Document ID: SEC-2020-1597-0001
Agency: sec
Document Type: Rule
Title: Accredited Investor Definition
Posted Date: 2020-10-09T04:00Z

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

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

SECURITIES AND EXCHANGE COMMISSION

17 CFR PARTS 230 and 240

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

Accredited Investor Definition

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

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

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

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

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

    \1\ 15 U.S.C. 77a et seq.
    \2\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

Table of Contents

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

[[Page 64235]]

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

I. Introduction and Background

    On December 18, 2019, the Commission proposed amendments to the 
definition of ``accredited investor'' in Securities Act Rules 215 and 
501(a) and to the definition of ``qualified institutional buyer'' in 
Rule 144A.\3\ The proposed amendments were intended to update and 
improve the definitions to identify more effectively institutional and 
individual investors that have sufficient knowledge and expertise to 
participate in investment opportunities that do not have the rigorous 
disclosure and procedural requirements, and related investor 
protections, provided by registration under the Securities Act.
---------------------------------------------------------------------------

    \3\ Amending the ``Accredited Investor'' Definition, Release 
Nos. 33-10734; 34-87784 (Dec. 18, 2019) [85 FR 2574 (Jan. 15, 2020)] 
(``Proposing Release'').
---------------------------------------------------------------------------

    The Proposing Release and the amendments we are adopting are part 
of a broader effort to simplify, harmonize, and improve the exempt 
offering framework under the Securities Act to promote capital 
formation and expand investment opportunities while maintaining and 
enhancing appropriate investor protections.\4\ As we noted in the 
Proposing Release, these amendments will provide a foundation for our 
ongoing efforts to assess whether the exempt offering framework, in its 
component parts and as a whole, is consistent, accessible, and 
effective for both issuers and investors. The Securities Act contains a 
number of exemptions from its registration requirements and authorizes 
the Commission to adopt additional exemptions. As the Commission has 
previously noted, the regulatory framework for exempt offerings has 
evolved, and the significance of the exempt securities markets has 
increased both in terms of the absolute amount raised and relative to 
the public registered markets.\5\ In 2019, registered offerings 
accounted for $1.2 trillion (30.8 percent) of new capital, compared to 
approximately $2.7 trillion (69.2 percent) that we estimate was raised 
through exempt offerings.\6\ Of this, the estimated amount of capital 
reported as being raised in offerings under Rule 506(b) and 506(c) of 
Regulation D was approximately $1.56 trillion.
---------------------------------------------------------------------------

    \4\ See Concept Release on Harmonization of Securities Offering 
Exemptions, Release No. 33-10649 (June 18, 2019) [84 FR 30460 (June 
26, 2019)] (``Concept Release'') and Facilitating Capital Formation 
and Expanding Investment Opportunities by Improving Access to 
Capital in Private Markets, Release Nos. 33-10763; 34-88321 (Mar. 4, 
2020) [85 FR 17956 (Mar. 31, 2020)] (``Access to Capital Proposing 
Release'').
    \5\ See Concept Release at 30465. See also Access to Capital 
Proposing Release at 17957.
    \6\ Unless otherwise indicated, information in this release on 
offering amounts is based on analyses by staff in the Commission's 
Division of Economic Risk and Analysis (``DERA'') of data collected 
from SEC filings.
---------------------------------------------------------------------------

    The accredited investor definition is a central component of the 
Rule 506 exemptions from registration and plays an important role in 
other exemptions and other federal and state securities law contexts. 
Qualifying as an accredited investor, as an individual or an 
institution, is significant because accredited investors may, under 
Commission rules, participate in investment opportunities that are 
generally not available to non-accredited investors, including certain 
investments in private companies and offerings by certain hedge funds, 
private equity funds, and venture capital funds. The final rules are 
tailored to permit investors with reliable alternative indicators of 
financial sophistication to participate in such investment 
opportunities, while maintaining the safeguards necessary for investor 
protection and public confidence in investing in areas of the economy 
that disproportionately create new jobs, foster innovation, and provide 
for growth opportunities.
    Historically, the Commission has stated that the accredited 
investor definition is ``intended to encompass those persons whose 
financial sophistication and ability to sustain the risk of loss of 
investment or fend for themselves render the protections of the 
Securities Act's registration process unnecessary.'' \7\ Prior to the 
adoption of these final rules, in the case of individuals, the 
accredited investor definition has used wealth--in the form of a 
certain level of income or net worth--as a proxy for financial 
sophistication. However, as stated in the Proposing Release, we do not 
believe wealth should be the sole means of establishing financial 
sophistication of an individual for purposes of the accredited investor 
definition. Rather, the characteristics of an investor contemplated by 
the definition can be demonstrated in a variety of ways. These include 
the ability to assess an investment opportunity--which includes the 
ability to analyze the risks and rewards, the capacity to allocate 
investments in such a way as to mitigate or avoid risks of 
unsustainable loss, or the ability to gain access to information about 
an issuer or about an investment opportunity--or the ability to bear 
the risk of a loss.\8\ Accordingly, the final rules create new 
categories of individuals and entities that qualify as accredited 
investors irrespective of their wealth, on the basis that such 
investors have demonstrated the requisite ability to assess an 
investment opportunity.
---------------------------------------------------------------------------

    \7\ See Regulation D Revisions; Exemption for Certain Employee 
Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015 (Jan. 
30, 1987)]. See also SEC v. Ralston Purina Co., 346 U.S. 119, 125 
(1953) (taking the position that the availability of the Section 
4(a)(2) exemption ``should turn on whether the particular class of 
persons affected needs the protection of the Act. An offering to 
those who are shown to be able to fend for themselves is a 
transaction `not involving any public offering' '').
    \8\ The accredited investor standard is similar to, but distinct 
from, other regulatory standards in Commission rules that are used 
to identify persons who are not in need of certain investor 
protection features of the federal securities laws. For example, 
Section 3(c)(7) of the Investment Company Act excepts from the 
definition of investment company any issuer, the outstanding 
securities of which are owned exclusively by persons who, at the 
time of acquisition of such securities, are qualified purchasers, 
and which is not making and does not at that time propose to make a 
public offering of securities. Congress defined qualified purchasers 
as: (i) Natural persons who own not less than $5 million in 
investments; (ii) family-owned companies that own not less than $5 
million in investments; (iii) certain trusts; and (iv) persons, 
acting for their own accounts or the accounts of other qualified 
purchasers, who in the aggregate own and invest on a discretionary 
basis, not less than $25 million in investments (e.g., institutional 
investors). Each of these regulatory standards serves a different 
regulatory purpose. Accordingly, an accredited investor will not 
necessarily meet these other standards and these other regulatory 
standards are not designed to capture the same investor 
characteristics as the accredited investor standard. See also Report 
on the Review of the Definition of ``Accredited Investor'' (Dec. 18, 
2015) (``2015 Staff Report''), available at https://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf.
---------------------------------------------------------------------------

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

[[Page 64236]]

in a 2015 report on the accredited investor definition,\9\ while some 
of the amendments are substantially similar to those the Commission 
proposed in 2007.\10\ Many of the amendments have been recommended, in 
one form or another, by the Small Business Capital Formation Advisory 
Committee, the former Advisory Committee on Small and Emerging 
Companies, the Investor Advisory Committee, and a wide array of public 
commenters.
---------------------------------------------------------------------------

    \9\ See 2015 Staff Report.
    \10\ Revisions of Limited Offering Exemptions in Regulation D, 
Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)] 
(``2007 Proposing Release'').
---------------------------------------------------------------------------

    The definition of ``qualified institutional buyer'' in Rule 144A is 
similarly intended to ``identify a class of investors that can be 
conclusively assumed to be sophisticated and in little need of the 
protection afforded by the Securities Act's registration provisions.'' 
\11\ With the exception of registered dealers, a qualified 
institutional buyer must in the aggregate own and invest on a 
discretionary basis at least $100 million in securities of issuers that 
are not affiliated with such a qualified institutional buyer.\12\ The 
final rules expand the list of entities eligible for qualified 
institutional buyer status to be consistent with the amendments to the 
accredited investor definition, maintaining the $100 million threshold 
for these entities to qualify for qualified institutional buyer status. 
In this way, the final rules avoid inconsistencies between the entity 
types eligible for each status while continuing to ensure that these 
entities have sufficient financial sophistication to participate in 
investment opportunities that do not have the additional protections 
provided by registration under the Securities Act.
---------------------------------------------------------------------------

    \11\ See Resale of Restricted Securities; Changes to Method of 
Determining Holding Period of Restricted Securities Under Rules 144 
and 145, Release No. 33-6806 (Oct. 25, 1988) [53 FR 44016 (Nov. 1, 
1988)]. Rule 144A provides a non-exclusive safe harbor exemption 
from the registration requirements of the Securities Act for resales 
to qualified institutional buyers of certain restricted securities. 
Any person other than the issuer or a dealer who offers or sells 
securities in compliance with Rule 144A is deemed not to be engaged 
in a distribution of the securities and therefore not an underwriter 
of the securities within the meaning of Section 2(a)(11) of the 
Securities Act, such that the Section 4(a)(1) exemption is available 
for the resales of the securities.
    \12\ Rule 144A(a)(1)(i). A registered dealer is a qualified 
institutional buyer if it owns and invests in the aggregate at least 
$10 million of securities of non-affiliated issuers on a 
discretionary basis or if it is acting in a riskless principal 
transaction on behalf of a qualified institutional buyer. Rules 
144A(a)(1)(ii) and (iii).
---------------------------------------------------------------------------

    We received more than 200 unique comment letters on the Proposing 
Release.\13\ Many commenters supported expanding the accredited 
investor definition,\14\ while some commenters did not.\15\ Other 
commenters recommended eliminating the definition altogether so that 
anyone could invest in exempt offerings.\16\ We also received comments 
from several commenters in general support of expanding the definition 
of qualified institutional buyer in Rule 144A.\17\ In addition, in 
response to the Concept Release, the SEC's Small Business Capital 
Formation Advisory Committee adopted a recommendation regarding changes 
to the accredited investor definition,\18\ and the 2019 SEC Government-
Business Forum on Small Business Capital Formation (``SEC Small 
Business Forum'') provided a recommendation on the accredited investor 
definition.\19\ Prior to the Concept Release, the SEC's Investor 
Advisory Committee adopted a recommendation regarding changes to the 
accredited investor definition.\20\

[[Page 64237]]

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

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

II. Final Amendments to the Accredited Investor Definitions

A. Proposed Amendments

    In the Proposing Release, the Commission proposed to amend the 
accredited investor definition to add categories of both natural 
persons and entities. For natural persons, the Commission proposed to 
add new categories to the definition that would permit natural persons 
to qualify as accredited investors based on certain professional 
certifications or designations or other credentials or, with respect to 
investments in a private fund, based on the person's status as a 
``knowledgeable employee'' of the fund. Specifically, the Commission 
proposed to add the following natural persons:
     Natural persons holding in good standing one or more 
professional certifications or designations or other credentials from 
an accredited educational institution that the Commission has 
designated as qualifying an individual for accredited investor status; 
and
     natural persons who are ``knowledgeable employees,'' as 
defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940 
(the ``Investment Company Act''), of the private-fund issuer of the 
securities being offered or sold.\21\
---------------------------------------------------------------------------

    \21\ A private fund is an issuer that would be an investment 
company, as defined in Section 3 of the Investment Company Act, but 
for Sections 3(c)(1) or 3(c)(7) of that Act. See Section 202(a)(29) 
of the Investment Advisers Act of 1940 (the ``Advisers Act'').
---------------------------------------------------------------------------

    For entities, the Commission proposed to add:
     SEC- and state-registered investment advisers and rural 
business investment companies to the list of entities specified in Rule 
501(a)(1);
     limited liability companies to the list of entities 
specified in Rule 501(a)(3);
     entities, of a type not listed in Rule 501(a)(1), (a)(2), 
(a)(3), (a)(7), or (a)(8), not formed for the specific purpose of 
acquiring the securities offered, owning investments in excess of 
$5,000,000;
     ``family offices,'' as defined in Rule 202(a)(11)(G)-1 
under the Advisers Act: (i) With assets under management in excess of 
$5,000,000, (ii) that are not formed for the specific purpose of 
acquiring the securities offered, and (iii) whose prospective 
investment is directed by a person who has such knowledge and 
experience in financial and business matters that such family office is 
capable of evaluating the merits and risks of the prospective 
investment; and
     ``family clients,'' as defined in Rule 202(a)(11)(G)-1 
under the Advisers Act, of a family office meeting the requirements in 
new Rule 501(a)(12).
    In the Proposing Release, the Commission also proposed to amend the 
accredited investor definition to allow spousal equivalents to pool 
finances for the purpose of qualifying as accredited investors. 
Finally, the Commission proposed to codify several staff 
interpretations by adding notes to Rule 501 to clarify that:
     The calculation of ``joint net worth'' for purposes of 
Rule 501(a)(5) can be the aggregate net worth of an investor and the 
investor's spouse (or spousal equivalent if ``spousal equivalent'' is 
included in Rule 501(a)(5)); \22\
---------------------------------------------------------------------------

    \22\ Throughout this release, references to an investor's spouse 
include a spousal equivalent, as applicable, in light of the 
adoption of the amendments to Rule 501(a)(5) and Rule 501(a)(6).
---------------------------------------------------------------------------

     the securities being purchased by an investor relying on 
the joint net worth test of Rule 501(a)(5) need not be purchased 
jointly; and
     when determining the accredited investor status of an 
entity under Rule 501(a)(8), one may look through various forms of 
equity ownership to natural persons.

B. Final Amendments

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

[[Page 64238]]

Some of these commenters noted that attaining credentials may signal a 
level of sophistication exceeding that of investors who currently 
qualify as accredited investors under the income or net worth 
thresholds.\24\ In addition, a few commenters supported the proposal to 
add professional certifications or designations to the definition, but 
suggested that the Commission also require professional experience.\25\ 
Another commenter opposed the proposal, raising a concern that 
individuals qualifying as accredited investors solely under such 
criteria would not have the financial capacity to be able to bear the 
financial risk of private investments.\26\ Another commenter opposed 
the proposal and the existence of the accredited investor concept, 
arguing that ``educational tests'' are inherently discriminatory.\27\
---------------------------------------------------------------------------

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

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

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

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

[[Page 64239]]

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

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

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

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

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

[[Page 64240]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 64241]]

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

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

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

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

    We also requested comment on the proposed non-exclusive list of 
attributes that the Commission would consider in determining which 
professional certifications and designations or other credentials 
qualify for accredited investor status. A few commenters expressed 
support for the proposed list.\91\ One proposed attribute was an 
indication that an individual holds the certification or designation is 
made publicly available by the relevant self-regulatory organization or 
other industry body. One commenter expressed support for this attribute 
but suggested that it be broadened to include not only publicly 
available certifications, but also those relevant certifications that 
may be ``otherwise independently verifiable.'' \92\ In addition, one 
commenter urged the Commission to establish a routine review of the 
defined list of eligible designations, certifications, and 
licenses.\93\
---------------------------------------------------------------------------

    \91\ See Fidelity Letter; CFA Institute Letter (noting that 
``[w]e believe the Release articulates sound principles in its non-
exclusive list of attributes that it would consider in determining 
which professional certifications and designations or other 
credentials qualify for accredited investor status''); and ABA FR of 
Sec. Comm. Letter (``[t]he Committee supports this approach, which 
would be based on criteria that are verifiable and provide ongoing 
flexibility for the Commission to add further appropriate investor 
categories'').
    \92\ See Fidelity Letter (noting that such approach ``[p]rovides 
the SEC flexibility as it considers additions to the list of 
professional certifications that meet its specified criteria in the 
future, which may not necessarily be searchable on a public website, 
but would be otherwise verifiable, such as on an access-controlled 
website'').
    \93\ See Carta Letter (``[t]he final rule should provide the 
Commission with flexibility to reevaluate previously designated 
certifications, designations, or credentials if they change over 
time, and also designate other, possibly new, certifications, 
designations, or credentials that meet specified criteria'').
---------------------------------------------------------------------------

ii. Final Amendments

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

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

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

[[Page 64242]]

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

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

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

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

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

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

    In light of the subject matter encompassed by these exams, and for 
the reasons stated above and in the Proposing Release, we believe that 
individuals who have passed these examinations and hold their 
certifications or designations in good standing have demonstrated a 
sufficient level of financial sophistication to participate in 
investment opportunities that do not have the additional protections 
provided by registration under the Securities Act. In this regard, we 
note that these certifications and designations are required in order 
to represent or advise others in connection with securities market 
transactions.\100\ To comply with the good standing requirement, the 
General Securities Representative license holder, the Private 
Securities Offerings Representative license holder,\101\ and the 
Licensed Investment Adviser Representative must have passed the 
required examinations and must maintain the individual's license or 
registration, as applicable, in good standing.\102\
---------------------------------------------------------------------------

    \100\ See Geraci Letter and AAPL Letter (noting that ``such a 
[Series 7, 65, or 82] license enables them to evaluate investments 
on behalf of third parties, thus qualifying them to effectively 
evaluate investment opportunities on their own behalf as well'').
    \101\ To maintain their certifications and designations in good 
standing, General Securities Representatives and Private Securities 
Offerings Representatives are subject to continuing education 
requirements under FINRA rules.
    \102\ As noted in note 98, the successful completion of the 
Series 65 exam does not convey the right to transact business prior 
to being granted a license or registration by a state. See also 
Proposing Release at 2581. To qualify as an accredited investor, a 
Licensed Investment Adviser Representative must maintain, in good 
standing, the individual's state-granted license or registration.
---------------------------------------------------------------------------

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

    \103\  See https://brokercheck.finra.org.
    \104\ See https://www.adviserinfo.sec.gov/IAPD/Default.aspx.
---------------------------------------------------------------------------

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

[[Page 64243]]

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

    The final rules will initially result in an increase in the number 
of individuals that qualify as accredited investors. However, we cannot 
estimate how many individuals that hold the relevant certifications and 
designations may already qualify as accredited investors under the 
current financial thresholds, and therefore we are unable to predict 
how many individuals will be newly eligible under the final rules.\107\ 
As discussed below in Section VI.B, (1) we do not expect that number of 
newly eligible individual accredited investors to be significant 
compared to the number of individual investors that currently are 
eligible to participate in private offerings, and (2) we expect the 
amount of capital invested by such newly eligible individual investors 
to have minimal effects on the private offering market generally.\108\ 
Moreover, as we stated in the Proposing Release, for purposes of 
updating the accredited investor definition, we believe it is less 
relevant to focus on the number of individuals that will qualify and 
more relevant to consider whether the criteria applied appropriately 
capture the attributes of financial sophistication that is a touchstone 
of the definition.
---------------------------------------------------------------------------

    \105\ As of December 2019. Of this number, 334,860 individuals 
were registered only as broker-dealers, 294,684 were dually 
registered as broker-dealers and investment advisers, and 61,497 
were registered only as investment advisers. Because FINRA-
registered representatives can be required to hold multiple 
professional certifications, this aggregation likely overstates, 
potentially significantly, the actual number of individuals that 
hold a Series 7 or Series 82, and we have no method of estimating 
the extent of overlap.
    \106\ As of December 2019.
    \107\ We also are not able to estimate how many newly-eligible 
individuals will seek to make investments as accredited investors.
    \108\ We note that new investment from newly eligible individual 
accredited investors may be significant in certain small offerings. 
See discussion in Section VI.C.5.
---------------------------------------------------------------------------

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

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

    In addition, we are not adopting an amendment that would permit 
individuals to self-certify that they have the requisite financial 
sophistication to be an accredited investor. We agree with some of the 
concerns raised by commenters with respect to the lack of standards 
applicable to such an approach. We note that the Commission will have 
an opportunity to evaluate its experience with the revised rules in 
connection with its quadrennial review of the accredited investor 
definition.\110\
---------------------------------------------------------------------------

    \110\ Section 413(b)(2)(A) states that this Commission review 
must be conducted not earlier than four years after the enactment of 
the Dodd-Frank Act and not less frequently than once every four 
years afterward. The next review is required to be conducted in or 
by 2023.
---------------------------------------------------------------------------

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

[[Page 64244]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 64245]]

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

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

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

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

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

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

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

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

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

    \131\ See https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2019-q2.pdf.
---------------------------------------------------------------------------

2. Entities
    In the Proposing Release, the Commission proposed to amend the 
definition of accredited investor to add several categories of 
entities: SEC- and state-registered investment advisers, rural business 
investment companies, limited liability companies, family offices, 
family clients, and a catch all category.
a. Registered Investment Advisers
    The Commission proposed to include in Rule 501(a)(1) investment 
advisers registered under Section 203 of the Advisers Act \132\ and 
investment advisers registered under the laws of the various states. 
The Proposing Release also requested comment on whether exempt 
reporting advisers should qualify as accredited investors.\133\
---------------------------------------------------------------------------

    \132\ See Section 203 of the Advisers Act (15 U.S.C. 80b-3).
    \133\ An exempt reporting adviser is an investment adviser that 
qualifies for the exemption from registration under Section 203(l) 
of the Advisers Act because it is an adviser solely to one or more 
venture capital funds, or under Rule 203(m)-1 of the Advisers Act 
because it is an adviser solely to private funds and has assets 
under management in the United States of less than $150 million. See 
Exemptions for Advisers to Venture Capital Funds, Private Fund 
Advisers With Less Than $150 Million in Assets Under Management, and 
Foreign Private Advisers, Investment Advisers Act Release No. 3222 
(June 22, 2011) [76 FR 39646 (July 6, 2011)].
---------------------------------------------------------------------------

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

[[Page 64246]]

advisers to the definition of accredited investor.\134\ Commenters 
supporting their inclusion generally stated that registered investment 
advisers have the investment acumen to make allocations of capital and 
discern among investments, including in the private placement 
market.\135\ While no commenters indicated they opposed this addition, 
one commenter recommended that the Commission narrow the definition to 
include only advisory firms, and not natural persons who are registered 
investment advisers.\136\ This commenter expressed the view that 
natural persons should be evaluated under the wealth tests that apply 
to individuals. Other commenters, on the other hand, recommended that 
the Commission expand the definition to include exempt reporting 
advisers, noting that exempt reporting advisers are professionals 
managing either venture capital funds or small investment funds as a 
business.\137\
---------------------------------------------------------------------------

    \134\ See P. Rutledge Letter; A. Hemmingsen Letter; CFA Letter; 
Mercer Advisors Letter; CCMC Letter; SBIA Letter; NASAA Letter; 
letter from Financial Planning Coalition dated Mar. 16, 2020 (``FPC 
Letter''); IWI Letter; and D. Burton Letter.
    \135\ See, e.g., CCMC Letter and A. Hemmnigsen Letter.
    \136\ See NASAA Letter.
    \137\ See P. Rutledge Letter and A. Hemmingsen Letter.
---------------------------------------------------------------------------

ii. Final Amendments
    We are adopting the amendment with certain modifications from our 
proposal. We believe that registered investment advisers, including 
those that are sole proprietorships, have the requisite financial 
sophistication needed to conduct meaningful investment analysis. As 
discussed in the Proposing Release, registered investment advisers are 
generally considered to be institutional investors under state law, and 
we see no compelling reason to distinguish SEC- and state-registered 
investment advisers acting for their own account from other 
institutional investors already treated as accredited investors.\138\
---------------------------------------------------------------------------

    \138\ See Proposing Release at 2586 (describing the inclusion of 
certain institutional investors in the definition of accredited 
investor, including banks, insurance companies, certain employee 
benefit plans, investment companies, small business investment 
companies (``SBICs''), savings and loan associations, credit unions, 
and registered broker-dealers).
---------------------------------------------------------------------------

    As a result, we believe it is appropriate to extend accredited 
investor status to all SEC- and state-registered investment advisers. 
We estimate that there are currently approximately 13,400 SEC-
registered investment advisers and approximately 17,500 state-
registered investment advisers.\139\ We are not able to estimate, 
however, how many of those SEC- or state-registered investment advisers 
meet the $5 million assets test under Rule 501(a)(3) and therefore 
currently qualify as accredited investors.
---------------------------------------------------------------------------

    \139\ Of these, 72 SEC-registered investment advisers are sole 
proprietorships and 1,712 advisers registered with one or more 
states are sole proprietorships. We do not believe sole 
proprietorships should be distinguished from other registered 
investment advisers for purposes of determining accredited investor 
status.
---------------------------------------------------------------------------

    After considering comments, we also believe it is appropriate to 
include exempt reporting advisers in the definition of accredited 
investor. We believe exempt reporting advisers, as advisers to private 
funds, have the requisite financial sophistication needed to conduct 
meaningful investment analysis. To qualify as an exempt reporting 
adviser under Section 203(m) or Section 203(l) of the Advisers Act, an 
adviser would otherwise be required to register as an investment 
adviser with the Commission and thereby meet the minimum asset 
thresholds triggering such requirement.\140\ Additionally, private 
funds themselves are institutional investors and all investors therein 
are presumed to be financially sophisticated. We estimate that there 
are currently approximately 4,244 exempt reporting advisers.\141\ We 
are not able to estimate, however, how many of those exempt reporting 
advisers may meet the $5 million assets test under Rule 501(a)(3) and 
therefore currently qualify as accredited investors.
---------------------------------------------------------------------------

    \140\ Advisers must apply for registration with the SEC if their 
regulatory assets under management are at least $110 million or if 
they have regulatory assets under management of at least $25 million 
but less than $100 million and meet one of the requirements to be 
classified as a ``mid-sized adviser.'' See Section 203A(a)(2) of the 
Advisers Act. See also Form ADV: Instructions for Part 1A, instr. 
2.b.
    \141\ Exempt reporting advisers are required to submit, and 
periodically update, reports on Form ADV. See Rule 204-4 under the 
Advisers Act.
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 64247]]

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

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

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

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

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

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

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

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

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

[[Page 64248]]

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

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

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

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

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

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

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

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

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

[[Page 64249]]

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

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

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

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

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

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

    In the Proposing Release, the Commission proposed that for a family 
office to qualify as an accredited investor, it would need to have more 
than $5 million in assets under management and its investments would 
need to be directed by a person who has such knowledge and experience 
in financial and business matters that such family office would be 
capable of evaluating the merits and risks of the prospective 
investment.
i. Comments
    Commenters generally supported the proposed amendments to the 
definition of accredited investor to include any ``family office'' with 
more than $5 million in assets under management,\185\ and no commenters 
opposed the amendments. One commenter noted that under the current 
regulatory scheme, depending on their organizational structure, many 
family offices are already able to meet the definition of an accredited 
investor, and establishing a clear standard would allow family offices 
to manage family assets more prudently and make issuers more 
comfortable working with family office investors.\186\
---------------------------------------------------------------------------

    \185\ See J. LaBerge Letter; M. Trudeau Letter; SBIA Letter; 
ILPA Letter; CCMC Letter; Carta Letter; AIC Letter; PIC Letter; 
Artivest Letter. One commenter also recommended that the Commission 
provide an exemption from the definition of ``investment company'' 
under the Investment Company Act for family offices and their family 
clients. See PIC Letter. This rulemaking is intended to amend the 
definition of accredited investor under the Securities Act. 
Accordingly, the suggested exemption from the definition of 
investment company is beyond the scope of this rulemaking.
    \186\ See M. Trudeau Letter. See also PIC Letter.
---------------------------------------------------------------------------

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

[[Page 64250]]

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

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

    Commenters generally supported the requirement that the family 
office's prospective investments be directed by a person who has such 
knowledge and experience in financial and business matters that such 
family office is capable of evaluating the merits and risks of the 
prospective investment,\189\ noting that the underlying premise of the 
amendments is that family offices and their professionals have the 
knowledge, experience and sophistication to apply to investment 
decisions, even though a family client may not.\190\
---------------------------------------------------------------------------

    \189\ See M. Trudeau Letter (adding a sophistication requirement 
for family office managers is integral to the rationale of the 
accredited investor definition); ILPA Letter; and PIC Letter.
    \190\ See PIC Letter. The commenter also noted structural 
similarities of this requirement with the trust category in 
accredited investor definition in Rule 501(a)(7) of the Securities 
Act that requires that the purchase of a trust be directed by a 
sophisticated person as described in Rule 506(b)(2)(ii).
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

[[Page 64251]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 64252]]

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

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

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

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

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

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

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

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

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

[[Page 64253]]

indicated that the amendment would raise concerns about Section 
4(a)(5), while one commenter expressly stated that it did not believe 
that Section 4(a)(5) would be affected.\225\ The Commission also 
requested comment on whether adding a reasonable belief standard to the 
definition in Rule 215 would raise concerns. No commenters indicated 
that adding a reasonable belief standard raised concerns, while two 
commenters expressly stated that no concerns would exist.\226\
---------------------------------------------------------------------------

    \224\ See P. Rutledge Letter; Arnold & Porter Letter; CCMC 
Letter; Republic Letter; D. Burton Letter; and ABA FR of Sec. Comm. 
Letter.
    \225\ See Arnold & Porter Letter.
    \226\ See Arnold & Porter Letter and D. Burton Letter.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

[[Page 64254]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 64255]]

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

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

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

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

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

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

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

[[Page 64256]]

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

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

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

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

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

A. Securities Act Rule 163B

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

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

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

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

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

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

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

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

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

B. Exchange Act Rule 15g-1

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

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

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

[[Page 64257]]

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

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

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

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

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

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

A. Proposed Amendments

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

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

B. Final Amendments

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

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

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

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

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

[[Page 64258]]

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

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

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

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

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

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

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

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

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

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

V. Other Matters

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

[[Page 64259]]

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

VI. Economic Analysis

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

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

A. Introduction and Broad Economic Considerations

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

[[Page 64260]]

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

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

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

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

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

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

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

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

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

[[Page 64261]]

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

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

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

B. Baseline and Affected Parties

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

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

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

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

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

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

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

[[Page 64262]]

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

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

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

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

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

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

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

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

[[Page 64263]]

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

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

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

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

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

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

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

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

[[Page 64264]]

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

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

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

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

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

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

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

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

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

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

[[Page 64265]]

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

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

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

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

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

[[Page 64266]]

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

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

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

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

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

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

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

[[Page 64267]]

information about investor interest before a potential registered 
offering. This could result in a more efficient and potentially lower-
cost and lower-risk capital raising process for such issuers.
2. Potential Benefits to Investors
    We believe that the individuals and institutions that will be newly 
eligible accredited investors under the final amendments have the 
requisite financial sophistication for meaningful investment analysis, 
and could therefore benefit from gaining broader access to investment 
opportunities in private capital markets and greater freedom to make 
investment decisions based on their own analysis and circumstances.
    There is recent empirical evidence that, for a number of reasons, 
issuers tend to stay private for longer than in the past and have been 
able to grow to a size historically available only to their public 
peers.\360\ This suggests that the high-growth stage of the lifecycle 
of many issuers occurs while they remain private. Thus, investors that 
do not qualify for accredited investor status may not be able to 
participate in the high-growth stage of these issuers because it often 
occurs before they engage in registered offerings.\361\ Allowing 
additional financially sophisticated investors to invest in 
unregistered offerings of private firms will potentially enable them to 
participate in the high-growth stages of these firms.
---------------------------------------------------------------------------

    \360\ See Michael Ewens & Joan Farre-Mensa, The Deregulation of 
the Private Equity Markets and the Decline in IPOs (Nat'l Bureau of 
Econ. Research, Working Paper No. 26317, Sept. 2019) (``Ewens & 
Farre-Mensa (2019)'').
    \361\ For example, according to one study, the median age of a 
firm that went public in 1999 was five years, and in 2018 the median 
age was 10 years. See Jay R. Ritter, Initial Public Offerings: 
Median Age of IPOs Through 2019, Jan. 2020, available at https://site.warrington.ufl.edu/ritter/files/2020/02/IPOs2019Age.pdf.
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 64268]]

returns on investment of their own funds and savings in starting a 
private business.\369\
---------------------------------------------------------------------------

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

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

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

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

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

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

[[Page 64269]]

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

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

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

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

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

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

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

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

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

[[Page 64270]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 64271]]

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

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

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

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

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

    \399\ Alicia Robb, ``Financing Patterns and Credit Market 
Experiences: A Comparison by Race and Ethnicity for U.S. Employer 
Firms,'' a study for the Office of Advocacy, U.S. Small Bus. Admin. 
(Feb. 2018), available at https://www.sba.gov/sites/default/files/Financing_Patterns_and_Credit_Market_Experiences_report.pdf.
    \400\ Id.
---------------------------------------------------------------------------

    Additionally, issuers located in geographic areas with lower 
concentrations of accredited investors may benefit relatively more from 
the amendments. For example, household income and net worth tend to be 
higher in the Northeast and West regions of the United States, which 
leads to higher concentrations of individual investors that qualify as 
accredited investors by meeting the financial threshold requirements. 
Thus, issuers that are outside those regions may currently find it 
relatively more difficult to identify and solicit accredited investors. 
Recent research has examined the importance of the pool of accredited 
investors for the entry of new businesses and employment and finds that 
geographic areas experiencing a larger reduction in the number of 
potential accredited investors experienced negative effects on new firm 
entry and employment levels at small entrants.\401\ Thus, because we 
expect the final amendments to expand the pool of accredited investors, 
the incremental benefits of this expansion to issuers may be 
comparatively greater for issuers in geographic areas with currently 
lower concentrations of accredited investors.\402\
---------------------------------------------------------------------------

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

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

[[Page 64272]]

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

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

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

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

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

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

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

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

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

[[Page 64273]]

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

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

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

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

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

[[Page 64274]]

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

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

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

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

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

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

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

[[Page 64275]]

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

VII. Paperwork Reduction Act

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

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

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

VIII. Final Regulatory Flexibility Analysis

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

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

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

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

B. Significant Issues Raised by Public Comments

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

C. Small Entities Subject to the Amendments

    The final amendments will affect some registrants that are small 
entities. The RFA defines ``small entity'' to mean ``small business,'' 
``small organization,'' or ``small governmental jurisdiction.'' \429\ 
For purposes of the RFA, under 17 CFR 230.157, an issuer, other than an 
investment company, is a ``small business'' or ``small organization'' 
if it had total assets of $5 million or less on the last day of its 
most recent fiscal year and is engaged or proposing to engage in an 
offering of securities not exceeding $5 million. Under 17 CFR 240.0-
10(a), an investment company, including a business development company, 
is considered to be a small entity if it, together with other 
investment companies in the same group of related investment companies, 
has net assets of $50 million or less as of the end of its most recent 
fiscal year.
---------------------------------------------------------------------------

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

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

[[Page 64276]]

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

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

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

E. Agency Action To Minimize Effect on Small Entities

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

IX. Statutory Authority

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

List of Subjects in 17 CFR Parts 230 and 240

    Reporting and recordkeeping requirements, Securities.

Text of the Amendments

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

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

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

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

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

Sec.  230.144A   Private resales of securities to institutions.

* * * * *
    (a) * * *
    (1) * * *
    (i) * * *
    (C) Any Small Business Investment Company licensed by the U.S. 
Small Business Administration under section 301(c) or (d) of the Small 
Business Investment Act of 1958 or any Rural Business Investment 
Company as defined in section 384A of the Consolidated Farm and Rural 
Development Act;
* * * * *
    (H) Any organization described in section 501(c)(3) of the Internal 
Revenue Code, corporation (other than a bank as defined in section 
3(a)(2) of the Act or a savings and loan association or other 
institution referenced in section 3(a)(5)(A) of the Act or a foreign 
bank or savings and loan association or equivalent institution), 
partnership, limited liability company, or Massachusetts or similar 
business trust;
* * * * *
    (J) Any institutional accredited investor, as defined in rule 
501(a) under the Act (17 CFR 230.501(a)), of a type not listed in 
paragraphs (a)(1)(i)(A) through (I) or paragraphs (a)(1)(ii) through 
(vi).

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

* * * * *

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

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

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

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

0
4. Revising Sec.  230.215 to read as follows:

Sec.  230.215   Accredited investor.

    The term accredited investor as used in section 2(a)(15)(ii) of the 
Securities Act of 1933 (15 U.S.C. 77b(a)(15)(ii)) shall have the same 
meaning as the

[[Page 64277]]

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

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

Sec.  230.501   Definitions and terms used in Regulation D.

* * * * *
    (a) * * *
    (1) Any bank as defined in section 3(a)(2) of the Act, or any 
savings and loan association or other institution as defined in section 
3(a)(5)(A) of the Act whether acting in its individual or fiduciary 
capacity; any broker or dealer registered pursuant to section 15 of the 
Securities Exchange Act of 1934; any investment adviser registered 
pursuant to section 203 of the Investment Advisers Act of 1940 or 
registered pursuant to the laws of a state; any investment adviser 
relying on the exemption from registering with the Commission under 
section 203(l) or (m) of the Investment Advisers Act of 1940; any 
insurance company as defined in section 2(a)(13) of the Act; any 
investment company registered under the Investment Company Act of 1940 
or a business development company as defined in section 2(a)(48) of 
that act; any Small Business Investment Company licensed by the U.S. 
Small Business Administration under section 301(c) or (d) of the Small 
Business Investment Act of 1958; any Rural Business Investment Company 
as defined in section 384A of the Consolidated Farm and Rural 
Development Act; any plan established and maintained by a state, its 
political subdivisions, or any agency or instrumentality of a state or 
its political subdivisions, for the benefit of its employees, if such 
plan has total assets in excess of $5,000,000; any employee benefit 
plan within the meaning of the Employee Retirement Income Security Act 
of 1974 if the investment decision is made by a plan fiduciary, as 
defined in section 3(21) of such act, which is either a bank, savings 
and loan association, insurance company, or registered investment 
adviser, or if the employee benefit plan has total assets in excess of 
$5,000,000 or, if a self-directed plan, with investment decisions made 
solely by persons that are accredited investors;
* * * * *
    (3) Any organization described in section 501(c)(3) of the Internal 
Revenue Code, corporation, Massachusetts or similar business trust, 
partnership, or limited liability company, not formed for the specific 
purpose of acquiring the securities offered, with total assets in 
excess of $5,000,000;
* * * * *
    (5) Any natural person whose individual net worth, or joint net 
worth with that person's spouse or spousal equivalent, exceeds 
$1,000,000;
* * * * *

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

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

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

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

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

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

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

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

[[Page 64278]]

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

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

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

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

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

Sec.  240.15g-1  Exemptions for certain transactions.

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

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

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

    By the Commission.

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