Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, 44771-44805 [2013-16883]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 142 (Wednesday, July 24, 2013)]
[Rules and Regulations]
[Pages 44771-44805]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-16883]


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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 239 and 242

[Release No. 33-9415; No. 34-69959; No. IA-3624; File No. S7-07-12]
RIN 3235-AL34


Eliminating the Prohibition Against General Solicitation and 
General Advertising in Rule 506 and Rule 144A Offerings

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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

SUMMARY: We are adopting amendments to Rule 506 of Regulation D and 
Rule 144A under the Securities Act of 1933 to implement Section 201(a) 
of the Jumpstart Our Business Startups Act. The amendment to Rule 506 
permits an issuer to engage in general solicitation or general 
advertising in offering and selling securities pursuant to Rule 506, 
provided that all purchasers of the securities are accredited investors 
and the issuer takes reasonable steps to verify that such purchasers 
are accredited investors. The amendment to Rule 506 also includes a 
non-exclusive list of methods that issuers may use to satisfy the 
verification requirement for purchasers who are natural persons. The 
amendment to Rule 144A provides that securities may be offered pursuant 
to Rule 144A to persons other than qualified institutional buyers, 
provided that the securities are sold only to persons that the seller 
and any person acting on behalf of the seller reasonably believe are 
qualified institutional buyers. We are also revising Form D to require 
issuers to indicate whether they are relying on the provision that 
permits general solicitation or general advertising in a Rule 506 
offering.
    Also today, in a separate release, to implement Section 926 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, we are 
adopting amendments to Rule 506 to disqualify issuers and other market 
participants from relying on Rule 506 if ``felons and other `bad 
actors' '' are participating in the Rule 506 offering. We are also 
today, in a separate release, publishing for comment a number of 
proposed amendments to Regulation D, Form D and Rule 156 under the 
Securities Act that are intended to enhance the Commission's ability to 
evaluate the development of market practices in Rule 506 offerings and 
address certain comments made in connection with implementing Section 
201(a)(1) of the Jumpstart Our Business Startups Act.

[[Page 44772]]


DATES: The final rule and form amendments are effective on September 
23, 2013.

FOR FURTHER INFORMATION CONTACT: Charles Kwon, Special Counsel, or Ted 
Yu, Senior Special Counsel, Office of Chief Counsel, Division of 
Corporation Finance, at (202) 551-3500, or, with respect to private 
funds, Holly Hunter-Ceci, Senior Counsel, Chief Counsel's Office, or 
Alpa Patel, Senior Counsel, Investment Adviser Regulation Office, 
Division of Investment Management, at (202) 551-6825 or (202) 551-6787, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rule 144A,\1\ 
Form D,\2\ and Rules 500,\3\ 501,\4\ 502 \5\ and 506 \6\ of Regulation 
D \7\ under the Securities Act of 1933,\8\ and to Rules 101,\9\ 102 
\10\ and 104 \11\ of Regulation M \12\ under the Securities Exchange 
Act of 1934.\13\
---------------------------------------------------------------------------

    \1\ 17 CFR 230.144A.
    \2\ 17 CFR 239.500.
    \3\ 17 CFR 230.500.
    \4\ 17 CFR 230.501.
    \5\ 17 CFR 230.502.
    \6\ 17 CFR 230.506.
    \7\ 17 CFR 230.500 through 230.508.
    \8\ 15 U.S.C. 77a et seq.
    \9\ 17 CFR 242.101.
    \10\ 17 CFR 242.102.
    \11\ 17 CFR 242.104.
    \12\ 17 CFR 242.100 through 242.105.
    \13\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

Table of Contents

I. Introduction
II. Final Amendments to Rule 506 and Form D
    A. Eliminating the Prohibition Against General Solicitation
    1. Proposed Rule Amendment
    2. Comments on the Proposed Rule Amendment
    3. Final Rule Amendment
    B. Reasonable Steps To Verify Accredited Investor Status
    1. Proposed Rule Amendment
    2. Comments on the Proposed Rule Amendment
    3. Final Rule Amendment
    a. Principles-Based Method of Verification
    b. Non-Exclusive Methods of Verifying Accredited Investor Status
    C. Reasonable Belief That All Purchasers Are Accredited 
Investors
    D. Form D Check Box for Rule 506(c) Offerings
    1. Proposed Form Amendment
    2. Comments on the Proposed Form Amendment
    3. Final Form Amendment
    E. Specific Issues for Private Funds
    F. Technical and Conforming Amendments
III. Final Amendment to Rule 144A
IV. Integration With Offshore Offerings
V. Paperwork Reduction Act
    A. Background
    B. Revisions to PRA Reporting and Cost Burden Estimates
VI. Economic Analysis
    A. Background
    B. Economic Baseline
    1. Size of the Exempt Offering Market
    2. Affected Market Participants
    a. Issuers
    b. Investors
    c. Investment Advisers
    d. Broker-Dealers
    3. Current Practices
    C. Analysis of the Amendment to Rule 506
    1. Benefits to Issuers
    2. Benefits to Investors
    3. Costs
    4. Indirect Effects on Other Markets
    5. Retention of Rule 506(b)
    D. Verifying Accredited Investor Status in Rule 506(c) Offerings
    E. Analysis of the Amendment to Rule 144A
    F. Additional Information Collection and Disclosures
VII. Final Regulatory Flexibility Analysis
    A. Reasons for, and Objectives of, the Action
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Final Rule and Form Amendments
    D. Projected Reporting, Recordkeeping and Other Compliance 
Requirements
    E. Duplicative, Overlapping or Conflicting Federal Rules
    F. Significant Alternatives
VIII. Statutory Authority and Text of Final Rule and Form Amendments

I. Introduction

    On August 29, 2012, we proposed rule and form amendments \14\ to 
implement Section 201(a) of the Jumpstart Our Business Startups Act 
(the ``JOBS Act'').\15\ Section 201(a)(1) of the JOBS Act directs the 
Commission, not later than 90 days after the date of enactment, to 
amend Rule 506 of Regulation D \16\ under the Securities Act of 1933 
(the ``Securities Act'') to permit general solicitation or general 
advertising in offerings made under Rule 506, provided that all 
purchasers of the securities are accredited investors.\17\ Section 
201(a)(1) also states that ``[s]uch rules shall require the issuer to 
take reasonable steps to verify that purchasers of the securities are 
accredited investors, using such methods as determined by the 
Commission.'' Section 201(a)(2) of the JOBS Act directs the Commission, 
not later than 90 days after the date of enactment, to revise Rule 
144A(d)(1) under the Securities Act \18\ to permit offers of securities 
pursuant to Rule 144A to persons other than qualified institutional 
buyers (``QIBs''),\19\ including by means of general solicitation or 
general advertising, provided that the securities are sold only to 
persons that the seller and any person acting on behalf of the seller 
reasonably believe are QIBs.
---------------------------------------------------------------------------

    \14\ See Eliminating the Prohibition Against General 
Solicitation and General Advertising in Rule 506 and Rule 144A 
Offerings, Release No. 33-9354 (Aug. 29, 2012) [77 FR 54464 (Sept. 
5, 2012)] (the ``Proposing Release'').
    \15\ Public Law 112-106, sec. 201(a), 126 Stat. 306, 313 (Apr. 
5, 2012).
    \16\ The Commission adopted Regulation D in 1982 as a result of 
the Commission's evaluation of the impact of its rules on the 
ability of small businesses to raise capital. See Revision of 
Certain Exemptions From Registration for Transactions Involving 
Limited Offers and Sales, Release No. 33-6389 (Mar. 8, 1982) [47 FR 
11251 (Mar. 16, 1982)]. Over the years, the Commission has revised 
various provisions of Regulation D in order to address, among other 
things, specific concerns relating to facilitating capital-raising 
as well as abuses that have arisen under Regulation D. See, e.g., 
Additional Small Business Initiatives, Release No. 33-6996 (Apr. 28, 
1993) [58 FR 26509 (May 4, 1993)] and Revision of Rule 504 of 
Regulation D, the ``Seed Capital'' Exemption, Release No. 33-7644 
(Feb. 25, 1999) [64 FR 11090 (Mar. 8, 1999)].
    \17\ The definition of the term ``accredited investor'' that is 
applicable to Rule 506 is set forth in Rule 501(a) of Regulation D 
[17 CFR 230.501(a)] and includes any person who comes within one of 
the definition's enumerated categories of persons, or whom the 
issuer ``reasonably believes'' comes within any of the enumerated 
categories, at the time of the sale of the securities to that 
person. For natural persons, Rule 502(a) defines an accredited 
investor as a person: (1) Whose individual net worth, or joint net 
worth with that person's spouse, exceeds $1 million, excluding the 
value of the person's primary residence (the ``net worth test''); or 
(2) 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 
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 
(the ``income test'').
    Although the Dodd-Frank Act did not change the amount of the $1 
million net worth test, it did change how that amount is 
calculated--by excluding the value of a person's primary residence. 
This change took effect upon the enactment of the Dodd-Frank Act. In 
December 2011, we amended Rule 501 to incorporate this change into 
the definition of accredited investor. See Net Worth Standard for 
Accredited Investors, Release No. 33-9287 (Dec. 21, 2011) [76 FR 
81793 (Dec. 29, 2011)].
    \18\ 17 CFR 230.144A(d)(1).
    \19\ The term ``qualified institutional buyer'' is defined in 
Rule 144A(a)(1) [17 CFR 230.144A(a)(1)] and includes specified 
institutions that, in the aggregate, own and invest on a 
discretionary basis at least $100 million in securities of issuers 
that are not affiliated with such institutions. Banks and other 
specified financial institutions must also have a net worth of at 
least $25 million. A registered broker-dealer qualifies as a QIB if 
it, in the aggregate, owns and invests on a discretionary basis at 
least $10 million in securities of issuers that are not affiliated 
with the broker-dealer.
---------------------------------------------------------------------------

    The Commission originally adopted Rule 506 as a non-exclusive safe 
harbor under Section 4(a)(2) (formerly Section 4(2)) of the Securities 
Act,\20\ which exempts transactions by an issuer ``not involving any 
public offering'' from the registration requirements of Section 5 of 
the Securities Act.\21\ Under existing Rule 506, an issuer may sell 
securities,

[[Page 44773]]

without any limitation on the offering amount, to an unlimited number 
of ``accredited investors,'' as defined in Rule 501(a) of Regulation D, 
and to no more than 35 non-accredited investors who meet certain 
``sophistication'' requirements.\22\ The availability of Rule 506 is 
subject to a number of requirements \23\ and is currently conditioned 
on the issuer, or any person acting on its behalf, not offering or 
selling securities through any form of ``general solicitation or 
general advertising.'' \24\ Although the terms ``general solicitation'' 
and ``general advertising'' are not defined in Regulation D, Rule 
502(c) does provide examples of general solicitation and general 
advertising, including advertisements published in newspapers and 
magazines, communications broadcast over television and radio, and 
seminars where attendees have been invited by general solicitation or 
general advertising.\25\ By interpretation, the Commission has 
confirmed that other uses of publicly available media, such as 
unrestricted Web sites, also constitute general solicitation and 
general advertising.\26\ In this release, we refer to both general 
solicitation and general advertising as ``general solicitation.''
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 77d(a)(2).
    \21\ 15 U.S.C. 77e.
    \22\ Under Rule 506(b)(2)(ii) [17 CFR 230.506(b)(2)(ii)], each 
purchaser in a Rule 506 offering who is not an accredited investor 
must possess, or the issuer must reasonably believe immediately 
before the sale of securities that such purchaser possesses, either 
alone or with his or her purchaser representative, ``such knowledge 
and experience in financial and business matters that he [or she] is 
capable of evaluating the merits and risks of the prospective 
investment.''
    \23\ Offerings under Rule 506 are subject to all the terms and 
conditions of Rules 501 and 502. If securities are sold to any non-
accredited investors, specified information requirements apply. See 
Rule 502(b) [17 CFR 230.502(b)].
    \24\ Rule 502(c) of Regulation D [17 CFR 230.502(c)].
    \25\ Id.
    \26\ See Use of Electronic Media for Delivery Purposes, Release 
No. 33-7233 (Oct. 6, 1995) [60 FR 53458, 53463-64 (Oct. 13, 1995)]; 
Use of Electronic Media, Release No. 33-7856 (Apr. 28, 2000) [65 FR 
25843, 25851-52 (May 4, 2000)].
---------------------------------------------------------------------------

    Rule 144A is a non-exclusive safe harbor exemption from the 
registration requirements of the Securities Act for resales of certain 
``restricted securities'' \27\ to QIBs. Resales to QIBs in accordance 
with the conditions of Rule 144A \28\ are exempt from registration 
pursuant to Section 4(a)(1) (formerly Section 4(1)) of the Securities 
Act,\29\ which exempts transactions by any person ``other than an 
issuer, underwriter, or dealer.'' Although Rule 144A does not include 
an express prohibition against general solicitation, offers of 
securities under Rule 144A currently must be limited to QIBs, which has 
the same practical effect. By its terms, Rule 144A is available solely 
for resale transactions; however, since its adoption by the Commission 
in 1990,\30\ market participants have used Rule 144A to facilitate 
capital-raising by issuers.\31\ The term ``Rule 144A offering'' in this 
release 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 that is exempt from registration 
pursuant to Section 4(a)(2) or Regulation S under the Securities 
Act,\32\ followed by the resale of those securities by the initial 
purchasers to QIBs in reliance on Rule 144A.
---------------------------------------------------------------------------

    \27\ ``Restricted securities'' are defined in Securities Act 
Rule 144(a)(3) [17 CFR 230.144(a)(3)] to include, in part, 
``[s]ecurities acquired directly or indirectly from the issuer, or 
from an affiliate of the issuer, in a transaction or chain of 
transactions not involving any public offering.''
    \28\ In order for a transaction to come within existing Rule 
144A, a seller must have a reasonable basis for believing that the 
offeree or purchaser is a QIB and must take reasonable steps to 
ensure that the purchaser is aware that the seller may rely on Rule 
144A. Further, only securities that were not, when issued, of the 
same class as securities listed on a U.S. securities exchange or 
quoted on a U.S. automated interdealer quotation system are eligible 
for resale under Rule 144A. Also, the seller and a prospective 
purchaser designated by the seller must have the right to obtain 
from the issuer, upon request, certain information on the issuer, 
unless the issuer falls within specified categories as to which this 
condition does not apply.
    \29\ 15 U.S.C. 77d(a)(1).
    \30\ See Resale of Restricted Securities; Changes to Method of 
Determining Holding Period of Restricted Securities Under Rules 144 
and 145, Release No. 33-6862 (Apr. 23, 1990) [55 FR 17933 (Apr. 30, 
1990)].
    \31\ While Rule 144A applies to resales of securities of both 
U.S. and non-U.S. issuers, one of the objectives of Rule 144A was to 
make primary offerings of non-U.S. issuers' securities available to 
U.S. institutions in the U.S. market through intermediaries (rather 
than compelling such investors to go to overseas markets) by making 
the private offering market in the United States more attractive to 
non-U.S. issuers. 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)].
    \32\ Regulation S under the Securities Act [17 CFR 230.901 
through 230.905] was adopted in 1990 as a safe harbor from the 
registration requirements of the Securities Act for any offer or 
sale of securities made outside the United States. It provides that 
any ``offer,'' ``offer to sell,'' ``sell,'' ``sale'' or ``offer to 
buy'' that occurs outside the United States is not subject to the 
registration requirements of Section 5. Regulation S does not affect 
the scope or availability of the antifraud or other provisions of 
the Securities Act to offers and sales made in reliance on 
Regulation S.
---------------------------------------------------------------------------

    Rule 506 offerings and Rule 144A offerings are widely used by U.S. 
and non-U.S. issuers to raise capital. In 2012, the estimated amount of 
capital (including both equity and debt) reported as being raised in 
Rule 506 offerings and non-asset-backed securities (``non-ABS'') Rule 
144A offerings by operating companies was $173 billion and $636 
billion, respectively, and by pooled investment funds, such as venture 
capital funds, private equity funds and hedge funds, was $725 billion 
and $4 billion, respectively, compared to $1.2 trillion raised in 
registered offerings.\33\ In 2011, the estimated amount of capital 
(including both equity and debt) reported as being raised in Rule 506 
offerings and non-ABS Rule 144A offerings by operating companies was 
$71 billion and $438 billion, respectively, and by pooled investment 
funds was $778 billion and $4 billion, respectively, compared to $985 
billion raised in registered offerings.\34\ These data points 
underscore the importance of the Rule 506 and Rule 144A exemptions for 
issuers seeking access to the U.S. capital markets.
---------------------------------------------------------------------------

    \33\ These statistics are based on a review of Form D electronic 
filings with the Commission--specifically, the ``total amount sold'' 
as reported in the filings--and data regarding other types of 
offerings (e.g., public debt offerings and Rule 144A offerings) from 
Securities Data Corporation's New Issues database (Thomson 
Financial). See Vladimir Ivanov and Scott Bauguess, Capital Raising 
in the U.S.: An Analysis of Unregistered Offerings Using the 
Regulation D Exemption, 2009-2012 (July 2013) (the ``Ivanov/Bauguess 
Study''), available at: https://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf. For non-ABS Rule 
144A offerings, since the databases we used to obtain the Rule 144A 
data do not distinguish between operating companies and funds, we 
classified issuers with SIC codes between 6200 and 6299 as funds, 
and the rest as operating companies.
    The amount of capital raised through offerings under Regulation 
D may be larger than what is reported in Form D filings because, 
although the filing of a Form D is a requirement of Rule 503(a) of 
Regulation D [17 CFR 230.503(a)], it is not a condition to the 
availability of the exemptions under Regulation D. Further, once a 
Form D is filed, the issuer is not required to file an amendment to 
the filing to reflect a change that occurs after the offering 
terminates or a change that occurs solely with respect to certain 
information, such as the amount sold in the offering. For example, 
if the amount sold does not result in an increase in the total 
offering amount of more than 10% or the offering closes within a 
year, the filing of an amendment to the initial Form D is not 
required. Therefore, a Form D filed for a particular offering may 
not reflect the total amount of securities sold in the offering in 
reliance on the exemption.
    \34\ See id.
---------------------------------------------------------------------------

    To implement Section 201(a) of the JOBS Act, we proposed amending 
Rule 506 to add new paragraph (c), under which the prohibition against 
general solicitation contained in Rule 502(c) would not apply, provided 
that all purchasers of the securities are accredited investors and the 
issuer takes reasonable steps to verify that such purchasers are 
accredited investors. In addition, we proposed amending Form D, which 
is a notice required to be filed with the Commission by each issuer

[[Page 44774]]

claiming a Regulation D exemption, to add a check box to indicate 
whether an issuer is claiming an exemption under Rule 506(c). We also 
proposed an amendment to Rule 144A to provide that securities sold 
pursuant to Rule 144A may be offered to persons other than QIBs, 
including by means of general solicitation, provided that the 
securities are sold only to persons that the seller and any person 
acting on behalf of the seller reasonably believe are QIBs.
    The comment period for the proposed rule and form amendments closed 
on October 5, 2012. We received over 225 comment letters on the 
Proposing Release, including from professional and trade associations, 
investor organizations, law firms, investment companies and investment 
advisers, members of Congress, the Commission's Investor Advisory 
Committee,\35\ state securities regulators, issuers, individuals and 
other interested parties. Most of the comment letters focused on the 
proposed amendments to Rule 506. As discussed below, commenters were 
sharply divided in their views on the proposed amendments to Rule 506, 
whereas commenters generally supported the proposed amendments to Rule 
144A and Form D.
---------------------------------------------------------------------------

    \35\ The SEC Investor Advisory Committee (``Investor Advisory 
Committee'') was established in April 2012 pursuant to Section 911 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
[Pub. L. 111-203, sec. 911, 124 Stat. 1376, 1822 (July 21, 2010)] 
(the ``Dodd-Frank Act'') to advise the Commission on regulatory 
priorities, the regulation of securities products, trading 
strategies, fee structures, the effectiveness of disclosure, 
initiatives to protect investor interests and to promote investor 
confidence and the integrity of the securities marketplace. The 
Dodd-Frank Act authorizes the Investor Advisory Committee to submit 
findings and recommendations for review and consideration by the 
Commission.
---------------------------------------------------------------------------

    We have reviewed and considered all of the comments that we 
received on the proposed rule and form amendments and on Section 201(a) 
of the JOBS Act.\36\ We are adopting new paragraph (c) to Rule 506 as 
proposed, with one modification, and the amendments to Form D and to 
Rule 144A as proposed. We are also adopting the technical and 
conforming rule amendments as proposed. We discuss these amendments in 
detail below.
---------------------------------------------------------------------------

    \36\ To facilitate public input on JOBS Act rulemaking before 
the issuance of rule proposals, the Commission invited members of 
the public to make their views known on various JOBS Act initiatives 
in advance of any rulemaking by submitting comment letters to the 
Commission's Web site at https://www.sec.gov/spotlight/jobsactcomments.shtml. The comment letters relating to Section 
201(a) of the JOBS Act submitted in response to this invitation are 
located at https://www.sec.gov/comments/jobs-title-ii/jobs-title-ii.shtml. The comment letters submitted in response to the Proposing 
Release are located at https://www.sec.gov/comments/s7-07-12/s70712.shtml. Many commenters submitted comment letters both before 
and after the issuance of the Proposing Release. Dated comment 
letters refer to those submitted before the issuance of the 
Proposing Release or by commenters that submitted multiple letters.
---------------------------------------------------------------------------

    We acknowledge the concerns of some commenters that the elimination 
of the prohibition against general solicitation for a subset of Rule 
506 offerings may affect the behavior of issuers and other market 
participants in ways they believe could compromise investor 
protection.\37\ Preserving the integrity of the Rule 506(c) market and 
minimizing the incidence of fraud are critical objectives for the 
Commission in implementing Section 201(a) of the JOBS Act. We are 
adopting today the bad actor disqualification for Rule 506 offerings 
mandated by the Dodd-Frank Act, which may address some of those 
concerns.\38\ We are also issuing a proposing release to amend 
Regulation D and Form D to enhance the Commission's ability to analyze 
the Rule 506 market and to amend Rule 156 under the Securities Act to 
provide guidance to private funds on the application of the antifraud 
provisions of the federal securities laws to their sales 
literature.\39\ Upon the effectiveness of Rule 506(c), the Commission 
staff will monitor developments in the market for Rule 506(c) offerings 
so as to be able to undertake a review of market practices in Rule 
506(c) offerings, including the steps taken by issuers and other market 
participants to verify that the purchasers of the offered securities 
are accredited investors, as well as the impact of the amendments to 
Rule 506 on capital formation.
---------------------------------------------------------------------------

    \37\ See, e.g., letters from Investor Advisory Committee; North 
American Securities Administrators Association, Inc. (``NASAA''); 
Consumer Federation of America (``Consumer Federation'').
    \38\ Disqualification of Felons and Other ``Bad Actors'' from 
Rule 506 Offerings, Release No. 33-9414 (July 10, 2013) (the ``Bad 
Actor Release'').
    \39\ See Amendments to Regulation D, Form D and Rule 156, 
Release No. 33-9416 (July 10, 2013).
---------------------------------------------------------------------------

II. Final Amendments to Rule 506 and Form D

A. Eliminating the Prohibition Against General Solicitation

    Section 4(a)(2) of the Securities Act exempts transactions by an 
issuer ``not involving any public offering.'' An issuer relying on 
Section 4(a)(2) is restricted in its ability to make public 
communications to attract investors for its offering because public 
advertising is incompatible with a claim of exemption under Section 
4(a)(2).\40\ As noted above, Rule 506 currently conditions the 
availability of the safe harbor under Section 4(a)(2) on the issuer, or 
any person acting on its behalf, not offering or selling securities 
through any form of general solicitation.\41\ Section 201(a)(1) of the 
JOBS Act directs the Commission to amend Rule 506 to provide that the 
prohibition against general solicitation contained in Rule 502(c) shall 
not apply to offers and sales of securities made pursuant to Rule 506, 
as so amended, provided that all purchasers of the securities are 
accredited investors and the issuer takes reasonable steps to verify 
their status as accredited investors.
---------------------------------------------------------------------------

    \40\ See Non-Public Offering Exemption, Release No. 33-4552 
(Nov. 6, 1962) [27 FR 11316 (Nov. 16, 1962)].
    \41\ See Rule 502(c) and Rule 506(b)(1) of Regulation D [17 CFR 
230.506(b)(1)]. The failure to comply with Rule 502(c) is deemed to 
be significant to the offering as a whole, which means that an 
issuer cannot rely on the ``insignificant deviation'' relief in Rule 
508 of Regulation D for violations of Rule 502(c). See Rule 
508(a)(2) [17 CFR 230.508(a)(2)].
---------------------------------------------------------------------------

    This mandate affects only Rule 506, and not Section 4(a)(2) 
offerings in general,\42\ which means that even after the effective 
date of Rule 506(c), an issuer relying on Section 4(a)(2) outside of 
the Rule 506(c) exemption will be restricted in its ability to make 
public communications to solicit investors for its offering because 
public advertising will continue to be incompatible with a claim of 
exemption under Section 4(a)(2). We are amending Rule 500(c) of 
Regulation D accordingly to make this clear.\43\ Congress' directive in 
Section 201(a)(1) of the JOBS Act, and not Section 4(a)(2) of the 
Securities Act or our interpretation of Section 4(a)(2), is the reason 
that Rule 506, ``as revised pursuant to [Section 201(a)(1)], shall 
continue to be treated as a regulation issued under section 4[(a)](2) 
of the Securities Act of 1933'' (emphasis added).\44\ Similarly, 
securities issued in Rule 506(c) offerings are deemed to be ``covered 
securities'' for purposes of

[[Page 44775]]

Section 18(b)(4)(E) of the Securities Act,\45\ only by virtue of 
Section 201(a)(1) of the JOBS Act.
---------------------------------------------------------------------------

    \42\ In this regard, we also note that bills that would have 
amended Section 4(a)(2) directly, rather than requiring the 
Commission to amend Rule 506, to permit the use of general 
solicitation were introduced and considered by Congress, but were 
not enacted. See Access to Capital for Job Creators, H.R. 2940, 
112th Cong., 1st Sess. (2011) (proposing to amend Section 4(a)(2) by 
adding the phrase ``whether or not such transactions involve general 
solicitation or general advertising''); Access to Capital for Job 
Creators, S.1831, 112th Cong., 1st Sess. (2011) (same).
    \43\ As revised, Rule 500(c) reads as follows: ``Attempted 
compliance with any rule in Regulation D does not act as an 
exclusive election; the issuer can also claim the availability of 
any other applicable exemption. For instance, an issuer's failure to 
satisfy all the terms and conditions of rule 506(b) (Sec.  
230.506(b)) shall not raise any presumption that the exemption 
provided by section 4(a)(2) of the Act is not available.'' 
(additions italicized).
    \44\ Section 201(a)(1) of the JOBS Act.
    \45\ 15 U.S.C. 77r(b)(4)(E). This means that state blue sky 
registration requirements do not apply to securities offered or sold 
in Rule 506(c) offerings.
---------------------------------------------------------------------------

1. Proposed Rule Amendment
    To implement the mandated rule change, we proposed new Rule 506(c), 
which would permit the use of general solicitation to offer and sell 
securities under Rule 506, provided that the following conditions are 
satisfied:
     All terms and conditions of Rule 501 \46\ and Rules 502(a) 
\47\ and 502(d) \48\ must be satisfied;
---------------------------------------------------------------------------

    \46\ Rule 501 sets forth definitions for the terms used in 
Regulation D, such as ``accredited investor.''
    \47\ Rule 502(a) addresses the question of integration by 
providing a six-month safe harbor from integration for successive 
Regulation D offerings and a five-factor framework to apply in cases 
in which the six-month safe harbor is not available.
    \48\ Rule 502(d) provides that, for resale purposes, securities 
acquired in a Regulation D offering, except as provided in Rule 
504(b)(1), have the status of securities acquired in a transaction 
under Section 4(a)(2) of the Securities Act. Rule 144(a)(3)(ii) [17 
CFR 230.144(a)(3)(ii)] defines ``restricted securities'' as 
securities ``acquired from the issuer that are subject to the resale 
limitations of Sec.  230.502(d) under Regulation D. . . .'' 
Separately, Section 201(b) of the JOBS Act added Section 4(b) of the 
Securities Act, which provides that ``[o]ffers and sales exempt 
under [Rule 506 as amended pursuant to Section 201 of the JOBS Act] 
shall not be deemed public offerings under the Federal securities 
laws as a result of general advertising or general solicitation.'' 
Thus, securities acquired under new Rule 506(c) would also meet the 
definition of ``restricted securities'' under Rule 144(a)(3)(i) [17 
CFR 230.144(a)(3)(i)] (``[s]ecurities acquired directly or 
indirectly from the issuer, or from an affiliate of the issuer, in a 
transaction or chain of transactions not involving any public 
offering'').
---------------------------------------------------------------------------

     all purchasers of securities must be accredited investors; 
and
     the issuer must take reasonable steps to verify that the 
purchasers of the securities are accredited investors.

Offerings under proposed Rule 506(c) would not be subject to the 
requirement to comply with Rule 502(c), which contains the prohibition 
against general solicitation. While we proposed Rule 506(c) to enable 
issuers to use general solicitation in Rule 506 offerings, we also 
preserved, in current Rule 506(b), the existing ability of issuers to 
conduct Rule 506 offerings subject to the prohibition against general 
solicitation.
2. Comments on the Proposed Rule Amendment
    Commenters were sharply divided in their views on the proposed 
amendment to Rule 506. Commenters who supported the proposed amendment 
to Rule 506 stated that Rule 506(c), if adopted, would assist issuers, 
particularly early stage and smaller issuers, in raising capital by 
allowing them to solicit investments from a larger pool of 
investors.\49\ These commenters generally approved of the flexibility 
afforded by the manner in which we proposed to implement Rule 506(c)'s 
verification requirement,\50\ as further discussed below, and supported 
retaining, in its current form, the ability of issuers under existing 
Rule 506(b) to conduct Rule 506 offerings subject to the prohibition 
against general solicitation.\51\ A number of commenters stated that 
they supported the availability of Rule 506(c) for private funds 
pursuant to the Commission's guidance in the Proposing Release.\52\
---------------------------------------------------------------------------

    \49\ See, e.g., letters from Biotechnology Industry Organization 
(``BIO''); National Small Business Association (``NSBA'').
    \50\ See letters from Linklaters LLP (``Linklaters'') (stating 
that a ``straightforward, focused rule that provides issuers with 
the flexibility to continue to adapt to market practice is the best 
way to realize the spirit and intent of the Jumpstart Our Business 
Startups Act''); BlackRock (stating that ``[o]verall, we believe 
that the Proposed Rule is in accordance with the intent of Congress 
and will facilitate the formation of capital''); Securities 
Regulation Committee, Business Law Section of the New York State Bar 
Association (``SRC of NYSBA'').
    \51\ See, e.g., letters from the Federal Regulation of 
Securities Committee, Business Law Section of the American Bar 
Association (``ABA Fed. Reg. Comm.''); Angel Capital Association 
(``ACA'') (Sept. 27, 2012); The CrowdFund Intermediary Regulatory 
Advocates (``CFIRA''); Investment Program Association (``IPA''); 
Montgomery & Hansen, LLP (``Montgomery & Hansen''); NSBA; Committee 
on Securities Regulation of the New York City Bar Association 
(``NYCBA''); Sullivan & Cromwell LLP (``S&C''); Securities Industry 
and Financial Markets Association (``SIFMA'') and The Financial 
Services Roundtable (``FSR'') (Oct. 5, 2012).
    \52\ See, e.g., letters from BlackRock; Dukas Public Relations 
(``Dukas''); Forum for U.S. Securities Lawyers in London; Hedge Fund 
Association (``HFA''); Investment Adviser Association (``IAA''); 
Managed Funds Association (``MFA'') (Sept. 28, 2012); NYCBA; SRC of 
NYSBA. In the Proposing Release, we stated that private funds that 
engage in general solicitation under proposed Rule 506(c) would not 
be precluded from relying on the exclusions from the definition of 
``investment company'' set forth in Section 3(c)(1) and Section 
3(c)(7) of the Investment Company Act of 1940.
---------------------------------------------------------------------------

    Other commenters opposed the proposed amendment to Rule 506 in its 
entirety or in part. Many of these commenters expressed concern that 
the proposed amendment, if adopted, would increase the risk of 
fraudulent and abusive Rule 506 offerings and asserted that additional 
investor safeguards are necessary under Rule 506(c).\53\ A number of 
these commenters urged the Commission to adopt rules concerning bad 
actor disqualifications for Rule 506 offerings, as required by Section 
926 of the Dodd-Frank Act.\54\ Other commenters recommended that the 
Commission amend the definition of ``accredited investor'' by raising 
the income and net worth thresholds for natural persons or by 
implementing other measures of financial sophistication.\55\ Some 
commenters stated that the Commission should condition the availability 
of the Rule 506(c) exemption on the filing of Form D or require the 
advance filing of Form D, or both.\56\ Other commenters argued that the 
Commission should adopt specific standards or requirements that would 
govern the content and/or manner of general solicitations in Rule 
506(c) offerings, particularly with respect to advertising by private 
funds.\57\ A number of commenters urged the Commission to require that 
the materials used to generally solicit investors in Rule 506(c) 
offerings be filed with or furnished to either the Commission or to 
FINRA.\58\
---------------------------------------------------------------------------

    \53\ See, e.g., letters from AARP; AFL-CIO and Americans for 
Financial Reform (``AFR''); Sen. Levin; CFA Institute; Council of 
Institutional Investors (``CII''); Consumer Federation; Fund 
Democracy, Inc. (``Fund Democracy''); Office of the Secretary of the 
Commonwealth of Massachusetts Securities Division (``Massachusetts 
Securities Division''); NASAA.
    \54\ Public Law 111-203, sec. 926, 124 Stat. 1376, 1851 (July 
21, 2010) (to be codified at 15 U.S.C. 77d note). See, e.g., letters 
from AFL-CIO and AFR; Consumer Federation; Fund Democracy; 
Commissioner of Securities, State of Hawaii (``Hawaii Commissioner 
of Securities''); Investor Advisory Committee; Rep. Waters; 
Commissioner of Securities, State of Missouri (``Missouri 
Commissioner of Securities''); NASAA.
    \55\ See, e.g., letters from AARP; AFL-CIO and AFR; 
BetterInvesting; CFA Institute; Consumer Federation; Investor 
Advisory Committee; Investment Company Institute (``ICI''); Rep. 
Waters; Massachusetts Securities Division (July 2, 2012).
    \56\ See, e.g., letters from AARP; AFL-CIO and AFR; Consumer 
Federation; Hawaii Commissioner of Securities; Investor Advisory 
Committee; Massachusetts Securities Division (July 2, 2012); 
Missouri Commissioner of Securities; Commissioner of Securities and 
Insurance, State of Montana (``Montana Commissioner of 
Securities''); NASAA; Ohio Division of Securities.
    \57\ See, e.g., letters from Sen. Levin; Consumer Federation; 
ICI; Independent Directors Council (``IDC''); Rep. Waters; Montana 
Commissioner of Securities; NASAA.
    \58\ See, e.g., letters from AFL-CIO and AFR; Investor Advisory 
Committee; ICI; Massachusetts Securities Division (July 2, 2012).
---------------------------------------------------------------------------

    A number of commenters requested that the Commission provide 
transitional guidance with respect to ongoing offerings under existing 
Rule 506 that commenced before the effectiveness of Rule 506(c).\59\ 
For example, in some situations, the initial closings in these 
offerings may have already occurred, and could have included non-
accredited investors pursuant to offering procedures that would not 
have involved any form of general solicitation.\60\ Several commenters 
suggested that the Commission clarify that an issuer would be entitled 
to conduct the portion of the

[[Page 44776]]

offering following the effectiveness of Rule 506(c) in accordance with 
the requirements of new Rule 506(c), without the portion of the 
offering occurring after the rule's effectiveness affecting the portion 
of the offering that was completed prior to the rule's 
effectiveness.\61\
---------------------------------------------------------------------------

    \59\ See letters from ABA Fed. Reg. Comm.; Forum for U.S. 
Securities Lawyers in London; S&C; IPA.
    \60\ See letter from ABA Fed. Reg. Comm.
    \61\ See letters from ABA Fed. Reg. Comm.; S&C (stating that 
``[w]e believe that such issuers should be allowed, upon 
effectiveness of the final rule, to use the new Rule 506(c) 
exemption and use general solicitation for the remaining portion of 
their offerings, provided that they satisfy the requirements of Rule 
506(c) going forward.'').
---------------------------------------------------------------------------

3. Final Rule Amendment
    After considering the comments, we are adopting Rule 506(c) as 
proposed, with one modification. Under new Rule 506(c), issuers can 
offer securities through means of general solicitation, provided that 
they satisfy all of the conditions of the exemption.\62\ These 
conditions are:
---------------------------------------------------------------------------

    \62\ We also note that broker-dealers participating in offerings 
in conjunction with issuers relying on Rule 506(c) would continue to 
be subject to FINRA rules regarding communications with the public, 
which, among other things, (1) generally require all member 
communications to be based on principles of fair dealing and good 
faith, to be fair and balanced, and to provide a sound basis for 
evaluating the facts in regard to any particular security or type of 
security, industry or service; and (2) prohibit broker-dealers from 
making false, exaggerated, unwarranted, promissory or misleading 
statements or claims in any communications. See FINRA Rule 2210.
---------------------------------------------------------------------------

     all terms and conditions of Rule 501 and Rules 502(a) and 
502(d) must be satisfied; \63\
---------------------------------------------------------------------------

    \63\ New Rule 506(c)(1).
---------------------------------------------------------------------------

     all purchasers of securities must be accredited investors; 
\64\ and
---------------------------------------------------------------------------

    \64\ New Rule 506(c)(2)(i).
---------------------------------------------------------------------------

     the issuer must take reasonable steps to verify that the 
purchasers of the securities are accredited investors.\65\
---------------------------------------------------------------------------

    \65\ New Rule 506(c)(2)(ii).

Issuers relying on Rule 506(c) for their offerings will not be subject 
to the prohibition against general solicitation found in Rule 
502(c).\66\ In addition and as further discussed below, in response to 
comments from a wide range of commenters asking for greater certainty 
with respect to satisfying the verification requirement, we are also 
including in Rule 506(c) a non-exclusive list of methods that issuers 
may use to verify the accredited investor status of natural persons.
---------------------------------------------------------------------------

    \66\ Offerings under Rule 506(c) will also not be subject to the 
information requirements in Rule 502(b) for non-accredited 
investors, because all purchasers in Rule 506(c) offerings are 
required to be accredited investors.
---------------------------------------------------------------------------

    Issuers will continue to have the ability under Rule 506(b) to 
conduct Rule 506 offerings subject to the prohibition against general 
solicitation. As we noted in the Proposing Release, offerings under 
existing Rule 506(b) represent an important source of capital for 
issuers of all sizes, and we believe that the continued availability of 
existing Rule 506(b) will be important for those issuers that either do 
not wish to engage in general solicitation in their Rule 506 offerings 
(and become subject to the requirement to take reasonable steps to 
verify the accredited investor status of purchasers) or wish to sell 
privately to non-accredited investors who meet Rule 506(b)'s 
sophistication requirements. Retaining the safe harbor under existing 
Rule 506(b) may also be beneficial to investors with whom an issuer has 
a pre-existing substantive relationship.\67\ In this regard, we do not 
believe that Section 201(a) requires the Commission to modify Rule 506 
to impose any new requirements on offers and sales of securities that 
do not involve general solicitation. Therefore, the amendment to Rule 
506 we are adopting today does not amend or modify the requirements 
relating to existing Rule 506(b).
---------------------------------------------------------------------------

    \67\ See Release No. 33-7856, at 25852 (noting that ``one method 
of ensuring that general solicitation is not involved is to 
establish the existence of a `pre-existing, substantive 
relationship''' and that ``there may be facts and circumstances in 
which a third party, other than a registered broker-dealer, could 
established a `pre-existing, substantive relationship' sufficient to 
avoid a `general solicitation' '').
---------------------------------------------------------------------------

    Finally, with respect to transition matters, for an ongoing 
offering under Rule 506 that commenced before the effective date of 
Rule 506(c), the issuer may choose to continue the offering after the 
effective date in accordance with the requirements of either Rule 
506(b) or Rule 506(c). If an issuer chooses to continue the offering in 
accordance with the requirements of Rule 506(c), any general 
solicitation that occurs after the effective date will not affect the 
exempt status of offers and sales of securities that occurred prior to 
the effective date in reliance on Rule 506(b).

B. Reasonable Steps To Verify Accredited Investor Status

    Section 201(a)(1) of the JOBS Act mandates that our amendment to 
Rule 506 require issuers using general solicitation in Rule 506 
offerings ``to take reasonable steps to verify that purchasers of the 
securities are accredited investors, using such methods as determined 
by the Commission.'' As noted in the Proposing Release, we believe that 
the purpose of the verification mandate is to address concerns, and 
reduce the risk, that the use of general solicitation in Rule 506 
offerings could result in sales of securities to investors who are not, 
in fact, accredited investors.\68\
---------------------------------------------------------------------------

    \68\ See, e.g., Markup of H.R. 2940, Access to Capital for Job 
Creators Act, Subcommittee on Capital Markets and Government 
Sponsored Enterprises, House Financial Services Committee, 112th 
Cong. (Oct. 5, 2011) (remarks of Rep. Waters, explaining that she is 
introducing the amendment that requires issuers to take reasonable 
steps to verify accredited investor status because ``we must take 
steps to ensure that those folks are indeed sophisticated''); 157 
Cong. Rec. H7291 (daily ed. Nov. 3, 2011) (remarks of Rep. Maloney 
(same)); 157 Cong. Rec. H7294 (daily ed. Nov. 3, 2011) (remarks of 
Rep. Lee (same)).
---------------------------------------------------------------------------

1. Proposed Rule Amendment
    To implement the verification mandate of Section 201(a)(1), we 
proposed to condition the Rule 506(c) exemption on the requirement that 
issuers using general solicitation ``take reasonable steps to verify'' 
that the purchasers of the offered securities are accredited investors. 
As proposed, whether the steps taken are ``reasonable'' would be an 
objective determination by the issuer (or those acting on its behalf), 
in the context of the particular facts and circumstances of each 
purchaser and transaction. Under this principles-based approach, 
issuers would consider a number of factors when determining the 
reasonableness of the steps to verify that a purchaser is an accredited 
investor, such as:
     The nature of the purchaser and the type of accredited 
investor that the purchaser claims to be;
     the amount and type of information that the issuer has 
about the purchaser; and
     the nature of the offering, such as the manner in which 
the purchaser was solicited to participate in the offering, and the 
terms of the offering, such as a minimum investment amount.

These factors would be interconnected, and the information gained by 
looking at these factors would help an issuer assess the reasonable 
likelihood that a potential purchaser is an accredited investor, which 
would, in turn, affect the types of steps that would be reasonable to 
take to verify a purchaser's accredited investor status.
    In the Proposing Release, we considered providing a list of 
specified methods for satisfying the verification requirement, which 
was suggested by some commenters on Section 201(a) prior to the 
issuance of the Proposing Release.\69\ We expressed concern that, in

[[Page 44777]]

designating such a list--for example, by setting forth particular types 
of information that issuers may rely upon as conclusive means of 
verifying accredited investor status--there may be circumstances where 
such information will not actually verify accredited investor status or 
where issuers may unreasonably overlook or disregard other information 
indicating that a purchaser is not, in fact, an accredited investor. 
Also, we were concerned that requiring issuers to use specified methods 
of verification would be impractical, burdensome and potentially 
ineffective in light of the numerous ways in which a purchaser can 
qualify as an accredited investor, as well as the potentially wide 
range of verification issues that may arise, depending on the nature of 
the purchaser and the facts and circumstances of a particular Rule 
506(c) offering. Even if the list of specified methods was not 
mandatory, but rather, constituted a non-exclusive list, we were 
concerned that a non-exclusive list of specified methods could be 
viewed by market participants as, in effect, required methods, in which 
compliance with at least one of the enumerated methods could be viewed 
as necessary in all circumstances to demonstrate that the verification 
requirement has been satisfied, thereby eliminating the flexibility 
that proposed Rule 506(c) was intended to provide.
---------------------------------------------------------------------------

    \69\ See letters from MFA (June 26, 2012) (suggesting that the 
Commission publish a non-exclusive list of the types of third-party 
evidence that an investor could provide to establish accredited 
investor status, in conjunction with certifying that he or she is an 
accredited investor); NASAA (July 3, 2012) (recommending that the 
Commission set forth non-exclusive safe harbors to specify the types 
of actions that would be deemed ``reasonable steps to verify'' for 
three types of accredited investors: natural persons who purport to 
satisfy the income test; natural persons who purport to satisfy the 
net worth test; and entities who purport to meet one of the other 
tests set forth in Rule 501(a)).
---------------------------------------------------------------------------

    We requested comment in the Proposing Release on our proposed 
principles-based method and its effectiveness in limiting sales of 
securities in Rule 506(c) offerings to only accredited investors. We 
also requested comment on possible alternative approaches for 
implementing the verification mandate of Section 201(a)(1), such as a 
rule that specifies mandatory methods for verifying accredited investor 
status or a non-exclusive list of verification methods that would 
function as a safe harbor for compliance with the verification 
requirement.
2. Comments on the Proposed Rule Amendment
    Commenters expressed a wide range of views on the proposed approach 
to the verification requirement in Rule 506(c). Some commenters 
commended the Commission for proposing a flexible, principles-based 
standard for verification.\70\ For example, one commenter stated that 
the Commission's proposed approach would provide issuers with the 
flexibility to develop tailored, reliable and cost-effective procedures 
for verification.\71\ A number of commenters stated that the discussion 
in the Proposing Release of the factors that issuers may take into 
account in verifying accredited investor status would assist issuers in 
assessing the reasonableness of their verification processes.\72\ Other 
commenters asserted that not requiring issuers to use certain specified 
methods to verify a purchaser's accredited investor status would permit 
advancements in verification methods over time.\73\ Some commenters 
expressed support for the Commission's proposal that accredited 
investor status may be verified through an attestation or certification 
by a third party, provided that the issuer has a reasonable basis to 
rely on such third-party verification.\74\
---------------------------------------------------------------------------

    \70\ See, e.g., letters from HFA; MFA (Sept. 28, 2012); BIO; ABA 
Fed. Reg. Comm.; IAA; Linklaters; NYCBA; SRC of NYSBA; SIFMA and FSR 
(Oct. 5, 2012); Artivest Holdings, Inc. (``Artivest'').
    \71\ See letter from SIFMA and FSR (Oct. 5, 2012).
    \72\ See, e.g., letters from SRC of NYSBA; S&C; SIFMA and FSR 
(Oct. 5, 2012); IAA.
    \73\ See letters from ACA (Sept. 27, 2012); CFIRA.
    \74\ See, e.g., letters from IAA; SIFMA and FSR (Oct. 5, 2012); 
Tannenbaum Helpern Syracuse & Hirschtritt LLP (``Tannenbaum 
Helpern''). A number of commenters noted that the availability of 
third-party verification could address investors' privacy and 
security concerns in providing information to an issuer. See, e.g., 
letters from L. Neumann; NSBA. One commenter urged the Commission 
not to limit third-party verification providers to certain types of 
entities. See letter from Tannenbaum Helpern. One commenter 
suggested the possibility of requiring investors to self-certify as 
to accredited investor status under penalty of perjury. See letter 
from NSBA.
---------------------------------------------------------------------------

    Other commenters opposed the Commission's proposed approach, for 
various reasons. A number of these commenters opposed the proposed 
verification standard because, in their view, self-certification by 
itself should be sufficient to satisfy the verification 
requirement.\75\ Some commenters opposed the proposed verification 
standard because it did not prescribe specific verification methods, 
which they believed is required in order to satisfy the verification 
mandate in Section 201(a).\76\ One commenter stated that the Commission 
should deem the verification requirement to be satisfied if all 
purchasers in a Rule 506(c) offering are in fact accredited 
investors.\77\ Another commenter stated that verification of accredited 
investor status should not be a condition of the Rule 506(c) exemption 
when the purchaser is actually an accredited investor.\78\
---------------------------------------------------------------------------

    \75\ See, e.g., letters from C. Hague; G. Brooks; Golenbock 
Eiseman Assor Bell & Peskoe LLP; P. Christenson; W. Johnson.
    \76\ See, e.g., letters from AFL-CIO and AFR; Sen. Levin; 
Consumer Federation; Fund Democracy; Rep. Waters; Massachusetts 
Securities Division; The Options Clearing Corporation (``OCC''); 
Ohio Division of Securities.
    \77\ See letter from IPA.
    \78\ See letter from S. Keller.
---------------------------------------------------------------------------

    Commenters expressed differing views on whether the Commission 
should include a non-exclusive list of methods in proposed Rule 506(c) 
for satisfying the verification requirement. Many commenters, 
encompassing a wide range of perspectives (e.g., state government 
officials, law firms, investor organizations, professional and trade 
associations, and individuals), urged the Commission to provide such a 
non-exclusive list.\79\ A number of these commenters cited the lack of 
legal certainty that the verification requirement has been satisfied in 
any given situation as the reason why, in their view, the Commission 
should include a non-exclusive list of verification methods in Rule 
506(c).\80\ In contrast, other commenters stated that the Commission 
should not include a non-exclusive list of verification methods in Rule 
506(c), arguing that such a list could be viewed by market participants 
as the required verification methods, which would thereby undermine the 
flexibility of the Commission's proposed approach.\81\
---------------------------------------------------------------------------

    \79\ See, e.g., letters from ACA (Sept. 27, 2012 and Dec. 11, 
2012); BIO; CFIRA; HFA; Hawaii Commissioner of Securities; IAA; 
Investor Advisory Committee (stating that the ``facts and 
circumstances'' based approach proposed by the Commission does not 
do enough either to ensure only accredited investors purchase in the 
offering or to provide issuers with the certainty they need to 
develop appropriate procedures); J. McLaughlin; MFA (Sept. 28, 
2012); Montana Commissioner of Securities; NASAA; Tufts Stephenson & 
Kasper, LLP; Nevada Securities Division; OCC; Ohio Division of 
Securities; Pepper Hamilton LLP (``Pepper Hamilton''); Plexus 
Consulting Group, LLC (``Plexus Consulting Group''); Small Business 
Investor Association (``SBIA''); South Carolina Securities 
Commissioner; Virginia Division of Securities.
    \80\ See, e.g., letters from ACA (Sept. 27, 2012 and Dec. 11, 
2012); HFA; Investor Advisory Committee; OCC.
    \81\ See, e.g., letters from ABA Fed. Reg. Comm.; Artivest; 
BlackRock; S&C; SIFMA and FSR (Oct. 5, 2012).
---------------------------------------------------------------------------

    If there were to be a non-exclusive list of verification methods, 
commenters expressed a range of views on what should be included in 
such a list, such as verification by certain third parties or through 
tax returns and third-party documentary proof such as Forms W-2, Forms 
1099, bank statements, brokerage account statements, tax assessment 
valuations and appraisal reports.\82\ With

[[Page 44778]]

respect to the types of third parties that could provide verification 
services, commenters named registered brokers-dealers,\83\ banks and 
other financial institutions,\84\ registered investment advisers,\85\ 
certified financial planners,\86\ attorneys,\87\ and accountants.\88\ 
Other commenters suggested including in a non-exclusive list of 
verification methods self-certification, plus a minimum investment 
amount such as $25,000,\89\ $100,000,\90\ $250,000,\91\ $500,000 \92\ 
or $1,000,000.\93\
---------------------------------------------------------------------------

    \82\ See, e.g., letters from B. Methven; L. Neumann; NASAA.
    \83\ See, e.g., letters from Massachusetts Securities Division 
(July 2, 2012); J. McLaughlin; NASAA; OCC; Pepper Hamilton; Plexus 
Consulting Group; SBIA.
    \84\ See letter from Massachusetts Securities Division (July 2, 
2012).
    \85\ See, e.g., letters from Plexus Consulting Group; SBIA.
    \86\ See, e.g., letters from Plexus Consulting Group; NSBA 
(stating that ``if there must be some kind of enhanced verification, 
we recommend that a certification by the investor's attorney, CPA, 
certified financial advisor or other licensed professional should be 
sufficient'').
    \87\ Id.
    \88\ Id.
    \89\ See letter from Montgomery & Hansen.
    \90\ See letters from B. Methven; SBIA (provided the issuer is a 
small business investment company (``SBIC'') or a fund that has been 
authorized to apply to be an SBIC by the U.S. Small Business 
Administration).
    \91\ See letter from J. Joseph (stating that ``[s]ome may feel 
that that number is $25,000, perhaps $100,000 but certainly at 
$250,000 there should be no question that the investor is properly 
qualified and accredited'').
    \92\ See letter from MFA (Sept. 28, 2012) (stating that ``[i]n 
considering the appropriate minimum investment level, we have 
previously recommended a minimum investment level of 50% of the 
accredited investor net worth or total asset thresholds, currently 
$500,000 for an individual, and $2,500,000 for an entity'').
    \93\ See letter from Pepper Hamilton.
---------------------------------------------------------------------------

    In contrast, one commenter argued that the ability to satisfy a 
minimum investment amount would not necessarily mean a person is an 
accredited investor, but rather, that the investor could be ``over-
concentrated in the investment.'' \94\ Another commenter stated that 
the verification requirement should not be deemed satisfied simply 
because an issuer possesses general information about the average 
compensation in the investor's profession or workplace.\95\
---------------------------------------------------------------------------

    \94\ Letter from Massachusetts Securities Division (July 2, 
2012).
    \95\ See letter from NASAA.
---------------------------------------------------------------------------

    Several commenters stated that there should be a ``grandfather'' 
provision from the verification mandate for an issuer's existing 
investors who purchased securities in a Rule 506(b) offering prior to 
the effective date of Rule 506(c),\96\ and one commenter proposed to 
limit the scope of any grandfather provision to only existing 
accredited investors.\97\ Two of these commenters reasoned that, as 
issuers are prohibited from engaging in general solicitation activities 
in Rule 506(b) offerings, their existing investors did not purchase 
securities in offerings that used general solicitation, and any future 
investments by these investors would be based on their pre-existing 
relationship with the issuers, and not as a result of general 
solicitation.\98\ Therefore, a grandfather provision would be 
appropriate because the purpose of the verification mandate in Section 
201(a) of the JOBS Act is to require the verification of the accredited 
investor status of only prospective purchasers who come to the issuer 
``as a result of'' the issuer's general solicitation activities.\99\ 
One commenter stated that, for existing investors, a ``reaffirmation 
representation'' of accredited investor status received shortly before 
or simultaneously with any subsequent investment should be sufficient 
for Rule 506(c) purposes.\100\
---------------------------------------------------------------------------

    \96\ See letters from MFA (Sept. 28, 2012); IAA; Tannenbaum 
Helpern.
    \97\ See letter from Pepper Hamilton.
    \98\ See letters from MFA (Sept. 28, 2012); Tannenbaum Helpern.
    \99\ See letter from Tannenbaum Helpern.
    \100\ See letter from Pepper Hamilton.
---------------------------------------------------------------------------

3. Final Rule Amendment
    After considering the comments and as directed by Section 201(a) of 
the JOBS Act, we are adopting as a condition of new Rule 506(c) the 
requirement that issuers take ``reasonable steps to verify'' that 
purchasers of the offered securities are accredited investors. This 
requirement is separate from and independent of the requirement that 
sales be limited to accredited investors, and must be satisfied even if 
all purchasers happen to be accredited investors.\101\ We are also 
including in Rule 506(c) a non-exclusive list of methods that issuers 
may use to satisfy the verification requirement. As discussed above, a 
number of commenters urged the Commission to provide greater certainty 
for issuers that the verification requirement has been satisfied by 
providing a non-exclusive list of methods for verifying the accredited 
investor status of purchasers in Rule 506(c) offerings. Upon further 
consideration, we have concluded that a general requirement that 
issuers take ``reasonable steps to verify'' that the purchasers are 
accredited investors, combined with a non-exclusive list of 
verification methods that are deemed to meet this requirement, would 
maintain the flexibility of the verification standard while providing 
additional clarity and certainty that this requirement has been 
satisfied if one of the specified methods is used. We have specified 
methods for verifying the accredited investor status of natural persons 
because we believe that the potential for uncertainty and the risk of 
participation by non-accredited investors is highest in offerings 
involving natural persons as purchasers.
---------------------------------------------------------------------------

    \101\ This will avoid diminishing the incentive for issuers to 
undertake the reasonable verification steps envisioned by the 
statute.
---------------------------------------------------------------------------

a. Principles-Based Method of Verification
    Under Rule 506(c), issuers are required to take reasonable steps to 
verify the accredited investor status of purchasers. Consistent with 
the Proposing Release, whether the steps taken are ``reasonable'' will 
be an objective determination by the issuer (or those acting on its 
behalf), in the context of the particular facts and circumstances of 
each purchaser and transaction. Among the factors that issuers should 
consider under this facts and circumstances analysis are:
     the nature of the purchaser and the type of accredited 
investor that the purchaser claims to be;
     the amount and type of information that the issuer has 
about the purchaser; and
     the nature of the offering, such as the manner in which 
the purchaser was solicited to participate in the offering, and the 
terms of the offering, such as a minimum investment amount.
    As noted in the Proposing Release, these factors are interconnected 
and are intended to help guide an issuer in assessing the reasonable 
likelihood that a purchaser is an accredited investor--which would, in 
turn, affect the types of steps that would be reasonable to take to 
verify a purchaser's accredited investor status. After consideration of 
the facts and circumstances of the purchaser and of the transaction, 
the more likely it appears that a purchaser qualifies as an accredited 
investor, the fewer steps the issuer would have to take to verify 
accredited investor status, and vice versa. For example, if the terms 
of the offering require a high minimum investment amount and a 
purchaser is able to meet those terms, then the likelihood of that 
purchaser satisfying the definition of accredited investor may be 
sufficiently high such that, absent any facts that indicate that the 
purchaser is not an accredited investor, it may be reasonable for the 
issuer to take fewer steps to verify or, in certain cases, no 
additional steps to verify accredited investor status other than to 
confirm that the purchaser's cash

[[Page 44779]]

investment is not being financed by a third party.
    Regardless of the particular steps taken, because the issuer has 
the burden of demonstrating that its offering is entitled to an 
exemption from the registration requirements of Section 5 of the 
Securities Act,\102\ it will be important for issuers and their 
verification service providers to retain adequate records regarding the 
steps taken to verify that a purchaser was an accredited investor.
---------------------------------------------------------------------------

    \102\ SEC v. Ralston Purina, 346 U.S. 119, 126 (1953) (``Keeping 
in mind the broadly remedial purposes of federal securities 
legislation, imposition of the burden of proof on an issuer who 
would plead the exemption seems to us fair and reasonable.'').
---------------------------------------------------------------------------

    Nature of the Purchaser. In determining the reasonableness of the 
steps to verify accredited investor status, an issuer should consider 
the nature of the purchaser of the offered securities. The definition 
of ``accredited investor'' in Rule 501(a) includes natural persons and 
entities that come within any of eight enumerated categories in the 
rule, or that the issuer reasonably believes come within one of those 
categories, at the time of the sale of securities to that natural 
person or entity. Some purchasers may be accredited investors based on 
their status, such as:
     a broker or dealer registered pursuant to Section 15 of 
the Securities Exchange Act of 1934 (the ``Exchange Act''); \103\ or
---------------------------------------------------------------------------

    \103\ See 17 CFR 230.501(a)(1).
---------------------------------------------------------------------------

     an investment company registered under the Investment 
Company Act of 1940 (the ``Investment Company Act'') or a business 
development company as defined in Section 2(a)(48) of that Act.\104\
---------------------------------------------------------------------------

    \104\ See id.

Some purchasers may be accredited investors based on a combination of 
their status and the amount of their total assets, such as:
     a 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 million; \105\ or
---------------------------------------------------------------------------

    \105\ See id.
---------------------------------------------------------------------------

     an Internal Revenue Code (``IRC'') Section 501(c)(3) 
organization, corporation, Massachusetts or similar business trust, or 
partnership, not formed for the specific purpose of acquiring the 
securities offered, with total assets in excess of $5 million.\106\
---------------------------------------------------------------------------

    \106\ See 17 CFR 230.501(a)(3).

Natural persons may be accredited investors based on either their net 
worth or their annual income, as follows:
     a natural person whose individual net worth, or joint net 
worth with that person's spouse, exceeds $1 million, excluding the 
value of the person's primary residence; \107\ or
---------------------------------------------------------------------------

    \107\ See 17 CFR 230.501(a)(5).
---------------------------------------------------------------------------

     a 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 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.\108\
---------------------------------------------------------------------------

    \108\ See 17 CFR 230.501(a)(6).
---------------------------------------------------------------------------

    As Rule 501(a) sets forth different categories of accredited 
investors, an issuer should recognize that the steps that will be 
reasonable to verify whether a purchaser is an accredited investor will 
vary depending on the type of accredited investor that the purchaser 
claims to be. For example, the steps that may be reasonable to verify 
that an entity is an accredited investor by virtue of being a 
registered broker-dealer--such as by going to FINRA's BrokerCheck Web 
site \109\--will necessarily differ from the steps that may be 
reasonable to verify whether a natural person is an accredited 
investor.
---------------------------------------------------------------------------

    \109\ This Web site is available at: https://www.finra.org/Investors/ToolsCalculators/BrokerCheck/.
---------------------------------------------------------------------------

    As we stated in the Proposing Release, the verification of natural 
persons as accredited investors may pose greater practical difficulties 
as compared to other categories of accredited investors, particularly 
for natural persons claiming to be accredited investors based on the 
net worth test. These practical difficulties likely will be exacerbated 
by privacy concerns about the disclosure of personal financial 
information. As between the net worth test and the income test for 
natural persons, we recognize that commenters have suggested that it 
might be more difficult for an issuer to obtain information about the 
assets and liabilities that determine a person's net worth--
particularly the liabilities--than it would be to obtain information 
about a person's annual income,\110\ although there could be privacy 
concerns with respect to either test. The question of what type of 
information would be sufficient to constitute reasonable steps to 
verify accredited investor status under the particular facts and 
circumstances will also depend on other factors, as described below.
---------------------------------------------------------------------------

    \110\ See letters from NASAA (stating that ``[v]erification of 
net worth is more challenging because an individual could provide 
proof of assets but not liabilities.''); P. Sigelman (Sept. 28, 
2012).
---------------------------------------------------------------------------

    Information about the Purchaser. The amount and type of information 
that an issuer has about a purchaser can also be a significant factor 
in determining what additional steps would be reasonable to take to 
verify the purchaser's accredited investor status. The more information 
an issuer has indicating that a prospective purchaser is an accredited 
investor, the fewer steps it may have to take, and vice versa.\111\ 
Examples of the types of information that issuers could review or rely 
upon--any of which might, depending on the circumstances, in and of 
themselves constitute reasonable steps to verify a purchaser's 
accredited investor status--include, without limitation:
---------------------------------------------------------------------------

    \111\ If an issuer has actual knowledge that the purchaser is an 
accredited investor, then the issuer will not have to take any steps 
at all.
---------------------------------------------------------------------------

     publicly available information in filings with a federal, 
state or local regulatory body--for example, without limitation:
    [cir] the purchaser is a named executive officer of an Exchange Act 
registrant, and the registrant's proxy statement discloses the 
purchaser's compensation; or
    [cir] the purchaser claims to be an IRC Section 501(c)(3) 
organization with $5 million in assets, and the organization's Form 990 
series return filed with the Internal Revenue Service discloses the 
organization's total assets; \112\
---------------------------------------------------------------------------

    \112\ Such an organization is required to make the Form 990 
series returns available for public inspection. See Internal Revenue 
Service, Public Disclosure and Availability of Exempt Organizations 
Returns and Applications: Documents Subject to Public Disclosure, 
available at: https://www.irs.gov/Charities-&-Non-Profits/Public-Disclosure-and-Availability-of-Exempt-Organizations-Returns-and-Applications:-Documents-Subject-to-Public-Disclosure (last reviewed 
or updated April 28, 2013).
---------------------------------------------------------------------------

     third-party information that provides reasonably reliable 
evidence that a person falls within one of the enumerated categories in 
the accredited investor definition--for example, without limitation:
    [cir] the purchaser is a natural person and provides copies of pay 
stubs for the two most recent years and the current year; or
    [cir] specific information about the average compensation earned at 
the purchaser's workplace by persons at the level of the purchaser's 
seniority is publicly available; or
     verification of a person's status as an accredited 
investor by a third party, provided that the issuer has a

[[Page 44780]]

reasonable basis to rely on such third-party verification.\113\
---------------------------------------------------------------------------

    \113\ For example, in the future, services may develop that 
verify a person's accredited investor status for purposes of new 
Rule 506(c) and permit issuers to check the accredited investor 
status of possible investors, particularly for web-based Rule 506 
offering portals that include offerings for multiple issuers. This 
third-party service, as opposed to the issuer itself, could obtain 
appropriate documentation or otherwise take reasonable steps to 
verify accredited investor status. Several commenters, in fact, have 
recommended that the Commission take action to facilitate the 
ability of issuers to rely on third parties to perform the necessary 
verification. See letters from NASAA (July 3, 2012) (recommending 
that the Commission allow an issuer to obtain the necessary 
verification through registered broker-dealers, provided that there 
are independent liability provisions for failure to adequately 
perform the verification); Massachusetts Securities Division (July 
2, 2012) (urging the Commission to adopt as a safe harbor or best 
practice the use of an independent party, such as a broker-dealer, 
bank, or other financial institution, that would verify the 
accredited investor status of purchasers). One commenter, however, 
expressed concerns that some of the Web sites that currently offer 
lists of accredited investors could be used to facilitate fraud, 
noting that some offer lists based on ``ethnicity, gender, and 
lifestyle--presumably to make [it] easier for scammers to relate to 
marks--and ominously, `seniors.' '' Letter from I. Moscovitz and J. 
Maxfield (June 27, 2012).
---------------------------------------------------------------------------

    Nature and Terms of the Offering. The nature of the offering--such 
as the means through which the issuer publicly solicits purchasers--may 
be relevant in determining the reasonableness of the steps taken to 
verify accredited investor status. An issuer that solicits new 
investors through a Web site accessible to the general public, through 
a widely disseminated email or social media solicitation, or through 
print media, such as a newspaper, will likely be obligated to take 
greater measures to verify accredited investor status than an issuer 
that solicits new investors from a database of pre-screened accredited 
investors created and maintained by a reasonably reliable third party. 
We believe that an issuer will be entitled to rely on a third party 
that has verified a person's status as an accredited investor, provided 
that the issuer has a reasonable basis to rely on such third-party 
verification. We do not believe that an issuer will have taken 
reasonable steps to verify accredited investor status if it, or those 
acting on its behalf, required only that a person check a box in a 
questionnaire or sign a form, absent other information about the 
purchaser indicating accredited investor status.
    The terms of the offering will also affect whether the verification 
methods used by the issuer are reasonable. We continue to believe that 
there is merit to the view that a purchaser's ability to meet a high 
minimum investment amount could be a relevant factor to the issuer's 
evaluation of the types of steps that would be reasonable to take in 
order to verify that purchaser's status as an accredited investor. By 
way of example, the ability of a purchaser to satisfy a minimum 
investment amount requirement that is sufficiently high such that only 
accredited investors could reasonably be expected to meet it, with a 
direct cash investment that is not financed by the issuer or by any 
third party, could be taken into consideration in verifying accredited 
investor status.
    Commenters suggested a number of alternative approaches to 
implementing the verification mandate. Some commenters urged us to 
adopt a requirement that prescribes specific methods of verification 
that issuers must use, either because they believed such methods are 
needed for issuers seeking clarity on how to comply with this condition 
of Rule 506(c) \114\ or because they believed that such methods are 
needed to maintain investor protection.\115\ We have decided not to 
take such an approach. As we stated in the Proposing Release, we 
believe that, at present, requiring issuers to use specified methods of 
verification will be impractical and potentially ineffective in light 
of the numerous ways in which a purchaser can qualify as an accredited 
investor, as well as the potentially wide range of verification issues 
that may arise, depending on the nature of the purchaser and the facts 
and circumstances of a particular Rule 506(c) offering. We are also 
concerned that a prescriptive rule that specifies required verification 
methods could be overly burdensome in some cases, by requiring issuers 
to follow the same steps, regardless of their particular circumstances, 
and ineffective in others, by requiring steps that, in the particular 
circumstances, would not actually verify accredited investor status.
---------------------------------------------------------------------------

    \114\ See, e.g., letter from Handler Thayer, LLP.
    \115\ See, e.g., letters from AARP; CII.
---------------------------------------------------------------------------

    We believe that the approach we are adopting appropriately 
addresses the concerns underlying the verification mandate by 
obligating issuers to take reasonable steps to verify that the 
purchasers are accredited investors, but not requiring them to follow 
uniform verification methods that may be ill-suited or unnecessary to a 
particular offering or purchaser in light of the facts and 
circumstances. We also expect that such an approach will give issuers 
and market participants the flexibility to adopt different approaches 
to verification depending on the circumstances, to adapt to changing 
market practices, and to implement innovative approaches to meeting the 
verification requirement, such as the development of reliable third-
party databases of accredited investors and verification services. In 
addition, we anticipate that many practices currently used by issuers 
in connection with existing Rule 506 offerings will satisfy the 
verification requirement for offerings pursuant to Rule 506(c).
b. Non-Exclusive Methods of Verifying Accredited Investor Status
    In addition to adopting a principles-based method of verification, 
we are including in Rule 506(c) four specific non-exclusive methods of 
verifying accredited investor status for natural persons that, if used, 
are deemed to satisfy the verification requirement in Rule 506(c); 
provided, however, that none of these methods will be deemed to satisfy 
the verification requirement if the issuer or its agent has knowledge 
that the purchaser is not an accredited investor.\116\ While the 
principles-based method of verification is intended to provide an 
issuer with the flexibility to address the particular facts and 
circumstances surrounding its offering, we appreciate the view of some 
commenters that the final rule should include a non-exclusive list of 
specific verification methods for natural persons that may be relied 
upon by those issuers seeking greater certainty that they satisfy the 
rule's verification requirement.\117\ Accordingly, we are adding a non-
exclusive list of specific verification methods to supplement our 
principles-based framework for verifying accredited investor 
status.\118\ Issuers are not required to use any of the methods 
discussed below, and can apply the reasonableness standard directly to 
the specific facts and circumstances presented by the offering and the 
investors.\119\
---------------------------------------------------------------------------

    \116\ Because an issuer must have a reasonable belief that the 
purchaser is an accredited investor, the issuer could not form such 
reasonable belief if it has knowledge that the purchaser is not an 
accredited investor. See Section II.C of this release for a 
discussion of the reasonable belief standard in the definition of 
accredited investor in Rule 501(a).
    \117\ See, e.g., letters from ACA (Sept. 27, 2012 and Dec. 11, 
2012); Investor Advisory Committee; MFA (Sept. 28, 2012).
    \118\ Information and documentation collected for these 
verification purposes may be subject to federal and/or state privacy 
and data security requirements. See, e.g., Regulation S-P [17 CFR 
248.1-248.30] (implementing notice requirements and restrictions on 
a financial institution's ability to disclose nonpublic personal 
information about customers); Privacy of Consumer Financial 
Information (Regulation S-P), Release No. 34-42974 (June 22, 2000) 
[65 FR 40334 (June 29, 2000)].
    \119\ We expect that many issuers will conduct Rule 506(c) 
offerings in reliance on the principles-based method of 
verification, in light of its flexibility and efficiency.

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

[[Page 44781]]

    First, in verifying whether a natural person is an accredited 
investor on the basis of income, an issuer is deemed to satisfy the 
verification requirement in Rule 506(c) by reviewing copies of any 
Internal Revenue Service (``IRS'') form that reports income, including, 
but not limited to, a Form W-2 (``Wage and Tax Statement''), Form 1099 
(report of various types of income), Schedule K-1 of Form 1065 
(``Partner's Share of Income, Deductions, Credits, etc.''), and a copy 
of a filed Form 1040 (``U.S. Individual Income Tax Return''),\120\ for 
the two most recent years, along with obtaining a written 
representation from such person that he or she has a reasonable 
expectation of reaching the income level necessary to qualify as an 
accredited investor during the current year. In the case of a person 
who qualifies as an accredited investor based on joint income with that 
person's spouse, an issuer would be deemed to satisfy the verification 
requirement in Rule 506(c) by reviewing copies of these forms for the 
two most recent years in regard to, and obtaining written 
representations from, both the person and the spouse.
---------------------------------------------------------------------------

    \120\ A person could provide a redacted version of an Internal 
Revenue Service form so as to disclose only information about annual 
income and to avoid disclosure of personally identifiable 
information, such as a Social Security number, or other information 
that would not be relevant to the determination of a person's annual 
income.
---------------------------------------------------------------------------

    Second, in verifying whether a natural person is an accredited 
investor on the basis of net worth, an issuer is deemed to satisfy the 
verification requirement in Rule 506(c) by reviewing one or more of the 
following types of documentation, dated within the prior three 
months,\121\ and by obtaining a written representation from such person 
that all liabilities necessary to make a determination of net worth 
have been disclosed. In the case of a person who qualifies as an 
accredited investor based on joint net worth with that person's spouse, 
an issuer would be deemed to satisfy the verification requirement in 
Rule 506(c) by reviewing such documentation in regard to, and obtaining 
representations from, both the person and the spouse. For assets: Bank 
statements, brokerage statements and other statements of securities 
holdings, certificates of deposit, tax assessments and appraisal 
reports issued by independent third parties are deemed to be 
satisfactory; and for liabilities: A consumer report (also known as a 
credit report) from at least one of the nationwide consumer reporting 
agencies is required.\122\ Commenters did not provide examples of any 
other type of documentation that would, in our view, adequately 
evidence liabilities.\123\ We recognize that it will be difficult for 
an issuer to determine whether it has a complete picture of a natural 
person's liabilities, and therefore, for purposes of this method, 
consistent with the suggestions of some commenters, we are requiring a 
consumer report and a written representation from such person that all 
liabilities necessary to make a determination of net worth have been 
disclosed.
---------------------------------------------------------------------------

    \121\ A person could provide redacted versions of these 
documents so as to disclose only information about the amounts of 
assets and liabilities and to avoid disclosure of personally 
identifiable information, such as a Social Security number, or other 
information that would not be relevant to the determination of a 
person's net worth.
    \122\ We note that the Fair Credit Reporting Act (``FCRA'') [15 
U.S.C. 1681 et seq.] requires each of the nationwide consumer 
reporting agencies to provide a person with a free copy of his or 
her consumer report, upon request, once every 12 months. In 
addition, the FCRA permits third parties to access individual 
consumer reports with the written permission of the individual.
    \123\ One commenter suggested that the Commission ``require the 
issuer to obtain a list of liabilities from the investor, which 
would include a sworn statement that all material liabilities are 
disclosed.'' Letter from NASAA. Another commenter noted that 
liabilities can be cross checked against UCC 1 filings, bankruptcy 
information on Public Access to Court Electronic Records (PACER), 
and credit reports. See letter from P. Sigelman (Sept. 28, 2012).
---------------------------------------------------------------------------

    Third, an issuer is deemed to satisfy the verification requirement 
in Rule 506(c) by obtaining a written confirmation from a registered 
broker-dealer, an SEC-registered investment adviser, a licensed 
attorney, or a certified public accountant that such person or entity 
has taken reasonable steps to verify that the purchaser is an 
accredited investor within the prior three months and has determined 
that such purchaser is an accredited investor.\124\ While third-party 
confirmation by one of these parties will be deemed to satisfy the 
verification requirement in Rule 506(c), depending on the 
circumstances, an issuer may be entitled to rely on the verification of 
accredited investor status by a person or entity other than one of 
these parties, provided that any such third party takes reasonable 
steps to verify that purchasers are accredited investors and has 
determined that such purchasers are accredited investors, and the 
issuer has a reasonable basis to rely on such verification.
---------------------------------------------------------------------------

    \124\ For purposes of this method, a licensed attorney must be 
in good standing under the laws of the jurisdictions in which the 
attorney is admitted to practice law, and a certified public 
accountant must be in good standing under the laws of the place of 
the accountant's residence or principal office.
---------------------------------------------------------------------------

    Fourth, with respect to any natural person who invested in an 
issuer's Rule 506(b) offering as an accredited investor prior to the 
effective date of Rule 506(c) and remains an investor of the issuer, 
for any Rule 506(c) offering conducted by the same issuer, the issuer 
is deemed to satisfy the verification requirement in Rule 506(c) with 
respect to any such person by obtaining a certification by such person 
at the time of sale that he or she qualifies as an accredited investor.
    We are including the first three methods in our non-exclusive list 
of methods that are deemed to satisfy the verification requirement in 
Rule 506(c) because we believe that there will likely be few instances 
in which they would not constitute reasonable steps to verify 
accredited investor status. With respect to the verification method for 
the income test, there are numerous penalties for falsely reporting 
information in an Internal Revenue Service form, and these forms are 
filed with the Internal Revenue Service for purposes independent of 
investing in a Rule 506(c) offering. Similarly, we believe that the 
various forms of documentation set forth in the verification method for 
the net worth test ordinarily are generated for reasons other than to 
invest in a Rule 506(c) offering (with the possible exception of 
appraisal reports) and, in combination with a consumer report and a 
written representation from the investor regarding his or her 
liabilities, constitute sufficiently reliable evidence that such 
person's net worth exceeds $1 million, excluding the value of the 
person's primary residence. With respect to the third-party 
verification method, we have included written confirmations from 
certain third parties in our non-exclusive list of verification methods 
because these third parties are subject to various regulatory and/or 
licensing requirements. Registered broker-dealers \125\ and SEC-
registered investment advisers \126\ are regulated by

[[Page 44782]]

the Commission; and in the United States, attorneys and certified 
public accountants are licensed at the state level and are subject to 
rules of professional conduct \127\ as well as, to the extent they 
appear or practice before the Commission in any way, to the 
Commission's Rules of Practice.\128\
---------------------------------------------------------------------------

    \125\ Registered broker-dealers are subject to a comprehensive 
system of oversight by the Commission as well as FINRA. In 
particular, registered broker-dealers, among other things, must 
maintain and preserve specified books and records, develop effective 
supervisory policies and controls, and comply with FINRA rules 
regarding registration and qualification requirements for their 
associated persons as well as general and specific conduct rules. In 
addition, registered broker-dealers are subject to examinations by 
both FINRA and Commission staff.
    \126\ An investment adviser must register with the Commission 
unless it is prohibited from registering under Section 203A of the 
Investment Advisers Act of 1940 [15 U.S.C. 80b-3a] (the ``Advisers 
Act'') or is exempt from registration under Advisers Act Section 203 
[15 U.S.C. 80b-3]. Investment advisers that are prohibited from 
registering with the Commission instead may be subject to regulation 
by the states, but the antifraud provisions of the Advisers Act 
continue to apply to them. See Advisers Act Sections 203A(b) and 206 
[15 U.S.C. 80b-3(a), 15 U.S.C. 80b-6]. SEC-registered investment 
advisers are subject to examinations by Commission staff.
    \127\ Attorneys are subject to state standards for professional 
competence and ethical conduct, such as those based on the American 
Bar Association (``ABA'') Model Rules of Professional Conduct, which 
have been adopted by most states in the United States. For example, 
Rule 4.1 of the ABA Model Rules of Professional Conduct prohibits an 
attorney from knowingly making a false statement of material fact or 
law to a third person or failing to disclose a material fact to a 
third person when disclosure is necessary to avoid assisting a 
criminal or fraudulent act by a client. Accountants are also subject 
to state standards for professional competence and ethical conduct, 
such as those based on the AICPA Code of Professional Conduct. See 
AICPA Code of Professional Conduct ET 201.01, 202.01; see also, 
e.g., The Uniform Accountancy Act (5th ed. 2007), available at: 
https://www.aicpa.org/Advocacy/State/StateContactInfo/uaa/DownloadableDocuments/UAA_Fifth_Edition_January_2008.pdf.
    The Commission recognizes that there may be particular 
considerations a certified public accountant would need to take into 
account to comply with applicable professional standards for 
attestation engagements to provide a report that constitutes a 
confirmation in the context of this rule.
    \128\ See Rule 102(e) of the Rules of Practice [17 CFR 
201.102(e)] (The Commission may censure a person or deny, 
temporarily or permanently, the privilege of appearing and 
practicing before it in any way to any person who is found by the 
Commission after notice and opportunity for hearing in the matter: 
(i) Not to possess the requisite qualifications to represent others; 
or (ii) To be lacking in character or integrity or to have engaged 
in unethical or improper professional conduct; or (iii) To have 
willfully violated, or willfully aided and abetted the violation of 
any provision of the Federal securities laws or the rules and 
regulations thereunder.).
---------------------------------------------------------------------------

    We are including the fourth method in our non-exclusive list of 
methods that are deemed to satisfy the verification requirement in Rule 
506(c) because we acknowledge that existing accredited investors who 
purchased securities in an issuer's Rule 506(b) offering prior to the 
effective date of Rule 506(c) would presumably participate in any 
subsequent offering by the same issuer conducted pursuant to Rule 
506(c) based on their pre-existing relationships with the issuer. 
Accordingly, for these existing investors who were accredited investors 
in a Rule 506(b) offering prior to the effective date of Rule 506(c), a 
self-certification at the time of sale that he or she is an accredited 
investor will be deemed to satisfy the verification requirement in Rule 
506(c). This provision does not extend to existing investors in an 
issuer who were not accredited investors in a Rule 506(b) offering that 
was conducted prior to the effective date of Rule 506(c).
    While we have not adopted the recommendations of commenters who 
believe that even more prescriptive verification requirements are 
needed, we do recognize the general concern regarding possible misuse 
of the new Rule 506(c) exemption to sell securities to those who are 
not qualified to participate in the offering. We will closely monitor 
and study the development of verification practices by issuers, 
securities intermediaries and others by undertaking a review of whether 
such practices are, in fact, resulting in the exclusion of non-
accredited investors from participation in these offerings, and the 
impact of compliance with this verification requirement on investor 
protection and capital formation.

C. Reasonable Belief That All Purchasers Are Accredited Investors

    In the Proposing Release, we noted that a number of commenters had 
raised concerns that the language of Section 201(a) of the JOBS Act 
could be interpreted as precluding the use of the ``reasonable belief'' 
standard in the definition of ``accredited investor'' in Rule 501(a) in 
determining whether a purchaser is an accredited investor, such that an 
issuer's determination as to whether a purchaser is an accredited 
investor is subject to an absolute, rather than a ``reasonable 
belief,'' standard.\129\ In their view, issuers may be more reluctant 
to use general solicitation in Rule 506 offerings if their 
determinations as to whether a purchaser is an accredited investor are 
subject to an absolute standard. Other commenters had interpreted the 
difference in the statutory language used in Section 201(a)(1) and 
Section 201(a)(2) \130\ as indicating Congress' intent that the 
Commission ``raise the `reasonable belief' standard for Rule 506 
offerings . . . .'' \131\
---------------------------------------------------------------------------

    \129\ See, e.g., letters from ABA Fed. Reg. Comm. (Apr. 30, 
2012); BlackRock (May 3, 2012); NYCBA (May 4, 2012); W. Sjostrom, 
Jr. (Apr. 14, 2012).
    \130\ Section 201(a)(2) of the JOBS Act, which calls for 
amendments to Rule 144A, specifically refers to a ``reasonable 
belief'' standard as to whether a purchaser is a QIB, whereas 
Section 201(a)(1) does not mention a similar ``reasonable belief'' 
standard with respect to the amendments to Rule 506.
    \131\ Letter from Fund Democracy (May 24, 2012). See also letter 
from Massachusetts Securities Division (July 2, 2012).
---------------------------------------------------------------------------

    Commenters on the Proposing Release were divided on the 
Commission's interpretation that the reasonable belief standard in Rule 
501(a) applies to offerings under Rule 506(c). Several commenters 
supported this interpretation; \132\ and other commenters opposed this 
interpretation.\133\
---------------------------------------------------------------------------

    \132\ See letters from ABA Fed. Reg. Comm. (stating that it 
``strongly support[s] the continued inclusion of the reasonable 
belief standard in the accredited investor definition, whether the 
offering is conducted under Rule 506(b) without general 
solicitation, or under Rule 506(c) with general solicitation''); 
IAA; MFA (Sept. 28, 2012) (stating that ``[e]liminating the 
`reasonable belief' standard in the definition of accredited 
investor would preclude issuers from relying on Rule 506(c)'' and 
that, if this were the case, ``[i]ssuers would not engage in general 
solicitation and Section 201 would fail in its intended purposes to 
modernize the securities laws''); NSBA; NYCBA; P. Rutledge.
    \133\ See letters from AFL-CIO and AFR (stating that ``the 
legislative record reflects unmistakable congressional intent that 
securities sold through general solicitation and advertising under 
Rule 506 be sold only to accredited investors, not individuals 
issuers reasonably believe to be accredited investors''); Sen. Levin 
(stating that the ``Proposed Rule also creates, with no statutory 
basis, an alternative to the `reasonable steps' requirement in the 
statute by stating that issuers may engage in a general solicitation 
or advertising so long as they `reasonably believe' that the 
investors to be addressed will be accredited''); Consumer Federation 
(stating that a reasonable belief standard ``is in direct conflict 
with the statutory mandate that all investors in offerings sold 
through general solicitation and advertising be accredited investors 
and that the Commission specify methods issuers must follow to 
ensure that this is the case''); Fund Democracy (arguing that 
``Congress intentionally chose not to make such [a reasonable 
belief] exception to the mandate that Rule 506 purchasers be 
accredited investors'').
---------------------------------------------------------------------------

    We are reaffirming the view that we expressed on this issue in the 
Proposing Release. In our view, the difference in the language between 
Section 201(a)(1) and Section 201(a)(2) reflects only the differing 
manner in which the reasonable belief standard was included in the 
respective rules at the time they were adopted, and does not represent 
a Congressional intent to eliminate the existing reasonable belief 
standard in Rule 501(a) or for Rule 506 offerings.\134\ We note that 
the definition of accredited investor remains unchanged with the 
enactment of the JOBS Act and includes persons that come within any of 
the listed categories of accredited investors, as well as persons that 
the issuer reasonably believes come within any such category.
---------------------------------------------------------------------------

    \134\ Both Rule 506 and Rule 144A currently provide for a 
reasonable belief standard regarding the eligibility of an investor 
to participate in an offering under the respective rules, but they 
reach that result in different ways. For Rule 506, the Commission 
chose to include the reasonable belief standard within the Rule 
501(a) definition of ``accredited investor''; for Rule 144A, the 
Commission chose to include the standard as a condition, in 
paragraph (d)(1), to the use of the exemption.
---------------------------------------------------------------------------

    Further, as discussed in the Proposing Release, we continue to 
recognize that a person could provide false information or 
documentation to an issuer in order to purchase securities in an 
offering made under new Rule 506(c). Thus, even if an issuer has taken 
reasonable

[[Page 44783]]

steps to verify that a purchaser is an accredited investor, it is 
possible that a person nevertheless could circumvent those 
measures.\135\ If a person who does not meet the criteria for any 
category of accredited investor purchases securities in a Rule 506(c) 
offering, we believe that the issuer will not lose the ability to rely 
on Rule 506(c) for that offering, so long as the issuer took reasonable 
steps to verify that the purchaser was an accredited investor and had a 
reasonable belief that such purchaser was an accredited investor at the 
time of sale.\136\
---------------------------------------------------------------------------

    \135\ We note that several federal courts have been 
unsympathetic to attempts by investors who represented that they 
were accredited investors at the time of the sale of securities to 
subsequently disavow those representations in order to pursue a 
cause of action under the federal securities laws. See, e.g., Wright 
v. Nat'l Warranty Co., 953 F.2d 256 (6th Cir. 1991) (rejecting the 
plaintiffs' argument that Rule 505 was unavailable because the 
plaintiffs ``specifically warranted and represented in the 
subscription agreement . . . that they were accredited investors''); 
Goodwin Properties, LLC v. Acadia Group, Inc., No. 01-49-P-C, 2001 
U.S. Dist. LEXIS 9975 (D. Me. 2001) (noting that the plaintiffs 
``provided the defendants with reason to believe that they were 
accredited investors as defined by 17 C.F.R. Sec.  230.501(a)'' and 
stating that therefore ``[t]hey cannot now disavow those 
representations in order to support their claims against the 
defendants''); Faye L. Roth Revocable Trust v. UBS Painewebber Inc., 
323 F. Supp. 2d 1279 (S.D. Fla. 2004) (stating that the plaintiffs 
``cannot disavow their representations that they were accredited 
investors'' and concluding that there was no material dispute that 
the offering complied with Regulation D).
    \136\ Our views regarding an issuer's ability to maintain the 
exemption for a Rule 506(c) offering notwithstanding the fact that 
not all purchasers meet the criteria for any category of accredited 
investor are consistent with our views regarding the effect of 
attempts by prospective investors to circumvent the requirement in 
Regulation S that offers and sales be made only to non-U.S. persons. 
See Statement of the Commission Regarding Use of Internet Web sites 
to Offer Securities, Solicit Securities Transactions or Advertise 
Investment Services Offshore, Release No. 33-7516 (Mar. 23, 1998) 
[63 FR 14806 (Mar. 27, 1998)] (``In our view, if a U.S. person 
purchases securities or investment services notwithstanding adequate 
procedures reasonably designed to prevent the purchase, we would not 
view the Internet offer after the fact as having been targeted at 
the United States, absent indications that would put the issuer on 
notice that the purchaser was a U.S. person.'').
---------------------------------------------------------------------------

D. Form D Check Box for Rule 506(c) Offerings

    Form D is the notice of an offering of securities conducted without 
registration under the Securities Act in reliance on Regulation D.\137\ 
Under Rule 503 of Regulation D, an issuer offering or selling 
securities in reliance on Rule 504, 505 or 506 must file a notice of 
sales on Form D with the Commission for each new offering of securities 
no later than 15 calendar days after the first sale of securities in 
the offering. Form D is currently organized around 16 numbered 
``items'' or categories of information. The information required to be 
provided in a Form D filing includes basic identifying information, 
such as the name of the issuer of the securities and the issuer's year 
and place of incorporation or organization; information about related 
persons (executive officers, directors, and promoters); the exemption 
or exemptions being claimed for the offering; and factual information 
about the offering, such as the duration of the offering, the type of 
securities offered and the total offering amount.
---------------------------------------------------------------------------

    \137\ Form D also applies to offerings conducted using the 
Section 4(a)(5) exemption. The Commission adopted Form D when it 
adopted Regulation D in 1982. Release No. 33-6389 (adopting Form D 
as a replacement for Forms 4(6), 146, 240 and 242).
---------------------------------------------------------------------------

1. Proposed Form Amendment
    We proposed revising Form D to add a separate field or check box 
for issuers to indicate whether they are claiming an exemption under 
Rule 506(c). Item 6 of Form D currently requires the issuer to identify 
the claimed exemption or exemptions for the offering from among Rule 
504's paragraphs and subparagraphs, Rule 505, Rule 506 and former 
Section 4(5), as applicable. Under the proposal, a new check box in 
Item 6 of Form D would require issuers to indicate specifically whether 
they are relying on the Rule 506(c) exemption. In addition, the current 
check box for ``Rule 506'' would be renamed ``Rule 506(b),'' and the 
current check box for ``Section 4(5)'' would be renamed ``Section 
4(a)(5)'' to update the reference to former Section 4(5) of the 
Securities Act.
    We explained in the Proposing Release that this revision would 
provide additional information needed to assist our efforts to analyze 
the use of general solicitation in Rule 506(c) offerings and the size 
of this offering market. The information would also help us to look 
into the practices that may develop to satisfy the verification 
requirement, which would assist us in assessing the effectiveness of 
various verification practices in identifying and excluding non-
accredited investors from participation in Rule 506(c) offerings.
2. Comments on the Proposed Form Amendment
    Most commenters who expressed a view on the proposed checkbox in 
Form D supported the addition of this checkbox for issuers to indicate 
whether they are relying on Rule 506(c) for their offerings.\138\ Only 
one commenter opposed the proposed checkbox.\139\ A number of 
commenters recommended that the Commission include additional 
information requirements in Form D for Rule 506(c) offerings, beyond a 
checkbox to indicate reliance on Rule 506(c).\140\ Some commenters 
asked for confirmation that issuers may check both the Rule 506(b) box 
and the Rule 506(c) box in a Form D under certain circumstances.\141\
---------------------------------------------------------------------------

    \138\ See, e.g., letters from MFA (Sept. 28, 2012); BIO; S&C; 
Tannenbaum Helpern; ABA Fed. Reg. Comm.; IAA; SIFMA and FSR (Oct. 5, 
2012); SRC of NYSBA.
    \139\ Letter from J. McLaughlin (stating that ``Section 
201(a)(1) does not authorize the Commission to impose a separate 
Form D filing requirement on issuers who choose to engage in general 
solicitation'').
    \140\ See, e.g., letters from AARP; AFL-CIO and AFR; Consumer 
Federation; Investor Advisory Committee; NASAA; Massachusetts 
Securities Division (July 2, 2012); Fund Democracy.
    \141\ See letters from J. Gross; NYCBA; IAA.
---------------------------------------------------------------------------

3. Final Form Amendment
    We are adopting the revision to Form D as proposed. Issuers 
conducting Rule 506(c) offerings must indicate that they are relying on 
the Rule 506(c) exemption by marking the new check box in Item 6 of 
Form D. Further, as proposed, the current check box for ``Rule 506'' 
will be renamed ``Rule 506(b),'' and the current check box for 
``Section 4(5)'' will be renamed ``Section 4(a)(5).''
    We are of the view that an issuer will not be permitted to check 
both boxes at the same time for the same offering. We remind issuers 
that once a general solicitation has been made to the purchasers in the 
offering,\142\ an issuer is precluded from making a claim of reliance 
on Rule 506(b), which remains subject to the prohibition against 
general solicitation, for that same offering.
---------------------------------------------------------------------------

    \142\ That is, the purchasers became interested in the offering 
because of, or through, the general solicitation, and not through 
some means other than the general solicitation, such as through a 
substantive, pre-existing relationship with the company or direct 
contact by the company or its agents outside of the general 
solicitation. See Revisions of Limited Offering Exemptions in 
Regulation D, Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116, 45129 
(Aug. 10, 2007)].
---------------------------------------------------------------------------

E. Specific Issues for Private Funds

    Private funds, such as hedge funds, venture capital funds and 
private equity funds, typically rely on Section 4(a)(2) and Rule 506 to 
offer and sell their interests without registration under the 
Securities Act.\143\ In addition, private funds generally rely on one 
of two exclusions from the definition of ``investment company'' under 
the Investment Company Act--Section

[[Page 44784]]

3(c)(1) \144\ and Section 3(c)(7) \145\--which enables them to be 
excluded from substantially all of the regulatory provisions of that 
Act.\146\ Private funds are precluded from relying on either of these 
two exclusions if they make a public offering of their securities.\147\ 
Section 3(c)(1) excludes from the definition of ``investment company'' 
any issuer whose outstanding securities (other than short-term paper) 
are beneficially owned by not more than 100 beneficial owners,\148\ and 
which is not making and does not presently propose to make a public 
offering of its securities. Section 3(c)(7) excludes from the 
definition of ``investment company'' any issuer whose outstanding 
securities are owned exclusively by persons who, at the time of 
acquisition of such securities, are ``qualified purchasers,'' \149\ and 
which is not making and does not at that time propose to make a public 
offering of its securities.
---------------------------------------------------------------------------

    \143\ See, e.g., Implications of the Growth of Hedge Funds, 
Staff Report to the Securities and Exchange Commission (Sept. 2003) 
(``Staff Report on Hedge Funds''), available at: https://www.sec.gov/news/studies/hedgefunds0903.pdf.
    \144\ 15 U.S.C. 80a-3(c)(1).
    \145\ 15 U.S.C. 80a-3(c)(7).
    \146\ We also refer in this release to ``pooled investment 
funds'' because that term is used in Form D. Issuers that rely on 
Section 3(c)(1) or 3(c)(7) of the Investment Company Act are a 
subset of pooled investment funds.
    \147\ See also Section 202(a)(29) of the Advisers Act [15 U.S.C. 
80b-2(a)(29)] (defining a ``private fund'' as an issuer that would 
be an investment company under the Investment Company Act, but for 
Sections 3(c)(1) or 3(c)(7) of that Act). Many ABS issuers also rely 
on the exclusions contained in Sections 3(c)(1) or 3(c)(7) of the 
Investment Company Act. These ABS issuers frequently participate in 
Rule 144A offerings.
    \148\ See also Rule 3c-5 under the Investment Company Act [17 
CFR 270.3c-5] (providing that the section's limit of 100 beneficial 
owners does not include ``knowledgeable employees,'' as defined in 
the rule).
    \149\ See Section 2(a)(51) of the Investment Company Act [15 
U.S.C. 80a-2(a)(51)] and the rules there under. See Also Rule 3c-5 
under the Investment Company Act (excluding ``knowledgeable 
employees'' from the determination of whether all of the outstanding 
securities of the fund relying on Section 3(c)(7) are owned 
exclusively by qualified purchasers).
---------------------------------------------------------------------------

    Section 201(a)(1) of the JOBS Act directs the Commission to 
eliminate the prohibition against general solicitation for a new 
category of Rule 506 offerings, and makes no specific reference to 
private funds. Section 201(b) of the JOBS Act also provides that 
``[o]ffers and sales exempt under [Rule 506, as revised pursuant to 
Section 201(a)] shall not be deemed public offerings under the Federal 
securities laws as a result of general advertising or general 
solicitation.'' We historically have regarded Rule 506 transactions as 
non-public offerings for purposes of Sections 3(c)(1) and 3(c)(7).\150\ 
As we stated in the Proposing Release and reaffirm here, the effect of 
Section 201(b) is to permit private funds to engage in general 
solicitation in compliance with new Rule 506(c) without losing either 
of the exclusions under the Investment Company Act.
---------------------------------------------------------------------------

    \150\ See Release No. 33-6389 (noting that the ``Commission 
regards rule 506 transactions as non-public offerings for purposes 
of the definition of `investment company' in section 3(c)(1) of the 
Investment Company Act''); Privately Offered Investment Companies, 
Release No. IC-22597 (Apr. 3, 1997) [62 FR 17512 (Apr. 9, 1997)], at 
n. 5 (noting that the ``Commission believes that section 3(c)(7)'s 
public offering limitation should be interpreted in the same manner 
as the limitation in section 3(c)(1)'').
---------------------------------------------------------------------------

    A few commenters argued that Section 201(b) does not permit private 
funds to engage in general solicitation under proposed Rule 506(c) 
without losing their exclusions under the Investment Company Act.\151\ 
In our view, although Section 201(b) does not explicitly reference the 
meaning of ``public offering'' under the Investment Company Act, it 
clearly states that ``[o]ffers and sales exempt under [Rule 506, as 
revised pursuant to Section 201(a)] shall not be deemed public 
offerings under the Federal securities laws as a result of general 
advertising or general solicitation'' (emphasis added). As the 
Investment Company Act is a federal securities law, the effect of 
Section 201(b) is to permit offers and sales of securities under Rule 
506(c) by private funds relying on the exclusions from the definition 
of ``investment company'' under Section 3(c)(1) or Section 3(c)(7) of 
the Investment Company Act.
---------------------------------------------------------------------------

    \151\ See letter from Fund Democracy (stating that ``Section 
201(b) refers only to Rule 506; it makes no reference to the meaning 
of `public offering' under the Investment Company Act exemptions''). 
See also letter from AFL-CIO and AFR.
---------------------------------------------------------------------------

    Some commenters expressed concerns about private funds engaging in 
general solicitation under proposed Rule 506(c).\152\ Other commenters, 
however, supported the removal of the prohibition against general 
solicitation in Rule 506(c) offerings with respect to private 
funds,\153\ with some commenters stating that the removal of the ban 
would bring greater transparency to the private fund industry and allow 
managers of private funds to communicate more effectively with the 
public and prospective investors.\154\
---------------------------------------------------------------------------

    \152\ See, e.g., letters from A. La Rosa; A. Pierwola; AFL-CIO 
and AFR; C. Erickson; Consumer Federation; E. Guthrie; F. Urling; 
Fund Democracy; J. Clark; K. Pesson; M. Gessford; M. Trail; M. 
Zartler; R. Dunn; S. Johnston; W. Cunningham.
    \153\ See, e.g., letters from BlackRock; Dukas; Forum for U.S. 
Securities Lawyers in London; HFA; IAA; MFA (Sept. 28, 2012); NYCBA; 
SRC of NYSBA.
    \154\ See, e.g., letters from Dukas; HFA.
---------------------------------------------------------------------------

    Some commenters who were concerned about private funds engaging in 
general solicitation recommended that we impose additional conditions 
on private funds that rely on Rule 506(c). In particular, a number of 
commenters believed that private funds engaging in general solicitation 
should be subject to some form of content and/or other restrictions, 
and suggested potential methods.\155\ For example, some believed that, 
in order to engage in general solicitation, private funds should be 
held to performance and advertising standards that are analogous to 
mutual fund standards.\156\ One of these commenters suggested that the 
Commission develop rules tailored to the ways private funds calculate 
and present investment performance, rather than extending mutual fund 
performance rules to private funds.\157\ Some made other suggestions, 
such as

[[Page 44785]]

requiring each private fund relying on Rule 506(c) to disclose that the 
private fund is not registered with the Commission and should not be 
confused with a registered fund, such as a mutual fund.\158\ With 
respect to private funds sold through broker-dealers subject to FINRA's 
rules of conduct, some commenters believed that we should direct FINRA 
to require the filing and review of private fund advertisements.\159\
---------------------------------------------------------------------------

    \155\ See, e.g., letters from ICI; AFL-CIO and AFR; C. Corn; 
Sen. Levin (stating that ``Congress did not contemplate removing the 
general solicitation ban--without retaining any limitations on forms 
of solicitation--for private investment vehicles''); Consumer 
Federation; D. Kronheim; D. Smith; Fund Democracy; G. Lavy; G. 
Morin; Investor Advisory Committee; IDC; J. Sanders; Rep. Waters; 
NASAA; P. Turney; Sens. Reed, Levin, Durbin, Harkin, Lautenberg, 
Franken and Akaka.
    \156\ See, e.g., letters from C. Corn; Sen. Levin (noting that 
``[a]lready, the Commission has determined that the manner and 
substance of solicitation and advertising for investments in 
registered investment companies deserves significant regulatory 
oversight. Many of those same concerns apply to investments in 
private investment vehicles. Accordingly, the Commission should 
impose analogous protections for investments in private funds.''); 
Consumer Federation (stating that ``[s]hort of an outright 
prohibition on general solicitation and advertising by private 
funds, the Commission should at the very least adopt clear standards 
for the reporting of performance and fees by private funds, and 
delay their eligibility from engaging in general solicitation and 
advertising until such time as those standards are in place,'' 
including a requirement to include in private fund advertisements 
``a clear, prominent warning that they are not mutual funds and 
carry special risks.''); D. Kronheim; D. Smith; Fund Democracy 
(noting that an alternative would be to ``apply mutual fund 
advertising and valuation rules to hedge funds that engage in 
[general solicitation and advertising] (and, in any case, require 
standardized performance and fee reporting for all hedge funds), and 
require explicit, large-font disclaimers that hedge funds are not 
mutual funds and present special risks.''); G. Lavy; ICI 
(recommending content restrictions on private fund advertising at 
least as extensive as those currently applicable to mutual funds 
(e.g., disclaimers regarding the performance figures or measures 
displayed in any advertisement), with a prohibition on use of 
performance advertising until the Commission can develop a new rule 
regarding such advertising); IDC; NASAA (stating that ``because the 
investment strategies of private funds are typically more opaque, 
risky, and illiquid than those of mutual funds, private fund 
advertisements should be subject to restrictions that are comparable 
to the rules for mutual funds.''); P. Turney.
    \157\ See letter from ICI (arguing that the antifraud provisions 
in Section 206(4) of the Advisers Act [15 U.S.C. 80b-6(4)] and Rule 
206(4)-8 thereunder [17 CFR 275.206(4)-8] would not be enough to 
protect investors because these advertisements will be presented 
before accredited and non-accredited investors at the same time).
    \158\ See letters from ICI; IDC.
    \159\ See letters from AFL-CIO and AFR (stating that ``FINRA 
already pre-reviews broker-dealer advertising; the same requirement 
should apply to general solicitation and advertising in Rule 506 
offerings in light of the significant potential for abuse.''); ICI 
(noting that ``FINRA has developed an infrastructure to handle such 
filings and an expertise to substantively review them, and 
accordingly is best positioned to handle this task.'').
---------------------------------------------------------------------------

    Finally, some commenters opposed the imposition of content and/or 
other restrictions for private funds.\160\ They asserted that 
purchasers of the securities of a private fund that relies on Rule 
506(c), must be, at a minimum, accredited investors and thus have met 
objective criteria demonstrating financial sophistication, which they 
believed eliminates the risk that other types of investors could be 
defrauded.\161\ A number of commenters pointed out that advertisements 
of private funds are subject to the antifraud provisions of the federal 
securities laws and suggested that liability under such provisions 
provides sufficient investor protections.\162\
---------------------------------------------------------------------------

    \160\ See, e.g., letters from Verrill Dana LLP (stating that 
``[t]here is no suggestion in Section 201 that the Commission must 
distinguish between `issuers that engage in operational businesses' 
and `those that are merely investment vehicles'''); Artivest (noting 
that for private funds managed by a registered commodity pool 
operator, the National Futures Association Rule 2-29 contains 
standards regarding marketing materials).
    \161\ In general, private funds that pay performance fees to 
their managers are available only to ``qualified clients'' that have 
at least $1 million in assets under management or that have a net 
worth of $2 million (excluding the value of the client's primary 
residence). See Rule 205-3 under the Advisers Act [17 CFR 275.205-
3]. See also letter from BlackRock.
    \162\ See, e.g., letters from BlackRock; HFA; MFA (Mar. 22, 
2013).
---------------------------------------------------------------------------

    We have carefully considered commenters' suggestions and concerns. 
We are mindful of certain commenters' concerns that private funds 
engaging in general solicitation may raise certain investor protection 
issues. We also understand that other commenters believe that 
additional measures regarding private fund advertising are not 
necessary because the antifraud provisions of the federal securities 
laws continue to apply. We will monitor and study the development of 
private fund advertising and undertake a review to determine whether 
any further action is necessary.
    We remind investment advisers to private funds that they are 
subject to Rule 206(4)-8 under the Advisers Act.\163\ Rule 206(4)-8 
provides that it shall constitute a fraudulent, deceptive or 
manipulative act, practice or course of business within the meaning of 
Section 206(4) of the Advisers Act for any investment adviser to a 
pooled investment vehicle \164\ to ``(1) [m]ake any untrue statement of 
a material fact or to omit to state a material fact necessary to make 
the statements made, in light of the circumstances under which they 
were made, not misleading, to any investor or prospective investor in 
the pooled investment vehicle; or (2) otherwise engage in any act, 
practice or course of business that is fraudulent, deceptive, or 
manipulative with respect to any investor or prospective investor in 
the pooled investment vehicle.'' \165\
---------------------------------------------------------------------------

    \163\ 17 CFR 275.206(4)-8.
    \164\ Rule 206(4)-8 defines a pooled investment vehicle to mean 
any investment company as defined in Section 3(a) of the Investment 
Company Act [15 U.S.C. 80a-3(a)] or any company that would be an 
investment company under Section 3(a) of that Act but for the 
exclusion provided from that definition by either Section 3(c)(1) or 
Section 3(c)(7) of that Act [15 U.S.C. 80a-3(c)(1) or (7)].
    \165\ Id.
---------------------------------------------------------------------------

    As was stated by the Commission when it adopted Rule 206-4(8), 
``[t]he rule clarifies that an adviser's duty to refrain from 
fraudulent conduct under the federal securities laws extends to the 
relationship with ultimate investors and that the Commission may bring 
enforcement actions under the Advisers Act against investment advisers 
who defraud investors or prospective investors in those pooled 
investment vehicles.'' \166\ We further stated that we ``intend to 
employ all of the broad authority that Congress provided us in section 
206(4) and direct it at adviser conduct affecting an investor or 
potential investor in a pooled investment vehicle.'' \167\ Recently, 
for example, we have brought enforcement actions against private fund 
advisers and others for material misrepresentations to investors and 
prospective investors regarding fund performance, strategy, and 
investments, among other things.\168\
---------------------------------------------------------------------------

    \166\ Prohibition of Fraud by Advisers to Certain Pooled 
Investment Vehicles, Release No. IA-2628 (Aug. 3, 2007) [72 FR 44756 
(Aug. 9, 2007)].
    \167\ Id.
    \168\ See, e.g., In the Matter of Oppenheimer Asset Management 
Inc. and Oppenheimer Alternative Investment Management, LLC, Release 
No. IA-3566 (Mar. 11, 2013); In the Matter of Sentinel Investment 
Management Corp., Release No. IA-3530 (Dec. 27, 2012); In the Matter 
of Weizhan Tang, Release No. IA-3482 (Oct. 5, 2012); In the Matter 
of Calhoun Asset Management, LLC, et al., Release No. IA-3428 (July 
9, 2012); In the Matter of Belal K. Faruki, Release No. IA-3405 (May 
17, 2012); In the Matter of GMB Capital Management LLC, et al., 
Release No. IA-3399 (Apr. 20, 2012).
---------------------------------------------------------------------------

    We believe that investment advisers that have implemented 
appropriate policies and procedures regarding, among other things, the 
nature and content of private fund sales literature, including general 
solicitation materials, are less likely to use materials that 
materially mislead investors or otherwise violate the federal 
securities laws. Accordingly, we believe that investment advisers to 
private funds should carefully review any such policies and procedures 
that have been implemented to determine whether they are reasonably 
designed to prevent the use of fraudulent or materially misleading 
private fund advertising and make appropriate amendments to those 
policies and procedures, particularly if the private funds intend to 
engage in general solicitation activity.\169\
---------------------------------------------------------------------------

    \169\ We remind investment advisers that are registered or 
required to be registered under Section 203 of the Advisers Act that 
they must adopt and implement written policies and procedures 
reasonably designed to prevent violations of the Advisers Act which 
include, but are not limited to, violations of Section 206 of the 
Advisers Act and the rules thereunder. They must also review, no 
less frequently than annually, the adequacy of the written policies 
and procedures and the effectiveness of the policies and procedures' 
implementation. See CFR 275.206(4)-7.
---------------------------------------------------------------------------

F. Technical and Conforming Amendments

    We proposed a number of technical and conforming amendments to 
Rules 502 and 506 of Regulation D. Under the proposal, we would amend 
various provisions in Rule 502(b) to clarify that the references to 
sales to non-accredited investors under Rule 506, and the corresponding 
informational requirements, would be applicable to offerings under Rule 
506(b) and not to offerings under Rule 506(c). We proposed to amend 
Rule 502(c) to clarify that Rule 502(c)'s prohibition against general 
solicitation would not apply to offerings under Rule 506(c). In 
addition, as Section 201(c) of the JOBS Act renumbered Section 4 of the 
Securities Act, we proposed to amend Regulation D and Rule 144A to 
update the references to Section 4. Finally, the proposal would update 
references to Section 2 of the Securities Act in these rules as some of 
the references have not been updated to reflect the current numbering 
scheme in Section 2. We received no comments regarding these technical 
and conforming amendments and are adopting these rule amendments as 
proposed.

[[Page 44786]]

III. Final Amendment to Rule 144A

    Section 201(a)(2) of the JOBS Act directs the Commission to revise 
Rule 144A(d)(1) under the Securities Act to provide that securities 
sold pursuant to Rule 144A may be offered to persons other than QIBs, 
including by means of general solicitation, provided that securities 
are sold only to persons that the seller and any person acting on 
behalf of the seller reasonably believe is a QIB. To implement the 
mandated rule change, we proposed amending Rule 144A(d)(1) to eliminate 
the references to ``offer'' and ``offeree.'' All of the commenters that 
expressed a view on the proposed amendment to Rule 144A(d)(1) stated 
that they supported the Commission's proposal.\170\ We are adopting the 
amendment as proposed. As amended, Rule 144A(d)(1) will require only 
that the securities be sold to a QIB or to a purchaser that the seller 
and any person acting on behalf of the seller reasonably believe is a 
QIB.\171\ Under this amendment, resales of securities pursuant to Rule 
144A can be conducted using general solicitation, so long as the 
purchasers are limited in this manner.\172\
---------------------------------------------------------------------------

    \170\ See letters from IAA; SIFMA and FSR (Oct. 5, 2012); J. 
Johnson; OTC Markets Group Inc.
    \171\ Rule 144A(d)(1).
    \172\ The general solicitation that is permitted in Rule 144A 
resales from the initial purchaser to the QIBs will not affect the 
availability of the Section 4(a)(2) exemption or Regulation S for 
the initial sale of securities by the issuer to the initial 
purchaser.
---------------------------------------------------------------------------

    As a result of the Section 201(a)(2) mandate and the resulting Rule 
144A revisions, we are also making technical and conforming revisions 
to the exceptions in Regulation M relating to transactions in Rule 144A 
securities, specifically Regulation M Rules 101(b)(10), 102(b)(7) and 
104(j)(2). When adopted in 1996, the exceptions delineated in Rules 
101(b)(10)(i), 102(b)(7)(i) and 104(j)(2)(i) were generally intended to 
permit transactions in securities eligible for resale under Rule 144A 
during a distribution of securities, provided that offers and sales of 
such securities were made solely to QIBs or persons reasonably believed 
to be QIBs in certain transactions exempt from registration.\173\
---------------------------------------------------------------------------

    \173\ See Anti-Manipulation Rules Concerning Securities 
Offerings, Release No. 34-38067 (Dec. 20, 1996) [62 FR 520 (Jan. 3, 
1997)] at 530 (``As adopted, the exception permits transactions in 
Rule 144A Securities during a distribution of such securities, 
provided that sales of such securities within the United States are 
made solely to: Qualified institution buyers (`QIBs'), or persons 
reasonably believed to be QIBs, in transactions exempt from 
registration under the Securities Act . . . The exception covers 
both the Rule 144A security being distributed and any reference 
security.'').
---------------------------------------------------------------------------

    As explained above, Section 201(a)(2) of the JOBS Act directs the 
Commission to revise Rule 144A to permit offers of securities to 
persons other than QIBs. As noted above, Rule 144A is being amended to 
eliminate references to ``offer'' and ``offeree,'' so that the amended 
rule will require only that securities be sold to a QIB or to a 
purchaser that the seller and any person acting on behalf of the seller 
reasonably believes is a QIB.
    In order to conform the language in Regulation M to Rule 144A, as 
amended, we are conforming the Regulation M exceptions by similarly 
eliminating the references to ``offered'' and ``offerees.'' We believe 
that these conforming modifications do not result in any substantive 
change to the Regulation M exceptions and are consistent with the 
purpose of the exceptions.
    As a transition matter, for an ongoing Rule 144A offering that 
commenced before the effective date of the amendment to Rule 
144A(d)(1), offering participants will be entitled to conduct the 
portion of the offering following the effective date of the amendment 
to Rule 144A(d)(1) using general solicitation, without affecting the 
availability of Rule 144A for the portion of the offering that occurred 
prior to the effective date of the amended rule.

IV. Integration With Offshore Offerings

    In the Proposing Release, we noted that the mandate in Section 
201(a) that the Commission amend Rule 506 and Rule 144A to permit the 
use of general solicitation in transactions under those rules has 
raised questions from some commenters \174\ regarding the impact of the 
use of general solicitation on the availability of the Regulation S 
safe harbors for concurrent unregistered offerings inside and outside 
the United States.\175\ The safe harbors are important when U.S. and 
non-U.S. companies engage in global offerings of securities in which 
the U.S. portion of the offering is conducted in accordance with Rule 
144A or Rule 506 and the offshore portion is conducted in reliance on 
Regulation S.
---------------------------------------------------------------------------

    \174\ See, e.g., letters from ABA Fed. Reg. Comm. (Apr. 30, 
2012); L. Neumann (June 12, 2012); NYCBA (May 4, 2012); 
SecuritiesLawUSA, PC (June 26, 2012); SIFMA (Apr. 27, 2012).
    \175\ Regulation S provides a safe harbor for offers and sales 
of securities outside the United States and includes an issuer and a 
resale safe harbor. Two general conditions apply to both safe 
harbors: (1) The securities must be sold in an offshore transaction 
and (2) there can be no ``directed selling efforts'' in the United 
States. Rule 902(c)(1) [17 CFR 230.902(c)(1)] broadly defines 
``directed selling efforts'' as: Any activity undertaken for the 
purpose of, or that could reasonably be expected to have the effect 
of, conditioning the market in the United States for any of the 
securities offered in reliance on Regulation S. Such activity 
includes placing an advertisement in a publication ``with a general 
circulation in the United States'' that refers to the offering of 
securities being made in reliance upon Regulation S.
---------------------------------------------------------------------------

    We expressed our view on this issue in the Proposing Release, which 
we are reaffirming in this release.\176\ Concurrent offshore offerings 
that are conducted in compliance with Regulation S will not be 
integrated with domestic unregistered offerings that are conducted in 
compliance with Rule 506 or Rule 144A, as amended. As explained in the 
Proposing Release, we believe that our view is consistent with the 
historical treatment of concurrent Regulation S and Rule 144A/Rule 506 
offerings.\177\
---------------------------------------------------------------------------

    \176\ All of the commenters who expressed a view on our 
interpretation supported it and encouraged us to reiterate it in 
this release. See letters from ABA Fed. Reg. Comm; Forum for U.S. 
Securities Lawyers in London; IAA; IPA; NYCBA.
    \177\ See Offshore Offers and Sales, Release No. 33-6863 (Apr. 
24, 1990) [55 FR 18306 (May 2, 1990)] (stating that ``[o]ffshore 
transactions made in compliance with Regulation S will not be 
integrated with registered domestic offerings or domestic offerings 
that satisfy the requirements for an exemption from registration 
under the Securities Act.''). In addressing the offshore transaction 
component of the Regulation S safe harbor, the Commission also 
stated, ``Offers made in the United States in connection with 
contemporaneous registered offerings or offerings exempt from 
registration will not preclude reliance on the safe harbors.'' Id. 
at n. 36. Likewise, in addressing directed selling efforts, the 
Commission stated, ``Offering activities in contemporaneous 
registered offerings or offerings exempt from registration will not 
preclude reliance on the safe harbors.'' Id. at n. 47. See also Rule 
500(g) of Regulation D [17 CFR 230.500(g)] (formerly Preliminary 
Note No. 7 to Regulation D) (``Regulation S may be relied upon for 
such offers and sales even if coincident offers and sales are made 
in accordance with Regulation D inside the United States.'').
---------------------------------------------------------------------------

V. Paperwork Reduction Act

A. Background

    The amendment to Form D contains a ``collection of information'' 
requirement within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\178\ We published a notice requesting comment on the 
collection of information requirement in the Proposing Release for the 
rule and form amendments. We submitted that requirement to the Office 
of Management and Budget (``OMB'') for review and approval in 
accordance with the PRA and its implementing regulations.\179\ The 
title of this requirement is: ``Form D'' (OMB Control No. 3235-
0076).\180\
---------------------------------------------------------------------------

    \178\ 44 U.S.C. 3501 et seq.
    \179\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \180\ Form D was adopted under the authority of Sections 
2(a)(15), 3(b), 4(a)(2), 19(a) and 19(c)(3) of the Securities Act 
[15 U.S.C. 77b(a)(15), 77c(b), 77d(a)(2), 77s(a) and 77s(c)(3)].
---------------------------------------------------------------------------

    We adopted Regulation D and Form D as part of the establishment of 
a series

[[Page 44787]]

of exemptions for offerings and sales of securities under the 
Securities Act. The Form D filing is required to be made by issuers as 
a notice of sales without registration under the Securities Act based 
on a claim of exemption under Regulation D or Section 4(a)(5) of the 
Securities Act. The Form D filing is required to include basic 
information about the issuer, certain related persons, and the 
offering. This information is needed for implementing the exemptions 
and analyzing their use. The information collection requirements 
related to the filing of Form D with the Commission are mandatory to 
the extent that an issuer elects to make an offering of securities in 
reliance on the relevant exemption. Responses are not confidential. The 
hours and costs associated with preparing and filing forms and 
retaining records constitute reporting and cost burdens imposed by the 
collection of information requirements. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information requirement unless it displays a currently valid OMB 
control number.
    As discussed above, we proposed to amend Form D to add a check box 
to indicate an offering relying on the Rule 506(c) exemption. In the 
Proposing Release, we requested comment on our PRA burden hour and cost 
estimates and the analysis used to derive such estimates. One commenter 
responded to our request for comment on the PRA analysis and stated 
that it believed that the cost estimates in the PRA and economic 
analysis are too low.\181\
---------------------------------------------------------------------------

    \181\ See letter from NSBA (stating that ``the compliance cost 
estimates should include the time required by the issuer and their 
advisors to familiarize themselves with the rule and to comply with 
the additional verification requirements and the time and costs of 
investors to comply (for example, with a third-party verification 
requirement)''). For PRA purposes, we consider only the burden of 
responding to the collection of information in Form D; we do not 
consider any of the other costs, direct or indirect, of conducting a 
Rule 506(c) offering.
---------------------------------------------------------------------------

B. Revisions to PRA Reporting and Cost Burden Estimates

    Consistent with the PRA analysis in the Proposing Release, we 
believe that the addition of a check box on Form D to indicate that an 
issuer is relying on the Rule 506(c) exemption for its offering will 
have a negligible effect on the paperwork burden of the form. Form D 
already contains a check box for each basis of exemption claimed under 
Regulation D; this change simply conforms the form to the new rule 
amendment. Accordingly, we estimate that under the amendment to Form D, 
the burden for responding to the collection of information in Form D 
will be substantially the same as before the amendment to Form D. We 
believe, however, that the amendment to Rule 506 could increase the 
number of Form D filings that are made with the Commission because we 
expect issuers may conduct more Rule 506 offerings.
    The table below shows the current total annual compliance burden, 
in hours and in costs, of the collection of information pursuant to 
Form D. For purposes of the PRA, we estimate that, over a three-year 
period, the average burden estimate will be four hours per Form D 
filing. Our burden estimate represents the average burden for all 
issuers. This burden is reflected as a one hour burden of preparation 
on the issuer and a cost of $1,200 per filing. In deriving these 
estimates, we assume that 25% of the burden of preparation is carried 
by the issuer internally and that 75% of the burden of preparation is 
carried by outside professionals retained by the issuer at an average 
cost of $400 per hour. The portion of the burden carried by outside 
professionals is reflected as a cost, while the portion of the burden 
carried by the issuer internally is reflected in hours.

                                       Table 1--Estimated Paperwork Burden Under Form D, Pre-Amendment to Rule 506
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            External
                                                       Number of      Burden hours/     Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                          (A)\182\              (B)                (C)=(A)*(B)    (D)              (E)     (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D............................................          18,187                4           72,748           18,187           54,561      $21,824,400
--------------------------------------------------------------------------------------------------------------------------------------------------------

    According to our Division of Economic and Risk Analysis (``DERA''), 
in 2012, 16,067 companies made 18,187 new Form D filings. The annual 
number of new Form D filings rose from 13,764 in 2009 to 18,187 in 
2012, an average increase of approximately 1,474 Form D filings per 
year, or approximately 10%. Assuming that the macroeconomic factors 
underlying this increase persist and the number of Form D filings 
continues to increase by 1,474 filings per year for each of the next 
three years, the average number of Form D filings in each of the next 
three years, absent the elimination of the prohibition against general 
solicitation, would be approximately 21,135.
---------------------------------------------------------------------------

    \182\ We had previously estimated the number of responses to be 
25,000, as reflected in OMB's Inventory of Currently Approved 
Information Collections (available at: https://www.reginfo.gov/public/do/PRAMain;jsessionid=D37174B5F6F9148DB767D63DF6983A65), but 
we are revising this estimate to reflect the number of new Form D 
filings made in 2012.
---------------------------------------------------------------------------

    We anticipate that new paragraph (c) of Rule 506 could result in an 
even greater annual increase in the number of Form D filings than the 
10% annual increase estimated above. As a reference point for the 
potential increase, we use the impact of another past rule change on 
the market for Regulation D offerings. In 1997, the Commission amended 
Rule 144(d) under the Securities Act \183\ to reduce the holding period 
for restricted securities from two years to one year,\184\ thereby 
increasing the attractiveness of Regulation D offerings to investors 
and to issuers. There were 10,341 Form D filings in 1996. This was 
followed by a 20% increase in the number of Form D filings in each of 
the subsequent three calendar years, reaching 17,830 by 1999. Although 
it is not possible to predict with any degree of accuracy the increase 
in the number of Rule 506 offerings following the elimination of the 
prohibition against general solicitation for a new category of Rule 506 
offerings, we assume for purposes of this analysis that there could be 
a similarly significant increase.
---------------------------------------------------------------------------

    \183\ 17 CFR 230.144(d).
    \184\ See Revision of Holding Period Requirements in Rules 144 
and 145, Release No. 33-7390 (Feb. 20, 1997) [62 FR 9242 (Feb. 28, 
1997)].
---------------------------------------------------------------------------

    For purposes of the PRA and based on our analysis above, we 
estimate that the amendment to Rule 506 will result in a 20% increase 
in Form D filings relying on the Rule 506 exemption, or approximately 
3,637 filings.\185\ We also assume that the number of Form D filings 
will increase by approximately 3,637 in each year following the 
adoption of the rule.
---------------------------------------------------------------------------

    \185\ This number is based on the 18,187 new Form D filings that 
were made in 2012.

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

[[Page 44788]]

    Based on this increase, we estimate that the annual compliance 
burden of the collection of information requirements for the first year 
in which issuers will make Form D filings after the adoption of Rule 
506(c) will be an aggregate of 21,824 hours of issuer personnel time 
and $26,188,800 for the services of outside professionals per year.

                                      Table 2--Estimated Paperwork Burden Under Form D, Post-Amendment to Rule 506
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            External
                                                       Number of      Burden hours/     Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                         (A) \186\              (B)                (C)=(A)*(B)    (D)              (E)     (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D............................................          21,824                4           87,296           21,824           65,472      $26,188,800
--------------------------------------------------------------------------------------------------------------------------------------------------------

VI. Economic Analysis

A. Background

    We are adopting amendments to Rule 506 and Rule 144A to implement 
the requirements of Section 201(a) of the JOBS Act.\187\ Section 
201(a)(1) directs the Commission to revise Rule 506 to provide that the 
prohibition against general solicitation contained in Rule 502(c) shall 
not apply to offers and sales of securities made pursuant to Rule 506, 
as amended, provided that all purchasers of the securities are 
accredited investors. Section 201(a)(1) also provides that ``such rules 
shall require the issuer to take reasonable steps to verify that 
purchasers of the securities are accredited investors, using such 
methods as determined by the Commission.'' Section 201(a)(2) of the 
JOBS Act directs the Commission to revise Rule 144A(d)(1) to provide 
that securities sold pursuant to Rule 144A may be offered to persons 
other than QIBs, including by means of general solicitation, provided 
that securities are sold only to persons that the seller and any person 
acting on behalf of the seller reasonably believe are QIBs.
---------------------------------------------------------------------------

    \186\ The information in this column is based on the 18,187 new 
Form D filings that were made in 2012, plus the additional 3,637 
filings we estimate would be filed in the first year after the 
effectiveness of Rule 506(c).
    \187\ As explained above, the Commission in this release is 
adopting only those rule and form amendments that are specifically 
mandated by Section 201(a). Correspondingly, we analyze the economic 
impacts--including the benefits and costs--only of those rules and 
form amendments considered within the scope of this release.
---------------------------------------------------------------------------

    We are mindful of the costs imposed by and the benefits obtained 
from our rules. The discussion below addresses the economic effects of 
the amendments to Rule 506, Rule 144A and Form D, including the likely 
benefits and costs of the amendments as well as the effect of the 
amendments on efficiency, competition and capital formation.\188\ Some 
of the costs and benefits stem from the statutory mandate of Section 
201(a), whereas others are affected by the discretion we have exercised 
in implementing this mandate. These two types of costs and benefits may 
not be entirely separable to the extent that our discretion is 
exercised to realize the benefits that we believe were intended by 
Section 201(a).
---------------------------------------------------------------------------

    \188\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] 
requires the Commission, when engaging in rulemaking that requires 
it to consider whether an action is necessary or appropriate in the 
public interest, to consider, in addition to the protection of 
investors, whether the action would promote efficiency, competition, 
and capital formation.
---------------------------------------------------------------------------

B. Economic Baseline

    The baseline analysis that follows is in large part based on 
information collected from Form D filings submitted by issuers relying 
on Regulation D to raise capital. As we describe in more detail below, 
we believe that we do not have a complete view of the Rule 506 market, 
particularly with respect to the amount of capital raised. Currently, 
issuers are required to file a Form D within 15 days of the first sale 
of securities, and are required to report additional sales through 
amended filings only under certain conditions. In addition, issuers may 
not report all required information, either due to error or because 
they do not wish to make the information public. Commenters have 
suggested and we also have evidence that some issuers do not file a 
Form D for their offerings in compliance with Rule 503.\189\ 
Consequently, the analysis that follows is necessarily subject to these 
limitations in the current Form D reporting process.
---------------------------------------------------------------------------

    \189\ Many commenters asserted that non-compliance with Form D 
filing obligations is widespread. See, e.g., letters from Investor 
Advisory Committee (stating that ``[i]t is generally acknowledged 
that a significant number of issuers do not currently file Form D. . 
.''); AARP (stating that ``[s]imply adding a checkbox to a form that 
too often goes unfiled and then only after the fact is inadequate to 
the task at hand.''); AFL-CIO and AFR (stating that ``many issuers 
today flout the Form D filing requirement for such offerings, 
further limiting the Commission's ability to provide effective 
oversight''). See also Securities and Exchange Commission, Office of 
Inspector General, Regulation D Exemption Process (Mar. 31, 2009) 
(``OIG Report''), available at: https://www.sec-oig.gov/Reports/AuditsInspections/2009/459.pdf (stating that while the Commission 
staff ``strongly encourage companies to comply with Rule 503, they 
are aware of instances in which issuers have failed to comply with 
Rule 503. . .''). Based on its analysis of the filings required by 
FINRA Rules 5122 and 5123 during the period of December 3, 2012 to 
February 5, 2013, DERA estimates that as many as 9% of the offerings 
represented in the FINRA filings for Regulation D or other private 
offerings that used a registered broker did not have a corresponding 
Form D.
---------------------------------------------------------------------------

1. Size of the Exempt Offering Market
    Exempt offerings play a significant role in capital formation in 
the United States. Offerings conducted in reliance on Rule 506 account 
for 99% of the capital reported as being raised under Regulation D from 
2009 to 2012, and represent approximately 94% of the number of 
Regulation D offerings.\190\ The significance of Rule 506 offerings is 
underscored by the comparison to registered offerings. In 2012, the 
estimated amount of capital reported as being raised in Rule 506 
offerings (including both equity and debt) was $898 billion, compared 
to $1.2 trillion raised in registered offerings.\191\ Of this $898 
billion, operating companies (issuers that are not pooled investment 
funds) reported raising $173 billion, while pooled investment funds 
reported raising $725 billion.\192\ The amount reported as being raised 
by pooled investment funds is comparable to the amount of capital 
raised by registered investment funds. In 2012, registered investment 
funds (which include money market mutual funds, long-term mutual funds, 
exchange-traded funds, closed-end funds and unit investment trusts) 
raised approximately $727 billion.\193\
---------------------------------------------------------------------------

    \190\ See Ivanov/Bauguess Study.
    \191\ See id.
    \192\ See id.
    \193\ In calculating the amount of capital raised by registered 
investment funds, we use the net amounts (plus reinvested dividends 
and reinvested capital gains), which reflect redemptions, and not 
gross amounts, by open-ended registered investment funds because 
they face frequent redemptions and do not have redemption 
restrictions and lock-up periods common among private funds. In 
addition, we use the new issuances of registered closed-end funds 
and the new deposits of registered unit investment trusts. See 2013 
Investment Company Institute Factbook, available at: https://www.icifactbook.org.

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

[[Page 44789]]

    In 2011, the estimated amount of capital (including both equity and 
debt) reported as being raised in Rule 506 offerings was $849 billion 
compared to $985 billion raised in registered offerings.\194\ Of the 
$849 billion, operating companies reported raising $71 billion, while 
pooled investment funds reported raising $778 billion.\195\ More 
generally, when including offerings pursuant to other exemptions--Rule 
144A, Regulation S and Section 4(a)(2)--significantly more capital 
appears to be raised through exempt offerings than registered offerings 
(Figure 1).\196\
---------------------------------------------------------------------------

    \194\ See Ivanov/Bauguess Study.
    \195\ See id.
    \196\ See id.
    \197\ The 2012 non-ABS Rule 144A offerings data is based on an 
extrapolation of currently available data through May 2012 from 
Sagient Research System's Placement Tracker database. For more 
detail, see the Ivanov/Bauguess Study.
[GRAPHIC] [TIFF OMITTED] TR24JY13.014

    At present, issuers are required to file a Form D not later than 15 
days after the first sale of securities in a Regulation D offering and 
an amendment to the Form D only under certain circumstances. Since 
issuers are not required to submit a Form D filing when an offering is 
completed, and submit amendments only under certain circumstances, we 
have no definitive information on the final amounts raised. Figure 2, 
below, illustrates that at the time of the Form D filing, only 39% of 
offerings by non-pooled investment fund issuers were completed relative 
to the total amount sought. Separately, 70% of pooled investment funds 
state their total offering amount to be ``Indefinite'' in their Form D 
filings. As a result, the Form D filings of these pooled investment 
funds likely do not accurately reflect the total amount of securities 
offered or sold.

[[Page 44790]]

[GRAPHIC] [TIFF OMITTED] TR24JY13.015

2. Affected Market Participants
    The amendments to Rule 506 we are adopting today will affect a 
number of different market participants. Issuers of securities in Rule 
506 offerings include both reporting and non-reporting operating 
companies and pooled investment funds. Investment advisers organize and 
sponsor pooled investment funds that conduct Rule 506 offerings. 
Intermediaries that facilitate Rule 506 offerings include registered 
broker-dealers, finders and placement agents. Investors in Rule 506 
offerings include accredited investors (both natural persons and legal 
entities) and non-accredited investors who meet certain 
``sophistication'' requirements. Each of these market participants is 
discussed in further detail below.
a. Issuers
    Based on the information submitted in 112,467 new and amended Form 
D filings between 2009 and 2012, there were 67,706 new Regulation D 
offerings by 49,740 unique issuers during this four-year period.\198\ 
The size of the average Regulation D offering during this period was 
approximately $30 million, whereas the size of the median offering was 
approximately $1.5 million.\199\ The difference between the average and 
median offering sizes indicates that the Regulation D market is 
comprised of many small offerings, which is consistent with the view 
that many smaller businesses are relying on Regulation D to raise 
capital, and a smaller number of much larger offerings.
---------------------------------------------------------------------------

    \198\ See Ivanov/Bauguess Study.
    \199\ See id. A study of unregistered equity offerings by 
publicly-traded companies over the period 1980-1996 found that the 
mean offering amount was $12.7 million, whereas the median offering 
amount was $4.5 million. See Michael Hertzel, Michael Lemmon, James 
Linck and Lynn Rees, Long-Run Performance Following Private 
Placements of Equity, 57 Journal of Finance 2595 (2002).
---------------------------------------------------------------------------

    Some information about issuer size is available from Item 5 in Form 
D, which requires issuers in Regulation D offerings to report their 
size in terms of revenue ranges or, in the case of certain pooled 
investment funds, net asset value ranges. All issuers can currently 
choose not to disclose this size information, however, and a 
significant majority of issuers that are not pooled investment funds 
declined to disclose their revenue ranges in the Forms D that they 
filed between 2009 and 2012. For those that did, most reported a 
revenue range of less than $1 million (Figure 3).\200\ During the 2009-
2011 period, approximately 10% of all public companies raised capital 
in Regulation D offerings; in 2012, approximately 6% of such companies 
did so.\201\ These public companies tended to be smaller and less 
profitable than their industry peers, which illustrates the 
significance of the private capital markets to smaller companies, 
whether public or private.\202\
---------------------------------------------------------------------------

    \200\ See Ivanov/Bauguess Study.
    \201\ Id. (explaining the methodology of using listings in the 
Standard & Poor's Compustat database and the University of Chicago's 
Center for Research in Securities Prices database to determine which 
companies were public companies).
    \202\ Id.

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

[[Page 44791]]

[GRAPHIC] [TIFF OMITTED] TR24JY13.016

    During this period, pooled investment funds conducted approximately 
24% of the total number of Regulation D offerings and raised 
approximately 81% of the total amount of capital raised in Regulation D 
offerings.\203\ More than 75% of pooled investment funds declined to 
disclose their net asset value range.
---------------------------------------------------------------------------

    \203\ Id.
    \204\ Id.
    [GRAPHIC] [TIFF OMITTED] TR24JY13.017
    
    Between 2009 and 2012, approximately 66% of Regulation D offerings 
were of equity securities, and almost two-thirds of these were by 
issuers other than pooled investment funds.204 Non-U.S. 
issuers accounted for

[[Page 44792]]

approximately 19% of the amount of capital raised in Regulation D 
offerings, indicating that the U.S. market is a significant source of 
capital for these issuers.\205\
---------------------------------------------------------------------------

    \205\ Id.
---------------------------------------------------------------------------

    Unlike in Regulation D offerings, issuers conducting Rule 144A 
offerings are not required to disclose information about their 
offerings to the Commission, which limits our ability to measure the 
size of the Rule 144A market. Based on transaction information 
collected by third-party data providers,\206\ we can broadly 
characterize the Rule 144A market as being divided between ABS and non-
ABS offerings. These sources indicate that, over the four-year period 
from 2009 to 2012, there were 3,510 non-ABS Rule 144A offerings by 
1,965 unique issuers. During this period, the average non-ABS offering 
size was approximately $526 million, while the median non-ABS offering 
size was $350 million. These offering sizes are significantly larger 
than the average and median amounts of Regulation D offerings, as 
discussed above, indicating that the Rule 144A market, as compared to 
the Regulation D market, is characterized by much larger issues (which 
we presume correlate to larger issuers, as well) and, based on the 
number of Rule 144A offerings, far fewer issuers. Another significant 
difference from Regulation D offerings is the type of security offered. 
During this period, over 99% of the non-ABS offerings in the Rule 144A 
market were debt offerings,\207\ compared to 13% of Regulation D 
offerings.\208\
---------------------------------------------------------------------------

    \206\ These statistics are based on a review of data from 
Securities Data Corporation's New Issues database (Thomson 
Financial) and Sagient Research System's Placement Tracker database.
    \207\ This statistic is based on a review of data from 
Securities Data Corporation's New Issues database (Thomson 
Financial) and Sagient Research System's Placement Tracker database.
    \208\ See Ivanov/Bauguess Study.
---------------------------------------------------------------------------

b. Investors
    We have relatively little information on the types and number of 
investors in Rule 506 offerings. Form D currently requires issuers in 
Rule 506 offerings to provide information about the total number of 
investors who have already invested in the offering and the number of 
persons who do not qualify as accredited investors.\209\ In 2012, 
approximately 153,000 investors participated in offerings by operating 
companies, while approximately 81,000 investors invested in offerings 
by pooled investment funds.\210\ Because some investors participate in 
multiple offerings, these numbers likely overestimate the actual number 
of unique investors in these reported offerings. In offerings under 
Rule 506(b), both accredited investors and up to 35 non-accredited 
investors who meet certain sophistication requirements are eligible to 
purchase securities. In offerings under new Rule 506(c), only 
accredited investors will be eligible to purchase securities.
---------------------------------------------------------------------------

    \209\ See Item 14 of Form D. Form D does not require any other 
information on the types of investors, such as whether they are 
natural persons or legal entities.
    \210\ These numbers are based on initial Form D filings 
submitted in 2012.
---------------------------------------------------------------------------

    Information collected from Form D filings indicates that most Rule 
506 offerings do not involve broad investor participation. More than 
two-thirds of these offerings have ten or fewer investors, while less 
than 5% of these offerings have more than 30 investors. Although Rule 
506 currently allows for the participation of non-accredited investors 
who meet certain sophistication requirements, such non-accredited 
investors reportedly purchased securities in only 11% of the Rule 506 
offerings conducted between 2009 and 2012.\211\ Only 8% of the 
offerings by pooled investment funds included non-accredited investors, 
compared to 12% of the offerings by other issuers.\212\
---------------------------------------------------------------------------

    \211\ See Ivanov/Bauguess Study.
    \212\ Id.

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

[[Page 44793]]

[GRAPHIC] [TIFF OMITTED] TR24JY13.018

    As stated above, between 2009 and 2012, the size of the median 
Regulation D offering, based on the information in Form D filings, was 
approximately $1.5 million. The presence of so many relatively small 
offerings suggests that a sizable number of current investors in Rule 
506 offerings are natural persons or legal entities in which all equity 
owners are natural persons. This is because smaller offerings may not 
provide sufficient scale for institutional investors to earn a sizable 
return. Institutional investors typically have a larger investible 
capital base and more formal screening procedures compared to investors 
who are natural persons, and the associated costs of identifying 
potential investments and monitoring their investment portfolio lead 
them to make larger investments than natural persons.\213\ As for 
whether natural persons investing in these offerings are accredited 
investors or non-accredited investors, almost 90% of the Regulation D 
offerings conducted between 2009 and 2012 did not involve any non-
accredited investors.\214\
---------------------------------------------------------------------------

    \213\ See, e.g., George Fenn, Nellie Liang and Stephen Prowes, 
The Economics of Private Equity Markets (1998); Steven Kaplan and 
Per Str[ouml]mberg, Leveraged Buyouts and Private Equity, 23 Journal 
of Economic Perspectives 121 (2009).
    \214\ See Ivanov/Bauguess Study.
---------------------------------------------------------------------------

    While we do not know what percentage of investors in Rule 506 
offerings are natural persons, the vast majority of Regulation D 
offerings are conducted without the use of an intermediary,\215\ 
suggesting that many of the investors in Regulation D offerings likely 
have a pre-existing relationship with the issuer or its management 
because these offerings would not have been conducted using general 
solicitation. This category of investors is likely to be much smaller 
than the total number of eligible investors for Rule 506(c) offerings, 
which is potentially very large. We estimate that at least 8.7 million 
U.S. households, or 7.4% of all U.S. households, qualified as 
accredited investors in 2010, based on the net worth standard in the 
definition of ``accredited investor'' (Figure 6).\216\
---------------------------------------------------------------------------

    \215\ An analysis of all Form D filings submitted between 2009 
to 2012 shows that approximately 11% of all new offerings reported 
sales commissions of greater than zero because the issuers used 
intermediaries. See Ivanov/Bauguess Study. We assume that the lack 
of a commission indicates the absence of an intermediary.
    \216\ This estimate is based on net worth and household data 
from the Federal Reserve Board's Triennial Survey of Consumer 
Finances 2010. Our calculations are based on all 32,410 observations 
in the 2010 survey.

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

[[Page 44794]]

[GRAPHIC] [TIFF OMITTED] TR24JY13.019

    Our analysis, however, leads us to believe that only a small 
percentage of these households are likely to participate in securities 
offerings, especially exempt offerings. First, as mentioned above, data 
from Form D filings in 2012 suggests that fewer than 234,000 investors 
(of which an unknown subset are natural persons) participated in 
Regulation D offerings, which is small compared to the 8.7 million 
households that qualify as accredited investors. Second, evidence 
suggests that only a small fraction of the total accredited investor 
population has significant levels of direct stockholdings. Based on an 
analysis of retail stock holding data for 33 million brokerage accounts 
in 2010, only 3.7 million accounts had at least $100,000 of direct 
investments in equity securities issued by public companies listed on 
domestic national securities exchanges, while only 664,000 accounts had 
at least $500,000 of direct investments in such equity securities 
(Figure 7).\217\ Assuming that investments in publicly-traded equity 
securities are a gateway to investments in securities issued in exempt 
offerings, and accredited investors with investment experience in 
publicly-traded equity securities are more likely to participate in an 
exempt offering than accredited investors who do not, the set of 
accredited investors likely to be interested in investing in Rule 
506(c) offerings could be significantly smaller than the total 
accredited investor population.
---------------------------------------------------------------------------

    \217\ This analysis by DERA is based on the stock holdings of 
retail investors from more than 100 brokerage firms covering more 
than 33 million accounts during the period June 2010-May 2011.

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

[[Page 44795]]

[GRAPHIC] [TIFF OMITTED] TR24JY13.020

    Investors in Rule 144A offerings are QIBs, which comprise a broad 
range of U.S. entities, including mutual funds, pension funds, banks, 
savings and loan associations, investment companies, insurance 
companies and entities whose equity owners are all QIBs.\218\ As there 
is no obligation for issuers in Rule 144A offerings to publicly 
disclose the characteristics of their investors, the information 
available on the number and types of QIBs in the Rule 144A market is 
not broadly known, and is generally available only to those financial 
intermediaries who act as initial purchasers in the offerings.
---------------------------------------------------------------------------

    \218\ Non-U.S. investors generally do not participate in Rule 
144A offerings; rather, they participate in Regulation S offerings. 
Issuers will frequently conduct side-by-side Rule 144A and 
Regulation S offerings.
---------------------------------------------------------------------------

c. Investment Advisers
    As of December 2012, there were 10,870 Commission-registered 
investment advisers that filed Form ADV with the Commission, 
representing approximately $50 trillion total assets under 
management.\219\ The average investment adviser registered with the 
Commission has assets under management of approximately $4.6 billion; 
the median size of assets under management for these registered 
investment advisers is $258 million.
---------------------------------------------------------------------------

    \219\ For the same time period, 2,303 exempt reporting advisers 
filed a Form ADV with the Commission. Certain investment advisers 
that are ineligible to register with the Commission may also be 
exempt from registration with any state.
---------------------------------------------------------------------------

    Approximately one-fourth of registered investment advisers (2,842) 
currently advise (or advised) private funds that filed Form D between 
2002 and 2012, while another 1,250 registered investment advisers 
currently advise (or advised) private funds that did not file Form D 
during the same period. The registered investment advisers advising 
private funds that submitted Form D filings during this period had 
average assets under management of $8.7 billion, while the ones 
advising private funds that did not submit Form D filings had average 
assets under management of $8.6 billion. Registered investment advisers 
that did not advise private funds (6,623) are considerably smaller, 
with average assets under management of $2.1 billion.
d. Broker-Dealers
    As of December 2012, there were 4,450 broker-dealers registered 
with the Commission who file on Form X-17A-5, with average total assets 
of approximately $1.1 billion per broker-dealer. The aggregate total 
assets of these registered broker-dealers are approximately $4.9 
trillion. Of these registered broker-dealers, 410 are dually registered 
as investment advisers. The dually registered broker-dealers are larger 
(average total assets of $6.4 billion) than those that are not dually 
registered. Among the dually registered broker-dealers, we identified 
24 that currently have or have had private funds that submitted Form D 
filings between 2002 and 2012.
3. Current Practices
    The extent of the economic impact of the amendments to Rule 506 
will depend on the current practices of issuers and market participants 
in Rule 506 offerings. As issuers in the Regulation D market are not 
required to disclose in Form D how they formed a reasonable belief that 
the purchasers in their Rule 506 offerings are accredited investors or 
sophisticated investors and are not currently required to take 
reasonable steps to verify the accredited investor status of these 
purchasers, the Commission does not have any data on current 
verification practices used in such offerings, if any. Commenters, 
however, provided examples of current practices of how issuers collect 
information from a potential purchaser to form a reasonable belief that 
he or she is an accredited investor. One commenter suggested that a 
large number of issuers rely on lists of accredited investors created 
and maintained by a reliable third party, such as registered broker-
dealers,\220\ which would be consistent with the

[[Page 44796]]

Commission's view that an issuer would not contravene Rule 502(c)'s 
prohibition against general solicitation if the issuer or its agent has 
a pre-existing substantive relationship with the offerees.\221\ Other 
commenters asserted that many issuers rely on the services of placement 
agents to obtain information about accredited investor status and to 
complete a Rule 506 transaction.\222\ One commenter stated that the 
most common practice was a combination of an investor suitability 
questionnaire and investor self-certification.\223\ These commenters, 
however, did not provide data to allow for an estimate of the frequency 
of usage and the costs associated with these practices.
---------------------------------------------------------------------------

    \220\ See letter from J. McLaughlin.
    \221\ See Release No. 33-7856.
    \222\ See letters from SIFMA and FSR (Oct. 5, 2012); IAA.
    \223\ See letters from NSBA; MFA (May 4, 2012) (noting that, in 
the hedge fund industry, a potential hedge fund investor must 
complete ``a subscription document provided by the fund's manager 
that provides a detailed description of, among other things, the 
qualification standards that a purchaser must meet under the federal 
securities laws'').
---------------------------------------------------------------------------

C. Analysis of the Amendment to Rule 506

    Congress has mandated that we eliminate the prohibition against 
general solicitation for a subset of Rule 506 offerings.\224\ Below, we 
analyze the benefits and costs associated with the amendments to Rule 
506 in light of the baseline discussed above. Because existing Rule 506 
has always been subject to the prohibition against general 
solicitation, there are significant data and informational limitations 
on our ability to quantify the economic impact of eliminating that 
prohibition in certain Rule 506 offerings. As discussed above, we do 
not believe that the Form D filings available on the Commission's 
Electronic Data Gathering, Analysis and Retrieval (``EDGAR'') system 
present a complete view of the Rule 506 market, as there are some Rule 
506 offerings for which a Form D is not filed and the information 
presented in the Forms D that are filed is not necessarily 
comprehensive.\225\ In addition, as discussed below, we believe that 
there are sufficient differences between Rule 504, as amended to permit 
general solicitation from 1992 to 1999, and Rule 506(c) such that it 
would not be useful to look to the Rule 504 market during that period 
to make meaningful predictions as to the type or magnitude of the 
effects of eliminating the prohibition against general solicitation for 
Rule 506(c) offerings. For example, the amount of capital that could be 
raised under Rule 504, as amended during this period, was capped at $1 
million over a 12-month period; the securities in a Rule 504 offering 
could be sold to an unlimited number of non-accredited investors; and 
the securities sold in Rule 504 offerings were not restricted 
securities for purposes of resale. We provide below a qualitative 
analysis of the potential costs and benefits of eliminating the 
prohibition against general solicitation in certain Rule 506 offerings, 
supplementing that analysis with quantification, where possible, based 
on existing data.
---------------------------------------------------------------------------

    \224\ The legislative history of a bill that was introduced (but 
not adopted) at or around the time of the JOBS Act may be 
instructive with respect to how Congress viewed the effect of 
eliminating the prohibition against general solicitation in private 
offerings. In its report on a bill that would have amended Section 
4(a)(2) of the Securities Act to permit the use of general 
solicitation, the House Committee on Financial Services stated that 
``regulations such as the prohibition of general solicitation and 
advertising in Regulation D Rule 506 offerings inhibit capital 
formation.'' Access to Capital for Job Creators Act, H.R. Rep. 112-
263, at 2 (2011). Accordingly, ``[t]he legislation would allow 
companies greater access to accredited investors and to new sources 
of capital to grow and create jobs, without putting less 
sophisticated investors at risk.'' Id.
    \225\ Because filing a Form D is not a condition for relying on 
Regulation D, commenters have noted that many issuers do not file a 
Form D when raising capital under Rule 506. Issuers are currently 
required to file an initial Form D within 15 days of the first sale 
of securities, but are required to report additional sales through 
amended filings only under certain conditions, which means that in 
many cases, the total amount of capital raised in a Regulation D 
offering is not reported on Form D. Finally, issuers do not report 
all required information, either due to error or because they do not 
wish to make the information public. For example, issuers have the 
option in Form D to decline to disclose their revenues or net asset 
values.
---------------------------------------------------------------------------

1. Benefits to Issuers
    The elimination of the prohibition against general solicitation for 
a subset of Rule 506 offerings will enable issuers to solicit potential 
investors directly, through both physical (such as mailings, newspaper 
advertisements and billboards) and electronic (such as the Internet, 
social media, email and television) means. As a result, we anticipate 
that issuers will be able to reach a much greater number of potential 
investors than is currently the case, thereby increasing their access 
to sources of capital. We note that many commenters, including those 
representing small businesses, biotechnology companies and angel 
investors, stated that the elimination of the prohibition against 
general solicitation will facilitate capital formation by allowing 
businesses, particularly early-stage companies, to solicit investments 
from a larger pool of investors.\226\ This could increase overall 
capital formation if issuers that previously did not raise capital from 
individual investors because it was too costly to solicit them through 
intermediaries now choose to solicit investors directly using general 
solicitation in accordance with Rule 506(c). Alternatively, if issuers 
use new Rule 506(c) in lieu of other methods of raising capital, such 
as registered offerings or unregistered non-Rule 506(c) offerings, then 
Rule 506(c) would replace one source of capital for another, thereby 
potentially improving the efficiency of capital flow through lower 
issuance costs, but not necessarily increasing the gross amount raised.
---------------------------------------------------------------------------

    \226\ See, e.g., letters from BIO; NSBA.
---------------------------------------------------------------------------

    We believe that it is reasonable to conclude that allowing issuers 
to have wider access to accredited investors by eliminating the 
prohibition against general solicitation for a category of Rule 506 
offerings will significantly improve their access to capital and 
potentially enhance capital formation and lower the issuance cost. 
Although the lack of available data on the economic impact of 
eliminating the prohibition against general solicitation in Rule 506 
offerings precludes us from quantifying the magnitude of this effect, 
the Commission has some evidence of the effect of the availability of 
general solicitation on issuers' ability to raise capital based on 
information about the number of Rule 504 offerings from 1992 to 2001, 
which covers the period during which the prohibition against general 
solicitation was lifted for Rule 504,\227\ and subsequently reinstated 
in 1999.\228\ In particular, and as shown in the chart below, the 
number of Rule 504 offerings increased at an average annual rate of 
10.6% from 1992 through 1999.\229\ In 2000, following the reinstatement 
of the ban, the number of Rule 504 offerings declined by almost 44%. 
This decline is coincident with the general market decline in 2000, 
including the collapse of the Internet bubble, which may have been the 
cause or at least a significant contributing factor to the rate of 
decline. During 2000, however, there was not a concurrent decline in 
either the number of Rule 505 offerings or the number of Rule 506 
offerings. To the contrary, the number of Rule 506 offerings increased 
by about 54% in 2000, while the number of Rule 505 offerings remained 
largely unchanged (Figure 8). Declines in the numbers of Rule 505 and 
Rule 506 offerings followed in 2001, when presumably both types of 
offerings were

[[Page 44797]]

negatively affected by the general market decline, although Rule 504 
offerings experienced a sharper decline (-35%) compared to Rule 506 
offerings (-30%). While it is not possible to disentangle the broader 
market effects in 2000 from the reinstatement of the prohibition 
against general solicitation on the number of Rule 504 offerings, the 
steady increase in the number of Rule 504 offerings during the seven-
year period following the elimination, in 1992, of the prohibition 
against general solicitation and the subsequent sharp decline in the 
number of Rule 504 offerings is consistent with the view that issuers' 
ability to generally solicit may enhance their ability to raise 
capital.
---------------------------------------------------------------------------

    \227\ See Small Business Initiatives, Release No. 33-6949 (July 
30, 1992) [57 FR 36442 (Aug. 13, 1992)].
    \228\ See Release No. 33-7644.
    \229\ This is based on an analysis of Form REGDEX filings on 
EDGAR.
[GRAPHIC] [TIFF OMITTED] TR24JY13.021

    The development of the venture capital (VC) industry in the United 
States may also be a relevant example to illustrate the potential for 
enhanced capital formation that may result from allowing issuers to 
have access to a wider range of investors. Under the Employment 
Retirement Income Security Act of 1974, pension fund managers are 
subject to a ``prudent man'' standard of care in making 
investments.\230\ Prior to 1979, there was uncertainty under the U.S. 
Department of Labor's then-existing interpretations of this standard as 
to whether pension funds could invest in venture capital and start-up 
companies. In 1979, the Department clarified its interpretation of this 
standard by indicating that portfolio diversification is a factor in 
determining whether an investment is prudent, which indicated that 
pension funds would not be precluded from making investments in VC 
funds.\231\ Following this regulatory change, the VC industry 
experienced substantial growth: VC commitments increased from $218 
million in 1978 (of which pension funds supplied approximately 15%) to 
$3 billion in 1988 (of which pension funds supplied approximately 
46%).\232\
---------------------------------------------------------------------------

    \230\ 29 U.S.C. 1104(a).
    \231\ See 29 CFR 2550.404a-1(b)(1)(i).
    \232\ See Paul A. Gompers and Josh Lerner, The Venture Capital 
Cycle (2006); Paul Gompers, The Rise and Fall of Venture Capital, 23 
Business and Economic History 1 (1994).
---------------------------------------------------------------------------

    We also anticipate that allowing issuers to solicit potential 
investors directly will lower the direct costs of Rule 506 offerings. 
Although none of the commenters provided data on direct cost savings, 
and although Form D filings do not present a complete view of the 
market, we do have estimates of the direct offering costs paid by 
issuers that use an intermediary to locate investors in Rule 506 
offerings. An analysis of all Form D filings submitted between 2009 to 
2012 shows that approximately 11% of all new Regulation D offerings 
reported sales commissions of greater than zero because the issuers 
used intermediaries.\233\ The average commission paid to these 
intermediaries was 5.9% of the offering size, with the median 
commission being approximately 5%. Accordingly, for a $5 million 
offering, which was the median size of a Regulation D offering with a 
commission during this period, an issuer could potentially save up to 
$250,000 if it solicits investors directly rather than through an 
intermediary, minus the cost of its own solicitation efforts and the 
cost associated with verifying accredited investor status.\234\ This 
potential benefit would likely be larger on a percentage basis for 
smaller offerings. During this four-year period, of the issuers that 
paid a commission in connection with a Regulation D offering, issuers 
raising up to $1 million in capital paid on average a 6.5% commission, 
whereas issuers raising over $50 million in capital paid on average a 
1.9% commission.\235\
---------------------------------------------------------------------------

    \233\ See Ivanov/Bauguess Study.
    \234\ We recognize that intermediaries can provide benefits to 
issuers in addition to locating investors. For example, an 
intermediary may be able to help an issuer obtain better pricing and 
terms or provide access to investors that can provide strategic or 
other advice to the issuer. An intermediary could also provide 
accreditation services. Unfortunately, we do not have data to 
quantify these benefits.
    \235\ See Ivanov/Bauguess Study.
---------------------------------------------------------------------------

    Even for issuers that do not currently use an intermediary, 
allowing issuers to generally solicit would likely lower the search 
costs associated with finding accredited investors who would be 
interested in a particular offering, thus enhancing economic 
efficiency.\236\ If lower search costs expand the pool of interested 
investors for offerings, there could be greater competition among

[[Page 44798]]

investors, thereby lowering the costs of capital for issuers.\237\
---------------------------------------------------------------------------

    \236\ See, for example, Erik Sirri and Peter Tufano, Costly 
Search and Mutual Fund Flows, 53 Journal of Finance 1589 (1998), for 
a similar argument with respect to investors in mutual funds.
    \237\ For example, a study on offerings involving venture 
capitalists finds that increased competition among them results in 
higher valuations for issuers. See Paul Gompers and Josh Lerner, 
Money Chasing Deals? The Impact of Fund Inflows on Private Equity 
Valuations, 55 Journal of Financial Economics 281 (2000).
---------------------------------------------------------------------------

    The elimination of the prohibition against general solicitation 
would also reduce the uncertainty for issuers as to whether a Rule 506 
offering can be completed in certain situations, and would eliminate 
the costs of complying with the prohibition.\238\ Under existing Rule 
506, an inadvertent release of information about an offering to 
entities or persons with whom the issuer does not have a pre-existing 
substantive relationship has been viewed by some as raising questions 
about the issuer's ability to rely on the exemption for the entire 
offering.\239\ In addition, some private funds have been reluctant to 
respond to press inquiries or to correct inaccurate reports due to 
concerns about these discussions being misconstrued as a general 
solicitation.\240\ Under Rule 506(c), any such uncertainty as to the 
availability of the exemption due to the public disclosure of 
information will be reduced. Nevertheless, there is no data available 
to quantify or estimate these effects.
---------------------------------------------------------------------------

    \238\ See letter from MFA (May 4, 2012).
    \239\ See, e.g., letter from S. Lorne and J. McLaughlin (Aug. 5, 
2008) on Release No. 33-8828 (stating that ``[o]n occasion, the 
prohibition forces issuers to delay or even cancel offerings because 
of communications--sometimes inadvertent--that could be viewed in 
hindsight as a solicitation. The need to police communications by 
transaction participants, and to analyze and remedy inadvertent 
communications, also adds significantly to the cost of effecting 
private placements.'').
    \240\ See, e.g., letters from D.E. Shaw & Co. (Apr. 3, 2006) on 
Exposure Draft of Final Report of Advisory Committee on Smaller 
Public Companies, Release No. 33-8666 (Feb. 28, 2006); MFA (May 4, 
2012).
---------------------------------------------------------------------------

2. Benefits to Investors
    The elimination of the prohibition against general solicitation in 
Rule 506(c) offerings will likely increase the amount and types of 
information about issuers and offerings that are communicated to 
investors, which could also lead to more efficient pricing for the 
offered securities. In addition, accredited investors who previously 
have found it difficult to find investment opportunities in Rule 506 
offerings may be able to find and potentially invest in a larger and 
more diverse pool of potential investment opportunities, which would 
result in a more efficient allocation of investments by accredited 
investors.\241\ Thus, Rule 506(c) could increase capital formation and 
at the same time improve its allocative efficiency.\242\ One commenter 
argued that we do not provide data to support the statements that 
accredited investors need new opportunities or cannot find new 
opportunities under the current rules prohibiting the use of general 
solicitation in Rule 506 offerings.\243\ While we do not have data to 
test the validity of these statements since general solicitation has 
heretofore been prohibited in Rule 506 offerings, economic theory 
suggests that expanding investors' opportunities for investment 
generally results in more efficient allocation of capital. For example, 
one seminal study suggests that if some investors have incomplete 
information and are not aware of all firms in the economy, risk sharing 
is incomplete and inefficient.\244\ Information that makes investors 
aware of the existence of these firms and enlarges the investor base 
leads to improved risk sharing and lower cost of capital.
---------------------------------------------------------------------------

    \241\ This benefit may not be applicable with respect to every 
issuer (e.g., certain private funds that offer their shares 
continuously at net asset value).
    \242\ Allocative efficiency is a condition that is reached when 
resources are allocated in a way that allows the maximum possible 
net benefit from their use. In this context, it means the right 
number of dollars from the right types of investors going to the 
most suitable investments on efficient terms.
    \243\ See letter from Consumer Federation.
    \244\ See Robert Merton, A Simple Model of Capital Market 
Equilibrium With Incomplete Information, 42 Journal of Finance 483 
(1987).
---------------------------------------------------------------------------

    With respect to private funds in particular, in the Proposing 
Release, we noted that eliminating the prohibition against general 
solicitation would allow accredited investors to gather information 
about private funds at relatively lower costs and to allocate their 
capital more efficiently.\245\ Increased information about private fund 
strategies, management fees and performance information would likely 
lead to greater competition among private funds for investor capital.
---------------------------------------------------------------------------

    \245\ See, e.g., letter from MFA (May 4, 2012); and Managed 
Funds Association, Petition for Rulemaking on Rule 502 of Regulation 
D under the Securities Act of 1933, File No. 4-643 (Jan. 9, 2012) 
(``MFA Petition'').
---------------------------------------------------------------------------

    Some commenters noted that greater transparency about private 
funds' activities would benefit investors in these funds, and 
communications about these activities would be subject to the antifraud 
provisions of the federal securities laws and FINRA regulations on the 
preparation of marketing materials.\246\ Other commenters believed that 
private funds engaging in general solicitation should be subject to 
form, content and/or other restrictions, such as performance and 
advertising standards that are analogous to the standards that are 
applicable to mutual funds in order to engage in general 
solicitation.\247\ One of the commenters suggested that the Commission 
develop a rule tailored to the ways private funds calculate and present 
performance, rather than extending mutual fund performance rules to 
private funds.\248\ With respect to private funds sold through broker-
dealers subject to FINRA's rules of conduct, some commenters believed 
that we should direct FINRA to require the filing and review of private 
fund advertisements.\249\
---------------------------------------------------------------------------

    \246\ See letters from IAA; BlackRock; MFA (Sept. 28, 2012).
    \247\ See, e.g., letters from AFL-CIO and AFR; Sen. Levin; 
Consumer Federation; Fund Democracy; Investor Advisory Committee; 
ICI; IDC; Rep. Waters; NASAA; P. Turney; and Sens. Reed, Levin, 
Durbin, Harkin, Lautenberg, Franken and Akaka.
    \248\ See letter from ICI.
    \249\ Letters from AFL-CIO and AFR; ICI.
---------------------------------------------------------------------------

    While the lack of data does not allow us to quantify the costs and 
benefits of eliminating the prohibition against general solicitation 
under Rule 506(c) for private funds, we believe that the potential for 
an increase in fraudulent or deceptive issuer behavior due to the 
elimination of the prohibition may be limited to some extent by the 
competitive nature of the private funds industry as well as by the fact 
that there are often repeat interactions between private funds and 
their investors.\250\
---------------------------------------------------------------------------

    \250\ See, e.g., William Fung and David Hsieh, Hedge Fund 
Benchmarks: Information Content and Biases, 58 Financial Analysts 
Journal 22 (2002); Rajarishi Nahata, Venture Capital Reputation and 
Investment Performance, 90 Journal of Financial Economics 127 
(2008); Douglas Cumming and Uwe Walz, Private Equity Returns and 
Disclosure Around the World, 41 Journal of International Business 
Studies 727 (2010).
---------------------------------------------------------------------------

3. Costs
    Eliminating the prohibition against general solicitation could 
result in heightened fraudulent activity in Rule 506(c) offerings 
because it will be easier for promoters of fraudulent schemes to reach 
potential investors through general solicitation. An increase in fraud 
would not only harm those investors who are defrauded, it would 
undermine investor participation in Rule 506(c) offerings and could 
negatively affect capital-raising by legitimate issuers--for example, 
by reducing investor participation in Rule 506(c) offerings--thereby 
inhibiting capital formation and reducing efficiency. One commenter was 
concerned that investors may confuse private funds with registered 
investment companies.\251\ In such cases, fraud that occurs with 
private funds may cause

[[Page 44799]]

investors to associate the wrongdoing with registered investment 
companies, and therefore refrain from investing in registered 
investment companies. In addition, some issuers with publicly-traded 
securities may use general solicitation for a purported Rule 506(c) 
offering to generate investor interest in the secondary trading 
markets, especially in the over-the-counter markets, which could be 
used by insiders to resell securities at inflated prices. This would 
impose costs to investors in these secondary markets, as well as 
investors in Rule 506(c) offerings, and could erode investor 
participation in Rule 506(c) offerings, thus potentially raising the 
cost of capital for issuers in this market. As discussed above, we 
cannot quantify these potential costs because the existence of the 
prohibition against general solicitation in Rule 506 offerings until 
now means that data on the economic impact of eliminating the 
prohibition is not available.
---------------------------------------------------------------------------

    \251\ See letters from ICI; ICI re: MFA Petition (Feb. 7, 2012).
---------------------------------------------------------------------------

    Several commenters echoed concerns regarding the potential of fraud 
related to private funds in the Rule 506(c) market.\252\ Empirical 
evidence on the extent of fraud involving private funds is not readily 
available. While a few economic studies suggest that certain hedge 
funds engage in various types of misreporting, such as misrepresenting 
past performance,\253\ delaying disclosure of returns \254\ and 
inflating returns at the end of the fiscal year in order to earn higher 
fees,\255\ these studies do not provide information about the extent or 
magnitude of any such misreporting activities. In a 2003 report, the 
Commission staff noted that there was no evidence that hedge funds were 
disproportionately involved in fraudulent activity and that the charges 
brought by the Commission in 38 enforcement actions against hedge fund 
advisers and hedge funds between 1999 and 2003 were similar to the 
charges against other types of investment advisers.\256\ Evidence on 
the extent of fraud involving other types of pooled investment funds 
also is sparse. A more recent study has identified 245 lawsuits (both 
federal and state) involving 200 venture capitalists as defendants 
between 1975 and 2007, and has shown that VC funds that are older and 
have a larger presence in terms of size and network are less likely to 
be sued.\257\
---------------------------------------------------------------------------

    \252\ See letters from Consumer Federation; Fund Democracy; IDC.
    \253\ See Andrew Patton, Tarun Ramadorai, and Michael 
Streatfield, Change You Can Believe In? Hedge Fund Data Revisions 
(Duke University, Working Paper, 2013). But see letter from MFA 
(June 20, 2013) (questioning the reliability of the underlying data 
used in the study).
    \254\ See George Aragon and Vikram Nanda, Strategic Delays and 
Clustering in Hedge Fund Reported Returns (Arizona State University, 
Working Paper, 2013).
    \255\ See Vikas Agarwal, Naveen Daniel, and Naranyan Naik, Do 
Hedge Funds Manage Their Reported Returns?, 24 Review of Financial 
Studies 3282 (2011).
    \256\ See Staff Report on Hedge Funds.
    \257\ See Vladimir Atanasov, Vladimir Ivanov, and Kate Litvak, 
Does Reputation Limit Opportunistic Behavior in the VC Industry? 
Evidence From Litigation Against VCs, 67 Journal of Finance 2215 
(2012).
---------------------------------------------------------------------------

    A number of commenters \258\ noted the Commission's experience with 
the elimination of the prohibition against general solicitation for 
Rule 504 offerings in 1992,\259\ and its subsequent reinstatement in 
1999 as a result of heightened fraudulent activity.\260\ We do not 
believe that our experience with offerings conducted pursuant to Rule 
504, as amended in 1992, is particularly instructive with respect to 
the potential incidence of fraud resulting from our implementation of 
Section 201(a) of the JOBS Act, for a number of reasons. In 1992, when 
we amended Rule 504 to eliminate the prohibition against general 
solicitation, we also provided that the securities issued in these Rule 
504 offerings would not be ``restricted securities'' for purposes of 
resale pursuant to Rule 144 under the Securities Act.\261\ As a result, 
a non-reporting company could sell up to $1 million of immediately 
freely-tradable securities in a 12-month period and be subject only to 
the antifraud and civil liability provisions of the federal securities 
laws.
---------------------------------------------------------------------------

    \258\ See letters from Consumer Federation; Fund Democracy; Sen. 
Levin.
    \259\ See Release No. 33-6949.
    \260\ See Release No. 33-7644.
    \261\ 17 CFR 230.144.
---------------------------------------------------------------------------

    By 1998, we concluded that securities issued in these Rule 504 
offerings facilitated a number of fraudulent secondary transactions in 
the over-the-counter markets, and that these securities were issued by 
``microcap'' companies, characterized by thin capitalization, low share 
prices and little or no analyst coverage.\262\ At that time, we stated 
that, while ``we believe that the scope of abuse is small in relation 
to the actual usage of the exemption, we also believe that a regulatory 
response may be necessary.'' \263\ As the freely-tradable nature of the 
securities facilitated the fraudulent secondary transactions, we 
proposed to ``implement the same resale restrictions on securities 
issued in a Rule 504 transaction as apply to transactions under the 
other Regulation D exemptions,'' in addition to reinstating the 
prohibition against general solicitation. Although we recognized that 
resale restrictions would have ``some impact upon small businesses 
trying to raise `seed capital' in bona fide transactions,'' we believed 
that such restrictions were necessary so that ``unscrupulous stock 
promoters will be less likely to use Rule 504 as the source of the 
freely tradable securities they need to facilitate their fraudulent 
activities in the secondary markets.'' \264\
---------------------------------------------------------------------------

    \262\ Revision of Rule 504 of Regulation D, the ``Seed Capital'' 
Exemption, Release No. 33-7541 (May 21, 1998) [63 FR 29168 (May 28, 
1998)].
    \263\ Id. at 29169.
    \264\ Id.
---------------------------------------------------------------------------

    In contrast, issuers using Rule 506(c) can sell only to accredited 
investors, and the securities issued in these offerings are deemed to 
be ``restricted securities'' for purposes of resale under Rule 144. As 
a result, schemes involving price manipulation to defraud unknowing 
investors in the immediate resale of securities purchased directly from 
issuers (colloquially referred to as ``pump and dump'' schemes) \265\ 
are not the types of fraud we believe are likely to occur in Rule 
506(c) offerings, given the holding period requirement in Rule 144(d) 
and other structural impediments, such as restricted transfer legends 
on stock certificates.
---------------------------------------------------------------------------

    \265\ See, e.g., Testimony of Arthur Levitt, Chairman, U.S. 
Securities and Exchange Commission, before the Permanent 
Subcommittee on Investigations, Senate Committee on Governmental 
Affairs, Sept. 22, 1997; SEC v. Huttoe, Litigation Release No. 15237 
(Jan. 31, 1997), 63 SEC Docket 2383 (Mar. 4, 1997); SEC v. Spencer, 
Litigation Release No. 14856 (Mar. 29, 1996), 61 SEC Docket 1960 
(Apr. 30, 1996), and Litigation Release No. 15042 (Sept. 12, 1996), 
62 SEC Docket 2409 (Oct. 8, 1996).
---------------------------------------------------------------------------

    The risks to investors of fraudulent offerings conducted under Rule 
506(c) may be mitigated to some extent by the requirement that issuers 
sell only to accredited investors (and take reasonable steps to verify 
such status), who, by virtue of meeting the requirements of the 
definition, may be better able to assess their ability to take 
financial risks and bear the risk of loss than investors who are not 
accredited investors. Issuers will still be subject to the antifraud 
provisions under the federal securities laws, and the public nature of 
these solicitations may also facilitate detection of fraudulent 
activity in that the fraudulent nature of some offerings may be 
inferred from particular statements contained in solicitation 
materials, for example, representations of guaranteed high rates of 
return.
    Several commenters asserted that satisfying the definition of 
accredited investor does not equate to financial sophistication and 
that it is questionable whether accredited investors will be better 
able to identify the financial risks

[[Page 44800]]

of the offerings and detect fraudulent offerings as compared to non-
accredited investors.\266\ They also noted that the income test and the 
net worth test have been significantly eroded by inflation. These 
commenters also stated that not all general solicitation activities are 
widely known or accessible, and that fraudulent offerings sold through 
telemarketing calls and email solicitations, for example, will be 
difficult if not impossible to detect until after significant damage 
has occurred.
---------------------------------------------------------------------------

    \266\ See, e.g., letters from Consumer Federation; Fund 
Democracy.
---------------------------------------------------------------------------

4. Indirect Effects on Other Markets
    Although Rule 506(c) will directly affect the private offering 
market, it could also have an indirect effect on other markets. The 
lower search costs associated with finding Rule 506(c) offerings may 
cause some investors that currently invest in public equity and debt 
markets or other non-registered offering markets to reallocate capital 
to offerings made under Rule 506(c). If a significant number of 
investors make a greater proportion of their investments in Rule 506(c) 
offerings, such investor behavior may reduce the supply of capital and 
prices in the public equity and debt markets and in other non-
registered offering markets. For example, issuers currently using the 
exemptions in Regulation A under the Securities Act \267\ and in Rules 
504(b)(1)(i) through (iii) of Regulation D \268\ to solicit investors 
could prefer to rely on the exemption under Rule 506(c) because they 
would be able to raise unlimited amounts of capital under Rule 506(c) 
and state blue sky securities registration requirements do not apply to 
Rule 506(c) offerings.\269\ Although it is difficult to estimate how 
many of these issuers will choose to rely on Rule 506(c) in lieu of 
other available exemptions from registration, we believe that it is 
likely that Rule 506(c) will have a larger impact on issuers using Rule 
504 rather than Regulation A because very few issuers have been using 
the Regulation A exemption in recent years.\270\ In addition, to the 
extent that accredited investors have invested in registered investment 
companies instead of private funds because of information asymmetry 
between private funds and registered investment companies, it is 
possible that registered investment companies' assets may decrease if 
these investors now transfer their assets to private funds. Because we 
cannot predict how issuers will use the various exemptions from 
registration after the elimination of the prohibition against general 
solicitation in Rule 506(c) offerings, we cannot quantify these 
potential effects.
---------------------------------------------------------------------------

    \267\ 17 CFR 230.251 through 17 CFR 230.263.
    \268\ 17 CFR 230.504(b)(1)(i)-(iii).
    \269\ 17 CFR 230.251 through 17 CFR 230.263.
    \270\ The Ivanov/Bauguess Study reported that 1,852 issuers 
relied on the Rule 504 exemption to raise capital between 2009 to 
2012, and 20 issuers relied on Regulation A. The number of issuers 
using Regulation A to raise capital may increase once the Commission 
adopts rules implementing Title IV of the JOBS Act, which directs 
the Commission to adopt an exemption based on Regulation A to permit 
offerings of up to $50 million.
---------------------------------------------------------------------------

5. Retention of Rule 506(b)
    We believe that retaining existing Rule 506(b) will have benefits 
for both issuers and investors. It will allow issuers that do not wish 
to generally solicit in their private offerings to avoid the added 
expense of complying with the rules applicable to Rule 506(c) 
offerings. It will also allow issuers to continue selling privately to 
up to 35 non-accredited investors who meet existing Rule 506's 
sophistication requirements. The continued availability of Rule 506(b) 
may also be beneficial to investors with whom the issuer has a pre-
existing substantive relationship and who do not wish to bear 
additional verification costs that may be associated with participation 
in Rule 506(c) offerings. All but one commenter supported the 
Commission's decision to retain Rule 506(b).\271\
---------------------------------------------------------------------------

    \271\ See, e.g., letters from ABA Fed. Reg. Comm.; ACA (Sept. 
27, 2012); CFIRA; IPA; Montgomery & Hansen; NSBA; NYCBA; S&C; SIFMA 
and FSR (Oct. 5, 2012). Only one commenter opposed retaining it. 
Letter from J. McLaughlin (stating that ``[t]here is no basis in the 
statute for the Commission to continue to apply the prohibition to a 
set of offerings exempt under Rule 506, especially since the effect 
of maintaining a parallel rule may have the effect of discouraging 
some issuers from using general solicitation . . . .'').
---------------------------------------------------------------------------

D. Verifying Accredited Investor Status in Rule 506(c) Offerings

    As there is no information available to us on the costs currently 
incurred by issuers to form a reasonable belief that a purchaser in a 
Rule 506 offering is an accredited investor, we are unable to quantify 
the estimated costs and benefits of the verification requirement in 
Rule 506(c). Comments from the public on this issue also did not 
provide any estimates.
    The requirement in Rule 506(c) for issuers to take reasonable steps 
to verify that purchasers are accredited investors will likely make it 
more difficult for issuers to sell securities to non-accredited 
investors. This, in turn, may reduce the likelihood that fraudulent 
offerings would be completed because those who are eligible to purchase 
are more likely to be able to protect their interests than investors 
who are not accredited investors. Issuers would also benefit from 
measures that improve the integrity and reputation of the Rule 506(c) 
market because the measures would facilitate investor participation, 
which could result in issuers having greater access to capital.
    The verification requirement in Rule 506(c) would impose costs as 
well. Because the requirement is to take ``reasonable'' steps to 
verify, and not every conceivable step to verify, it is possible that 
some investors in Rule 506(c) will not be accredited investors, even if 
the issuer takes reasonable steps to verify their status as accredited 
investors. If so, then these investors will participate in offerings 
for which they are not qualified and that may not be appropriate for 
them, thereby resulting in a potentially inefficient allocation of 
capital for these investors. These investors could also face an 
additional cost in the form of heightened risk of significant losses on 
their investments, which they may not be able to manage or diversify in 
a way that accredited investors could.
    In addition, some potential investors likely would have to provide 
more information to issuers than they currently provide, while issuers 
may have to apply a stricter and more costly process to determine 
accredited investor status than what they currently use. While 
commenters provided us with examples of the methods currently used by 
issuers in the Rule 506 market to collect information about purchasers, 
they did not provide any data on the costs of these methods. While it 
is reasonable to expect that the costs associated with the verification 
requirement could be offset somewhat by its benefits, it is also 
reasonable to expect that some accredited investors who would 
participate in existing Rule 506(b) offerings would decline to 
participate in Rule 506(c) offerings in light of the verification 
requirement.
    To the extent that issuers require investors to provide personally 
identifiable information (e.g., Social Security numbers, tax 
information, bank or brokerage account information) in order to verify 
their accredited investor status, these investors may be reluctant to 
do so in the context of making an investment in an issuer, particularly 
an issuer with which they may have no prior relationship.\272\ In 
addition to concerns about maintaining personal privacy, investors may 
be concerned that their personally identifiable information could be 
stolen or accessed by third parties or used by

[[Page 44801]]

unscrupulous issuers in various ways (e.g., identity theft), which 
could impose costs to investors that go well beyond the costs typically 
associated with investing. As a consequence, some potential investors 
may elect not to participate in Rule 506(c) offerings, thus impeding 
capital formation to some extent.
---------------------------------------------------------------------------

    \272\ See letter from SecondMarket Holdings, Inc. (May 25, 
2012).
---------------------------------------------------------------------------

    Our decision not to specify the verification methods that an issuer 
must use in taking reasonable steps to verify accredited investor 
status would provide issuers with the flexibility to use methods that 
are appropriate in light of the facts and circumstances of each 
offering and each purchaser. Such flexibility could mitigate the cost 
to issuers of complying with Rule 506(c) because it would allow them to 
select the most cost-effective verification method for each offering. 
We anticipate, however, that issuers or their verification service 
providers will document the particular verification methods used in the 
event of any question being raised about the availability of the 
exemption. Although we do not specify the nature or extent of any such 
documentation, we acknowledge that it will create some cost.
    On the other hand, the greater flexibility of the principles-based 
``reasonableness'' verification method could result in less rigorous 
verification, thus allowing some unscrupulous issuers to more easily 
sell securities to purchasers who are not accredited investors and 
perpetrate fraudulent schemes, or it could create or promote legal 
uncertainty about the availability of Rule 506(c), which may cause some 
issuers to interpret ``reasonable steps to verify'' in a manner that is 
more burdensome than if specific verification methods were prescribed, 
thus incurring higher cost. We believe that the non-exclusive list of 
specific methods of verification we are including in Rule 506(c), as 
adopted, should help to mitigate the impact of these costs.
    Some commenters suggested that using a flexible verification 
standard is optimal for issuers because it closely resembles current 
market practices which they believe have worked well in this 
market.\273\ Such flexibility will allow issuers to adopt different 
approaches based on the types of accredited investors, types of 
offerings and changing market practices. In contrast, other commenters 
questioned the benefits of the flexibility provided by the principles-
based verification method and criticized the Commission for not 
quantifying the costs and benefits of currently used verification 
methods.\274\ They argued that the application of the reasonableness 
standard in the principles-based method will lead to lax verification 
practices by issuers, which would lessen investor protection by 
allowing sales of securities to non-accredited investors.
---------------------------------------------------------------------------

    \273\ See letters from SIFMA and FSR (Oct. 5, 2012); and IAA.
    \274\ See letters from Consumer Federation; Fund Democracy.
---------------------------------------------------------------------------

    Our decision to provide a non-exclusive list of specified methods 
that issuers can use to verify a purchaser's accredited investor status 
will provide legal certainty in those circumstances in which there is a 
question as to whether or not the steps taken are reasonable in light 
of the facts and circumstances. Using a specified method would reduce 
issuers' verification costs to the extent that they would otherwise 
incur costs to analyze whether or not the steps they had taken or 
proposed to take satisfied the reasonableness standard in Rule 506(c). 
It could also reduce investors' costs, since the methods for verifying 
income and net worth rely mostly on documents prepared by third parties 
at no cost to the investors. On the other hand, some investors may be 
reluctant to provide the personal financial information required by the 
income and net worth methods; and with respect to the third-party 
method, it may be relatively costly to pay for the verification 
services of a lawyer or accountant as they may be concerned about 
professional liability. The grandfather method--which permits self-
certification by existing investors who purchased securities as 
accredited investors in an issuer's Rule 506(b) offering before the 
effective date of Rule 506(c)--could result in investors that do not 
meet the definition of ``accredited investor'' participating in Rule 
506(c) offerings because issuers conducting Rule 506(b) offerings are 
not required to take reasonable steps to verify the accredited investor 
status of their purchasers.
    In addition, our non-exclusive list of specified verification 
methods could be mistakenly viewed by market participants as the 
required verification methods, in which compliance with at least one of 
the enumerated methods could be viewed, in the practical application of 
the verification requirement, as necessary in all circumstances to 
demonstrate that the verification requirement has been satisfied, 
thereby eliminating the flexibility that Rule 506(c) is intended to 
provide.\275\ If issuers choose not to use verification methods 
different from those on the non-exclusive list, then some potential 
investors may limit their participation in the Rule 506(c) market, 
which may impede capital formation to some extent. Finally, even if a 
specified method has been used, thereby satisfying the verification 
requirement, there may be circumstances in which issuers may 
unreasonably overlook or disregard other information indicating that a 
purchaser is not, in fact, an accredited investor. This could lead to 
sales being made to persons who are not accredited investors. Because, 
as stated above, the Commission does not have data on current 
verification practices, we cannot quantify the effect of the new 
verification requirement in Rule 506(c).
---------------------------------------------------------------------------

    \275\ The use of any of the specified methods is optional. We 
expect that many issuers will conduct Rule 506(c) offerings in 
reliance on the principles-based method of verification, in light of 
its flexibility and efficiency.
---------------------------------------------------------------------------

E. Analysis of the Amendment to Rule 144A

    We expect the potential benefits of the amendments to Rule 144A to 
be lower (i.e., less available) for issuers in Rule 144A offerings as 
compared to issuers in Rule 506(c) offerings because QIBs, which are 
the only permitted investors in Rule 144A offerings, are generally 
fewer in number, known by market participants, and better networked 
than accredited investors. Thus, as we noted in the Proposing Release, 
we believe that eliminating the prohibition against general 
solicitation for Rule 144A offerings is unlikely to dramatically 
increase issuers' access to QIBs in such offerings or to lower the cost 
of capital in Rule 144A offerings.
    We expect that there would be fewer potential occurrences of 
general solicitation-induced fraud in Rule 144A offerings, as compared 
to Rule 506(c) transactions, because Rule 144A offerings involve an 
intermediary that, as the initial purchaser of the securities, 
typically performs a due diligence investigation and assists the issuer 
in preparing the offering materials, thereby adding a layer of 
protection against fraud. Also, Rule 144A investors are generally large 
institutions, which are thought to be better able to identify 
fraudulent activities than smaller institutions and retail investors in 
general.
    We also anticipate that eliminating the prohibition against general 
solicitation would significantly affect private trading systems by 
permitting information vendors to provide more information about Rule 
144A securities. Indeed, because offers will be able to be made to the 
public, the information on private trading systems for Rule 144A

[[Page 44802]]

securities could be made available to all investors, even though sales 
would be limited to QIBs.\276\ In addition, currently there is no 
public dissemination through Trade Reporting and Compliance Engine 
(``TRACE'') of transactions in Rule 144A securities.\277\ Now that Rule 
144A is being amended to permit offers to be made to persons other than 
QIBs, transaction information with respect to Rule 144A securities can 
be publicly disseminated. Such improvements in the information 
available to potential investors could enhance efficiency in the Rule 
144A market.
---------------------------------------------------------------------------

    \276\ Under the PORTAL Trading System developed by the Nasdaq 
Stock Market for trading Rule 144A securities, access is restricted 
to QIBs. Other privately developed Rule 144A trading systems, such 
as Portal Alliance, have similar restrictions.
    \277\ See FINRA Rule 6750. There is mandatory reporting of over-
the-counter trades in fixed income securities. On April 19, 2013, 
the FINRA Board of Governors announced that it has authorized FINRA 
to file with the Commission ``proposed amendments to FINRA Rules 
6750 and 7730 to provide for the dissemination of transactions in 
TRACE-eligible securities effected pursuant to Securities Act Rule 
144A (Rule 144A transactions).'' See Letter from Richard G. Ketchum, 
Chairman and CEO, FINRA (Apr. 19, 2013), available at: https://www.finra.org/Industry/Regulation/Guidance/CommunicationstoFirms/P244913.
---------------------------------------------------------------------------

F. Additional Information Collection and Disclosures

    We are amending Form D to add a new check box in Item 6 of Form D 
that will require an issuer to indicate whether it is relying on Rule 
506(c) in conducting its offering. With this information, the 
Commission will be able to more effectively analyze the use of Rule 
506(c). The marginal cost to issuers of providing this information is 
likely to be low because Form D already requires issuers to identify 
the exemption on which they are relying. Commenters generally supported 
the proposal to have a new check box in Item 6 of Form D as a way to 
identify Rule 506(c) offerings.\278\ One commenter, however, questioned 
the usefulness of the information provided by the new check box.\279\
---------------------------------------------------------------------------

    \278\ See letters from MFA (Sept. 28, 2012); SIFMA and FSR (Oct. 
5, 2012); IAA.
    \279\ See letter from Consumer Federation.
---------------------------------------------------------------------------

    Much of what we know about the size and characteristics of the 
private offering market comes from Form D filings. The information 
collected to date and described in this release illustrates and 
underscores the importance of the private offering market to the U.S. 
economy. The continued collection of this information following the 
elimination of the prohibition against general solicitation in Rule 
506(c) and Rule 144A offerings will be an important tool in assessing 
the ongoing economic impact of the new rule amendments.

VII. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with Section 603 of the Regulatory Flexibility 
Act.\280\ It relates to the amendments to Rules 500, 501, 502 and 506 
of Regulation D, Form D and Rule 144A that we are adopting in this 
release. An Initial Regulatory Flexibility Analysis (``IRFA'') was 
prepared in accordance with the Regulatory Flexibility Act and included 
in the Proposing Release.
---------------------------------------------------------------------------

    \280\ See 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Action

    The primary reason for, and objective of, the amendments to Rule 
502 and Rule 506 is to implement the statutory requirements of Section 
201(a)(1) of the JOBS Act, which directs the Commission to revise Rule 
506 to provide that the prohibition against general solicitation in 
Rule 502(c) shall not apply to offers and sales of securities made 
pursuant to Rule 506, provided that all purchasers of the securities 
are accredited investors. Consistent with the language in Section 
201(a), the amendment to Rule 506 requires issuers to take reasonable 
steps to verify that purchasers in any Rule 506 offering using general 
solicitation are accredited investors. The primary reason for, and 
objective of, the amendment to Form D is to assist our efforts to 
analyze the use of general solicitation in Rule 506(c) offerings and 
the size of this offering market.
    The primary reason for, and objective of, the final amendment to 
Rule 144A is to implement the statutory requirements of Section 
201(a)(2) of the JOBS Act, which directs the Commission to revise Rule 
144A(d)(1) to provide that securities sold pursuant to Rule 144A may be 
offered to persons other than QIBs, including by means of general 
solicitation, provided that securities are sold only to persons that 
the seller and any person acting on behalf of the seller reasonably 
believe are QIBs.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on any aspect of the 
IRFA, including the number of small entities that would be subject to 
the proposed rule and form amendments and the nature of the effects of 
the proposed amendments on small entities. We received one comment 
addressing the IRFA.\281\ This commenter stated that the Commission 
failed in its IRFA to consider the alternative of eliminating Form D or 
significantly reducing the scope of information required to be 
disclosed on Form D. As Form D provides meaningful information about 
the Regulation D market, and our need for information about this market 
will only increase once Rule 506(c) is in effect, we are not 
considering eliminating Form D or significantly reducing the scope of 
information required to be disclosed on Form D.
---------------------------------------------------------------------------

    \281\ See letter from K. Bishop.
---------------------------------------------------------------------------

C. Small Entities Subject to the Final Rule and Form Amendments

    For purposes of the Regulatory Flexibility Act, under our rules, an 
issuer, other than an investment company, is a ``small business'' or 
``small organization'' if it has total assets of $5 million or less as 
of the end of its most recent fiscal year and is engaged or proposing 
to engage in an offering of securities which does not exceed $5 
million.\282\ For purposes of the Regulatory Flexibility Act, an 
investment company is a small entity if it, together with other 
investment companies in the same group of related investment companies, 
has net assets of $50 million or less as of the end of its most recent 
fiscal year.\283\
---------------------------------------------------------------------------

    \282\ 17 CFR 230.157.
    \283\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

    Rule 506(c) will affect small issuers (including both operating 
businesses and investment funds that raise capital under Rule 506) 
relying on this exemption from Securities Act registration. All issuers 
that sell securities in reliance on Regulation D are required to file a 
Form D with the Commission reporting the transaction. For the year 
ended December 31, 2012, 16,067 issuers made 18,187 new Form D filings, 
of which 15,208 issuers relied on the Rule 506 exemption. Based on the 
information reported by issuers on Form D, there were 3,958 small 
issuers \284\ relying on the Rule 506 exemption in 2012. This number 
likely underestimates the actual number of small issuers relying on the 
Rule 506 exemption, however, because over 60% of issuers that are not 
pooled investment funds and over 80% of issuers that are pooled 
investment funds declined to report their amount of revenues in 2012.
---------------------------------------------------------------------------

    \284\ Of this number, 3,627 of these issuers are not investment 
companies, and 331 are investment companies. We also note that 
issuers that are not investment companies disclose only revenues on 
Form D, and not total assets. Hence, we use the amount of revenues 
as a measure of issuer size.
---------------------------------------------------------------------------

    The final amendment to Rule 144A will affect small entities that 
engage in

[[Page 44803]]

Rule 144A offerings.\285\ Unlike issuers that use Regulation D, issuers 
conducting Rule 144A offerings are not required to file any form with 
the Commission. This lack of data significantly limits our ability to 
assess the number and the size of issuers that conduct Rule 144A 
offerings. Still, we are able to obtain some data on non-ABS Rule 144A 
offerings during the 2009 to 2012 period from two commercial 
databases.\286\ Based on these data, we identified 3,510 offerings 
involving 1,965 issuers from 2009 to 2012. We were able to obtain 2011 
financial information for 598 of these issuers,\287\ of which only 11 
issuers reported total assets of less than $50 million.
---------------------------------------------------------------------------

    \285\ While it may be theoretically possible for a small entity 
to meet one part of the definition of ``qualified institutional 
buyer'' (e.g., an ``entity, all of the equity owners of which are 
qualified institutional buyers, acting for its own account or the 
accounts of other qualified institutional buyers''), we do not have 
any information to suggest that there are such small entities. 
Accordingly, the regulatory flexibility analysis in regard to Rule 
144A is focused on small issuers that engage in Rule 144A offerings.
    \286\ These databases are Thomson Financial's SDC Platinum 
Service and Sagient Research System's Placement Tracker database.
    \287\ Financial data for fiscal year 2011 was obtained from 
Compustat, a product of Standard and Poor's.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The final amendment to Rule 506 will impose certain reporting and 
compliance requirements on issuers that engage in general solicitation 
in Rule 506 offerings. As discussed above, issuers taking advantage of 
Rule 506(c) to engage in general solicitation in Rule 506 offerings 
will be required to take reasonable steps to verify that the purchasers 
of the securities are accredited investors. The steps required will 
vary with the circumstances, but we anticipate that some potential 
investors may have to provide more information to issuers than they 
currently provide, while issuers may have to apply a stricter and more 
costly process to verify accredited investor status than what they 
currently use. We expect that the costs of compliance will vary 
depending on the size and nature of the offering, the nature and extent 
of the verification methods used, and the number and nature of 
purchasers in the offering. Rule 506(c) does not impose any 
recordkeeping requirements; however, we anticipate that issuers or 
their verification service providers will document the steps taken to 
verify that purchasers are accredited investors in Rule 506 offerings 
involving general solicitation because the issuer has the burden of 
demonstrating that its offering is entitled to an exemption from the 
registration requirements of Section 5 of the Securities Act. To 
promote legal certainty, we are including in Rule 506(c) a non-
exclusive list of verification methods that in and of themselves will 
be deemed to satisfy the verification requirement.
    The final amendment to Form D will also impose an information 
requirement with respect to Rule 506 offerings that use general 
solicitation. Each issuer submitting a Form D for a Rule 506 offering 
will be required to check a box on the form to indicate whether the 
issuer is relying on the Rule 506(c) exemption. We do not believe that 
this revision to Form D will increase in any material way the time or 
information required to complete the Form D that must be filed with the 
Commission in connection with a Rule 506 offering.
    The final amendment to Rule 144A contains no reporting, 
recordkeeping or compliance requirements for issuers that engage in 
Rule 144A offerings.

E. Duplicative, Overlapping or Conflicting Federal Rules

    The Commission believes that there are no rules that duplicate, 
overlap or conflict with the final amendments to Rule 144A, Form D, and 
Rules 500, 501, 502 and 506 of Regulation D.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish the stated objectives of our 
amendments, while minimizing any significant adverse impact on small 
entities. In regard to the final amendment to Rule 144A and the final 
amendment to Rule 506 to remove the prohibition against general 
solicitation in Rule 506 offerings where all purchasers are accredited 
investors and issuers have taken reasonable steps to verify purchasers' 
accredited investor status, there are no significant alternatives to 
these amendments that would accomplish the stated objectives of Section 
201(a) of the JOBS Act. Eliminating the prohibition against general 
solicitation for a subset of Rule 506 offerings is intended to assist 
small entities--and other entities--seeking to raise capital. Small 
entities are not required to use Rule 506(c) to raise capital and would 
do so presumably only if it would be useful to them.
    In connection with the final amendment to Form D and the final 
amendment to Rule 506 that requires issuers to take reasonable steps to 
verify that purchasers of securities are accredited investors, the 
Commission considered the following alternatives: (1) Establishing 
different compliance or reporting standards that take into account the 
resources available to small entities; (2) clarifying, consolidating or 
simplifying compliance requirements under the rule; (3) using design 
rather than performance standards; and (4) exempting small entities 
from coverage of all or part of the amendment to Rule 506.
    With respect to using design rather than performance standards, we 
note that the ``reasonable steps to verify'' requirement in Rule 506(c) 
is a performance standard. We believe that the flexibility of a 
performance standard accommodates different types of offerings and 
purchasers without imposing overly burdensome methods that may be ill-
suited or unnecessary to a particular offering or purchaser, given the 
facts and circumstances. The Commission is not adopting different 
compliance or reporting requirements or timetables for small entities 
under Rule 506(c). The particular steps necessary to meet the 
requirement to take reasonable steps to verify that purchasers are 
accredited investors will vary according to the circumstances. 
Different compliance requirements for small entities may create the 
risk that the requirements may be too prescriptive or, alternatively, 
insufficient to verify a purchaser's accredited investor status. 
Special requirements for small entities may also lead to investor 
confusion or reduced investor participation in Rule 506 offerings if 
they create the impression that small entities have a different 
standard of verification than other issuers of securities. As the 
verification requirement is intended to protect investors by limiting 
participation in unregistered offerings to those who are most able to 
bear the risk, we are of the view that a flexible standard applicable 
to all issuers better accomplishes the goal of investor protection that 
this requirement is intended to serve. At the same time, the non-
exclusive list of verification methods that we are including in the 
final rule will provide additional legal certainty to all issuers, 
including small entities. The Commission is not adopting a different 
reporting requirement for small entities because the additional 
information that will be required in Form D is minimal and should not 
be unduly burdensome or costly for small entities.
    We similarly believe that it does not appear consistent with the 
objective of the final amendments or the considerations described above 
regarding investor confusion and investor participation to further 
clarify, consolidate or simplify the amendments for small entities. 
With respect to

[[Page 44804]]

exempting small entities from coverage of these final amendments, we 
believe such an approach would be contrary to the requirements of, and 
the legislative intent behind, Section 201(a) of the JOBS Act, as 
evidenced by the plain language of the statute.

VIII. Statutory Authority and Text of Final Rule and Form Amendments

    The final amendments contained in this release are being adopted 
under the authority set forth in Sections 4(a)(1), 4(a)(2), 7, 17(a), 
19 and 28 of the Securities Act, as amended, Sections 2, 3, 9(a), 10, 
11A(c), 12, 13, 14, 15(c), 15(g), 17(a), 23(a) and 30 of the Exchange 
Act, as amended, Sections 23, 30 and 38 of the Investment Company Act, 
as amended, and Section 201(a) of the JOBS Act.\288\
---------------------------------------------------------------------------

    \288\ Although 15 U.S.C. 77d note is not an authority for the 
amendments in this release, it is being included in the instruction 
below for the general authority citation for Part 230 to ensure that 
the Code of Federal Regulations is correctly updated for purposes of 
the bad actor disqualification rule for Rule 506 offerings also 
published today. See Bad Actor Release.
---------------------------------------------------------------------------

List of Subjects in 17 CFR Parts 230, 239 and 242

    Reporting and recordkeeping requirements, Securities.
    For the reasons set out above, the Commission is amending 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 general authority citation for Part 230 is revised to read as 
follows:

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77d note, 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), 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *


Sec.  230.144A  [Amended]

0
2. Amend Sec.  230.144A by:
0
a. In Preliminary Note 7, removing the reference to ``section 4(2)'' 
and adding in its place ``section 4(a)(2)'';
0
b. In paragraph (a)(1)(i)(A), removing the reference to ``section 
2(13)'' and adding in its place ``section 2(a)(13)'';
0
c. In paragraph (b), removing the reference to ``sections 2(11) and 
4(1)'' and adding in its place ``sections 2(a)(11) and 4(a)(1)'';
0
d. In paragraph (c), removing the references to ``section 4(3)(C)'', 
``section 2(11)'' and ``section 4(3)(A)'' and adding in their place 
``section 4(a)(3)(C)'', ``section 2(a)(11)'' and ``section 
4(a)(3)(A),'' respectively;
0
e. In paragraph (d)(1), first sentence, removing the phrase ``offered 
or''; and
0
f. In paragraph (d)(1), first sentence, removing the phrase ``an 
offeree or'' and adding in its place ``a''.


Sec.  230.500(c)  [Amended]

0
3. Amend Sec.  230.500(c) by:
0
a. Removing the reference to ``section 4(2)'' and adding in its place 
``section 4(a)(2)''; and
0
b. In the second sentence, adding ``(b)'' after ``rule 506'' and after 
``(Sec.  230.506''.


Sec.  230.501  [Amended]

0
4. Amend Sec.  230.501 by:
0
a. In paragraph (a)(1), removing the reference to ``section 2(13)'' and 
adding in its place ``section 2(a)(13)''; and
0
b. In paragraph (g), removing the reference to ``section 2(4)'' and 
adding in its place ``section 2(a)(4)''.


Sec.  230.502  [Amended]

0
5. Amend Sec.  230.502 by:
0
a. In paragraphs (b)(1), (b)(2)(iv), (b)(2)(v) and (b)(2)(vii), 
removing the reference to ``Sec.  230.506'' and adding in its place 
``Sec.  230.506(b)'';
0
b. In paragraph (c), first sentence, adding the phrase ``or Sec.  
230.506(c)'' after the phrase ``Except as provided in Sec.  
230.504(b)(1)'';
0
c. In paragraph (d), removing the reference to ``section 4(2)'' and 
adding in its place ``section 4(a)(2)''; and
0
d. In paragraph (d), removing the reference to ``section 2(11)'' and 
adding in its place ``section 2(a)(11).''

0
6. Amend Sec.  230.506 by:
0
a. In paragraph (a), adding the phrase ``or (c)'' after the phrase 
``satisfy the conditions in paragraph (b)'';
0
b. In paragraph (a), removing the phrase ``section 4(2)'' and adding in 
its place ``section 4(a)(2)'';
0
c. In the heading of paragraph (b), adding the phrase ``in offerings 
subject to limitation on manner of offering'' after the phrase 
``Conditions to be met'';
0
d. In the note following paragraph (b)(2)(i), removing the phrase 
``this section'' and adding in its place ``paragraph (b) of this 
section''; and
0
e. Adding paragraph (c) to read as follows:


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

* * * * *
    (c) Conditions to be met in offerings not subject to limitation on 
manner of offering--(1) General conditions. To qualify for exemption 
under this section, sales must satisfy all the terms and conditions of 
Sec. Sec.  230.501 and 230.502(a) and (d).
    (2) Specific conditions--(i) Nature of purchasers. All purchasers 
of securities sold in any offering under paragraph (c) of this section 
are accredited investors.
    (ii) Verification of accredited investor status. The issuer shall 
take reasonable steps to verify that purchasers of securities sold in 
any offering under paragraph (c) of this section are accredited 
investors. The issuer shall be deemed to take reasonable steps to 
verify if the issuer uses, at its option, one of the following non-
exclusive and non-mandatory methods of verifying that a natural person 
who purchases securities in such offering is an accredited investor; 
provided, however, that the issuer does not have knowledge that such 
person is not an accredited investor:
    (A) In regard to whether the purchaser is an accredited investor on 
the basis of income, reviewing any Internal Revenue Service form that 
reports the purchaser's income for the two most recent years 
(including, but not limited to, Form W-2, Form 1099, Schedule K-1 to 
Form 1065, and Form 1040) and obtaining a written representation from 
the purchaser that he or she has a reasonable expectation of reaching 
the income level necessary to qualify as an accredited investor during 
the current year;
    (B) In regard to whether the purchaser is an accredited investor on 
the basis of net worth, reviewing one or more of the following types of 
documentation dated within the prior three months and obtaining a 
written representation from the purchaser that all liabilities 
necessary to make a determination of net worth have been disclosed:
    (1) With respect to assets: Bank statements, brokerage statements 
and other statements of securities holdings, certificates of deposit, 
tax assessments, and appraisal reports issued by independent third 
parties; and
    (2) With respect to liabilities: A consumer report from at least 
one of the nationwide consumer reporting agencies; or
    (C) Obtaining a written confirmation from one of the following 
persons or entities that such person or entity has taken reasonable 
steps to verify that the purchaser is an accredited investor within the 
prior three months and has determined that such purchaser is an 
accredited investor:
    (1) A registered broker-dealer;
    (2) An investment adviser registered with the Securities and 
Exchange Commission;
    (3) A licensed attorney who is in good standing under the laws of 
the

[[Page 44805]]

jurisdictions in which he or she is admitted to practice law; or
    (4) A certified public accountant who is duly registered and in 
good standing under the laws of the place of his or her residence or 
principal office.
    (D) In regard to any person who purchased securities in an issuer's 
Rule 506(b) offering as an accredited investor prior to September 23, 
2013 and continues to hold such securities, for the same issuer's Rule 
506(c) offering, obtaining a certification by such person at the time 
of sale that he or she qualifies as an accredited investor.
    Instructions to paragraph (c)(2)(ii)(A) through (D) of this 
section:
    1. The issuer is not required to use any of these methods in 
verifying the accredited investor status of natural persons who are 
purchasers. These methods are examples of the types of non-exclusive 
and non-mandatory methods that satisfy the verification requirement in 
Sec.  230.506(c)(2)(ii).
    2. In the case of a person who qualifies as an accredited investor 
based on joint income with that person's spouse, the issuer would be 
deemed to satisfy the verification requirement in Sec.  
230.506(c)(2)(ii)(A) by reviewing copies of Internal Revenue Service 
forms that report income for the two most recent years in regard to, 
and obtaining written representations from, both the person and the 
spouse.
    3. In the case of a person who qualifies as an accredited investor 
based on joint net worth with that person's spouse, the issuer would be 
deemed to satisfy the verification requirement in Sec.  
230.506(c)(2)(ii)(B) by reviewing such documentation in regard to, and 
obtaining written representations from, both the person and the spouse.

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

0
7. The authority citation for Part 239 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77sss, 78c, 78l, 78m, 78n, 78o (d), 78o-7 note, 78u-5, 78w(a), 78ll, 
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 
80a-29, 80a-30, and 80a-37, unless otherwise noted.

0
8. Amend Form D (referenced in Sec.  239.500) by:
0
a. In Item 6, removing the phrase ``Rule 506'' and adding in its place 
``Rule 506(b)'' next to the appropriate check box, and removing the 
phrase ``Securities Act Section 4(5)'' and adding in its place 
``Securities Act Section 4(a)(5)'' next to the appropriate check box;
0
b. In Item 6, adding a check box that reads ``Rule 506(c)'' after the 
newly redesignated Rule 506(b) check box; and
0
c. In the instruction ``Who must file:'', removing the reference to 
``Section 4(5)'' and adding in its place ``Section 4(a)(5).''
    (Note: The text of Form D does not, and the amendments will not, 
appear in the Code of Federal Regulations.)

PART 242--REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN 
REQUIREMENTS FOR SECURITY FUTURES

0
9. The authority citation for Part 242 continues to read as follows:

    Authority:  15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 
80a-37.


Sec.  242.101  [Amended]

0
10. Amend Sec.  242.101 by:
0
a. In paragraph (b)(10) introductory text, removing the phrase 
``offered or''; and
0
b. In paragraph (b)(10)(i), removing the phrase ``offerees or''.


Sec.  242.102  [Amended]

0
11. Amend Sec.  242.102 by:
0
a. In paragraph (b)(7) introductory text, removing the phrase ``offered 
or''; and
0
b. In paragraph (b)(7)(i), removing the phrase ``offerees or''.


Sec.  242.104  [Amended]

0
12. Amend Sec.  242.104 by:
0
a. In paragraph (j)(2) introductory text, removing the phrase ``offered 
or''; and
0
b. In paragraph (j)(2)(i), removing the phrase ``offerees or''.

    By the Commission.

    Dated: July 10, 2013.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-16883 Filed 7-23-13; 8:45 am]
BILLING CODE 8011-01-P