ law provisions. We were

delegated the responsibility to

determine the meaning of the term

‘‘qualified purchaser.’’ In accordance

with legislative direction, the proposed

definition needs to be based upon the

financial sophistication of the investors

who should not need the protections

offered by state registration and review.

We have therefore proposed, for

purposes of defining qualified

purchasers, our existing definition of

accredited investor contained in Rule

501(a), which uses an objective standard

and has been in operation for about 20

years.

B. Small Entities Subject to the Rule

The proposed rule addition would

exempt small entities from complying

with state registration and review

requirements in offering securities to

qualified purchasers. The proposal

would affect small entities that are

offering securities under the Securities

Act and small entities that invest in

securities.

For purposes of the Regulatory

Flexibility Act, the Securities Act

defines a ‘‘small business’’ issuer, other

than an investment company as one that

on the last day of its most recent fiscal

year had total assets of $5 million or less

and is engaged in or proposes to engage

in an offering of securities of $5 million

or less. When used with respect to an

investment company, the term is

defined as one with any related

investment company having aggregate

net assets of $50 million or less at the

end of its most recent fiscal year.

We are currently aware of

approximately 2,500 reporting

companies that are not investment

companies with assets of $5 million or

less. There are approximately 400

investment companies that satisfy the

‘‘small entity’’ definition. This proposal

would only affect these small entities

that offer securities in states that do not

currently exempt offerings to accredit

investors from state registration

requirements. We have no reliable way

to determine how many businesses may

become subject to our reporting

obligations in the future, or may

otherwise be impacted by the change in

state oversight of financing transactions.

‘‘Accredited Investor’’ also includes

broker/dealers, investment advisors and

investment companies as investors.

Many of them are small. These entities

would be accredited investors and

would be able to be offered and sold

offerings without state registration. We

do not know how many of these entities

would purchase securities in these

transactions.

C. Reporting, Recordkeeping, and Other

Compliance Requirements

The proposed rule would not impose

any new reporting, recordkeeping or

compliance requirements. In fact, the

proposed rule would, pursuant to

Congressional directive, remove state

law requirements for the registration of

offers and sales to certain entities.

D. Significant Alternatives

The Regulatory Flexibility Act directs

us to consider significant alternatives

that would accomplish the stated

objectives, while minimizing any

significant adverse impact on small

issuers. In connection with the

proposed rule, we considered several

alternatives, including:

• Establishing different compliance

and reporting requirements or

timetables that take into account the

resources of small businesses;

• Clarifying, consolidating or

simplifying compliance and reporting

requirements under the rule for small

businesses;

• Using performance rather than

design standards; and

• Exempting small businesses from

all or part of the requirements.

The proposed rule would reduce the

burden of complying with state

securities laws for both large and small

businesses. Because the proposal

reduces burdens on securities issuers,

we believe it is advantageous to small

issuers to include them, rather than

exclude them. Further, we are not aware

of any alternative that would increase

Federal Register / Vol. 66, No. 248 / Thursday, December 27, 2001 / Proposed Rules 66847

74See Section 2(b) of the Securities Act (15 U.S.C.

77b(b)).

the benefit of this proposal for small

entities.

The Securities Act prohibits the states

from requiring the registration of

securities transactions with qualified

purchasers. Consequently, the states

may not review or comment on the

disclosure provided to qualified

purchasers, nor apply standards with

respect to the merits of the offering or

impose conditions on offerings to

qualified purchasers. Removing these

costs should facilitate capital raising.

We believe that preempting state

regulation of transactions involving

qualified purchasers who we define the

same as accredited investors may make

state accredited investor exemptions a

nullity. In this case, the accredited

investor prong of the Rule 504 public

offering exemption may no longer be

usable. We are concerned, however, that

as a result, issuers, especially small

ones, might be disadvantaged in their

ability to raise capital by publicly

offering their securities to accredited

investors. Consequently, we have

invited comment on the issue and to see

if it would be better to provide limited

relief from our proposed preemption for

these public Rule 504 transactions. We

also have solicited comment on an

alternative approach that would replace

the accredited investor prong with a

new exemption for offerings to qualified

purchasers.

We believe that design standards of

objectively defining qualified

purchasers add certainty and promote

the purposes of the rule. We therefore

do not propose performance standards

to specify different requirements for

small entities. We do not believe that it

is feasible to further clarify, consolidate

or simplify the proposed rule for small

entities.

E. Overlapping or Conflicting Federal

Rules

We do not believe any current federal

rules duplicate, overlap or conflict with

the rule we propose to amend.

F. Solicitation of Comments

We encourage the submission of

written comments with respect to any

aspect of this initial regulatory

flexibility analysis. Such written

comments will be considered in the

preparation of the final regulatory

flexibility analysis, if the proposed rule

amendment is adopted. Persons wishing

to submit written comments should

follow the instructions contained in the

beginning of this release. We

particularly seek comment on:

• The number of small entities that

would be affected by the proposed rule;

• The expected impact of the

proposal;

• How to quantify the number of

small entities that would be affected by,

and how to quantify the impact of the

proposed rule.

We ask commenters to describe the

nature of any impact and provide

empirical data supporting the extent of

the impact.

VII. Promotion of Efficiency,

Competition, and Capital Formation

We request your comment on whether

the proposed amendment would be a

‘‘major rule’’ for purposes of the Small

Business Regulatory Enforcement

Fairness Act of 1996. We request

comments on whether the proposed

amendment is likely to have a $100

million or greater annual effect on the

economy. Your comments should

provide empirical data to support your

views.

We are required to define qualified

purchaser consistent with the public

interest and the protection of investors.

When the public interest is considered,

we must determine whether the

definition selected would promote

efficiency, competition and capital

formation, in addition to investor

protection.74 As described in this

release, we believe the proposal fosters

each of these important goals. We

request your comments on how our

proposals would affect each of these

objectives.

VIII. Statutory Basis

We propose an amendment to Rule

146 under the authority set forth in

Sections 2(b), 18(b) and 19 of the

Securities Act.

IX. Text of the Amendments

List of Subjects in 17 CFR Part 230

Securities.

In accordance with the foregoing,

Title 17, Chapter II of the Code of

Federal Regulations is proposed to be

amended as follows:

PART 230—GENERAL RULES AND

REGULATIONS, SECURITIES ACT OF

1933

1. The authority citation for Part 230

continues to read in part as follows:

Authority: 15 U.S.C. 77b, 77c, 77d, 77f,

77g, 77h, 77j, 77r, 77sss, 77z–3, 78c, 78d, 78l,

78m, 78n, 78o, 78t, 78w, 78ll(d), 78mm, 79t,

80a–8, 80a–24, 80a–28, 80a–29, 80a–30, and

80a–37, unless otherwise noted.

* * * * *

2. Section 230.146 is amended by

adding paragraph (c) to read as follows:

§ 230.146 Rules under section 18 of the

Act.

* * * * *

(c) Qualified Purchaser. A ‘‘qualified

purchaser’’ as used in Section 18(b)(3)

of the Act (15 U.S.C. 77r(b)(3)) means

any accredited investor as defined in

§ 230.501(a).

3. Section 230.504 is amended by:

a. Adding ‘‘or’’ at the end of

paragraph (b)(1)(i);

b. Removing ‘‘; or’’ at the end of

paragraph (b)(1)(ii) and adding in its

place a period; and

c. Removing paragraph (b)(1)(iii).

By the Commission.

Dated: December 19, 2001.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–31742 Filed 12–26–01; 8:45 am]

BILLING CODE 8010–01–U

DEPARTMENT OF THE INTERIOR

Bureau of Indian Affairs

25 CFR Part 292

RIN 1076–AD93

Gaming on Trust Lands Acquired After

October 17, 1988

AGENCY: Bureau of Indian Affairs,

Interior.

ACTION: Proposed rule: reopening of

comment period.

SUMMARY: This notice reopens the

comment period for the proposed rule

that was published in the Federal

Register on September 14, 2000.

EFFECTIVE DATE: Comments must be

received on or before February 25, 2002.

ADDRESSES: Mail comments to George

Skibine, Director, Office of Indian

Gaming Management, Bureau of Indian

Affairs, 1849 C Street NW, MS 2070–

MIB, Washington, DC 20240. Comments

may be hand delivered to the same

address from 9 a.m. to 4 p.m., Monday

through Friday or sent by facsimile to

202–273–3153.

FOR FURTHER INFORMATION CONTACT:

Nancy Pierskalla, Office of Indian

Gaming Management, 202–219–4066.

SUPPLEMENTARY INFORMATION: On

September 14, 2000, the Bureau of

Indian Affairs published a proposed

rule (65 FR 55471) concerning Gaming

on Trust Lands Acquired After October

17, 1988. The deadline for receipt of

comments was November 13, 2000. Six

comments were received after