[Federal Register Volume 66, Number 248 (Thursday, December 27, 2001)]
[Proposed Rules]
[Pages 66839-66847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31742]


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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.

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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: <a href="/cdn-cgi/l/email-protection#4e1c3b222b632d2123232b203a3d0e3d2b2d60292138"><span class="__cf_email__" data-cfemail="9ac8eff6ffb7f9f5f7f7fff4eee9dae9fff9b4fdf5ec">[email protected]</span></a>. 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\
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    \1\ We 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.

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,

[[Page 66840]]

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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 self-executing. 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.
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    \2\ Pub. L. 104-290, 11 Stat. 3416 (Oct. 11, 1996).
    \3\ 15 U.S.C. 77r.
    \4\ 15 U.S.C. 77a et seq.
    \5\ Section 18(b)(3) [15 U.S.C. 77c(b)(3)].
    \6\ 17 CFR 230.146.
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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:
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    \7\ See 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)].
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    <bullet> Securities that are listed on the New York Stock Exchange 
(``NYSE''), American Stock Exchange (``Amex'') or Nasdaq National 
Market System (``Nasdaq NMS''); \8\
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    \8\ This 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)].
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    <bullet> Securities issued by an investment company registered 
under the Investment Company Act of 1940 \9\ (the ``1940 Act'');
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    \9\ 15 U.S.C. 89a-1 et seq.
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    <bullet> Most exempt securities listed in Section 3(a) of the 
Securities Act; \10\
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    \10\ 15 U.S.C. 77c(a).
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    <bullet> 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\
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    \11\ 15 U.S.C. 77d(1) and (3).
    \12\ 15 U.S.C. 78a et seq.
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    <bullet> Securities issued in exempt transactions under Section 
4(4) of the Securities Act; \13\
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    \13\ 15 U.S.C. 77d(4).
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    <bullet> Securities issued in exempt offerings under Rule 506 of 
Regulation D; \14\ and
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    \14\ 17 CFR 230.506.
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    <bullet> Any security offered or sold to a ``qualified purchaser.'' 
\15\
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    \15\ See Section 18(b)(3) [15 U.S.C. 77r(b)(3)].
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    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.
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    \16\ They 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.
    \17\ For 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.
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    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.
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    \18\ H.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.
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    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.
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    \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.
    \20\ See 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.'')
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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.
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    \21\ 15 U.S.C. 77d(2).
    \22\ SEC 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.
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    After the Ralston Purina decision, we provided guidance on the 
Section 4(2)

[[Page 66841]]

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 non-public 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\
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    \23\ Rule 506 of Regulation D replaced former Rule 146. See the 
adopting release for Regulation D, note 31 below.
    \24\ Rule 505 of Regulation D replaced Rule 242. See the 
adopting release for Regulation D, note 31 below.
    \25\ See Release No. 33-6180 (Jan. 17, 1980) [45 FR 6362].
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    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\
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    \26\ Congress 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).
    \27\ Rule 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].
    \28\ Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015].
    \29\ Section 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.
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    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\
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    \30\ 15 U.S.C. 77b(a)(15)(i) and (ii).
    \31\ Regulation 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.
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    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\
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    \32\ Securities Act Rule 501(a)(5) and (6) [17 CFR 230.501(a)(5) 
and (6)].
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    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\
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    \33\ Securities Act Rule 501(a)(1), (3) and (7) [17 CFR 
230.501(a)(1), (3) and (7)].
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    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\
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    \34\ Securities Act Rule 501(a)(1), (2) and (3) [17 CFR 
230.501(a)(1), (2) and (3)].
    \35\ Securities Act Rule 501(a)(1), (4) and (8) [17 CFR 
230.501(a)(1), (4) and (8)].
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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).
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    \36\ See Senate Report at 15 and House Report at 31.
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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

[[Page 66842]]

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.
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    \37\ 17 CFR 230.144A. See Release No. 33-6862 (Apr. 23, 1990) 
[55 FR 17933].
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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.
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    \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.
    \39\ Section 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].
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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.
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    \40\ 17 CFR 275.205-3.
    \41\ 15 U.S.C. 80b-1 et seq.
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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.
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    \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).
    \45\ The 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)].
    \46\ Additionally, 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].
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    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

[[Page 66843]]

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\
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    \47\ We 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.
    \48\ The 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.
    (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.
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    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.
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    \50\ See Senate Report at 32.
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    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.
---------------------------------------------------------------------------

    \51\ CCH 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.
    \52\ Therefore, 10 states have no special exemptive provision 
related to accredited investor purchases.
    \53\ The 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \54\ The 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 non-qualified 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.
    \56\ Of course, to rely on the Section 4(2) exemption federally, 
the issuer cannot conduct a public offering in any state.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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)].
---------------------------------------------------------------------------

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

[[Page 66844]]

solicit in the offering and the securities issued in the offering are 
restricted and not freely tradeable.
---------------------------------------------------------------------------

    \59\ See Rule 504(A) of Regulation D [17 CFR 230.504(a)].
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \60\ Where state accredited investor exemptions use definitions 
different from the one contained in Rule 501(a), states could 
continue to regulate transactions with such investors.
---------------------------------------------------------------------------

    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?
---------------------------------------------------------------------------

    \61\ Private 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \62\ See note 51 above.
---------------------------------------------------------------------------

    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?
---------------------------------------------------------------------------

    \63\ These are the so-called ``bad body'' disqualification 
provisions used under the Regulation A exemption. 17 CFR 230.262.
---------------------------------------------------------------------------

    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 
state-registered offering to non-qualified purchasers be permitted 
contemporaneously with a public tombstone ad solicitation to qualified 
purchasers?
---------------------------------------------------------------------------

    \64\ Rule 504(b)(1)(i) and (ii).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \65\ House Report at 31. (``First, many States currently exempt 
such securities from registration 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 broker-dealer, 
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.

---------------------------------------------------------------------------

[[Page 66845]]

    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\
---------------------------------------------------------------------------

    \66\ See 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.
---------------------------------------------------------------------------

    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?
---------------------------------------------------------------------------

    \69\ See Exchange Act Rule 3a51-1 [17 CFR 240.3a51-1].
---------------------------------------------------------------------------

    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?
---------------------------------------------------------------------------

    \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 anti-fraud provisions.
    \71\ See, e.g., Securities Act Rule 701 [17 CFR 230.701] where 
offers are exempt and only sales are subject to specified regulatory 
requirements.
---------------------------------------------------------------------------

    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?
---------------------------------------------------------------------------

    \72\ See 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)].
---------------------------------------------------------------------------

    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

[[Page 66846]]

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.)
---------------------------------------------------------------------------

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

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. Sec. 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:
    <bullet> Establishing different compliance and reporting 
requirements or timetables that take into account the resources of 
small businesses;
    <bullet> Clarifying, consolidating or simplifying compliance and 
reporting requirements under the rule for small businesses;
    <bullet> Using performance rather than design standards; and
    <bullet> 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

[[Page 66847]]

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:
    <bullet> The number of small entities that would be affected by the 
proposed rule;
    <bullet> The expected impact of the proposal;
    <bullet> 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.
---------------------------------------------------------------------------

    \74\ See Section 2(b) of the Securities Act (15 U.S.C. 77b(b)).
---------------------------------------------------------------------------

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:


Sec. 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 Sec. 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


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