[Federal Register: August 10, 2007 (Volume 72, Number 154)]
[Proposed Rules]
[Page 45115-45145]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10au07-22]
[[Page 45115]]
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Part IV
Securities and Exchange Commission
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17 CFR Parts 200, 230, and 239
Revisions of Limited Offering Exemptions in Regulation D; Proposed
Rule
[[Page 45116]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 230, and 239
[Release No. 33-8828; IC-27922; File No. S7-18-07]
RIN 3235-AJ88
Revisions of Limited Offering Exemptions in Regulation D
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules; request for additional comments.
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SUMMARY: We propose to revise Regulation D to provide additional
flexibility to issuers and to clarify and improve the application of
the rules. We propose to create a new exemption from the registration
provisions of the Securities Act of 1933 for offers and sales of
securities to ``large accredited investors.'' The exemption would
permit limited advertising in an exempt offering where each purchaser
meets the definition of ``large accredited investor.'' We also propose
to revise the term ``accredited investor'' in Regulation D to clarify
the definition and reflect developments since its adoption. In
addition, we propose to shorten the timing required by the integration
safe harbor in Regulation D, and to apply uniform disqualification
provisions to all offerings seeking to rely on Regulation D. We are
soliciting comments on possible revisions to Rule 504. Finally, we also
solicit additional comments on the definition of ``accredited natural
person'' for certain pooled investment vehicles in Securities Act Rules
216 and 509 that we proposed in December 2006.
DATES: Comments should be received on or before October 9, 2007.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml.
); Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-18-07 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-18-07. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
also are available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Room 1580,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. All comments received will be posted without change; we
do not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.
FOR FURTHER INFORMATION CONTACT: Gerald J. Laporte, Office Chief, or
Anthony G. Barone, Special Counsel, Office of Small Business Policy, at
(202) 551-3460, or Steven G. Hearne, Special Counsel, Office of
Rulemaking, at (202) 551-3430, Division of Corporation Finance, or, in
connection with the proposed definition of accredited natural person,
Elizabeth G. Osterman, Assistant Chief Counsel, Division of Investment
Management, at (202) 551-6825, U.S. Securities and Exchange Commission,
100 F Street, NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: We propose to amend Rule 30-1,\1\ Rule
144A,\2\ Rule 146,\3\ Rule 215,\4\ and Form D,\5\ and revise Regulation
D \6\ under the Securities Act of 1933 \7\ by amending Rules 501,\8\
502,\9\ 503,\10\ 504,\11\ 505,\12\ 506 \13\ and 508,\14\ and replacing
Rule 507.\15\ We also request further comment on proposed new Rules 216
and 509 under the Securities Act.\16\
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\1\ 17 CFR 200.30-1.
\2\ 17 CFR 230.144A.
\3\ 17 CFR 230.146.
\4\ 17 CFR 230.215.
\5\ 17 CFR 239.500.
\6\ 17 CFR 230.501 through 230.508.
\7\ 15 U.S.C. 77a et seq.
\8\ 17 CFR 230.501.
\9\ 17 CFR 230.502.
\10\ 17 CFR 230.503.
\11\ 17 CFR 230.504.
\12\ 17 CFR 230.505.
\13\ 17 CFR 230.506.
\14\ 17 CFR 230.508.
\15\ 17 CFR 230.507.
\16\ See Release No. 33-8766 (Dec. 27, 2006) [72 FR 399] (the
``Private Pooled Investment Vehicle Release'').
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Table of Contents
I. Background and Overview of Proposals
II. Proposed Revisions of Regulation D
A. Proposed Rule 507--Exemption for Limited Offers and Sales to
Large Accredited Investors
1. ``Large Accredited Investor'' Standard
2. Limited Advertising Permitted
3. No Sales to Persons Who Do Not Qualify as Large Accredited
Investors
4. Authority for Exemption
5. Covered Security Status
B. Proposed Revisions Related to Definition of ``Accredited
Investor''
1. Adding Alternative Investments-Owned Standards to Accredited
Investor Standards
a. Proposed Definition of ``Investments''
b. Amount of Investments Required
2. Proposed Definition of ``Joint Investments''
3. Future Inflation Adjustments
4. Adding Categories of Entities to List of Accredited and Large
Accredited Investors
5. Proposed Definition of Accredited Natural Person
C. Proposed Revisions to General Conditions of Regulation D
1. Proposed Revisions to Regulation D Integration Safe Harbor
2. Disqualification Provisions
D. Possible Revisions to Rule 504
E. Other Proposed Conforming Revisions
1. Proposed Amendments to Rule 215
2. Proposed Amendment to Rule 144A
3. Delegated Authority
III. General Request for Comment
IV. Paperwork Reduction Act
V. Cost-Benefit Analysis
VI. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation
VII. Initial Regulatory Flexibility Act Analysis
VIII. Small Business Regulatory Enforcement Fairness Act
IX. Statutory Basis and Text of Proposed Amendments
I. Background and Overview of Proposals
Regulation D, adopted in 1982, was designed to facilitate capital
formation while protecting investors by simplifying and clarifying
existing exemptions for private or limited offerings, expanding their
availability, and providing more uniformity between federal and state
exemptions.\17\ Although Regulation D originated as an effort to assist
small business capital formation and continues to play an important
role in that arena, all sizes of companies use the registration
exemptions in Regulation D.
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\17\ See Release No. 33-6389 (Mar. 8, 1982) [47 FR 11251].
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Regulation D consists of eight rules. Rules 501 through 503 contain
definitions, conditions, and other provisions that apply generally
throughout Regulation D. Rules 504 through 506 detail specific
exemptions from registration under the Securities Act. Rules 504 and
505 provide
[[Page 45117]]
exemptions adopted pursuant to the Commission's authority under Section
3(b) \18\ of the Securities Act. Rule 504 provides exemptions for
companies that are not subject to reporting requirements under the
Securities Exchange Act of 1934 \19\ for the offer and sale of up to
$1,000,000 of securities in a 12-month period. Rule 505 exempts offers
by companies of up to $5,000,000 of securities in a 12-month period, so
long as offers are made without general solicitation or advertising.
Rule 506 is a safe harbor under Section 4(2) \20\ of the Securities Act
and provides an exemption without any limit on the offering amount, so
long as offers are made without general solicitation or advertising and
sales are made only to ``accredited investors'' and a limited number of
non-accredited investors who satisfy an investment sophistication
standard. Rules 507 and 508 were added in 1989.\21\ Rule 507
disqualifies issuers from relying on Regulation D, under certain
circumstances, for failure to file a Form D notice.\22\ Rule 508
provides a safe harbor for certain insignificant deviations from a
term, condition, or requirement of Regulation D.
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\18\ 15 U.S.C. 77c(b).
\19\ 15 U.S.C. 78a et seq.
\20\ 15 U.S.C. 77d(2).
\21\ See Release No. 33-6825 (Mar. 14, 1989) [54 FR 11369]
(adding 17 CFR 230.507 and 230.508).
\22\ Rule 503 requires the filing of a Form D notice with the
Commission no later than 15 days after the first sale of securities
in an offering under Regulation D.
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Following our adoption in June 2005 of comprehensive amendments to
our rules and forms relating to registered public offerings,\23\ we
believe it is appropriate to propose revisions to our rules applicable
to private and limited offerings. Our objective in this effort is to
clarify and modernize our rules to bring them into line with the
realities of modern market practice and communications technologies
without compromising investor protection.\24\ Action in this area also
is timely because our Advisory Committee on Smaller Public Companies
made a number of recommendations relating to private and limited
offerings in its final report dated April 23, 2006.\25\ Several of the
proposals in this release build on the Advisory Committee's
recommendations.
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\23\ See Release No. 33-8591 (Jul. 19, 2005) [70 FR 44722].
\24\ The American Bar Association recently suggested that
revisions in this area would be appropriate, in view of the
implementation of the securities offering reform rules for
registered offerings. See comment letter in Commission Rulemaking
File No. S7-11-07 from American Bar Association (Mar. 22, 2007) (the
``ABA Private Offering Letter''), available at http://www.sec.gov/comments/s7-11-07/s71107-4.pdf
.
\25\ See Final Report of the Advisory Committee on Smaller
Public Companies to the United States Securities and Exchange
Commission (April 23, 2006), at 74-81, 92-93, 94-96, 100-101 (the
``Advisory Committee Final Report''), available at http://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf
.
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As discussed in detail below, we propose to make changes in the
following four principal areas involving Regulation D:
Creating a new exemption from the registration provisions
of the Securities Act for offers and sales to ``large accredited
investors'';
Revising the definition of the term ``accredited
investor'' to clarify it and reflect developments since its adoption;
Shortening the length of time required by the integration
safe harbor for Regulation D offerings; and
Providing uniform disqualification provisions throughout
Regulation D.
We propose to create a new exemption to the registration
requirements of the Securities Act under our general exemptive
authority in Section 28 of that Act.\26\ This exemption, set forth in
proposed new Rule 507, would be limited to sales of securities to
``large accredited investors,'' and would permit an issuer to publish a
limited announcement of the offering. The proposed definition of large
accredited investor would be based on the ``accredited investor''
definition, but with higher and somewhat different dollar-amount
thresholds. Large accredited investors that participate in these exempt
offerings would be considered ``qualified purchasers'' under Section
18(b)(3) of the Securities Act,\27\ thereby providing ``covered
security'' status and the resulting preemption of certain state
securities regulation.
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\26\ 15 U.S.C. 77z-3. Section 28 states that the Commission, by
rule or regulation, may conditionally or unconditionally exempt any
person, security, or transaction, or any class or classes of
persons, securities, or transactions, from any provision or
provisions of this title or of any rule or regulation issued under
this title, to the extent that such exemption is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.
\27\ 15 U.S.C. 77r(b)(3).
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We also propose to update the ``accredited investor'' definition.
First, we propose to add an alternative ``investments-owned'' standard
for determining accredited investor and large accredited investor
status. This standard would include definitions of ``investments'' and
``joint investments'' similar to those we proposed in December 2006 in
our initiative to revise Regulation D as it relates to investments by
individuals in certain private pooled investment vehicles relying on
Rule 506.\28\ In addition, we propose a mechanism to adjust the dollar-
amount thresholds in the definition of ``accredited investor'' to
reflect future inflation. We propose to add categories of entities to
the list of permitted accredited investors. We also propose to shorten
the time frame for the integration safe harbor for Regulation D
offerings from six months to 90 days to help provide flexibility to
issuers. Finally, we propose to establish uniform disqualification
provisions for all offerings under Regulation D in order to prevent
certain issuers from relying on Regulation D exemptions.
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\28\ See Private Pooled Investment Vehicle Release. We are
taking the opportunity to request additional comment on that
proposal here. See II.B.5 below.
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In addition to these proposals, we also are soliciting comment on
whether Rule 504 of Regulation D, the ``seed capital'' exemption,
should be amended so that securities sold pursuant to a state law
exemption that permits sales only to accredited investors would be
deemed ``restricted securities'' for purposes of Rule 144.\29\
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\29\ 17 CFR 230.144.
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Finally, in last year's Private Pooled Investment Vehicle Release,
we solicited comment on two new rules that would establish a new
category of accredited investor, ``accredited natural person,'' that
individuals would need to satisfy in order to invest in certain private
pooled investment vehicles relying on Rule 506.\30\ We received
approximately 600 comments on that proposal, many of which generally
disfavored our proposal, which would raise individual investor
thresholds for such investments. We are continuing to consider those
comments, and solicit further comment on the proposed definition of
accredited natural person made in the Private Pooled Investment Vehicle
Release. The Commission may act on the new proposals in this release
and the December 2006 proposals at the same time.
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\30\ Proposed Rules 216 and 509 under the Securities Act.
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II. Proposed Revisions of Regulation D
A. Proposed Rule 507--Exemption for Limited Offers and Sales to Large
Accredited Investors
We propose to create a new exemption to the registration
requirements of the Securities Act for offers and sales of securities
to a new category of investors called ``large accredited investors.''
\31\ The exemption would permit limited advertising of
[[Page 45118]]
these offerings.\32\ Large accredited investors would consist of the
same categories of entities and individuals that qualify for accredited
investor status under existing Rule 506, but with significantly higher
dollar-amount thresholds for investors subject to such thresholds.\33\
Legal entities that are considered accredited investors if their assets
exceed $5 million would be required to have $10 million in investments
to qualify as large accredited investors. Individuals generally would
be required to own $2.5 million in investments or have annual income of
$400,000 (or $600,000 with one's spouse) to qualify as large accredited
investors, as compared to the current accredited investor standard of
$1 million in net worth or annual income of $200,000 (or $300,000 with
one's spouse). Legal entities that are not subject to dollar-amount
thresholds to qualify as accredited investors, generally government-
regulated entities, would not be subject to dollar-amount thresholds to
qualify as large accredited investors.
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\31\ We propose to move the current contents of Rule 507 into
proposed Rule 502(e) and then include the new exemption in Rule 507.
\32\ The exemption would not, however, be available to offers
and sales by pooled investment vehicles relying on Section 3(c)(1)
(15 U.S.C. 80a-3(c)(1)) or Section 3(c)(7) (15 U.S.C. 80a-3(c)(7))
of the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.). See
II.A.4 below.
\33\ In II.B below, we propose to make certain changes to other
accredited investor qualifications. These changes would apply
equally to accredited investors in Rule 505 and 506 transactions and
to large accredited investors in Rule 507 transactions.
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We believe that we may exempt certain offers and sales that may
involve limited advertising from the registration requirements of
Section 5 of the Securities Act \34\ without compromising investor
protection, due to the general increased sophistication and financial
literacy of investors in today's markets, coupled with the advantages
of modern communication technologies. Our proposal is patterned
generally after the Model Accredited Investor Exemption adopted by the
North American Securities Administrators Association (NASAA) in
1997.\35\ Like the Model Accredited Investor Exemption, our proposal
does not eliminate the prohibition on general solicitation and general
advertising from the conditions of the exemption. Both the Advisory
Committee on Smaller Public Companies and the American Bar
Association's Committee on Federal Regulation of Securities recommended
relaxing the ban on general solicitation for transactions with
purchasers who do not need the protection of registration.\36\ Our
proposal attempts to ease restrictions on limited offerings of
securities in a manner that is cognizant of the potential harm of
offerings by unscrupulous issuers or promoters who might take advantage
of more open solicitation and advertising to lure unsophisticated
investors to make investments in exempt offerings that do not provide
all the benefits of Securities Act registration. We believe easing the
restriction on limited offerings of securities as we have proposed is
appropriate, given the additional safeguards we have proposed.
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\34\ 15 U.S.C. 77e.
\35\ A copy of the Model Accredited Investor Exemption is
available on the NASAA Web site at http://www.nasaa.org/content/Files/Model%5FAccredited%5FInvestor%5FExemption.pdf
.
\36\ See Advisory Committee Final Report at 74-81; ABA Private
Offering Letter, n. 24 above, at 26.
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The proposed Rule 507 exemption would share the following
characteristics with the Rule 506 exemption:
It would allow an issuer to sell an unlimited amount of
its securities to an unlimited number of investors who meet specified
criteria-accredited investors in the case of Rule 506 transactions and
large accredited investors in the case of Rule 507 transactions;
Its availability would focus on purchasers, and not depend
on the characteristics of offerees;
It would place no restrictions on the payment of
commissions or similar transaction-related compensation;
It would be non-exclusive, meaning that the issuer could
choose to claim any other available exemption without the benefit of
the rule; \37\
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\37\ An issuer engaging in the limited advertising permitted by
Rule 507 may not be able to claim the Section 4(2) exemption if the
activity has imparted a public character to the offering. See
Release No. 33-7943 (Jan. 26, 2001) [66 FR 8881] (text accompanying
n. 31), citing Release No. 33-4552 (Nov. 6, 1962) [27 FR 11316]
(public advertising incompatible with claim of private offering).
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Securities acquired in a transaction under the rule would
be subject to the limitations on resale under Rule 502(d) \38\ and
therefore would be treated as ``restricted securities'' as defined in
Securities Act Rule 144(a)(3)(ii); \39\
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\38\ 17 CFR 502(d).
\39\ 17 CFR 230.144(a)(3)(ii). In a companion release, we have
proposed changes to Rule 144. Release No. 33-8813 (June 22, 2007)
[72 FR 36822].
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The issuer would be required to exercise reasonable care
to assure that the purchasers of the securities are not underwriters;
\40\ and
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\40\ Rule 502(d). The term ``underwriter'' is defined in Section
2(a)(11) of the Securities Act. 15 U.S.C. 77b(a)(11).
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The issuer would have an obligation to file a notice of
sales in the offering with the Commission on Form D.\41\
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\41\ In a companion release, we are proposing changes to Form D
to simplify and update it, as well as to require electronic filing.
Release No. 33-8814 (June 29, 2007) [72 FR 37376].
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In addition, proposed Rule 507 would include the same
disqualification provisions as we propose below for other Regulation D
exemptions.\42\ Currently, Rule 506 has no bad actor disqualification
provisions.
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\42\ See II.C.2 below.
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Rule 507 would differ from Rule 506 in five ways:
Large Accredited Investor Standard. Rule 507 would be
premised on the concept of large accredited investors. Rule 506 would
continue to be premised on the concept of accredited investors.
Limited Advertising Permitted. Instead of a total ban on
general solicitation and general advertising, as is the case in Rule
506 transactions, issuers in Rule 507 transactions could engage in
limited advertising that satisfies the requirements of the rule. All
other general solicitation and advertising would be prohibited.
No Sales to Persons Who Do Not Qualify as Large Accredited
Investors. Issuers in Rule 507 transactions would not be allowed to
sell securities to any investor who does not qualify as a large
accredited investor. In Rule 506 transactions, issuers may sell
securities to an unlimited number of accredited investors and up to 35
non-accredited investors.\43\
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\43\ If an issuer sells to non-accredited investors in a Rule
506 transaction, the issuer must furnish them with the information
specified in Rule 502(b), 17 CFR 230.502(b). The issuer also must
assure that the non-accredited investors meet the investor
sophistication requirements of Rule 506(b)(2)(ii), 17 CFR
230.506(b)(2)(ii). We are not proposing these kinds of requirements
for Rule 507 transactions because issuers could not sell securities
to any non-accredited investors in Rule 507-exempt transactions.
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Authority for Exemption. Rule 507 would be adopted as an
exemption primarily under the Commission's general exemptive authority
under Section 28 of the Securities Act, while Rule 506 was adopted as a
safe harbor under Section 4(2) of the Securities Act.
Covered Security Status. Securities sold in accordance
with either of these rules would be considered ``covered securities,''
but under different provisions of Section 18 of the Securities Act.
Securities sold under Rule 507 would be covered securities because the
purchasing large accredited investors would be defined as ``qualified
purchasers'' under Section 18(b)(3) of the Securities Act. Securities
sold under Rule 506 would continue to be covered securities under
Section 18(b)(4)(D) of the Securities Act \44\ because Rule 506
[[Page 45119]]
was issued under Section 4(2) of the Securities Act.\45\
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\44\ 15 U.S.C. 77r(b)(4)(D).
\45\ State securities regulation of covered securities generally
is limited under Section 18(b) of the Securities Act to imposing
notice filing requirements on offerings, requiring the filing of a
consent to service of process, and assessing a filing fee.
Securities sold in offerings that are exempt under Rule 506 are
covered securities because Section 18(b)(4)(D) provides that
securities sold in transactions exempt under Commission rules issued
under Section 4(2), which includes Rule 506, are covered securities.
Securities sold in offerings that are exempt under Rule 507 would be
covered securities because our proposal provides for an amendment to
Rule 146 under the Securities Act that would define the term
``qualified purchaser'' in Section 18(b)(3) of the Act to include
large accredited investors with respect to offers or sales in
compliance with Rule 507. Under Section 18(b)(3), qualified
purchasers, as defined by the Commission under the Securities Act,
purchase covered securities in transactions so designated by the
Commission.
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We discuss these five areas of difference in the sections
immediately below.
1. ``Large Accredited Investor'' Standard
We propose to define a new category of investors, called ``large
accredited investors,'' \46\ which we would use in Rule 507. The
proposed definition of large accredited investor is based on the
``accredited investor'' definition, but with higher and somewhat
different dollar-amount thresholds.\47\ We have proposed higher
thresholds due to what we perceive are increased investor protection
risks relating to the limited advertising that would be allowed under
Rule 507.\48\ The higher thresholds would provide a cushion over the
accredited investor standards for determining eligibility for the new
exemption. The greater public access to investors that the new
exemption would provide warrants increased assurance of the ability of
investors in offerings under that exemption to fend for themselves.
Further, the higher thresholds may provide such assurance.
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\46\ See Proposed Rule 501(a).
\47\ See the discussion of the accredited investor definition in
II.B below.
\48\ While the Model Accredited Investor Exemption is limited to
accredited investors, we propose to further limit the Rule 507
exemption to large accredited investors. NASAA, the organization of
state securities administrators, recently supported a similar higher
threshold for any new federal exemption that would relax the
prohibitions against general solicitation and general advertising.
See comment letter in Commission File No. 265-23 from NASAA to the
Advisory Committee (March 28, 2006) (the ``NASAA Letter''), at 2,
available at http://www.sec.gov/rules/other/265-23/rastaples1692.pdf
.
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We propose that the entities or institutions that currently must
have more than $5 million in assets to qualify for accredited investor
status under Rule 501(a) would be required to have more than $10
million in investments to qualify as large accredited investors.
Individuals, or ``natural persons'' as the rule calls them, would be
able to qualify as large accredited investors if they own more than
$2.5 million in investments or have had individual annual income of
more than $400,000 (or $600,000 with one's spouse) in the last two
years and expect to maintain the same income level in the current
year.\49\ We propose to have alternative investments and income tests
for individuals because an investments test without an income test
tends to favor investors who have had time to build investment
portfolios.
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\49\ We discuss our proposed use of the term ``aggregate
income'' instead of the term ``joint income,'' which currently is
used in Rule 501(a), 17 CFR 230.501(a), in II.B.2 below.
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Based on estimates from our Office of Economic Analysis, 1.64
percent of U.S. households would qualify as large accredited investors,
compared with 8.47 percent that would qualify as accredited
investors.\50\ Our approach in selecting the dollar-amount thresholds
for investors to qualify as large accredited investors reflects an
attempt to approximate the standards adopted by the Commission in the
1980s for accredited investors in light of current knowledge and
changed circumstances.\51\
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\50\ These estimates are based on Federal Reserve Board of
Governors, Survey of Consumer Finances, 2004. This survey used year-
end 2003 values. More information regarding the survey may be
obtained at http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html
.
\51\ Our Office of Economic Analysis estimates that in 1982,
when Regulation D was adopted, approximately 1.87 percent of U.S.
households qualified for accredited investor status. This estimate
is based on Federal Reserve Board of Governors, Survey of Consumer
Finances, 1983. This survey used year-end 1982 values. More
information regarding the survey may be obtained at http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html
.
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We selected the $10 million amount for institutions for two
additional reasons. First, in the interest of uniformity between
Federal and State securities regulation, we chose a standard similar to
the standard in the Uniform Securities Act of 2002, as amended, that
was approved by the National Conference of Commissioners of Uniform
State Laws.\52\ The model statute, which has been adopted by several
states, requires that most non-regulated institutional investors have
$10 million in assets to qualify as ``institutional investors.'' In
selecting a standard for large accredited investors, we chose to
substitute a $10 million investments-owned standard for the $10 million
assets-owned standard because, as discussed below, we believe that
investments owned may be a more accurate and more easily administered
standard than assets owned to determine whether an investor needs the
protection of Securities Act registration. The $10 million amount also
correlates closely with the inflation-indexed value of $5 million in
1982, when we adopted the $5 million assets-owned standard.\53\
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\52\ See Uniform Securities Act (2002), as amended, available at
http://www.uniformsecuritiesact.org/usa/DesktopDefault.aspx?tabindex=2&tabid=48
.
\53\ Our Office of Economic Analysis estimates that the
financial thresholds used in Rule 501(a), adjusted for inflation as
of July 1, 2006, would be as follows: the $5 million asset
requirement for certain legal entities would have increased to
approximately $9.5 million; the $1 million individual net worth test
would have increased to approximately $1.9 million; and the $200,000
individual income test and $300,000 joint income test would have
increased to approximately $388,000 and $582,000, respectively. Our
Office of Economic Analysis estimated these levels using the
Personal Consumption Expenditures Chain-Type Price Index, as
published by the Department of Commerce, available at http://www.bea.gov
.
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We selected the $2.5 million investments-owned standard for
individuals and spouses based on the $2.5 million investments-owned
standard we proposed in December 2006 for individuals and spouses to
invest in private pooled investment vehicles.\54\ We selected the
$400,000 in annual income standard for individuals because it is
approximately the inflation-indexed value of $200,000 in 1982, when the
Commission first adopted the $200,000 in annual income standard for
individual accredited investors. Similarly, we selected the $600,000 in
aggregate income for spouses standard because it is approximately the
inflation-indexed value of $300,000 in 1982. Although the $300,000
combined standard was not adopted until 1988, it was adopted to
complement the $200,000 individual income standard adopted in 1982.\55\
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\54\ See Private Pooled Investment Vehicle Release.
\55\ See Release No. 33-6758 (March 3, 1988) [53 FR 7866].
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Individuals and entities that currently are not subject to a
dollar-amount threshold to qualify as accredited investors also would
qualify as large accredited investors. As such, banks, registered
investment companies, private business development companies, and other
regulated entities identified in Rule 501(a)(1) and (2) that are not
subject to an assets test to qualify for accredited investor status
also would qualify for large accredited investor status without being
subject to an income, assets, or investments requirement.\56\ Further,
directors and executive officers of the issuer would be considered
large accredited investors in addition to being considered accredited
investors, without being subject to an income, assets, or investments
[[Page 45120]]
requirement.\57\ As in the accredited investor standard, these entities
and persons are generally deemed not to need the same level of
protection under the Securities Act as other entities and non-
affiliated persons.
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\56\ See 17 CFR 230.501(a)(1) and (2).
\57\ See 17 CFR 230.501(a)(4).
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Request for Comment
Do the standards we propose for qualifying as a large
accredited investor provide a reasonable basis for determining that,
under the circumstances of Rule 507, those investors do not need all of
the protections of Securities Act registration? If not, what
qualifications should we set? Are other levels more appropriate than
$10 million in investments for legal entities and $2.5 million in
investments for individuals and spouses, or annual income of $400,000
for individuals and $600,000 with one's spouse? Should these levels be
lower? Should they be higher, especially because of the availability of
limited advertising? For example, would $7.5 million or $15 million in
investments for legal entities and $1.5 million or $3.5 million in
investments for individuals and spouses, or annual income of $300,000
or $600,000 for individuals and $400,000 or $800,000 with one's spouse
be more appropriate levels? Why? Should we adopt an eligible person
threshold of $1 million in investments for individuals, as suggested by
NASAA? \58\ If you propose thresholds, please provide the basis for
your belief that those thresholds are more appropriate.
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\58\ See n. 48.
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Should we adopt a definition of ``large accredited
investor'' that includes only an investments-owned test for individual
investors, as we proposed in the Private Pooled Investment Vehicle
Release for certain individual investors in private pooled investment
vehicles, or should we adopt alternative investments and income tests
as proposed? Please explain the reasons for your views.
Should we retain the asset-based test instead of using an
investment-based test for determining status as a large accredited
investor for both individuals and legal entities? In this regard,
should the standard for legal entities be $10 million in assets--the
same as the requirement for institutional investors in the Uniform
Securities Act?
Would it be appropriate to modify proposed Rule 507 to
include any additional safeguards in the definition of large accredited
investor?
2. Limited Advertising Permitted
Rule 507 would permit an issuer in an exempt transaction to publish
a limited announcement of an offering.\59\ The announcement would be
required to state prominently that sales will be made to large
accredited investors only, that no money or other consideration is
being solicited or will be accepted through the announcement, and that
the securities have not been registered with or approved by the
Commission and are being offered and sold pursuant to an exemption.\60\
At the issuer's option, the announcement also could contain the
following additional information:
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\59\ While the proposed statement is similar to the statement
permitted under Rule 135c, 17 CFR 230.135c, the proposed exemption
is substantially patterned after the Model Accredited Investor
Exemption and differs from Rule 135c in that the advertisement is
permitted and anticipated to be part of the offering process,
whereas Rule 135c is limited to an announcement that is not to be
used to condition the market or as part of the solicitation for the
offering.
\60\ These statements are similar to statements required by the
Model Accredited Investor Exemption, except that the proposed
announcement is not required to contain a statement that the
securities have not been registered with or approved by a state
securities agency.
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The name and address of the issuer;
A brief description of the business of the issuer in 25 or
fewer words; \61\
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\61\ The Model Accredited Investor Exemption limits an issuer's
description of the business to 25 or fewer words. We have retained
the 25-word limitation in the proposal, but solicit comment below on
whether such a limitation is appropriate. We already have one
federal exemption from Securities Act registration that permits
offerings involving select investors and a limited amount of general
solicitation. Our Rule 1001, 17 CFR 230.1001, exempts offerings
conducted under Section 25102(n) of the California Corporations
Code's ``Qualified Purchaser Exemption.'' Adopted in September 1994,
the California provision permits offerings to specified classes of
qualified purchasers that are similar to federal classes of
accredited investors without state registration. The QPE allows for
a general announcement of an offering, including a brief description
of the issuer's business, without a word limit. California's QPE
served as a prototype for the Model Accredited Investor Exemption.
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The name, type, number, price, and aggregate amount of
securities being offered and a brief description of the securities;
A description of what large accredited investor means;
Any suitability standards and minimum investment
requirements for prospective purchasers in the offering; and
The name, postal or e-mail address, and telephone number
of a person to contact for additional information.\62\
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\62\ The additional information permitted in the announcement is
patterned after the Model Accredited Investor Exemption, but also
permits a description of the meaning of the term ``large accredited
investor'' and a discussion of suitability standards and minimum
investment requirements. We propose to permit these latter
statements to avoid confusion about the meaning of the term ``large
accredited investor'' and to facilitate management of offerings
under the exemption.
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Publication of such an announcement would not contravene the
prohibition on general solicitation and advertising otherwise
applicable to the offer and sale of securities in a Rule 507
transaction. The publication could only be ``in written form'' \63\ but
could occur in any written medium, such as in a newspaper or on the
Internet. We have proposed to limit the publication to written form in
an effort to limit aggressive selling efforts made through the
announcement. As part of this limitation, radio or television broadcast
spots or ``infomercials'' would be prohibited.\64\
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\63\ Proposed Rule 507 uses the term ``in written form'' to
limit the term and differentiate the concept from ``written
communication'' as defined in Rule 405. 17 CFR 230.405. The term
``written communication'' is defined in Rule 405 to include a radio
or television broadcast. Publication of an announcement under Rule
507 would be substantially more limited.
\64\ Limiting the use of certain types of advertisements under
Rule 507 would be consistent with our position in Rule 433, 17 CFR
230.433, relating to free writing prospectuses in the context of
public offerings by non-reporting and unseasoned issuers.
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Rule 507 also provides that an issuer or a person acting on an
issuer's behalf may provide information in addition to the limited
announcement only if the issuer reasonably believes that the
prospective purchaser is a large accredited investor.\65\ Additional
information may be provided orally or in writing, such as in the form
of sales material or an offering circular. Information also may be
delivered to prospective purchasers through an electronic database that
is restricted to large accredited investors.\66\
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\65\ For a related discussion of what measures an issuer could
take to satisfy its obligation under Rule 501(a) to form a
reasonable belief that a prospective purchaser satisfies the
definition of accredited investor, see n. 99 and accompanying text.
\66\ For a discussion of on-line private offerings under
Regulation D, see Release No. 33-7856 (Apr. 28, 2000) [65 FR 25843].
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Request for Comment
We propose to limit the information included in a Rule 507
announcement and require that the information be in written form.
Should we require or permit any other information to be included in the
limited announcement proposed in Rule 507 offerings? If so, what
additional information would be appropriate? Should any of the optional
information be required? Should we eliminate or expand the 25-word
limit on the description of the issuer's business? If we did not impose
a limit on the business description, would
[[Page 45121]]
issuers be more or less likely to use inappropriately promotional and
non-objective language to describe their businesses in the limited
announcement? Should the rule require that any description of the
issuer's business be fair and impartial?
Should we eliminate the requirement that the Rule 507
announcement be in written form? If so, what limitations, if any,
should we have on the form of the announcement? Should we define the
phrase ``in written form''? Should we limit permitted written
announcements to publications, as opposed to, for example, flyers
handed out on street corners? Should we allow radio or television
broadcast announcements? Should we follow the Model Accredited Investor
Exemption and allow the announcement to be made by any means? Should we
require issuers to retain copies of any advertisements or to submit
copies of the script of any radio or television broadcast to the
Commission staff? Should they be filed with the Commission, and if so,
should the filing be confidential?
Proposed Rule 507 would require issuers to include in any
permitted public announcement a prominent statement that sales will be
made only to large accredited investors, that no money is being
solicited or will be accepted by way of the announcement, and that the
securities have not been registered with or approved by the Commission
and are being offered and sold pursuant to an exemption. Are these
appropriate requirements for the announcement? Should we require
additional statements? Do we need to require that the statement be
prominent? If so, should we also specify format or font sizes? How
would such a requirement operate for electronic communications? Does
the requirement that the announcement prominently state that ``no money
or other consideration is being solicited or will be accepted through
the announcement'' make it clear that an investor should not respond to
the announcement by sending a check to the issuer? Can you suggest
alternative wording?
Should we allow issuers, at their option, to include in a
Rule 507 announcement a coupon, returnable to the issuer, indicating
interest in the offering, containing the name, address and telephone
number of the prospective purchaser, and stating clearly and separately
that the indication of interest is not binding and that no money should
be sent? \67\
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\67\ This provision could be modeled after subparagraph (c) of
Rule 254 of Regulation A, 17 CFR 254(c). Proposed Rule 135d,
although never adopted, had a similar provision in subparagraph (b).
See Release No. 33-7188 (June 27, 1995) [60 FR 35648].
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The Model Accredited Investor Exemption does not permit
telephone solicitation unless, before placing a telephone call, the
issuer reasonably believes the prospective purchaser to be solicited is
an accredited investor.\68\ Should we include a similar limitation in
Rule 507 with respect to large accredited investors?
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\68\ Paragraph (G) of the Model Accredited Investor Exemption
provides that no telephone solicitation is permitted unless the
issuer reasonably believes that the person solicited is an
accredited investor before making the telephone solicitation.
Proposed Rule 507(b)(2)(iii) provides that any information beyond
the announcement may be provided ``only if the issuer reasonably
believes that the prospective purchaser is a large accredited
investor,'' but does not address telephone solicitation explicitly.
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The rule provides that an issuer or any person acting on
an issuer's behalf may provide additional information if the issuer
reasonably believes the prospective purchaser is a large accredited
investor. Does the proposal adequately acknowledge that the reasonable
belief of an agent of the issuer may be attributable to the issuer and
thereby permit the issuer to satisfy the standard? What requirements,
if any, should apply to the delivery of information to prospective
purchasers through an electronic database that is restricted to large
accredited investors? \69\ Should we provide additional guidance and if
so, should the guidance be in the rule?
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\69\ See n. 66.
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Should the rule provide any guidance as to how an issuer
may arrive at a reasonable belief that a prospective purchaser is a
large accredited investor? Should it be permitted to form the belief
entirely on the basis of responses to a questionnaire?
Rule 508 provides that insignificant deviations from the
requirements of Regulation D do not result in the loss of the
exemption.\70\ Rule 508(a)(2) provides, however, that failures with
regard to limitations on the manner of offering are deemed to be
significant. What should be the implications for failure to comply with
the restrictions on permitted advertising in Rule 507 transactions?
Should the issuer no longer be able to rely on the Rule 507 exemption?
Are the provisions of Rule 508 sufficient to deal with situations that
might arise?
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\70\ We propose to amend Rule 508 to add a reference to proposed
Rule 507.
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Should we adopt broader amendments to Rule 508 to address
related issues that might arise under the Rule 507 exemption, as well
as under other exemptions in Regulation D? For example, should we
delete the current Rule 508 carve-out of manner of sale limitations in
the list of insignificant deviations? This carve-out has been read to
provide that an issuer's failure to comply with a ban on general
solicitation applicable to a Regulation D offering never can constitute
an insignificant deviation. As a result, legal practitioners have
expressed concern that an insignificant deviation relating to general
solicitation could result in total loss of the Rule 508 defense. If the
carve-out were deleted, Rule 508 would treat insignificant failures to
comply with an applicable ban on general solicitation like most other
deviations from the requirements of Regulation D. One effect of such a
rule amendment would be to clearly permit issuers to raise the Rule 508
defense with respect to complaining parties who were not generally
solicited in an offering structured to avoid general solicitation,
while continuing to preclude the issuer from raising the defense with
respect to a party who was generally solicited, depending upon whether
it is able to satisfy the other conditions to availability of the
defense.
3. No Sales to Persons Who Do Not Qualify as Large Accredited Investors
We propose that issuers relying on Rule 507 to exempt a transaction
from Securities Act registration be permitted to sell securities only
to investors who qualify as large accredited investors. This is a
departure from the approach taken in Rule 506, where issuers are
permitted to sell securities to up to 35 non-accredited investors, in
addition to an unlimited number of accredited investors. Because
limited advertising allows issuers to provide information about their
offering to anyone, we believe it is appropriate to establish stricter
limitations on sales to limit investors to those who do not need all of
the protections of Securities Act registration.
A Rule 507 offering could only be conducted simultaneously or
``side-by-side'' with another Regulation D offering if the two
offerings were considered as separate and distinct offerings under the
five-factor integration test set forth in Rule 502(a) of Regulation
D.\71\ Since Rule 506 prohibits the use of general solicitation and
advertising and Rule 507 is limited exclusively to sales to large
accredited investors, neither of these two exemptions would be
available if two offerings were
[[Page 45122]]
considered as integrated where one offering used limited public
advertising and the other offering was sold to persons who were not
large accredited investors.\72\
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\71\ 17 CFR 230.502(a). We are proposing a note to clarify that
Rule 144A does not preclude an issuer or a person acting on the
issuer's behalf from publishing a general announcement of an
offering pursuant to Rule 507. See II.E.2 below.
\72\ We do not propose to provide an integration safe harbor for
Rule 507 offerings as was done, for example, in Section 3(c)(7)(E)
of the Investment Company Act, 15 U.S.C. 80a-3(c)(7)(E), and under
17 CFR 230.144A(e) and 17 CFR 230.701(f).
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Request for Comment
Should we permit investors who do not qualify as large
accredited investors to invest in Rule 507 offerings? If so, how should
we limit the number of non-qualifying investors? Would permitting
investors who do not qualify as large accredited investors to invest in
Rule 507 offerings increase the potential for fraud in those offerings?
To limit sales to large accredited investors, would it be
appropriate to limit publication of the announcement to password-
protected Web sites that are accessible only by large accredited
investors? Should we provide other limitations to ensure that the
exemption is not abused?
4. Authority for Exemption
We are proposing Rule 507 as an exemption from the registration
provisions of Section 5 of the Securities Act under our general
exemptive authority in Section 28 of that Act. Under Section 28, we may
exempt any transaction from any provision of the Securities Act ``to
the extent that such exemption is necessary or appropriate in the
public interest, and is consistent with the protection of investors.''
\73\
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\73\ 15 U.S.C. 77z-3.
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We believe proposed Rule 507 meets the standard set forth in
Section 28 because it safeguards investor interests by limiting both
the advertising permitted and the types of investors that may invest in
an exempt offering. The proposal would impose strict controls on
advertising and would be limited to offerings that are sold only to
investors who meet high financial qualification standards designed to
identify investors who have less need for the protections offered by
Securities Act registration, as they can ``fend for themselves'' with
regard to the transaction.\74\
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\74\ The conclusion that investors do not need all the
protections that registration under the Securities Act would offer
them and that they can fend for themselves is the determination that
must be made under SEC v. Ralston Purina, 346 U.S. 119, 125 (1953),
to establish that transactions are exempt under Section 4(2) of the
Securities Act as transactions ``not involving any public
offering.'' We believe the Ralston Purina standard is informative in
analyzing whether Rule 507, as proposed, would satisfy the Section
28 standard. As a practical matter, we believe that the use of high
financial thresholds to qualify as a large accredited investor and
the imposition of a ban on most general solicitation and advertising
would tend to support a determination that Rule 507 is appropriate
in the public interest and consistent with the protection of
investors.
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Proposing Rule 507 under Section 28, rather than Section 4(2),\75\
has certain consequences. Among these consequences is that pooled
investment vehicles that rely on the exclusion from the definition of
``investment company'' provided by Section 3(c)(1) or Section 3(c)(7)
of the Investment Company Act would not be able to take advantage of
the limited advertising proposed to be permitted under Rule 507. This
results because those vehicles are required to sell their securities in
transactions not involving a public offering.\76\ Such vehicles
typically rely on Section 4(2) to meet this requirement, frequently
through Rule 506, which expressly forbids general solicitation and
general advertising.\77\ Accordingly, they would be precluded from
selling their securities in reliance on Rule 507.
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\75\ Because some advertising would be permitted in Rule 507
transactions, we have chosen not to propose the exemption under
Section 4(2) of the Securities Act, which the Commission in the past
has viewed as incompatible with a non-public offering under Section
4(2). See n. 37.
\76\ Section 3(c)(1) of the Investment Company Act excludes from
the definition of investment company an issuer the securities (other
than short-term paper) of which are beneficially owned by not more
than 100 persons and that is not making or proposing to make a
public offering of its securities. Section 3(c)(7) of the Investment
Company Act excludes from the definition of investment company an
issuer the outstanding securities of which are owned exclusively by
persons who, at the time of acquisition of such securities, are
``qualified purchasers,'' as defined in the Investment Company Act,
and that is not making or proposing to make a public offering of its
securities. The term ``qualified purchaser'' is defined for purposes
of the Investment Company Act in Section 2(a)(51) of the Investment
Company Act, 15 U.S.C. 80a-2(a)(51). This definition applies in the
context of the Investment Company Act; the term has a different
meaning under the Securities Act, as provided in the proposed
amendment to Rule 146(c).
\77\ Compliance with Rule 506 provides a safe harbor that a
transaction does not involve ``any public offering'' within the
meaning of Section 4(2) of the Securities Act. See 17 CFR
230.506(a).
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Request for Comment
Are there other implications we should consider as a
result of our proposed use of our exemptive authority under Section 28,
rather than proposing Rule 507 under Section 4(2)?
5. Covered Security Status
Securities sold under Rule 506 are ``covered securities'' under
Section 18(b)(4)(D) of the Securities Act.\78\ To enhance the utility
of proposed Rule 507, we propose that a large accredited investor that
participates in a Rule 507 offering be defined in Rule 146 as a
``qualified purchaser'' under Section 18(b)(3) of the Securities Act.
As such, securities sold in a Rule 507-exempt offering would be
``covered securities,'' resulting in preemption from state securities
regulation as provided under Section 18 of the Securities Act.\79\ By
providing ``covered security'' status to the securities, the securities
would be primarily regulated on the federal level, with the goal of
enhancing efficiency and reducing duplicative regulation without
compromising investor protection. Because the dollar-amount thresholds
for investors in Rule 507 transactions would be significantly higher
than the dollar-amount thresholds in Rule 506 offerings, we believe the
policy rationales for making securities in Rule 506 transactions
``covered securities'' also support making securities in Rule 507
transactions ``covered securities.'' \80\
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\78\ The National Securities Markets Improvement Act of 1996,
Pub. L. 104-290, 110 Stat. 3416 (Oct. 11, 1996) (``NSMIA''),
preempts the state registration and review of transactions involving
``covered securities.'' It amended Section 18 of the Securities Act
to establish classes of covered securities, including securities
offered or sold to ``qualified purchasers,'' as defined by
Commission rule.
\79\ In 2001, we proposed to define the term ``qualified
purchaser'' in the Securities Act to equate that term with our
definition of the term ``accredited investor'' in Rule 501(a). See
Release No. 33-8041 (Dec. 19, 2001) [66 FR 66839]. That proposal is
no longer under consideration by the Commission.
\80\ These policy rationales are contained in the legislative
history of NSMIA, especially H.R. Rep. No. 104-622, at 159-165
(1996).
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Request for Comment
We propose to amend Rule 146 to define the term ``large
accredited investor'' as a ``qualified purchaser'' for purposes of
Section 18 of the Securities Act. Is defining a ``large accredited
investor'' as a ``qualified purchaser'' under the Securities Act
appropriate? Should the definition of ``qualified purchaser'' be
narrower or broader?
Proposed Rule 146(c) includes a provision that indicates
clearly that states may continue to impose substantially similar notice
filing requirements as those imposed by the Commission on transactions
with qualified purchasers. Is this provision necessary? Should we
define ``substantially similar'' more precisely? If so, please provide
specific language. Would the proposed language preclude states from
requiring that certain supplemental items be attached to notice
filings?
B. Proposed Revisions Related to Definition of ``Accredited Investor''
We propose revisions to the definition of the term ``accredited
investor'' in
[[Page 45123]]
Rule 501(a) of Regulation D, which sets forth the standards to qualify
as an accredited investor. The current definition provides that a
person who comes within, or who the issuer reasonably believes comes
within, one of eight enumerated categories at the time of sale is an
accredited investor. Currently, the Rule 501(a) categories include:
Institutional investors; \81\
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\81\ This category includes banks, savings and loan
associations, registered brokers and dealers, insurance companies,
registered investment companies, business development companies, and
small business investment companies. The category also includes
certain employee benefit plans within the meaning of the Employee
Retirement Income Security Act (codified primarily at 29 U.S.C. ch.
18), with total assets in excess of $5 million. See Rule 501(a)(1).
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Private business development companies;
Corporations, partnerships and tax exempt organizations
with total assets in excess of $5 million;
Directors, executive officers and general partners of the
issuer;
Individuals with a net worth exceeding $1 million, either
alone or with their spouses;
Individuals with income in excess of $200,000 in each of
the two most recent years or joint income with the individual's spouse
in excess of $300,000 in each of those years;
Trusts with total assets in excess of $5 million; and
Entities in which all of the equity owners are accredited
investors.
The revisions we propose to the Rule 501(a) ``accredited investor''
qualification standards would affect Rules 504 through 506 and, to the
extent that the standards to qualify as a ``large accredited investor''
are based on the standards to qualify as an ``accredited investor,''
Rule 507.\82\ We believe our proposed revisions of the qualification
standards for accredited investors will result in those standards,
together with the substantive provisions of the exemptions in
Regulation D, better determining who meets the requirements for
reliance on the exemptions. Our proposed revisions would:
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\82\ The revisions may affect offerings made by pooled
investment vehicles under Sections 3(c)(1) and 3(c)(7) of the
Investment Company Act, as those offerings must qualify as non-
public offerings under Section 4(2) of the Securities Act and many
such offerings are structured to take advantage of the Rule 506 safe
harbor for the Section 4(2) exemption. We recently proposed
revisions to our accredited investor qualification standards for
individuals investing in certain pooled investment vehicles. See
II.B.5 below.
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Add an alternative ``investments-owned'' standard to Rule
501(a);
Define the term ``joint investments'';
Establish a mechanism to adjust the dollar-amount
thresholds in the definitions in the future to reflect inflation; and
Add several categories of permitted entities to the list
of accredited and large accredited investors.
In addition, in the Private Pooled Investment Vehicle Release, we
proposed to revise Regulation D to establish a new category of
accredited investor, ``accredited natural person,'' that individuals
would need to satisfy in order to invest in certain private pooled
investment vehicles relying on Rule 506.\83\ We are continuing to
consider the comments received on that proposal. We also are taking the
opportunity to solicit further comment on the questions we asked in
December 2006 when we issued that proposal, especially in light of the
new proposals in this release, and to solicit comment on additional
questions on the proposal, as discussed below.
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\83\ Proposed Rules 216 and 509 under the Securities Act.
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1. Adding Alternative Investments-Owned Standards to Accredited
Investor Standards
Rule 501(a) currently provides generally that certain legal
entities must have total assets in excess of $5 million to qualify as
accredited investors, that individuals and spouses may qualify if they
have a net worth above $1 million, that individuals also may qualify if
they have annual income above $200,000, and that spouses also may
qualify if they have annual income above $300,000. We propose to add
alternative standards for these entities and for individuals and
spouses in Rule 501(a) that reflect investments owned by the
prospective investor as an additional and alternative method of
establishing accredited investor status.\84\ We believe an investments-
owned standard will add another, potentially more accurate method to
assess an investor's need for the protections of registration under the
Securities Act. We also believe an investments-owned standard may
reduce and simplify compliance burdens for companies by providing an
alternative standard that may be assessed more easily than the current
assets or net worth or annual income standards.
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\84\ As explained above with respect to large accredited
investors, an investments-owned standard would be an alternative to
the income standards for establishing large accredited investor
status for individuals and spouses and the sole method for
establishing large accredited investor status for entities that must
satisfy a dollar-amount threshold.
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a. Proposed Definition of ``Investments''
We propose a definition of ``investments'' for purposes of
qualifying for accredited investor and large accredited investor status
that is substantively the same as the definition we proposed in
December 2006 in the Private Pooled Investment Vehicle Release.\85\
However, in order to establish a uniform definition that applies
throughout Regulation D, the newly proposed definition contains slight
differences. The Private Pooled Investment Vehicle Release proposed
separate definitions for the terms ``prospective accredited natural
person,'' ``related person,'' ``investment purposes,'' ``valuation,''
and ``deductions.'' \86\ Our current proposal replaces the term
``prospective accredited natural person'' with the term ``purchaser.''
In addition, the concepts underlying the terms ``related person,''
``investment purposes,'' ``valuation,'' and ``deductions'' are
discussed in the notes to the definition of ``investments'' in our
current proposal rather than as separate definitions, as was done in
the Private Pooled Investment Vehicle Release.\87\ We believe including
these concepts as notes to the definition of ``investments'' in
proposed Rule 501(h) will provide greater clarity and ease use of the
definition.
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\85\ The standard proposed in December 2006 would require
investors to satisfy a two-part test--they would be required to be
an accredited investor, as defined in Rule 501(a)(5) or (6) for
transactions offered under Rule 506 or Rule 215(e) or (f) for
transactions under Section 4(6) of the Securities Act (15 U.S.C.
77d(6)), and to own at least $2.5 million in ``investments,'' as
that term would be defined in Rule 509 as proposed in the Private
Pooled Investment Vehicle Release.
\86\ Unlike in the Private Pooled Investment Vehicle Release, we
have not here proposed a definition of ``certain retirement plans
and trusts'' for use in our proposed definition of ``investments.''
We assume that investments held in retirement plans and trusts would
be included in our proposed definition of investments.
\87\ In order to simplify the definition of ``investments,'' we
included the concepts of ``related person'' and ``deduction'' in the
notes as they relate to ``investment purposes'' and ``valuation,''
respectively. See proposed notes 1 through 3 to paragraph (h) of
Rule 501.
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b. Amount of Investments Required
For legal entities required to satisfy a $5 million assets test,
the proposed amendment would add an alternative investments standard of
$5 million. For individuals and spouses, the proposed amendment would
provide a new alternative standard of $750,000 in investments that
could be used instead of the current net worth standard of $1 million
or annual income standards of $200,000 (or $300,000 with one's
[[Page 45124]]
spouse).\88\ We proposed an investments-owned standard as part of our
December 2006 proposal for a new category of accredited investor, the
``accredited natural person,'' which was developed to address
eligibility for individuals to invest in private pooled investment
vehicles that rely on the exclusion from the definition of the term
``investment company'' provided by Section 3(c)(1) of the Investment
Company Act.\89\
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\88\ We are proposing the $750,000 investments-owned standard
because the dollar-amount threshold is the same as the dollar-amount
threshold initially proposed in Regulation D for the assets test,
which, as initially proposed, excluded certain assets, including
personal residences. The assets threshold was increased to $1
million and adopted for the sake of simplicity and reflected a
$250,000 increase in large part to account for the value of the
primary residence. See Release No. 33-6389, at 11255.
\89\ See n. 76.
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Unlike the December 2006 proposed definition, the proposed
alternative standards would not result in a reduction in the number of
investors eligible for accredited investor status; rather, the standard
is intended to ease issuers' threshold determinations and provide a
possibly more logical basis for them.\90\ In determining whether an
investor meets the threshold under the investments-owned standard, the
value of personal residences and places of business would not be
included. Although we recognize that we have historically included (and
may continue to include) personal residences and places of business as
assets in calculating total assets for legal entities and net worth for
individuals, we believe, consistent with our December 2006 proposed
definition, that an accurate method of assessing an investor's need for
the protections of registration under the Securities Act when based on
an investments test is to exclude these real estate assets from the
definition of investments, since they are not held for investment
purposes.\91\ Accordingly, real estate would not be considered to be
held for ``investment purposes'' if the real estate is used by the
person or certain related persons for personal purposes (e.g., as a
personal residence).\92\ The term ``personal purposes'' is derived from
the Internal Revenue Code provision that addresses circumstances under
which a taxpayer is allowed deductions with respect to certain
``dwelling units.'' \93\ The proposed definition refers to the Internal
Revenue Code because it would allow determinations of whether
residential real estate is an investment based on the same provisions
that would apply in determining whether certain expenses related to the
property are deductible for purposes of completing tax returns.
Similarly, property that has been used as a place of business or in
connection with the conduct of a trade or business also would not be
considered to be held for investment purposes.\94\
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\90\ As proposed, there would be no changes to the current
standards for accredited investors in Regulation D that would
decrease the existing pool of potential investors. We do not believe
these amendments would substantially change the number of investors
now eligible for accredited investor status. Based on the 2004
Federal Reserve survey cited in n. 50, our Office of Economic
Analysis estimates that adding an alternative $750,000 investments
standard to the current accredited investor standard for natural
persons (net worth in excess of $1 million or individual income in
excess of $200,000 (or $300,000 with the person's spouse)) would
result in 8.69 percent of households qualifying for accredited
investor status in 2003, as opposed to 8.47 percent of households
qualifying for accredited investor status without the proposed
alternative.
\91\ This approach follows the proposed approach in the Private
Pooled Investment Vehicle Release. Commenters generally preferred
including the primary residence in the valuation of investments. We
continue to consider those comments, but are again proposing to
exclude the primary residence when determining the value of
investments, as the value of an individual's primary residence may
have little relevance with regard to the individual's need for the
protections of Securities Act registration.
\92\ See proposed Note 1 to Rule 501(h).
\93\ The proposed rule would treat residential real estate as an
investment if it is not treated as a dwelling unit used as a
residence in determining whether deductions for depreciation and
other items are allowable under the IRC. Section 280A of the IRC
provides, among other things, that a taxpayer uses a dwelling unit
during the taxable year as a residence if he or she uses such unit
for personal purposes for a number of days that exceeds the greater
of 14 days or 10 percent of the number of days during which the unit
is rented at a fair rental. 26 U.S.C. 280A.
\94\ See proposed Note 1 to Rule 501(h).
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Request for Comment \95\
Are the dollar-amount thresholds for the proposed
investments-owned standard appropriate? Are other levels more
appropriate than the $5 million in investments for legal entities and
$750,000 in investments for individuals and spouses? Should these
levels be higher or lower? For example, would $4 million in investments
for legal entities and $500,000 in investments for individuals and
spouses be more appropriate levels? Why?
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\95\ We intend to consider comments we receive in response to
this request for comment along with the comments on the Private
Pooled Investment Vehicle Release.
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Is there a better way to define ``investments'' to meet
the goals of the standard in Regulation D? Is our proposed definition
of investments too complicated? Should we specifically include
additional types of investment asset classes in the definition of
investments? Should we exclude or limit any of the investment asset
classes we have proposed for inclusion?
We are proposing a definition of ``investments'' in
proposed paragraph (h) of Rule 501 that is substantially similar to the
definition in proposed Securities Act Rule 509(b)(3) \96\ and existing
Investment Company Act Rule 2a51-1(b).\97\ Should we adopt a less
technical, more principles-based definition of ``investments''? Would a
more principles-based definition be more appropriate for the many
smaller companies and small businesses with limited resources that
commonly use Regulation D, sometimes operating without sophisticated
legal counsel? If a more principles-based definition would be more
appropriate, should the rule define ``investments'' as meaning cash and
cash equivalents, securities, real estate, commodities, and commodity
interests held for investment purposes, provide that the value of
investments be calculated ``net of investment indebtedness,'' and
provide that investment purposes would not include use of real estate
by a prospective purchaser as a primary or secondary residence or
primary place of business?
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\96\ See the Private Pooled Investment Vehicle Release.
\97\ 17 CFR 270.2a51-1(b).
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Should we specifically exclude from the definition of
investments real estate used as a primary residence or primary place of
business? Should we exclude secondary residences? Is it appropriate to
include secondary residences that are not held for investment purposes?
Would it be appropriate to specify in the rule that residential real
estate that currently qualifies for the home mortgage interest
deduction under the Internal Revenue Code is the type of residential
real estate that would be excluded for purposes of determining
investments owned? Commenters are asked to discuss why they believe
that real estate of the kind excluded should or should not be counted
as an investment under the rules and why.
Our proposed definition of ``investments'' excludes
securities that constitute a ``control interest'' in an issuer.
Limiting the definition in this manner is designed to exclude, among
other things, controlling ownership interests in family-owned and other
closely-held businesses.\98\ Such holdings may not demonstrate the lack
of need for protection of the Securities Act registration provisions.
Proposed
[[Page 45125]]
Rule 501(h) and proposed Rule 509(b)(3) and the underlying existing
rule upon which these two proposals are based, Rule 2a51-1(b)(1), all
contain the same exceptions from the control interest exclusion--
interests in ``investment vehicles,'' ``public companies'' and ``large
private companies''--all of which are defined in Rule 2a51-1. Should
these three exceptions be omitted from the definition of investments or
referred to in Rule 501(h) in a shorter, more principles-based
definition so as to be easier to comprehend?
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\98\ For a more in-depth discussion of the concept of
investments as used in proposed Rule 501(h), proposed Rule 509(b)(3)
and Rule 2a51-1(b)(1), see the adopting release for Rule 2a51-1,
Release No. IC-22597 (Apr. 3, 1997) [62 FR 17511].
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Note 3 to proposed Rule 501(h) indicates that the value of
investments is the fair market value on the most recent practicable
date or their cost and that the determination is made net of any
outstanding indebtedness incurred to acquire or for the purpose of
acquiring the investments. Would it be appropriate to provide that the
test be the higher or lower of fair market value or cost, or solely
fair market value? Should we simply use the concept of net of
investment indebtedness or is it more helpful to have a more detailed
explanation of the deductions?
Does an investments-owned standard serve as a better proxy
than a net worth or total assets standard for determining whether an
investor is among those investors who do not need the protections of
Securities Act registration? Would an investments-owned standard be a
more appropriate determinant of accredited investor status than the
current net worth standard?
Our experience indicates that some issuers may not have
taken appropriate measures to satisfy their obligation under Rule
501(a) to form a reasonable belief that a prospective purchaser
satisfied the definition of accredited investor. What additional
measures could and should we take to improve issuers' understanding and
practices in this area? Should we create a safe harbor in Regulation D
that sets forth the type of investigation required for an issuer to
reach a reasonable belief? Would it be appropriate to set forth in the
safe harbor that an issuer must conduct a reasonable investigation in
order to come to a reasonable belief? Are there other modifications to
the existing requirements under Regulation D that would improve
issuers' practices in forming a reasonable belief that prospective
purchasers satisfy the definition of accredited investor? Should we
provide specific details as to what kind of investigation an issuer can
rely upon to form a reasonable belief, as we did in Rule 144A(d)(1)?
\99\ What other criteria or methods could be used by issuers to form a
reasonable belief that an investor is accredited? Or would any of the
foregoing render the rule less usable for capital formation?
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\99\ 17 CFR 230.144A(d)(1). In determining whether a prospective
purchaser is a qualified institutional buyer, Rule 144A(d) provides
that a seller and any person acting on its behalf are entitled to
rely upon the following non-exclusive methods of establishing the
prospective purchaser's ownership and discretionary investment of
securities: (i) The prospective purchaser's most recent publicly
available financial statements; (ii) the most recent publicly
available information appearing in documents filed by the
prospective purchaser with the Commission or another U.S. federal,
state, or local government agency or self-regulatory organization,
or with a foreign governmental agency or self-regulatory
organization; (iii) the most recent publicly available information
appearing in a recognized securities manual; or (iv) a certification
by the chief financial officer, a person fulfilling an equivalent
function, or other executive officer of the purchaser, specifying
the amount of securities owned and invested on a discretionary basis
by the purchaser as of a specific date on or since the close of the
purchaser's most recent fiscal year.
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2. Proposed Definition of ``Joint Investments''
Our rules currently allow issuers to count all of the assets that
an individual owns jointly with a spouse or that are part of a shared
community interest in the calculation of whether the individual is an
accredited investor under Rule 501(a)(5) because the individual has a
``joint net worth'' with the spouse of more than $1 million. In the
Private Pooled Investment Vehicle Release, we proposed to take a
different approach to determining eligibility for accredited investor
status by reason of assets owned by a spouse or as part of a shared
community interest in calculating ``joint investments.'' \100\ We
propose to take that same approach in calculating ``joint investments''
to apply throughout Regulation D. We propose a simplified definition of
the term ``joint investments'' to apply throughout Regulation D that
retains the substantive meaning of the definition proposed in the
Private Pooled Investment Vehicle Release.
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\100\ Private Pooled Investment Vehicle Release at 407.
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The definition of ``joint investments'' that we propose provides
that investments of an individual seeking to make an investment in a
Regulation D-exempt offering without obtaining the signature and
binding commitment of his or her spouse may include only 50 percent of:
Any investments held jointly with the individual's spouse;
and
Any investments in which the individual shares a community
property or similar shared ownership interest with the individual's
spouse.
Where spouses both sign and are bound by the investment
documentation, the full amount of their investments (whether made
jointly or separately) may be included for purposes of determining
whether the investors are either accredited or large accredited
investors.\101\
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\101\ We received substantial comment on this issue in response
to the Private Pooled Investment Vehicle Release, urging that we
permit a spouse's assets to be included in any calculation for
determining an investor's accreditation. See, e.g., comment letters
in Commission Rulemaking File No. S7-25-06 from American Bar
Association (Mar. 12, 2007) (the ``ABA Private Pooled Investment
Vehicle Letter''), available at http://www.sec.gov/comments/s7-25-06/s72506-584.pdf
, and New York State Bar Association (Mar. 14,
2007), available at http://www.sec.gov/comments/s7-25-06/s72506-597.pdf.
We continue to consider this issue.
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To avoid confusion and clarify language in other parts of Rule 501
in connection with the ``joint investments'' proposal, we propose to
change the words used to describe the threshold for spouses to qualify
for accredited investor status on the basis of net worth under Rule
501(a)(5) from ``joint net worth'' to ``aggregate net worth'' and to
change the words used to describe the income threshold for spouses to
qualify as accredited investors under Rule 501(a)(6) from ``joint
income'' to ``aggregate income.'' We also would use the ``aggregate
income'' terminology in the definition of large accredited investor. We
believe these changes are advisable to avoid confusion between the
interpretation of the word ``joint'' in the context of the term ``joint
investments'' and in the context of the terms ``joint net worth'' and
``joint income.'' Our previous releases and staff interpretations in
this area have used the terms ``joint net worth'' and ``joint income''
to mean aggregate net worth and aggregate income, and we do not intend
for these changes to alter the meaning of the rules.\102\
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\102\ For a discussion of ``joint net worth,'' see Release No.
33-6389, at n. 14 (Mar. 8, 1982) [47 FR 11251]. For a discussion of
``joint income,'' see Release No. 33-6683 (Jan. 16, 1987) [52 FR
3015] and Release No. 33-6758 (Mar. 3, 1988) [53 FR 7866].
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Request for Comment
Does the proposed joint investments approach properly
address the application of the accredited investor standard to marital
assets? Should we base the determination as to whether marital assets
may be considered in determining the accredited investor status of
individual spouses on something other than whether both spouses sign
and are bound by the investment documentation?
Under Rule 501(a)(5) as we propose to amend it, an issuer
could count 100
[[Page 45126]]
percent of the assets held jointly with an individual's spouse or as
part of a shared community interest in determining, on the basis of net
worth, the eligibility for accredited investor status of an individual
investing without his or her spouse but only 50 percent of those same
assets (if they are investments) in determining eligibility on the
basis of investments owned. Is this approach workable? Should we treat
assets of a spouse the same regardless of whether an individual
investor is qualifying on the basis of net worth or investments owned?
For instance, should we permit an issuer to include only 50 percent of
an individual investor's marital assets in calculating both net worth
and investments owned? Or should we permit the issuer to include 100
percent or some other part of the marital assets?
We believe that the definition of joint investments
proposed today does not reflect any material change in substance from
the definition of joint investments proposed in the Private Pooled
Investment Vehicle Release. Would adopting both definitions, with their
immaterial differences, create confusion, and why? Would it create less
confusion and be more appropriate to modify the definition of joint
investments in proposed Rule 216 and proposed Rule 509 to mirror the
definition we propose today?
3. Future Inflation Adjustments
Our staff recently indicated that ``inflation, along with the
sustained growth in wealth and income of the 1990s, has boosted a
substantial number of investors past the `accredited investor
standard.' '' \103\ By not adjusting these dollar-amount thresholds
upward for inflation, we have effectively lowered the thresholds in
terms of real purchasing power.\104\ We recognize, however, that
raising the accredited investor standards of Regulation D too high may
result in some issuers returning to pre-1982 practices of effecting
private placements under the statutory exemption in Section 4(2) and
forgoing the Regulation D safe harbor. This result may not be desirable
for issuers or for the health of our private capital markets because
issuers would be required to incur the expenses and complications of
multi-state securities law compliance and the uncertainty of case law
interpretations of the Section 4(2) exemption, as was the case before
the adoption of Regulation D.\105\ In addition, regulators and
investors would no longer be provided with Form D filings, which help
in monitoring private placement activity.\106\ Accordingly, we are
reluctant at this time to immediately adjust upward for inflation the
current income requirements and investment thresholds in Rule 501(a).
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\103\ See Implication of the Growth of Hedge Funds, Staff Report
to the U.S. Securities and Exchange Commission (Sept. 2003)
available at http://www.sec.gov/news/studies/hedgefunds0903.pdf.
\104\ See n. 53 and the discussion in II.A.1.
\105\ For transactions that are exempt under Rule 506, the
federal preemption of most state securities regulation under Section
18(b)(4)(D) of the Securities Act would apply.
\106\ The current version of Form D was developed by the
Commission and NASAA as a uniform form to be filed with both the
Commission and the States. See Release No. 33-6663 (Oct. 2, 1986)
[51 FR 36385]. Form D continues to be accepted and used by many
states to monitor private placement activity.
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Instead, at this time we propose to adjust for inflation all
dollar-amount thresholds set forth in Rule 501 of Regulation D on a
going forward basis, starting on July 1, 2012, and every five years
thereafter, to reflect any changes in the value of the Personal
Consumption Expenditures Chain-Type Price Index (or any successor index
thereto), as published by the Department of Commerce, from December 31,
2006.\107\ We propose to round the adjusted dollar amounts to the
nearest multiple of $10,000. By adjusting the thresholds for inflation
in the future, we intend to retain the income, assets, and investments
requirements in real terms so that the accredited investor standards
will not erode over time.\108\
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\107\ This index was selected based on discussions with the
Federal Reserve Bank and wide use of the index as an indicator of
inflation in the U.S. economy. Adjusting thresholds every five years
ensures that the thresholds stay current while limiting the
disruption caused by changing the threshold.
\108\ This is the same method we have proposed to apply to the
accredited natural person standards we proposed for private pooled
investment vehicles. See the Private Pooled Investment Vehicle
Release, at 406.
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Request for Comment
We have noted the effects of inflation on the total
assets, net worth, and income thresholds currently used in the
accredited investor qualification standards. Should we make a one-time
adjustment now to the thresholds to increase them to take into account
the effects of inflation?
Is our proposal to adjust the dollar-amount thresholds in
Regulation D every five years in the future and the methodology that we
have proposed for this purpose appropriate? Should the time period
between adjustments be longer or shorter than five years? Should the
adjusted dollar amounts be rounded to the nearest multiple of $10,000,
as proposed, or to a different nearest multiple, such as $50,000 or
$100,000? What would the impact of this inflation adjustment be on the
ability of companies to raise capital, particularly small businesses?
Is there more appropriate data to use that would support
different conclusions as to our proposal to adjust Regulation D dollar-
amount thresholds for inflation? Is there a more appropriate way to
interpret the data that we have provided?
Is another index more appropriate for our purposes than
the Personal Consumption Expenditures Chain-Type Price Index (or any
successor index thereto), as published by the Department of Commerce?
4. Adding Categories of Entities to List of Accredited and Large
Accredited Investors
The definition of accredited investor in Rule 501(a)(3) currently
includes a list of legal entities that may qualify as accredited
investors, assuming they satisfy other conditions. The list includes
organizations described in Section 501(c)(3) of the Internal Revenue
Code,\109\ corporations, Massachusetts or similar business trusts, and
partnerships. It does not include limited liability companies, Indian
tribes, labor unions, governmental bodies, and similar legal entities,
leading to some degree of uncertainty as to whether these types of
entities may qualify as accredited investors.
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\109\ 26 U.S.C. 501(c)(3).
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Accordingly, we propose to amend the Rule 501(a)(3) list of legal
entities so that it includes any corporation (including any non-profit
corporation), Massachusetts or similar business trust, partnership,
limited liability company, Indian tribe, labor union, governmental body
or other legal entity with substantially similar legal attributes. We
also would add a definition of the term ``governmental body'' to Rule
501(a), similar to the definition of that term that appears commonly in
transactional financing documents.\110\ Our staff is regularly asked
questions about which entities may qualify as accredited investors, and
has provided guidance that limited liability companies and certain
governmental units may so qualify.\111\ We hope these changes will
[[Page 45127]]
reduce uncertainty and legal costs and promote more efficient private
capital formation.
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\110\ See, e.g., Section of Business Law, American Bar
Association, Model Stock Purchase Agreement with Commentary, at 15-
16 (1995). Our proposed definition of ``governmental body'' would
apply only to the definition of ``accredited investor'' in Rule 215
and Rule 501(a), which apply only in the context of exempt offerings
under Section 4(6) and Regulation D.
\111\ In this regard, see Division of Corporation Finance no-
action letter to Wolf, Block, Schorr and Solis-Cohen (Dec. 11, 1996)
(limited liability companies), and Release No. 33-6455 (Mar. 4,
1983) [48 FR 10045] at Q & A 19, citing Division of Corporation
Finance no-action letter to Voluntary Hospitals of America, Inc.
(Dec. 30, 1982) (governmental unit that falls within the substantive
description of 26 U.S.C. 501(c)(3)).
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Requests for Comment
Should we add or delete types of legal entities from the
list in paragraph (a)(3) of Rule 501? For example, should we
specifically include ``joint venture'' or ``college or university
endowment'' in the list, or is it clear that they would be covered by
the proposed language of the rule? \112\ Should we delete the list
entirely and simply say that any legal entity that can sue or be sued
in the United States, assuming it meets the other standards for
becoming an accredited investor, can qualify as an accredited investor?
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\112\ As originally proposed, the definition of ``accredited
investor'' in Regulation D specifically included college or
university endowment funds. See Release No. 33-6339 (Aug. 7, 1981)
[46 FR 41791]. Upon adoption, college or university endowment funds
were intended to be included within the category ``organization[s]
described in Section 501(c)(3) of the Internal Revenue Code.'' See
Release No. 33-6389 (Mar. 8, 1982) [47 FR 11251]. Since we now
propose to replace the phrase ``organization described in Section
501(c)(3) of the Internal Revenue Code'' with a reference to non-
profit corporations, we seek to assure that college and university
endowment funds will still be considered accredited investors if
they satisfy the applicable financial standard.
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Should we define the terms ``Indian tribe'' and ``labor
union'' and, if so, how? For example, should we define ``Indian tribe''
in terms of a tribe, band, nation, pueblo, village, or community that
the Secretary of the Interior acknowledges to exist as an Indian tribe
under the Federally Recognized Indian Tribe List Act of 1994? \113\
Should we include state-recognized Indian tribes? Should we make any
special provision for labor union pension funds?
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\113\ 25 U.S.C. 479a.
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When we first proposed Rule 144A, we noted that the type
of ``qualified institutional buyers'' contemplated under that rule
would generally include ``very large institutions, long involved in the
resale market for restricted securities, as to which there has been
little concern with respect to Section 5 implications.'' \114\ As a
result, we looked to the list of institutional accredited investors
contained in Rule 501(a)(3) to develop the Rule 144A(a)(1)(i)(H) list
of qualified institutional buyers. Because we are now proposing to
amend Rule 501(a)(3) by expanding the list of institutional accredited
investors, we are seeking comment on whether the Rule 144A(a)(1)(i)(H)
list of qualified institutional buyers should be expanded in a similar
manner. Is it appropriate to consider all institutions that would come
under Rule 501(a)(3) and that meet the $100 million investment size
threshold under Rule 144A as having sufficient experience with the
resale market for restricted securities? Should any or all of the
categories of institutional accredited investors contained in Rule
501(a)(3) be included in the Rule 144A(a)(1)(H) list of qualified
institutional buyers? Are there any categories of institutions included
in proposed Rule 501(a)(3) that should not be included in the
definition of qualified institutional buyer under Rule 144A?
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\114\ See Release No. 33-6806 (Oct. 25, 1988) [53 FR 33147].
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Rule 144A contains few procedural restrictions relating to
the transferability of restricted securities sold under Rule 144A. Do
we need to make any modifications in light of the possibility that, if
we were to expand the definition of qualified institutional buyer under
Rule 144A, these restrictions would lead to a greater likelihood of
restricted securities flowing into the public market?
5. Proposed Definition of Accredited Natural Person
In the Private Pooled Investment Vehicle Release, we expressed our
concerns about the increased number of individual investors who may
today be eligible as accredited investors to make investments in pooled
investment vehicles relying on Section 3(c)(1) of the Investment
Company Act. We noted that the existing $1 million net worth and
$200,000 ($300,000 with one's spouse) income tests provide some
investor protection for individuals seeking to invest in pooled
investment vehicles relying on Section 3(c)(1) of the Investment
Company Act, but expressed our concern that some further level of
protection may be necessary to safeguard investors seeking to make an
investment in such vehicles in light of their unique risks, including
risks with respect to undisclosed conflicts of interest, complex fee
structures, and the higher risk that may accompany such vehicles'
anticipated returns. Accordingly, we proposed for comment a standard
that would require individual investors to satisfy a two-part test to
qualify as accredited investors for purposes of investing in certain
private pooled investment vehicles--they would be required to satisfy
the current standard to qualify as accredited investors, as defined in
(i) Rule 501(a)(5) or (6) for transactions under Rule 506 or (ii) Rule
215(e) or (f) for transactions under Section 4(6) of the Securities
Act, and also to own at least $2.5 million in ``investments,'' as that
term would be defined in proposed Rule 509 or proposed Rule 216, as
applicable.
We recognize that if we adopt the alternative investments-owned
standard for individuals in the definition of accredited investor in
proposed Rule 215(e) and Rule 501(a)(5) ($750,000) and the investments-
owned standard for the definition of accredited natural person in
proposed Rule 216 and Rule 509 ($2.5 million), an individual who meets
the investment test as an accredited natural person would also meet the
investments test as an accredited investor. We believe that the
different amounts applicable under the definitions are targeted to
address concerns about the nature of different types of offerings. As
noted, the alternative investments-owned standards proposed under the
definition of accredited investor are designed to add another method to
assess an investor's need for the protections of registration under the
Securities Act. The additional and higher investments-owned standard
proposed in the definition of accredited natural person is intended to
provide a more objective and clearer standard to use in ascertaining
whether an individual is likely to have sufficient knowledge and
experience in financial and business matters to enable that investor to
evaluate the merits and risks of a prospective investment in certain
private pooled investment vehicles, or to be able to hire someone with
such knowledge and experience who may help the individual to make such
an evaluation.
We received numerous comments disagreeing with the proposed
definition of accredited natural person. Most of those submitting
comments argued that the proposal limits investor access to private
pooled investment vehicles and questioned the dollar amount of the
investments standard. In light of those comments, we are soliciting
additional comments on the following points.
Requests for Comment
We request comment on whether we should revise the
proposed definition of accredited natural person to include alternative
income and investment standards similar to those used in the definition
of ``large accredited investor'' in proposed Rule 507 (income of
$400,000 (or $600,000 with one's spouse) or investments of $2.5
million). Would such a revision address some of the concerns noted by
those who submitted comments on the
[[Page 45128]]
Private Pooled Investment Vehicle Release? Would a higher (e.g.,
$500,000 (or $700,000 with one's spouse)) or lower (e.g., $300,000 (or
$400,000 with one's spouse)) income standard be more appropriate, and
why? Would a higher (e.g. $3 million) or lower (e.g. $2 million)
investments standard be more appropriate, and why? In responding to
this request for comment, please also comment on any concerns you might
have if any final definition that we may adopt includes an inflation
adjustment provision. For example, some comment letters on the December
2006 proposal raised a concern that the proposed inflation adjustment
could result in the proposed standard for accredited natural persons
ultimately being higher than the existing $5 million investments-owned
requirement for private investment pools that rely on Section 3(c)(7)
of the Investment Company Act.\115\ How would you propose to address
this concern? Should we set a dollar limit above which the dollar
amount of investments included in proposed Rule 216 and proposed Rule
509 may not rise (for example, should we cap the investments amount at
$4.9 million), and why?
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\115\ See, e.g., comment letters in Commission Rulemaking File
No. S7-25-06 from Schulte, Roth & Zabel LLP (Mar. 9, 2007),
available at http://www.sec.gov/comments/s7-25-06/s72506-549.pdf,
and ABA Private Pooled Investment Vehicle Letter, n. 101 above.
An individual that invests in 3(c)(7) pools must be a qualified
person, defined in Section 2(a)(51)(A)(1) of the Investment Company
Act as an individual who owns not less than $5 million in
investments. Rule 2a51-1(b) under the Investment Company Act defines
investments, and is the basis for the definition we proposed in
December 2006 and today.
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We believe that the changes we propose to make in the
definition of ``investments'' proposed today do not reflect any
material change from the definition of ``investments'' proposed in the
Private Pooled Investment Vehicle Release. Would adopting both
definitions, with their immaterial differences, create confusion, and
why? Would it create less confusion and be more appropriate to modify
the definition of ``investments'' in proposed Rule 216 and proposed
Rule 509 to mirror the definition we propose today?
Would a more principles-based definition of the term
``investments,'' like the one we have suggested as an alternative to
the definition we are proposing for Rule 501(h), also be appropriate in
the context of proposed Rule 509 and Rule 216? Is there any reason to
have a definition of ``investments'' in Rule 501(h) that is different
from the definition used in proposed Rule 509 and Rule 216, and why?
Earlier in this release, we request specific comment on
the treatment of real estate as an investment, the treatment of
securities that constitute a ``control interest'' in an issuer as an
investment, and how investments are proposed to be valued under the
definition of ``investments'' proposed in this release. We solicit
comment with respect to those points in connection with the definition
of the term ``investments'' as proposed for use with the term
``accredited natural person.'' Is there any reason to have a definition
of the term ``investments'' under proposed Rules 216 and 509 that is
different from the one proposed in this release? Please explain why or
why not.
As we have explained, we modeled the definition of
``investments'' in proposed Rule 216 and proposed Rule 509 on the
definition included in Rule 2a51-1(b) under the Investment Company Act.
Would a more principles-based definition of the term ``investments,''
like the one we have suggested as an alternative to the definition we
are proposing for Rule 501(h), also be appropriate in the context of
Rule 2a51-1, and why? Should we adopt coordinated definitions of
``investments'' for purposes of proposed Rule 501(h), proposed Rule
216, proposed Rule 509 and Rule 2a51-1, or should there be different
definitions applicable to these rules, and why?
C. Proposed Revisions to General Conditions of Regulation D
Rule 502 of Regulation D sets forth conditions that are applicable
to offers and sales made under Regulation D. We propose to make changes
to those conditions, including shortening the amount of time issuers
are required to wait to make offers and sales in order to rely on the
integration safe harbor provided in Rule 502(a) and adding
disqualification provisions for certain issuers seeking to rely on the
exemptions in Regulation D. We also are providing guidance regarding
the integration of concurrent public and private offerings.
Our Advisory Committee on Smaller Public Companies advised that the
six-month safe harbor period from integration provided in Rule 502(a)
``represents an unnecessary restriction on companies that may very well
be subject to changing financial circumstances, and weighs too heavily
in favor of investor protection, at the expense of capital formation.''
\116\ The Committee supported ``clearer guidance concerning the
circumstances under which two or more apparently separate offerings
will or will not be integrated.'' \117\ The Advisory Committee
acknowledged the difficulty, however, of modifying the five-factor test
contained in Rule 502(a) and concluded that the issue could be more
readily addressed through a shortening of the six-month period. Based
on their analysis of the issue, the Advisory Committee recommended that
we shorten the integration safe harbor from six months to 30 days.\118\
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\116\ Advisory Committee Final Report at 96.
\117\ Id. at 95.
\118\ Id. at 94.
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In making recommendations with respect to the integration doctrine,
the Advisory Committee recommended, in addition to decreasing the time
period of the integration safe harbor in Regulation D, that the
Commission clarify the interpretation of or amend Securities Act Rule
152 \119\ in order to permit companies to conduct a valid private
placement immediately before the filing of a registration statement
without concern that the two offerings would be integrated.\120\ The
Advisory Committee also noted in making this recommendation that, in
addition to the concerns that companies may not be able to raise
capital privately in the time shortly before the filing of a
registration statement, there also are continuing integration
considerations when conducting concurrent private placements while a
registration statement is pending with the Commission.\121\ This
recommendation and commentary demonstrate that questions continue to
arise in the capital raising process concerning the ability of issuers
to conduct a private placement before a Securities Act registration
statement is filed with the Commission, or in the period between the
filing and effectiveness of the registration statement.
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\119\ 17 CFR 230.152. Rule 152 specifies that ``[t]he phrase
`transactions by an issuer not involving any public offering' in
Section 4(2) shall be deemed to apply to transactions not involving
any public offering at the time of said transaction although
subsequently thereto the issuer decides to make a public offering
and/or files a registration statement.''
\120\ Advisory Committee Final Report at 100-101.
\121\ Advisory Committee Final Report at n. 207.
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We understand that capital raising around the time of a public
offering, in particular an initial public offering, often is critical
if companies are to have sufficient funds to continue to operate while
the public offering process is ongoing. For this reason, we are
providing guidance so that companies and their counsel may have a
better
[[Page 45129]]
framework for evaluating their particular circumstances.\122\
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\122\ This guidance does not affect the risk that the Commission
or a court could find a violation of Section 5 where a company
begins an offering as a private placement and seeks to complete that
offering pursuant to a registration statement, or where a company
commences a registered offering and seeks to complete that offering
through a private placement, except in those circumstances specified
in Securities Act Rule 155. See Integration of Abandoned Offerings,
Release No. 33-7943 (Jan. 26, 2001) [66 FR 8887].
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Consistent with Securities Act Rule 152, the staff of the Division
of Corporation Finance, in its review of Securities Act registration
statements, will not take the view that a completed private placement
that was exempt from registration under Securities Act Section 4(2)
should be integrated with a public offering of securities that is
registered on a subsequently filed registration statement.\123\
Consistent with the staff's approach to this issue, we are of the view
that, pursuant to Securities Act Rule 152, a company's contemplation of
filing a Securities Act registration statement for a public offering at
the same time that it is conducting a Section 4(2)-exempt private
placement would not cause the Section 4(2) exemption to be unavailable
for that private placement.\124\
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\123\ See, e.g., Division of Corporation Finance no-action
letter to Verticom, Inc. (Feb. 12, 1986).
\124\ In these circumstances, companies should be careful to
avoid any pre-filing communications regarding the contemplated
public offering that could render the Section 4(2) exemption
unavailable for what would be an otherwise exempt private placement.
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We recognize that a company's financing needs do not end with the
filing of a registration statement. As a general matter, however, the
filing of a registration statement has been viewed as a general
solicitation of investors.\125\ Today, upon the filing of a
registration statement, information about a company and its prospects
is available immediately through our EDGAR filing system. The staff of
the Division of Corporation Finance has issued interpretive letters to
the effect that, notwithstanding the availability of the information in
the registration statement, companies may continue to conduct
concurrent private placements without those offerings necessarily being
integrated with the ongoing public offering.\126\ Concerns remain,
however, with the ability to complete such concurrent private
placements in factual situations that were not considered previously by
the Division staff in interpretive letters. The Division staff has not
applied any per se approach in addressing these circumstances in its
review of filings, but rather has requested a discussion of the
relevant facts and in some cases an opinion of counsel when concerns
arose as to the potential integration of the concurrent private
offering and public offering and the availability of the Section 4(2)
exemption after the filing of the registration statement.\127\
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\125\ See, e.g., Division of Corporation Finance no-action
letter to Michael Bradfield, General Counsel, Board of Governors of
the Federal Reserve System (Mar. 16, 1984).
\126\ See, e.g., Division of Corporation Finance no-action
letters to Black Box Incorporated (June 26, 1990) and Squadron
Ellenoff, Pleasant & Lehrer (Feb. 28, 1992). The guidance in this
release does not affect the ability of issuers to continue to rely
on the views expressed by the Division staff in these letters.
\127\ The guidance that follows applies in the context of
private placements conducted under existing exemptions from
registration. If we adopt proposed Rule 507 of Regulation D, we may
provide additional interpretive guidance on any potential
integration issues unique to that exemption. In this regard, we note
that, as proposed, offers and sales exempt under Rule 507 would be
subject to a ban on general solicitation except as permitted under
the rule and would be considered ``limited,'' rather than
``private,'' offerings.
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Our view is that, while there are many situations in which the
filing of a registration statement could serve as a general
solicitation or general advertising for a concurrent private offering,
the filing of a registration statement does not, per se, eliminate a
company's ability to conduct a concurrent private offering, whether it
is commenced before or after the filing of the registration statement.
Further, it is our view that the determination as to whether the filing
of the registration statement should be considered to be a general
solicitation or general advertising that would affect the availability
of the Section 4(2) exemption for such a concurrent unregistered
offering should be based on a consideration of whether the investors in
the private placement were solicited by the registration statement or
through some other means that would otherwise not foreclose the
availability of the Section 4(2) exemption. This analysis should not
focus exclusively on the nature of the investors, such as whether they
are ``qualified institutional buyers'' as defined in Securities Act
Rule 144A or institutional accredited investors, or the number of such
investors participating in the offering; instead, companies and their
counsel should analyze whether the offering is exempt under Section
4(2) on its own, including whether securities were offered and sold to
the private placement investors through the means of a general
solicitation in the form of the registration statement. For example, if
a company files a registration statement and then seeks to offer and
sell securities without registration to an investor that became
interested in the purportedly private offering by means of the
registration statement, then the Section 4(2) exemption would not be
available for that offering. On the other hand, if the prospective
private placement investor became interested in the concurrent private
placement through some means other than the registration statement that
did not involve a general solicitation and otherwise was consistent
with Section 4(2), such as through a substantive, pre-existing
relationship with the company or direct contact by the company or its
agents outside of the public offering effort, then the prior filing of
the registration statement generally would not impact the potential
availability of the Section 4(2) exemption for that private placement
and the private placement could be conducted while the registration
statement for the public offering was on file with the Commission.
Similarly, if the company is able to solicit interest in a concurrent
private placement by contacting prospective investors who (1) Were not
identified or contacted through the marketing of the public offering
and (2) did not independently contact the issuer as a result of the
general solicitation by means of the registration statement, then the
private placement could be conducted in accordance with Section 4(2)
while the registration statement for a separate public offering was
pending. While these are only examples, we believe they demonstrate the
framework for analyzing these issues that companies and their counsel
should apply and that the staff will consider when reviewing
registration statements.
1. Proposed Revisions to Regulation D Integration Safe Harbor
The integration doctrine seeks to prevent an issuer from improperly
avoiding registration by artificially dividing a single offering into
multiple offerings such that Securities Act exemptions would apply to
the multiple offerings that would not be available for the combined
offering. The integration concept was first articulated in 1933 \128\
and was further developed in two interpretive releases issued in the
1960s.\129\ The interpretive releases clarified that determining
whether a particular securities offering should be integrated with
another offering requires an analysis of the specific facts and
circumstances of the offerings. In our guidance, we identified five
factors to
[[Page 45130]]
consider in making the determination of whether the offerings should be
integrated.\130\ In 1982, we included the five factors and established
an integration safe harbor in Rule 502(a). We stated that the five
factors relevant to the question of integration are:
\128\ Release No. 33-97 (Dec. 28, 1933).
\129\ Release No. 33-4434 (Dec. 6, 1961) [26 FR 11896] and
Release No. 33-4552 (Nov. 6, 1962) [27 FR 11316].
\130\ Release No. 33-4552 (Nov. 6, 1962) [27 FR 11316].
``Whether (1) The different offerings are part of a single plan of
financing, (2) the offerings involve issuance of the same class of
security, (3) the offerings are made at or about the same time, (4) the
same type of consideration is to be received, and (5) the offerings are
made for the same general purpose.''\131\
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\131\ Id.
Under the safe harbor, offers and sales more than six months before a
Regulation D offering or more than six months after the completion of a
Regulation D offering will not be considered part of the same offering.
This provides issuers with a bright-line test upon which they can rely
to avoid integration of multiple offerings.
In making its recommendation that the integration safe harbor be
shortened, the Advisory Committee noted that smaller companies'
financing needs often are unpredictable, making the six-month waiting
period for use of the safe harbor problematic for issuers in need of
capital. Other commenters have made similar recommendations to decrease
the waiting period in the safe harbor.\132\ While we recognize the
burdens that the integration doctrine places on capital formation,
improper reliance on exemptions from registration harms investors by
depriving them of the benefits of full and fair disclosure and the
civil remedies that flow from registration. Any changes that we make to
the integration doctrine must continue to provide that issuers are
aware of their obligation to analyze the exemptions upon which they
rely and whether any offers and sales are, in reality, part of a single
plan of financing.
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\132\ See ABA Private Offering Letter, n. 24 above, at 33. The
ABA letter also suggested expanding the factors to consider when
making the determination of whether an offering should be
integrated.
---------------------------------------------------------------------------
The current six-month time frame of the safe harbor in Rule 502(a)
provides a substantial time period that has worked well to clearly
differentiate two similar offerings and provide time for the market to
assimilate the effects of the prior offering. The Advisory Committee
has expressed concern, however, that such a long delay could inhibit
companies, particularly smaller companies, from meeting their capital
needs.\133\ We recognize that increased volatility in the capital
markets and advances in information technology have changed the
landscape of private offerings. We remain concerned, however, that an
inappropriately short time frame could allow issuers to undertake
serial Rule 506-exempt offerings each month to up to 35 non-accredited
investors in reliance on the safe harbor, resulting in unregistered
sales to hundreds of non-accredited investors in a year. Such sales
could result in large numbers of non-accredited investors failing to
receive the protections of Securities Act registration. Our proposal
seeks to strike an appropriate balance between the number of non-
accredited investors allowed in an offering relying on the integration
safe harbor and the non-public nature of that offering. It would be an
anomalous result that an issuer could make an offering to hundreds of
non-accredited investors in reliance on the integration safe harbor,
triggering reporting requirements under the Exchange Act, without a
public offering. We propose, therefore, to lower the safe harbor time
frame to 90 days rather than the 30 days recommended by the Advisory
Committee.\134\ We believe 90 days is appropriate, as it would permit
an issuer to rely on the safe harbor once every fiscal quarter.\135\
This reduction in time should provide additional flexibility to
issuers, while still requiring them to wait a sufficient period of time
before initiating a substantially similar offer in reliance on the safe
harbor.\136\
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\133\ See Advisory Committee Final Report at 96.
\134\ Both the Advisory Committee and the ABA recommended
reducing the time frame for the integration safe harbor to 30 days.
Their proposals do not address our concerns that such a short time
frame could result in public offerings conducted under the guise of
private offerings. See ABA Private Offering Letter, n. 24 above, at
33 and Advisory Committee Final Report at 94.
\135\ For issuers that provide quarterly reports, the 90-day
requirement would provide time and transparency for investors and
the market to take into account the offering and its results.
\136\ The five-factor test would continue to apply, providing
issuers with flexibility where they are making separate offerings
within the 90-day time frame.
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The same integration analysis as applies to other Regulation D
offerings would apply to offerings made under proposed Rule 507.
Accordingly, an issuer would not be able to take advantage of the safe
harbor in Rule 502(a) for any sales to investors that are not large
accredited investors within the safe harbor period after the
publication of a general announcement as permitted by Rule 507. The new
90-day safe harbor would apply to Rule 507 offerings, allowing issuers
to make offerings without integration concerns after waiting the
requisite period of time.
Request for Comment
As proposed, we would reduce the time frame for the
integration safe harbor from six months to 90 days. Is 90 days an
appropriate time frame for the safe harbor? Is 90 days still too long a
delay for issuers seeking capital in reliance on the integration safe
harbor? Would this reduction increase the possibility that issuers will
use the safe harbor and undertake serial offerings?
Some commentators have suggested that a 30-day integration
safe harbor would be appropriate. We are concerned that such a short
time period could encourage serial private offerings that would
otherwise be integrated and effectively allow unregistered public
offerings. If we were to reduce the time period of the safe harbor,
should we limit the total number of non-accredited investors to whom an
issuer may sell over the course of the year? If so, how many non-
accredited investors would be an appropriate limitation per year--100,
140, 210 or some other number?
The five-factor test provides issuers with an analytical
framework to differentiate offers so that they need not be integrated.
Does the five-factor test provide sufficient guidance for issuers to
make their analysis? If not, how could we improve the factors to
provide clearer guidance? Should we provide additional factors? Would
the proposed 90-day time frame obviate the need to revise the test?
Would the interaction between the general announcement
permitted by proposed Rule 507 and the proposed 90-day integration safe
harbor present opportunities for abuse? Could issuers use the general
announcement permitted by proposed Rule 507 to test the waters before
deciding whether to undertake either a registered public offering or
unregistered exempt offering under Regulation D? Should we permit this
use of a Rule 507 general announcement? Should we modify proposed Rule
507 to prohibit such a practice?
2. Disqualification Provisions
In conjunction with the proposed revisions to Regulation D, we have
considered the need for general ``bad actor'' disqualification
provisions for all offerings under Regulation D. Our concern arises
from the number of recidivists we see in problematic Regulation D
offerings. Before the National Securities Markets Improvement Act of
1996,\137\ recidivists
[[Page 45131]]
were excluded from most Rule 506 offerings by state disqualification
provisions. The National Securities Markets Improvement Act preempts
the states from enforcing those provisions in favor of federal
regulation, raising the question whether federal disqualification
provisions should be adopted to replace them.
We propose that availability of all Regulation D exemptions be
conditioned on the application of bad actor disqualification
provisions. By deterring recidivists from participating in our primary
private and limited offering marketplaces, we intend to improve the
effectiveness of Regulation D offerings for a significant majority of
companies, especially smaller companies, that do not have bad actors
associated with their securities offerings and will not be disqualified
under the proposed provisions.
Currently, in Regulation D, only Rule 505 provides disqualification
provisions.\138\ Rule 505 refers issuers to the substantive
disqualification provisions of Rule 262 \139\ under Regulation A,\140\
essentially incorporating those provisions by reference. Under those
provisions, issuers are barred from relying on the exemption where the
issuer, any of its predecessors, any affiliated issuers, any director,
officer or general partner of the issuer, any beneficial owner of 10
percent or more of any class of its equity securities, any promoter of
the issuer presently connected with the issuer, any underwriter of the
securities to be offered, or any partner, director or officer of the
underwriter have committed relevant violations of laws and regulations.
The Model Accredited Investor Exemption \141\ and the Uniform
Securities Act of 2002 \142\ also provide for similar disqualification
provisions for these types of issuers and associated persons.
The exemption in proposed Rule 507 and the proposal to reduce the
time that issuers must wait to rely on the integration safe harbor
would provide issuers with greater flexibility in preparing and
conducting private offerings. Given this proposed increase in
flexibility, as well as enforcement issues we have confronted with
recidivists involved in purported Regulation D offerings,\143\ we
believe it is appropriate to propose that certain issuers be precluded
from relying on any of the Regulation D exemptions if they or the
persons designated in proposed Rule 502(e) have violated the law. We
are proposing a rule that is based generally on the provisions in
Regulation A, the Model Accredited Investor Exemption and the Uniform
Securities Act of 2002.\144\ In the interests of coordination and
uniformity, we drew extensively from the Model Accredited Investor
Exemption, but have modified some of the provisions, taking into
account provisions of the Uniform Securities Act. The proposed
disqualification provisions all relate to determinations by regulators
and courts of problematic behavior or wrongdoing. It is our intent that
the Commission's adoption of disqualification provisions based on
provisions in use in many states will lead to increased uniformity in
federal and state securities regulation.\145\
Exempt private and limited offerings under Regulation D do not
provide the protections that registration would afford. We believe that
registration, with its incumbent rights for investors and duties of the
issuer, is more appropriate for offerings by issuers and persons that
have been subject to determinations of violations of law or wrongdoing
than offerings relying on Regulation D exemptions. Thus, we believe it
would be prudent to preclude certain persons who have been shown to
have acted improperly from relying on Regulation D to make or be
involved with unregistered offers and sales of securities.
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\137\ Pub. L. 104-290.
\138\ 17 CFR 230.505(b)(2)(iii).
\139\ 17 CFR 230.262.
\140\ 17 CFR 230.251 through 230.263. Regulation A is an
exemption from Securities Act registration, promulgated under
Section 3(b) of the Securities Act, 15 U.S.C. 77c(b), for public
offerings not exceeding $5 million in any 12-month period.
\141\ According to NASAA, as of 1999, 33 states plus the
District of Columbia and Puerto Rico had adopted a form of this
exemption and seven more states had bills pending in their
legislatures. See North American Securities Administrators
Association, Written Statement before the House Small Business
Committee, Government Programs and Oversight Subcommittee (Oct. 14,
1999).
\142\ See http://www.uniformsecuritiesact.org. According to the
drafting committee, as of April 27, 2007, the Act had been enacted
in 11 states and the U.S. Virgin Islands and is endorsed by NASAA,
the Securities Industry and Financial Markets Association (formerly
known as the Securities Industry Association) and the American Bar
Association.
\143\ See, e.g., SEC v. Calvo, 378 F.2d 1211, 1216 (11th Cir.
2004).
\144\ In response to the Advisory Committee's proposed
recommendations, NASAA commented that any new exemption in
Regulation D should ``contain at least disqualification provisions
like those contained in Rule 505(b)(2)(iii), Rule 1.B of the NASAA
Uniform Limited Offering Exemption (1983), and Section D of the
Model Accredited Investor Exemption.'' See NASAA Letter, n. 48
above.
\145\ Several provisions of the federal securities laws call for
greater uniformity in federal and state securities regulation. See,
e.g., Securities Act Sec. 19(d), 15 U.S.C. 77s(d).
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As proposed, the disqualification provisions in new Rule 502(e)
would apply to all offerings made in reliance on Regulation D,
precluding reliance by the issuer on Regulation D if the issuer itself
is disqualified or the presence of any of the enumerated persons
disqualifies the issuer.\146\ The disqualification provisions under
proposed Rule 502(e) would apply to:
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\146\ In conjunction with this proposal, we also propose to
delete the current disqualification provisions in Rule
505(b)(2)(iii).
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The issuer, any predecessor of the issuer, and any
affiliated issuer;
Any director, executive officer, general partner, or
managing member of the issuer;
Any beneficial owner of 20 percent or more of any class of
the issuer's equity securities; and
Any promoter connected with the issuer.
The persons and entities we propose to subject to the
disqualification provisions are substantially similar to those in
Regulation A and the Model Accredited Investor Exemption, except that
we do not propose to include underwriters.\147\ Both Regulation A and
the Model Accredited Investor Exemption include underwriters among the
classes of persons to whom disqualification provisions apply.\148\
Underwriters generally do not directly control the issuer or determine
for an issuer whether to conduct an offering. In weighing the balance
of adding the disqualification provisions, we determined that adding
provisions throughout Regulation D would have positive effects on the
private and limited offering equity markets. In order to limit the
burden of expanding these provisions, we propose to limit the
application, and therefore the due diligence burden, to the issuer and
those persons whom we regard as having substantial influence over the
issuer.\149\
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\147\ We propose to add managing members to the traditional list
of directors, officers, and general partners to indicate clearly
that managing members of limited liability companies are intended to
be included in the provision. We also propose to limit the
provisions to ``executive officers'' rather than ``officers'' and to
20 percent beneficial owners rather than 10 percent beneficial
owners as provided in Rule 262 of Regulation A. We believe that
limiting the scope of these provisions to executive officers and 20
percent beneficial owners would be appropriate, given their greater
influence on the policies of the issuer as compared to officers and
10 percent beneficial owners.
\148\ The term ``underwriters'' is used in both Regulation A and
the Model Accredited Investor Exemption. The term underwriters
includes selling broker-dealers, who are commonly called
underwriters in Regulation A offerings and placement agents in
private offerings.
\149\ We have chosen not to use in this context the concept of
``affiliate,'' which we use in other rules under the Securities Act
to designate certain persons with control relationships with
issuers. Rule 505 of Regulation D currently refers issuers to the
disqualification provisions of Rule 262 of Regulation A. Under the
proposed disqualification provisions, Rule 505 would refer to Rule
502(e) and not to the disqualification provisions in Regulation A.
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[[Page 45132]]
Proposed Rule 502(e) provides six disqualification provisions that
would preclude an issuer from relying on Regulation D. Each of the
disqualification provisions requires a determination by a government
official or agency or self-regulatory organization that the relevant
person has violated the law or engaged in other wrongdoing. These
provisions apply where the issuer or the covered persons:
Filed a registration statement within the last five years
that is the subject of a currently effective permanent or temporary
injunction or an administrative stop order; \150\
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\150\ Rule 262(a)(1) provides that the issuer, any of its
predecessors or any affiliated issuer ``has filed a registration
statement which is the subject of any pending proceeding or
examination under Section 8 of the Act, or has been the subject of
any refusal order or stop order thereunder within five years prior
to the filing of the offering statement required by Rule 252.'' As
proposed, the provision would not be limited to the issuer and the
language of the provision would apply more generally to court
injunctions and stop orders or similar orders by the Commission or
state securities agencies. The proposed language tracks Section
306(a)(3) of the Uniform Securities Act.
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Was convicted of a criminal offense in the last 10 years
that was in connection with the offer, purchase or sale of a security
or involved the making of a false filing with the Commission; \151\
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\151\ Rule 262 provides disqualification provisions for ``any
felony or misdemeanor in connection with the purchase or sale of any
security or involving the making of any false filing with the
Commission.'' Under Rule 262, the disqualification of issuers,
predecessors and affiliated issuers is for five years, while for any
director, officer or general partner of the issuer, beneficial owner
of 10 percent or more of any class of its equity securities, any
promoter of the issuer presently connected with it in any capacity,
any underwriter of the securities to be offered, or any partner,
director or officer of any such underwriter the disqualification is
for 10 years. The proposed provision tracks Rule 262 instead of the
Model Accredited Investor Exemption or Uniform Securities Act,
because the language focuses on securities-related offenses while
the other models use broader language. The proposal uses the term
``criminal offense'' instead of specifying ``felony or misdemeanor''
as used in Rule 262 and uniformly applies a 10-year disqualification
for these more egregious acts. This provision would substantially
cover situations addressed in Rule 262(a)(3) and Rule 262(b)(3).
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Has been subject to an adjudication or determination
within the last five years by a federal or state regulator that the
person violated federal or state securities or commodities law or a law
under which a business involving investments, insurance, banking or
finance is regulated; \152\
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\152\ This provision is based on Section 412(d)(6) of the
Uniform Securities Act, but more generally includes ``federal or
state regulator'' and ``federal or state securities or commodities
laws or a law under which a business involving investments,
insurance, banking, or finance is regulated'' instead of providing a
specific list of relevant statutes. The Model Accredited Investor
Exemption contains a similar, but more limited provision that
disqualifies a person if they are ``currently subject to any state
or federal administrative enforcement order or judgment * * *
finding fraud or deceit in connection with the purchase or sale of
any security.''
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Is subject to an order, judgment or decree by a court
entered within the last five years that restrains or enjoins the issuer
or a person from engaging in any conduct or practice involving
securities and other similar businesses, including an order for failure
to comply with Rule 503 (the filing of Form D); \153\
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\153\ We sought to simplify the provisions in Rule 262(a)(2) and
(b)(2) of Regulation A by following the Model Accredited Investor
Exemption provision (D)(1)(d). Rather than refer to ``involving
fraud or deceit in connection with the purchase or sale of any
security,'' we broadened the application to a business ``involving
securities, commodities, investments, insurance, banking, or
finance'' as suggested by the Uniform Securities Act. We did not,
however, include a business involving franchises as in the Uniform
Securities Act list. We also added a specific reference to Rule 503,
which is being moved from current Rule 507, as discussed below.
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Is subject to a cease and desist order entered within the
last five years issued under federal or state securities or similar
laws; \154\ or
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\154\ This provision, while similar to the provisions in Rule
502(e)(1)(iii) and (iv), is based on Section 412(12) of the Uniform
Securities Act.
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Is subject to a suspension or expulsion from membership in
or association with a member of a national securities exchange or
national securities association for an act or omission constituting
conduct inconsistent with just and equitable principles of trade.\155\
---------------------------------------------------------------------------
\155\ This provision is substantially similar to Rule 262(b)(4)
and seeks to bar similar persons to those covered by Uniform
Securities Act Section 412(13).
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The length of disqualification from reliance on Regulation D in the
proposal is generally five years. For more egregious conduct resulting
in a criminal conviction, we propose disqualification for 10
years.\156\ We believe that these disqualification provisions would
provide a deterrent effect, as well as offer protection to investors
from recidivists who have violated securities and related laws and
rules in the past.
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\156\ The period of disqualification generally follows the
periods provided in Regulation A. The disqualification period for
issuers convicted of a criminal offense would be increased from five
to 10 years to conform with the disqualification for other criminal
offenders and to better conform with the Uniform Securities Act.
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Proposed subparagraphs (i), (iii), (iv), and (v) of Rule 502(e)(1)
enumerate the various administrative and civil orders, judgments, and
determinations that would trigger disqualification for an issuer.
Proposed subparagraph (ii) provides a similar disqualification
provision for criminal convictions, and proposed subparagraph (vi)
provides a disqualification provision that relates to decisions of
self-regulatory organizations. Each disqualification provision relates
to a failure to comply with laws or regulations, raising concerns that
the person may continue to disregard laws and regulations relating to
the offering of securities. For this reason, we believe an issuer
should not be allowed to rely on Regulation D if the issuer or one of
the covered persons meets the disqualification provisions in proposed
Rule 502(e).
In order to combine all of the disqualification provisions in the
same rule, we propose to remove the disqualification provision relating
to failure to comply with Rule 503 (the filing of Form D) that is found
in current Rule 507 and replace the substance of that provision with a
clause in proposed Rule 502(e)(1)(iv). Proposed Rule 502(e)(1)(iv)
would specifically indicate that an order for failure to comply with
Rule 503 of Regulation D would trigger the disqualification provision.
Proposed Rule 502(e)(2) would expand upon the concept in current Rule
507 and allow the Commission, upon a showing of good cause, to waive
any of the enumerated disqualification provisions in proposed Rule
502(e)(1).\157\ Proposed Rule 502(e)(2) also would provide a safe
harbor for an offering by an issuer, if that issuer establishes that it
did not know and reasonably could not have known that the
disqualification existed.\158\
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\157\ The waiver provision tracks the preliminary language in
Rule 262 and provides flexibility for the Commission. The Commission
staff has, and would continue to have, delegated authority to act on
waiver requests under Rule 262 of Regulation A and Rule 505, and we
are proposing a similar delegation for all other Regulation D
disqualification waiver requests. See II.E.3 below.
\158\ The Model Accredited Investor Exemption provides
exemptions from disqualification where a waiver is provided or where
the issuer establishes that it did not know and in the exercise of
reasonable care, based on a factual inquiry, could not have known of
the disqualification. Regulation A does not include the exemption
where an issuer reasonably could not have known. Due to the broad
application of the proposed Rule, we have proposed similar
exemptions to those in the Model Accredited Investor Exemption
providing for waiver and for an issuer that reasonably could not
have known. We have not included the requirement for a factual
inquiry to establish the reasonable basis as in the Model Accredited
Investor Exemption.
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Request for Comment
Should we limit the disqualification provisions to Rule
505 exemptions only, as is currently the case, rather than applying
these provisions to all Regulation D exemptions? Are there any
[[Page 45133]]
current disqualifications not included in the proposed rule that we
should include? Are any persons not covered who should be?
What would be the effects on disqualified issuers? How
many issuers would be affected?
Unlike the Regulation A, Regulation E \159\ and current
Rule 505 disqualification provisions, proposed Rule 502(e) excludes
selling broker-dealers, underwriters, and placement agents from the
disqualification provisions. Should selling broker-dealers,
underwriters, and placement agents be covered in the disqualification
provisions? Would including selling broker-dealers, underwriters, and
placement agents give issuers an incentive to check their backgrounds
before engaging them for an offering? If they were included, should
there be an exemption for persons who continue to be licensed or
registered to conduct securities related business in the jurisdiction
where the order, judgment, or decree creating the disqualification was
entered, as is the case in the Model Accredited Investor Exemption?
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\159\ 17 CFR 230.601 through 230.610a. Regulation E is an
exemption from Securities Act registration, promulgated under
Section 3(c) of the Securities Act, 15 U.S.C. 77c(c), for securities
of small business investment companies.
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Does the proposed rule adequately cover the
disqualification provisions of Regulation A, which currently apply to
Rule 505? For example, proposed Rule 502(e)(1)(iii) would disqualify
persons subject to an adjudication or determination by a federal or
state regulator that the person violated securities or commodities laws
or a law under which a business involving investments, insurance,
banking, or finance is regulated. Under Rule 262(a)(5), a United States
Postal Service false representation order and certain other orders and
injunctions are specifically enumerated. Does the proposed rule
adequately cover these and other related orders and injunctions? If
not, should we revise the proposed rule to specifically cover United
States Postal Service orders and injunctions or other specific
circumstances?
Should the disqualification provisions for being currently
subject to an order, judgment, decree, or cease and desist order apply
as long as the person is subject to the order, no matter when the order
was entered into, or should the provisions apply only to orders entered
into within the last five years, as proposed?
The length of disqualification in the proposed rules
generally is consistent with our current Rule 262 provisions in
Regulation A. The proposal increases the length of disqualification for
criminally convicted issuers from 5 years to 10 years. Under the
Uniform Securities Act of 2002, a person convicted of a felony
involving the business of securities is permanently barred from relying
on the exemption. Should such felony convictions permanently disqualify
a person? Is 10 years an appropriate disqualification period? Is 5
years an appropriate length of time to protect investors adequately
from persons who have been determined to have violated or have been
sanctioned for violations of securities-related and similar laws and
regulations?
How should the Commission phase in the new
disqualification provisions, if adopted? Should we ``grandfather''
individuals and entities from the consequences of the new
disqualification provisions if an issuer commences an offering before
the effectiveness of proposed Rule 502(e)? With respect to offerings
commenced before the effectiveness of proposed Rule 502(e), should we
subject individuals and entities that become newly associated with the
issuer after effectiveness to all the consequences of the new
disqualification provisions? In these cases, should we provide any
special waiver provisions and/or condition any waiver on providing
disclosure in the offering document regarding any past disqualifying
events?
Would mandatory disclosure of the adverse orders,
judgments, and determinations be an adequate substitute for
disqualification? \160\ If so, how should disclosure be mandated and
enforced?
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\160\ We recently proposed changes to Form D, the form required
of issuers relying on Regulation D, that would include requiring
each issuer submitting the form to certify that it is not
disqualified from relying on Regulation D for one of the reasons
stated in proposed Rule 502(e). See Release No. 33-8814 (June 29,
2007) [72 FR 37376].
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The proposed rule provides an exemption from the
disqualification provisions if, in the exercise of reasonable care, the
issuer could not have known that a disqualification existed. Is this
appropriate? If so, should an issuer be required to establish that
reasonable care was based on a factual inquiry, as required in the
Model Accredited Investor Exemption? Are there circumstances where no
factual inquiry would be necessary? Would the requirement for a factual
inquiry be burdensome?
Should we revise the disqualification provisions in
Regulation A and Regulation E to conform with proposed Rule 502(e)?
What changes specific to Regulation A or Regulation E should we make to
the proposed disqualification provisions?
D. Possible Revisions to Rule 504
Rule 504 of Regulation D is known as the ``seed capital''
exemption. It is limited to offerings by non-reporting companies that
do not exceed an aggregate annual amount of $1 million. Rule 504 places
substantial reliance upon state securities laws, because the size and
local nature of these offerings has not appeared to warrant imposing
significant federal regulation.
Rule 504 sets forth the requirements for four separate exemptions
from the registration requirements of the Securities Act. Among these
is Rule 504(b)(1)(iii),\161\ which provides an exemption from
registration for offers and sales of securities that are conducted
``according to state law exemptions from registration that permit
general solicitation and general advertising so long as sales are made
only to `accredited investors' as defined in [Rule 501(a)].'' \162\
Securities sold without registration in reliance on this provision are
not subject to the limitations on resale established in Rule 502(d)
and, as such, are not ``restricted securities'' for purposes of Rule
144(a)(3)(ii).
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\161\ 17 CFR 230.504(b)(1)(iii).
\162\ Rule 501(a) has been discussed at length at various places
above. The other three Rule 504 exemptions, which would not be
affected by the possible revisions we are discussing here, are
contained in:
(a) The introductory clause of Rule 504(b)(1), 17 CFR
230.504(b)(1) (exemption for offers and sales of restricted
securities that do not involve general solicitation and
advertising); and
(b) Rules 504(b)(1)(i) and 504(b)(1)(ii), 17 CFR
230.504(b)(1)(i) and 230.504(b)(1)(ii) (exemptions for offers and
sales of unrestricted securities that may involve general
solicitation and advertising if the offering is registered under
appropriate state securities laws that require the public filing and
delivery of a disclosure document to investors before sale).
In a companion release, we have proposed to amend Form D, the
notice that must be filed with us when an issuer sells securities in
a Regulation D offering, to require issuers relying on Rule 504 to
specify the precise Rule 504 exemption on which they are relying.
See Release No. 33-8814 (June 29, 2007) [72 FR 37376]. One of the
purposes of this change is to provide us with better information on
the extent of use of the different types of Rule 504 offerings.
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We added Rule 504(b)(1)(iii) as a new exemption to Rule 504 in
1999.\163\ It was an attempt to apply the appropriate federal
securities law treatment to offerings made under state registration
exemptions that satisfied its conditions. As an example of these
exemptions, we cited the Model Accredited Investor
[[Page 45134]]
Exemption, which was a model exemption developed in 1997 by the North
American Securities Administrators Association.\164\ It was our
understanding at the time that securities issued under Rule
504(b)(1)(iii) generally could not be transferred under state law, and
that immediate resale generally would not be possible.\165\
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\163\ See Release No. 33-7644 (Feb. 25, 1999) [64 FR 11090].
Previously, securities sold under Rule 504 were not deemed
restricted securities.
\164\ Id. A copy of the Model Accredited Investor Exemption is
available on the NASAA Web site at http://www.nasaa.org/content/Files/Model%5FAccredited%5FInvestor%5FExemption.pdf
.
\165\ See Release No. 33-7644, n. 38.
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The addition of Rule 504(b)(1)(iii) in 1999 was part of a series of
changes designed to deter abusive practices in Rule 504 offerings while
not impeding legitimate ``seed capital'' offerings. The Commission had
been concerned for some time with abusive practices in Rule 504
offerings, many of which involved ``pump and dump'' schemes for
securities of non-reporting companies that traded over the counter. At
the time, we stated that we would monitor the use of Rule 504 as
revised and contact state securities regulators regarding their
experience with these offerings. We further stated that if abusive
practices involving Rule 504 continued, we would consider stronger
measures in the future.\166\
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\166\ Id. Other suggested measures included the expansion of
disqualification provisions similar to those in Rule 505(b)(2)(iii)
and Rule 262. We propose to expand such disqualification provisions
to all Regulation D offerings in this release. See II.C.2 above.
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In recent years, the Commission has taken enforcement action
against numerous ``pump and dump'' schemes, most of which involve the
securities of small companies without large market capitalization or
significant market following.\167\ Several of these cases have involved
claims of purported compliance with Rule 504(b)(1)(iii) and state
securities laws that are submitted to transfer agents as the basis for
the issuance of securities without restrictive legends to permit
immediate resale. In informal discussions, state securities regulators
also have raised concerns about abusive practices involving Rule
504(b)(1)(iii) offerings. These factors lead us to question whether we
should amend Rule 504(b)(1) to provide that the limitations on resale
set forth in Rule 502(d) would apply to securities sold in a Rule
504(b)(1)(iii) transaction. Such an amendment would result in those
securities being ``restricted securities'' for purposes of Rule 144.
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\167\ See, e.g., SEC v. Integrated Services Group Inc., Lit.
Release No. 19476 (Nov. 29, 2005) (reporting complaint filed in S.D.
Tex.); SEC v. Custom Designed Compressor Systems, Inc., Lit. Release
No. 19101 (Feb. 28, 2005) (reporting complaint filed in D. N.M.).
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In a companion release, we have proposed to amend Rule 144 to
provide that non-affiliates receiving restricted securities of non-
reporting companies would be eligible to resell those securities after
12 months without any restrictions.\168\ A 12-month holding period
would be consistent with the Model Accredited Investor Exemption. If we
adopt the Rule 144 proposal and revise Rule 504(b)(1) to provide that
securities sold in a Rule 504(b)(1)(iii) transaction are ``restricted
securities,'' the resale restrictions will be less stringent than under
current Rule 144.\169\
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\168\ See Release No. 33-8813 (June 22, 2007) [72 FR 36822].
\169\ For resales of securities by non-affiliates of the issuer,
current Rule 144 requires a one-year holding period followed by an
additional year when resales are subject to manner of sale
restrictions, volume limitations, current public information
requirements, and notice requirements. Unlimited resales may occur
after the second year.
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Request for Comment
The Commission seeks comment as to whether Regulation D
should be amended so that securities sold in reliance on Rule
504(b)(1)(iii) pursuant to a state law exemption that permits sales
only to accredited investors would be subject to the limitations on
resale in Rule 502(d) and, as such, be deemed ``restricted securities''
for purposes of Rule 144.\170\
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\170\ We envision that any such amendment would not affect the
resale status of securities sold under the exemptions in Rules
504(b)(1)(i) and 504(b)(1)(ii), which exempt certain offerings of
securities that are registered under a state securities law that
requires the public filing and delivery of a disclosure document to
investors before sale. As such, the resale limitations of Rule
502(d) would continue not to apply to securities sold in
transactions that are exempted by those rules and those securities
would not be ``restricted securities'' for purposes of Rule 144.
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If Regulation D were amended to make securities issued
under Rule 504(b)(1)(iii) ``restricted securities,'' would the
amendment impose a significant burden on start-up and other smaller
companies? If you believe so, please explain your reasons, given the
resale restrictions typically required under state securities law
exemptions. Do any states have resale restrictions that are narrower
than would apply to ``restricted securities''?
E. Other Proposed Conforming Revisions
1. Proposed Amendments to Rule 215
We propose to amend Rule 215 to conform the definition of
``accredited investor'' in Rule 215 with the definition in Rule 501(a)
of Regulation D. Rule 215 defines accredited investor under Section
2(a)(15) of the Securities Act \171\ for purposes of Section 4(6) of
the Securities Act and would track the proposed definition in Rule
501(a) of Regulation D.
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\171\ 15 U.S.C. 77b(a)(15).
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2. Proposed Amendment to Rule 144A
Rule 144A currently provides a safe harbor under Section 5 of the
Securities Act for offers and resales of securities to a qualified
institutional buyer or to an offeree or purchaser that the seller and
any person acting on the seller's behalf reasonably believe is a
qualified institutional buyer. A general announcement of an offering
published by an issuer in accordance with Rule 507 may be deemed
inconsistent with the requirement under Rule 144A that offers be made
solely to such persons. As a result, we propose to add a Preliminary
Note 8 to Rule 144A to clarify that publication of a general
announcement of an offering in accordance with Rule 507 would not
preclude resales pursuant to Rule 144A.
Request for Comment
As proposed, Preliminary Note 8 to Rule 144A would not
make any distinctions based on the type of security that is being
offered pursuant to Rule 507. Should the Preliminary Note only apply to
debt securities, as opposed to equity, because debt securities are more
likely to be sold to institutional investors?
3. Delegated Authority
Under Rule 30-1,\172\ the Commission has delegated to the Director
of the Division of Corporation Finance the authority to grant
applications for exemptions to the disqualification provisions under
Regulation A and Rule 505. As we are proposing to include
disqualification provisions for all Regulation D offerings, we propose
to revise Rule 30-1(c) to delegate authority to the Director of the
Division of Corporation Finance to grant applications for exemptions to
the disqualification provisions of Regulation D.
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\172\ 17 CFR 200.30-1(b)(1), 200.30-1(c).
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III. General Request for Comment
The Commission is proposing these revisions. We welcome your
comments. We solicit comment, both specific and general, on each
component of the proposals. We request and encourage any interested
person to submit comments regarding:
The proposals that are the subject of this release;
[[Page 45135]]
Additional or different revisions to Regulation D; and
Other matters that may have an effect on the proposals
contained in this release.
In December 2006, the Commission proposed to add a new category of
accredited investor, defined as accredited natural person, under the
Securities Act.\173\ We are taking the opportunity to solicit further
comment on the questions we asked in connection with that proposal,
especially in light of the new proposals in this release. Are there any
differences in the regulation of operating and private pooled
investment vehicles that we should consider in crafting harmonious
rules for limited offerings? Finally, we solicit comment on whether any
additional conforming amendments are necessary.
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\173\ See Private Pooled Investment Vehicle Release.
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Comment is solicited from the point of view of both issuers and
investors, as well as of capital formation facilitators, such as
broker-dealers, and other regulatory bodies, such as state securities
regulators. Any interested person wishing to submit written comments on
any aspect of the proposal is requested to do so.
IV. Paperwork Reduction Act
The proposals contain ``collection of information'' requirements
within the meaning of the Paperwork Reduction Act of 1995.\174\ The
title of these requirements is:
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\174\ 44 U.S.C. 3501 et seq.
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``Form D'' (OMB Control No. 3235-0076).\175\
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\175\ Form D was adopted pursuant to Sections 2(a)(15), 3(b),
4(2), 19(a) and 19(c)(3) of the Securities Act (15 U.S.C. 77b(15),
77c(b), 77d(2), 77s(a) and 77s(c)(3)).
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We adopted Regulation D and Form D as part of the establishment of
a series of exemptions for offerings and sales of securities under the
Securities Act.\176\ We are submitting these requirements to the Office
of Management and Budget (``OMB'') for review and approval in
accordance with the Paperwork Reduction Act and its implementing
regulations.\177\
We propose to make changes in four principal areas involving
Regulation D, as well as to make other conforming changes, relating to:
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\176\ In a companion release, Release No. 33-8814, we are
proposing changes to Form D that would require that Form D be filed
electronically. If Form D is required to be filed electronically,
filers will be required to file Form ID in order to be able to file
electronically. If the proposal to require electronic Form D is
adopted, any increase in the number of companies filing Form D will
result in an increase in the number of Form ID filings.
\177\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
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Creating a new exemption from the registration provisions
of the Securities Act for offers and sales of covered securities to
``large accredited investors'';
Revising the definition of the term ``accredited
investor'' to clarify it and reflect developments since its adoption;
Shortening the timing required by the integration safe
harbor for Regulation D offerings; and
Providing uniform disqualification provisions to apply
throughout Regulation D.\178\
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\178\ Currently under Regulation D, only Rule 505 offerings are
subject to disqualification provisions. The proposal would subject
issuers making any offering in reliance on Regulation D to similar
disqualification provisions.
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We also are soliciting comment on whether to amend Rule 504 of
Regulation D so that securities sold pursuant to a state law exemption
that permits sales only to accredited investors would be deemed
``restricted securities'' for purposes of Rule 144.
The information collection requirements related to the filing with
the Commission of Form D 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.
A. Summary of Information Collections
Form D contains collection of information requirements, requiring
an issuer to file a notice of sale of securities pursuant to Regulation
D or Section 4(6) of the Securities Act. The Form D is required to
include basic information about the type of filing, the issuer, certain
related persons, and the offering. Form D is filed 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(6) of the
Securities Act. The information is needed for implementing the
exemptions and monitoring their use.
We propose to amend Form D to add a check box to indicate an
offering relying on the proposed Rule 507 exemption. We do not believe
the proposed change will have any effect on the paperwork burden of the
form. However, we believe the overall effect of the proposals will be
to increase the number of forms that are filed with the Commission.
While we anticipate an increase in the number of filings, we believe
that most issuers that are seeking capital in the private equity
markets would do so even without the proposed amendments. We believe
the following proposals are likely to increase the number of exempt
offerings and therefore the number of forms filed:
The proposal to create a new exemption from the
registration provisions of the Securities Act for offers and sales to
large accredited investors permitting limited advertising, providing
issuers a new option for offering securities;
The proposals to clarify the definition of accredited
investor will slightly increase the pool of accredited investors and,
due to the increased pool of investors, is likely to marginally
increase the number of offerings to those investors; \179\ and
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\179\ We propose to add an ``investments-owned'' standard to the
current standards under accredited investor. We anticipate that will
increase the pool of accredited investors from 8.47 percent of U.S.
households to 8.69 percent of U.S. households. See n. 90. Most of
the additional clarification supports current staff positions on who
may qualify as an accredited investor and should not significantly
affect the size of the investor pool, though it may increase
awareness among those groups of their ability to qualify.
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The proposal to shorten the timing of the integration safe
harbor will allow issuers to conduct more frequent offerings using the
safe harbor.\180\
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\180\ We anticipate the reduction in the safe harbor waiting
period will increase the number of Forms D filed, but do not believe
it will increase the number of Forms ID filed, as any increase in
Forms D will be from repeat filers.
On the other hand, some of our proposals are likely to decrease the
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number of exempt offerings and therefore the number of forms filed:
The proposal to revise the disqualification provisions
applicable to Rule 505 and apply those provisions to all offerings
relying on Regulation D may have the effect of reducing the number of
forms filed.\181\
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\181\ We believe that very few issuers will be subject to the
disqualification provisions and expect the number of Forms D filed
will be minimally affected. We believe the revisions are necessary
in order to exclude a small number of recidivists who have been
found by regulators and courts to have violated applicable laws and
regulations.
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The proposal to require for the determination of
accredited investors status that an individual may count only 50
percent of any joint investments with their spouse unless both persons
sign the investment documentation may reduce the pool of accredited
investors where spouses decide not to invest together.
[[Page 45136]]
To the extent that an amendment to revise Rule 504 to
treat securities sold pursuant to a state law exemption that permits
sales only to accredited investors as ``restricted securities'' for
purposes of Rule 144 may result in potentially greater limitation on
resale than may exist under state securities laws, this could have the
effect of slightly reducing the number of forms filed.
B. Paperwork Reduction Act Burden Estimates
According to our Office of Filings and Information Services, in
2006, 16,829 companies made 25,329 Form D filings. The annual number of
Form D filings rose from 17,390 in 2002 to 25,239 in 2006 for an
average increase of approximately 2,000 Form D filings per year.
Assuming the number of Form D filings continues to increase by 2,000
filings per year for each of the next three years, the average number
of Form D filings in each of the next three years would be about
29,300.\182\
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\182\ Our current OMB information collection estimate indicates
that we expect 17,480 Form D filings per year. In conjunction with
the Private Pooled Investment Vehicle Release, OMB revised the Form
D information collection estimates to reflect an expected decrease
in responses from 17,500 Form D filings to 17,480. However, based on
the new data, we are increasing our estimated number of Form D
filings.
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As described above, we estimate that our proposals, if adopted,
would have mixed effects on the number of Forms D filed with the
Commission. Use of the new exemption, the shortened delay for the
Regulation D safe harbor, and the slight increase in the pool of
accredited investors due to the revised accredited investor definition
likely would raise the number of Forms D filed. The utility of the
established exemptions, particularly Rule 506, makes large numbers of
Regulation D-exempt offerings that otherwise would not have been filed
unlikely. In addition, the new disqualification provisions, some
aspects of the revised definition of accredited investor, and the
possible revisions to Rule 504 may slightly lower the number of
filings.
We estimate that if the proposed rules are adopted, the burden for
responding to the collection of information in Form D would not
increase for most companies because the information required in the
form would not change. Balancing the increasing and decreasing effects
of the proposals, for purposes of the Paperwork Reduction Act, we
estimate an annual increase in the number of Form D filings of five
percent, or approximately 1,500 filings.\183\
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\183\ To arrive at this estimate, we multiplied the number of
Form D filings estimated per year (29,300) by 5 percent and rounded
up to the nearest 100.
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For purposes of the Paperwork Reduction Act, we estimate that, over
a three-year period, the average burden estimate will be four hours per
Form D. This burden is reflected as a one-hour burden of preparation on
the company and a cost of $1,200 per filing. Our burden estimates
represent the average burden for all issuers. We expect that the burden
and costs could be greater for larger issuers and lower for smaller
issuers. For Form D notices, we estimate that 25 percent of the burden
of preparation is carried by the company internally and that 75 percent
of the burden of preparation is carried by outside professionals
retained by the issuer at an average cost of $400 per hour.\184\ The
portion of the burden carried by outside professionals is reflected as
a cost, while the portion of the burden carried by the company
internally is reflected in hours. We estimate the proposals will
incrementally increase the number of Form D filings and therefore the
filing burden by 1,500 hours of company personnel time and $1,800,000.
Based on this increase, we estimate that the annual compliance burden
in the proposed collection of information requirements in hours for
issuers making Form D filings will be an aggregate 30,800 hours of
company personnel time and $36,960,000 for the services of outside
professionals per year.
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\184\ The hourly cost estimate is based on our consultations
with several registrants and law firms and other persons who
regularly assist registrants in preparing and filing with the
Commission.
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We request comment on the accuracy of our estimates. Pursuant to 44
U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i) Evaluate
whether the proposed collection of information is necessary for the
proper performance of the functions of the agency, including whether
the information will have practical utility; (ii) evaluate the accuracy
of the Commission's estimate of burden of the proposed collection of
information; (iii) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(iv) evaluate whether there are ways to minimize the burden of the
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
Persons submitting comments on the collection of information
requirements should direct the comments to the Office of Management and
Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and should send a copy to Nancy M. Morris, Secretary,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090, with reference to File No. [S7-18-07]. Requests for
materials submitted to OMB by the Commission with regard to these
collections of information should be in writing, refer to File No. [S7-
18-07], and be submitted to the Securities and Exchange Commission,
Records Management, Office of Filings and Information Services,
Washington, DC 20549. OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication of
this release. Consequently, a comment to OMB is assured of having its
full effect if OMB receives it within 30 days of publication.
C. Paperwork Reduction Act--Accredited Natural Person
In December 2006, the Commission proposed to add a new category of
accredited investor, defined as accredited natural person, under the
Securities Act.\185\ We do not believe that the additional questions
regarding that proposal on which we solicit comment in this release
change our analysis under the Paperwork Reduction Act provided in the
Private Pooled Investment Vehicle Release. We solicit comment on that
conclusion and on whether our estimates continue to be accurate.
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\185\ See Private Pooled Investment Vehicle Release.
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V. Cost-Benefit Analysis
A. Background and Summary of Proposals
Adopted in 1982, Regulation D was designed as a comprehensive
scheme for exemptions from the registration provisions of the
Securities Act for smaller companies attempting to sell securities in
private or limited offerings. We are proposing revisions to Regulation
D in order to clarify certain rules and definitions and to add a new
exemption. The proposed changes include:
Providing issuers a more flexible exemption in proposed
Rule 507 that would allow limited advertising in offerings of covered
securities made exclusively to large accredited investors,
[[Page 45137]]
a new category of investor proposed in Rule 501(a);
Revising the definition of the term ``accredited
investor'' to clarify it and reflect developments since its adoption,
including adding alternative investments-owned standards to the
definition, accounting for future inflation, clarifying the list of
legal entities that may qualify as accredited investors and clarifying
the meaning of ``joint investments'';
Shortening the timing required by the integration safe
harbor for Regulation D offerings from six months to 90 days; and
Providing uniform disqualification provisions to apply
throughout Regulation D.
We also are soliciting comment on whether to amend Rule 504 of
Regulation D so that securities sold pursuant to a State law exemption
that permits sales only to accredited investors would be deemed
``restricted securities'' for purposes of Rule 144.
We have identified certain costs and benefits that may result from
the proposals. We encourage commenters to identify, discuss, analyze
and supply relevant data regarding these or any additional costs and
benefits.
B. Benefits
We believe the proposals will benefit investors by providing a new
offering exemption to issuers, clarifying our existing rules and
barring certain recidivists from offering securities in Regulation D
exempt offerings. The benefits discussed are difficult to quantify and
value. Generally, we believe the proposals will reduce the cost of
Regulation D exempt offerings and thereby encourage issuers to
substitute this form of offering for more costly alternatives, thereby
lowering the cost of capital generally. The benefits of the proposals
may include the following:
Proposed Rule 507 would allow for limited advertising in
offerings made exclusively to large accredited investors. Permitting
limited advertising in an exempt offering would provide issuers more
efficient access to the pool of potential investors and capital. This
may reduce the cost of capital formation by allowing issuers to contact
investors directly, and avoid the need for financial intermediaries to
provide unnecessary costly assistance in the effort to raise capital.
Finally, offerings of covered securities are preempted from state
registration requirements permitting issuers to more readily offer
their securities nationally.
The proposal to revise the definition of accredited
investor would add alternative investments-owned standards to the
current accredited investor standards. We believe an investments-owned
standard is both easier to establish and a more accurate indicator of
whether an investor needs the protections afforded by registration,
providing issuers a potentially better way of identifying accredited
investors.\186\ We believe the proposed standards would decrease the
cost of establishing accredited investor qualification and slightly
expand the number of accredited investors, thereby increasing the pool
of potential investors and thus potentially benefiting investors by
decreasing the cost of capital.
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\186\ If the criteria to determine accredited investor status
are easier to apply, the cost of determining accredited investor
status and the risk of sales to non-accredited investors would
decrease. This would also lower the risk that the issuer may need to
make a rescission offer or that an investor may inappropriately
invest in an offering.
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The proposal would revise the accredited investor
thresholds to account for future inflation, to clarify the meaning of
``joint investments'' and to clarify the list of legal entities that
may qualify as accredited investors. Greater clarity in the rule would
generally benefit investors by making the rule easier to apply and
easing regulatory burdens on issuers.
The proposal to shorten the Regulation D integration safe
harbor from six months to 90 days would provide issuers greater
flexibility to conduct more frequent offerings to meet unpredictable
financing needs. Greater flexibility would allow issuers to better time
their offerings, benefiting investors by potentially lowering the cost
of capital.
The proposal to establish uniform bad actor
disqualification provisions to apply throughout Regulation D would
preclude certain issuers from relying on Regulation D exemptions. We
believe these disqualification provisions will help to keep recidivists
out of the limited and private offering market. By deterring bad actors
from conducting exempt offerings under Regulation D, we believe we may
reduce fraud in the market, thereby ultimately lowering the cost of
capital.
An amendment to revise Rule 504 to treat securities sold
pursuant to a state law exemption that permits sales only to accredited
investors as ``restricted securities'' for purposes of Rule 144 would
likely have a deterrent affect on abusive practices, such as ``pump and
dump'' schemes for securities of non-reporting companies that trade
over the counter.
C. Costs
Our proposals may impose some costs on investors by placing
additional regulatory burdens on issuers. We have estimated for our
Paperwork Reduction Act analysis that the proposals will increase the
number of Form D filings by 1,500, resulting in $2,062,500 in
additional costs relating to the filing of additional Forms D.\187\
Many of the costs are dependent on a number of factors, but may
include:
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\187\ We estimate that the burden of preparation for the 1,500
additional Form D filings carried by outside professionals will cost
$1,800,000 and an additional 1,500 hours of company personnel time
which we estimate to be valued at $175 per hour.
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Proposed Rule 507 would allow limited advertising in an
exempt offering to large accredited investors. If the proposed rule is
successful, issuers may substitute Rule 507 offerings for registered
offerings, resulting in investors losing some of the informational and
enforcement benefits of federal securities registration. Investors in
the covered securities to be offered under Rule 507 in lieu of
registered offerings also may incur costs due to the lost benefits of
state registration and oversight.
We expect that the majority of Rule 507 offerings would be
undertaken by issuers in lieu of Rule 506 offerings, since all large
accredited investors eligible to participate in Rule 507 offerings also
would be eligible to participate in Rule 506 offerings. We believe the
informational, enforcement and state registration and oversight
benefits of Rule 507 would be the same as those of Rule 506, with no
difference in costs to investors.
Proposed Rule 507 may also cause certain issuers to
undertake an offering of securities that they otherwise may not have
undertaken in the absence of the new rule. The costs to conduct a Rule
507 offering, including attorney and accountant fees, as well as the
costs related to limited advertising permissible in Rule 507 offerings,
would be in lieu of the costs of other traditional financing methods,
such as bank loans or the costs of not raising additional capital.
If there is an increase in fraudulent activity through the
limited advertising and solicitation allowed under proposed Rule 507,
such activity could discourage the use of the exemption and other
Regulation D exemptions generally, and thereby have the unintended
consequences of increasing the cost of capital formation above what
would occur in the absence of the rule amendment.
[[Page 45138]]
The proposal to account for future inflation in the
definition of accredited investor would limit the growth and could
shrink the pool of accredited investors, imposing costs on investors by
increasing issuers' cost of capital relative to what would occur in the
absence of the rule amendment.
The proposal to establish uniform disqualification
provisions to apply throughout Regulation D may disqualify certain
issuers from undertaking Regulation D exempt offerings relative to what
would occur without the rule amendment. The application of the proposed
disqualification provisions would add an additional cost to offerings
for investigations in order to determine whether any of the
participants in the offering will cause the issuer to be
disqualified.\188\ In addition, a disqualified issuer would not have
access to Regulation D, which would likely impose costs on investors by
increasing the cost of raising capital for the issuer.
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\188\ Under the current rules, disqualification provisions are
included in Rule 505, but do not apply to Rule 504 or Rule 506. As
proposed, the new disqualification provisions would apply to all
Regulation D exemptions. Therefore, new costs would apply to
offerings under Rules 504, 506 and 507. Costs would likely decrease
for Rule 505 offerings, since the proposed disqualification
provisions would not include ``underwriters,'' which are currently
included in the Rule 505 disqualification provisions.
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An amendment to revise Rule 504 to treat securities sold
pursuant to a state law exemption that permits sales only to accredited
investors as ``restricted securities'' for purposes of Rule 144 could
result in potentially greater limitations on resale than may exist
under state securities laws.
D. Request for Comment
We solicit comments on the costs and benefits of the proposed
revisions. We request your views on the costs and benefits described
above, as well as on any other costs and benefits that could result
from the adoption of these proposals. We encourage commenters to
identify, discuss, analyze, and supply relevant data regarding these or
any additional costs and benefits. Specifically, we ask the following:
What are the costs and benefits of limited advertising and
greater flexibility in the proposed Rule 507 exemption?
What are the nature and extent of the costs and benefits
to investors that would result from amending the accredited investor
standards as proposed? Are there costs to accredited investors relating
to the application of the investments-owned standard?
What are the costs and benefits of the shortened 90-day
integration safe harbor?
What are the costs and benefits of the disqualification
provisions we propose for Regulation D?
What would be the costs and benefits if we revised Rule
504 to treat securities sold pursuant to a state law exemption that
permits sales only to accredited investors as ``restricted securities''
for purposes of Rule 144?
In general, we request comment on all aspects of this cost-benefit
analysis, including identification of any additional costs or benefits
of the proposals not already defined, that may result from the adoption
of these proposed amendments and rules. We generally request comment on
the competitive benefits or anticompetitive effects that may impact any
market participants if the proposals are adopted as proposed. We also
request comment on what impact the proposals, if adopted, would have on
efficiency and capital formation. Commenters are requested to provide
empirical data and other factual support for their views to the extent
possible.
E. Accredited Natural Person
In December 2006, the Commission proposed to add a new category of
accredited investor, defined as accredited natural person, under the
Securities Act.\189\ We do not believe that the additional questions
regarding that proposal on which we solicit comment in this release
change the cost-benefit analysis we provided in connection with that
proposal. We solicit comment on that conclusion. For example, would
changing the thresholds on who can invest materially affect investors
in or issuers of pooled investment vehicles? We also welcome further
comments on all aspects of that analysis.
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\189\ See Private Pooled Investment Vehicle Release.
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VI. Consideration of Burden on Competition and Promotion of Efficiency,
Competition and Capital Formation
A. General
Section 2(b) of the Securities Act \190\ requires us, when engaging
in rulemaking where we are required to consider or determine whether an
action is necessary or appropriate in the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. The proposals
are intended to modernize and streamline Regulation D without
compromising investor protection.
---------------------------------------------------------------------------
\190\ 15 U.S.C. 77b(b).
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We do not believe most of the proposals will place a significant
burden on or otherwise affect competition. The proposed Rule 507
exemption, the revisions to the definition of accredited investor and
the Regulation D safe harbor would apply equally to all issuers and
should encourage additional Regulation D offerings. The limited
advertising permitted in the proposed Rule 507 exemption may provide
issuers with a competitive alternative to using finders and private
placement agents to locate prospective investors in exempt offerings.
This may help to reduce an issuer's costs of raising capital. The
proposed disqualification provisions may provide a competitive
disadvantage for issuers subject to them, as such issuers would be
required to take appropriate actions to no longer be subject to the
disqualification, seek a waiver or raise capital through a registered
offering rather than use Regulation D. We believe any disadvantage
would be tempered by an issuer's ability to avoid disqualification by
dissociating from the disqualified person or seeking a waiver.
We believe our proposals may positively affect efficiency and
capital formation. The proposals to provide a new exemption that allows
limited advertising in offerings made exclusively to large accredited
investors and to shorten the time frame of the Regulation D integration
safe harbor should both promote more efficient allocation of resources
and increase capital formation, by allowing issuers greater flexibility
in their choice of the method and timing of their offerings. We believe
the proposals to add alternative investments-owned standards and to
clarify the definition of accredited investors would promote efficiency
by providing clearer guidance on the application of the accredited
investor standard. The proposal to account for future inflation may
reduce the number of accredited investors and add complications when
calculating new accredited investor thresholds in the future, but also
would limit the erosion of the accredited investor threshold over time.
Finally, the application of bad actor disqualification provisions to
all offerings under Regulation D would require issuers to determine
whether executive officers and other related parties would subject the
issuer to the disqualification provisions. Issuers subject to the
disqualification provisions would be able to seek capital through
registered offerings, with their heightened
[[Page 45139]]
protections for investors. Although this would add costs to an issuer's
capital formation, we believe this provision would serve more generally
to promote capital formation by providing additional investor
protection and inspiring greater confidence in the private equity
markets.
We are soliciting comment on whether to amend Rule 504 so that
securities sold pursuant to a state law exemption that permits sales
only to accredited investors would be deemed ``restricted securities''
for purposes of Rule 144. Given the resale restrictions typically
required under state securities law exemptions, if this amendment were
adopted, we do not believe it would have a material affect on issuers'
ability to raise capital.
We request comment on whether the proposed amendments, if adopted,
would promote or burden efficiency, competition and capital formation.
Finally, we request commenters to provide empirical data and other
factual support for their views if possible. We believe adoption of the
proposed revisions to Regulation D would have a minor impact on
competition, and would have a positive impact on the efficiency of
raising capital and on capital formation.
B. Accredited Natural Person
In December 2006, the Commission proposed to add a new category of
accredited investor, defined as accredited natural person, under the
Securities Act.\191\ We do not believe that the additional questions
regarding that proposal on which we solicit comment in this release
change our analysis under Section 2(b) of the Securities Act with
respect to that proposal. We solicit comment on that conclusion. For
example, would harmonized definitions increase the efficiency of
limited offerings? Would different investment thresholds affect capital
formation? We also welcome further comments on all aspects of that
analysis.
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\191\ See Private Pooled Investment Vehicle Release.
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VII. Initial Regulatory Flexibility Act Analysis
This Initial Regulatory Flexibility Analysis has been prepared in
accordance with 5 U.S.C. 603. It relates to proposed revisions to
Regulation D under the Securities Act.
A. Reasons for the Proposed Action
Our objective in this effort is to clarify and modernize our rules
to bring them into line with the realities of modern market practice
and communications technologies without compromising investor
protection. Action in this area also is timely because our Advisory
Committee on Smaller Public Companies made a number of recommendations
relating to private and limited offerings in its final report dated
April 23, 2006. We propose to revise Regulation D to provide additional
flexibility to issuers and to clarify and improve the application of
the rules through:
Creating a new exemption from the registration provisions
of the Securities Act for offers and sales of covered securities to
``large accredited investors'';
Revising the definition of the term ``accredited
investor'' to clarify it and reflect developments since its adoption;
Shortening the timing required by the integration safe
harbor for Regulation D offerings; and
Providing uniform disqualification provisions to apply
throughout Regulation D.
B. Objectives
The goal of Regulation D was to facilitate capital formation
consistent with the protection of investors through simplification and
clarification of existing exemptions, expansion of their availability
and greater uniformity between federal and state exemptions. Our
proposals offer revisions that would continue to simplify and clarify
the exemptions and facilitate capital formation for smaller issuers,
while protecting investors.
We propose to provide issuers with a more flexible safe harbor
exemption in Rule 507 that would allow limited advertising in offerings
made exclusively to large accredited investors. Proposed Rule 507 would
permit issuers to publish a limited announcement of their offering,
thereby providing issuers with greater access to potential investors
and reducing their costs of raising capital. We also propose to adjust
the definition of accredited investor:
To add alternative investments-owned standards along with
the current total asset and net worth standards, because an
investments-owned standard may be easier to use and may provide a more
accurate method to assess an investor's need for the protections of
registration under the Securities Act;
To adjust the dollar-amount thresholds in Rule 501 to
account for inflation so that the thresholds will not erode over time;
To clarify the list of legal entities that may qualify as
accredited investors to eliminate existing uncertainty regarding the
list;
To clarify under the definition of ``joint investments''
that only 50 percent of the assets held jointly by spouses should be
used in determining an individual's accredited investor status.
In addition, we propose to shorten the Regulation D integration
safe harbor from six months to 90 days to provide flexibility to
issuers to meet financing needs, which often are unpredictable.
Finally, we propose that certain issuers be precluded from relying on
Regulation D if they are subject to the disqualification provisions in
proposed Rule 502(e). We believe these disqualification provisions will
serve to guard against fraud in exempt offerings and improve the
market's perceptions of these offerings, thereby reducing the cost of
capital.
We are soliciting comment on whether to amend Rule 504 so that
securities sold pursuant to a state law exemption that permits sales
only to accredited investors would be deemed ``restricted securities''
for purposes of Rule 144. Given that Rule 504 issuers tend to be small
entities, this amendment would affect small entities, to the extent
that Rule 144 restrictions would be greater than current state law
restrictions.
C. Legal Basis
The amendments are being proposed under the authority set forth in
Sections 2(a)(15), 3(b), 4(2), 4(6), 18, 19, and 28 of the Securities
Act.
D. Small Entities Subject to the Proposed Rules
The proposals would affect issuers that are small entities. For
purposes of the Regulatory Flexibility Act under our rules, an issuer
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.\192\ 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. The proposed amendments would apply to all issuers that
rely on Regulation D for an exemption to Securities Act registration.
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\192\ 17 CFR 230.157.
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All issuers that offer securities in reliance on Regulation D must
file a Form D with the Commission. However, the vast majority of
companies filing Form D are not required to provide financial reports
to the Commission. As previously noted, in 2006, 16,829 issuers filed
Form D. We believe that many of these issuers are small entities,
[[Page 45140]]
but we currently do not collect information on total assets to
determine if they are small entities for purposes of this analysis.
E. Reporting, Recordkeeping and Other Compliance Requirements
None of our proposed revisions to Regulation D would increase in
any material way the information or time required to complete the Form
D that must be filed with the Commission in connection with a
Regulation D transaction. Our proposed revisions would also not require
any further disclosure than is currently required in offerings made in
reliance on Regulation D, other than requiring each issuer submitting a
Form D to certify that it is not disqualified from relying on
Regulation D for one of the reasons stated in proposed Rule
502(e).\193\
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\193\ In a companion release, we are proposing this change to
Form D. See Release No. 33-8814 (June 29, 2007) [72 FR 37376].
---------------------------------------------------------------------------
Proposed Rule 507 would permit an issuer to publish a limited
advertisement and to solicit large accredited investors. The
limitations of the advertisement are detailed in Rule 507(b)(2)(ii).
The exemption builds on the accredited investor definition in
Regulation D, requiring that an issuer evaluate whether investors meet
the large accredited investor eligibility requirements. The same
systems and procedures an issuer would use to determine accredited
investor eligibility would be required to determine large accredited
investor eligibility. Issuers may need to establish new procedures if
they intend to make an offering on their own and relied on financial
intermediaries to establish the procedures in the past.
Proposed Rule 502(e), establishing uniform disqualification
provisions throughout Regulation D, would require issuers to determine
whether the issuer, any predecessor of the issuer, any affiliated
issuer, any director, executive officer, general partner or managing
member of the issuer, any beneficial owner of 20 percent or more of any
class of its equity securities, or any promoter currently connected
with the issuer is subject to any of the disqualification provisions.
F. Duplicative, Overlapping or Conflicting Federal Rules
We believe that there are no rules that conflict with or duplicate
the proposed rules.
G. Significant Alternatives
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objective of our
proposals, while minimizing any significant adverse impact on small
entities. In connection with the proposed amendments and rules, we
considered the following alternatives:
The establishment of different compliance or reporting
requirements or timetables that take into account the resources
available to small entities;
The clarification, consolidation, or simplification of the
rule's compliance and reporting requirements for small entities;
The use of performance rather than design standards; and
An exemption from coverage of the proposed rules, or any
part thereof, for small entities.
Regulation D provides exemptions to the registration requirements
under the Securities Act. The proposed amendments to Regulation D would
apply equally to all issuers that rely upon these exemptions. The
regulation is designed to facilitate access to capital by providing
exemptions to registration under the Securities Act. These exemptions
allow issuers to raise capital without having to expend the time and
resources necessary to undertake a registered public offering. Our
proposals are intended to further the goals of Regulation D through
simplification and clarification of the exemptions, expansion of their
availability and by providing greater uniformity between federal and
state exemptions.
With respect to the establishment of special compliance
requirements or timetables under the proposals for small entities, we
do not think this is feasible or appropriate. Our proposals are
designed to further facilitate issuers' access to capital for both
large and small issuers. Excepting small entities from our proposals
would increase, rather than decrease, their regulatory burden.
Nevertheless, we request comment on whether it is feasible or
appropriate for small entities to have special requirements or
timetables for compliance with our proposals.
With respect to clarification, consolidation and simplification of
Regulation D's compliance and reporting requirements for small
entities, we believe our proposals are designed to streamline and
modernize Regulation D for all issuers, both large and small.
Nevertheless, we request comment on ways to clarify, consolidate, or
simplify any part of the proposed amendments and rules.
With respect to the use of performance or design standards, we do
not consider using performance rather than design standards to be
consistent with our statutory mandate of investor protection in the
present context. Because the proposed rules seek compliance with
specific standards without seeking to achieve pre-determined levels of
capital formation or offering activity, design standards are necessary
to achieve the objective of the proposals. Nevertheless, we request
comment on these matters.
With respect to exempting small entities from coverage of these
proposed rules, we believe such changes would be impracticable. These
proposed rules are designed to facilitate an issuer's access to
capital, regardless of the size of the issuer. We have endeavored
throughout these proposed amendments and rules to minimize the
regulatory burden on all issuers, including small entities, while
meeting our regulatory objectives. Nevertheless, we request comment on
ways in which we could exempt small entities from coverage of any
unduly onerous aspects of our proposed amendments and rules.
H. Request for Comment
We encourage comments with respect to any aspect of this initial
regulatory flexibility analysis. In particular, we request comments
regarding:
The number of small entities that may be affected by the
proposals;
The existence or nature of the potential impact of the
proposals on small entities discussed in the analysis; and
How to quantify the impact of the proposed rules.
Commenters are asked to describe the nature of any impact and provide
empirical data supporting the extent of the impact. Such comments will
be considered in the preparation of the final regulatory flexibility
analysis, if the proposals are adopted, and will be placed in the same
public file as comments on the proposed amendments themselves.
I. Accredited Natural Person
In December 2006, the Commission proposed to add a new category of
accredited investor, defined as accredited natural person, under the
Securities Act.\194\ We do not believe that the additional questions
regarding that proposal on which we solicit comment in this release
change our Initial Regulatory Flexibility Analysis provided on that
proposal. We solicit comment on that conclusion and welcome further
comments on all aspects of that analysis.
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\194\ See Private Pooled Investment Vehicle Release.
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[[Page 45141]]
VIII. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\195\ a rule is ``major'' if it has resulted, or is likely
to result in:
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\195\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996).
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An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
We request comment on whether our proposals would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment or
innovation.
IX. Statutory Basis and Text of Proposed Amendments
The amendments are being proposed under the authority set forth in
Sections 2(a)(15), 3(b), 4(2), 4(6), 18, 19 and 28 of the Securities
Act, as amended.
Text of Proposed Amendments
List of Subjects
17 CFR Part 200
Authority delegations (Government agencies).
17 CFR Part 230 and 239
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND
REQUESTS
1. The authority citation for part 200, Subpart A, continues to
read, in part, as follows:
Authority: 15 U.S.C. 77o, 77s, 77sss, 78d, 78d-1, 78d-2, 78w,
78ll(d), 78mm, 80a-37, 80b-11, and 7202, unless otherwise noted.
* * * * *
2. Amend Sec. 200.30-1 by revising paragraph (c) to read as
follows:
Sec. 200.30-1 Delegation of authority to Director of Division of
Corporation Finance.
* * * * *
(c) With respect to the Securities Act of 1933 (15 U.S.C. 77a et
seq.) and Regulation D thereunder (Sec. 230.501 et seq. of this
chapter), to authorize the granting of applications under Rule
502(e)(2)(ii) (Sec. 230.502(e)(2)(ii) of this chapter) upon the
showing of good cause that it is not necessary under the circumstances
that the exemption under Regulation D be denied.
* * * * *
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
3. The authority citation for part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r,
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w,
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37,
unless otherwise noted.
* * * * *
4. Amend Sec. 230.144A by adding Preliminary Note 8 to read as
follows:
Sec. 230.144A Private resales of securities to institutions.
* * * * *
8. The publication of a general announcement of an offering in
accordance with Rule 507 (17 CFR 230.507) would not preclude resales
pursuant to Rule 144A.
* * * * *
5. Amend Sec. 230.146 by adding paragraph (c) to read as follows:
Sec. 230.146 Rules under section 18 of the Act.
* * * * *
(c) Definition of Qualified Purchaser. For purposes of Section
18(b)(3) of the Act (15 U.S.C. 77r(b)(3)), the term ``qualified
purchaser'' shall mean any large accredited investor as defined in
Sec. 230.501(k) with respect to an offer or sale in compliance with
Sec. 230.507, but this paragraph does not prohibit a state from
imposing notice filing requirements that are substantially similar to
those imposed by the Commission for transactions with such investors.
6. Revise Sec. 230.215 to read as follows:
Sec. 230.215 Accredited investor.
The term accredited investor as used in section 2(a)(15)(ii) of the
Securities Act of 1933 (15 U.S.C. 77b(a)(15)(ii)) shall include the
following persons:
(a) Any bank as defined in section 3(a)(2) of the Act, or any
savings and loan association or other institution as defined in section
3(a)(5)(A) of the Act, whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934; any insurance company as defined in
section 2(a)(13) of the Act; any investment company registered under
the Investment Company Act of 1940 or business development company as
defined in section 2(a)(48) of that Act; any Small Business Investment
Company licensed by the U.S. Small Business Administration under
section 301(c) or (d) of the Small Business Investment Act of 1958; any
plan established and maintained by a state, its political subdivisions,
or any agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees, if such plan has total
assets in excess of $5,000,000 or investments in excess of $5,000,000
(each as adjusted for inflation in accordance with the Note to this
Sec. 230.215); or any employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974 if the investment
decision is made by a plan fiduciary, as defined in section 3(21) of
such statute, which is either a bank, savings and loan association,
insurance company, or registered investment adviser, or if the employee
benefit plan has total assets in excess of $5,000,000 or investments in
excess of $5,000,000 (each as adjusted for inflation in accordance with
the Note to this Sec. 230.215) or, if a self-directed plan, with
investment decisions made solely by persons that are accredited
investors;
(b) Any private business development company as defined in section
202(a)(22) of the Investment Advisers Act of 1940;
(c) Any corporation (including any non-profit corporation),
Massachusetts or similar business trust, partnership, limited liability
company, Indian tribe, labor union, governmental body, or other legal
entity with substantially similar legal attributes, not formed for the
specific purpose of acquiring the securities offered, with total assets
in excess of $5,000,000 or investments in excess of $5,000,000 (each as
adjusted for inflation in accordance with the Note to this Sec.
230.215);
(d) Any director, executive officer, general partner, or managing
member of the issuer of the securities being offered or sold, or any
director, executive officer, general partner, or managing member of a
general partner or managing member of that issuer;
(e) Any natural person whose individual net worth, or aggregate net
worth with that person's spouse, at the time of purchase exceeds
$1,000,000 or whose individual investments, or joint investments with
that person's spouse, at the time of purchase exceeds $750,000 (each as
adjusted for inflation in accordance with the Note to this Sec.
230.215);
(f) Any natural person who had an individual income in excess of
$200,000
[[Page 45142]]
in each of the two most recent years or aggregate income with that
person's spouse in excess of $300,000 in each of those years (each as
adjusted for inflation in accordance with the Note to this Sec.
230.215) and has a reasonable expectation of reaching the same income
level in the current year;
(g) Any trust, with total assets in excess of $5,000,000 or
investments in excess of $5,000,000 (each as adjusted for inflation in
accordance with the Note to this Sec. 230.215), not formed for the
specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii);
and
(h) Any entity in which all of the equity owners are accredited
investors.
Note to Sec. 230.215: The dollar amounts of the accredited
investor thresholds as set forth in paragraphs (a), (c), (e), (f)
and (g) of this section shall be adjusted for inflation every five
years, with the first adjustments effective July 1, 2012, by
appropriate publication by the Commission in the Federal Register.
The inflation adjustments shall be computed by: Dividing the annual
value of the Personal Consumption Expenditures Chain-Type Price
Index (or any successor index thereto), as published by the
Department of Commerce, for the calendar year preceding the calendar
year in which the adjustment is being made by the annual value of
such index (or successor) for the calendar year ending December 31,
2006; and multiplying the dollar amounts by the quotient obtained.
The adjusted dollar amounts shall be rounded to the nearest multiple
of $10,000.
Instruction to Sec. 230.215: All terms used in the definition of
``accredited investor'' shall have the meaning indicated in Sec.
230.501.
7. The general authority citation for Part 230, Regulation D--Rules
Governing the Limited Offer and Sale of Securities Without Registration
Under the Securities Act of 1933 is revised to read as follows:
Regulation D--Rules Governing the Limited Offer and Sale of Securities
Without Registration Under the Securities Act of 1933
Authority: Section 230.501 to 230.508 issued under 15 U.S.C.
77c, 77d, 77r, 77s, and 77z-3.
* * * * *
Sec. Sec. 230.501 through 230.508 [Amended]
8. Amend Preliminary Note 2 to Regulation D, consisting of
Sec. Sec. 230.501 through 230.508, by revising the reference to
``19(c)'' to read ``19(d)''.
9. Amend Sec. 230.501 by:
a. Revising paragraph (a).
b. Redesignating paragraphs (g) and (h) as paragraphs (i) and (l).
c. Revising the reference in newly redesignated paragraph
(l)(1)(ii) that reads ``(h)(1)(i) or (h)(1)(iii)'' to read ``(l)(1)(i)
or (l)(1)(iii)''.
d. Revising the reference in newly redesignated paragraph
(l)(1)(iii) that reads ``(h)(1)(i) or (h)(1)(ii)'' to read ``(l)(1)(i)
or (l)(1)(ii)''.
e. Revising the reference in Note 2 to newly redesignated paragraph
(l) that reads ``paragraph (h)(3) and the disclosure required by
paragraph (h)(4)'' to read ``paragraph (l)(3) and the disclosure
required by paragraph (l)(4)''.
f. Adding new paragraphs (g), (h), (j) and (k).
The revisions and additions read as follows:
Sec. 230.501 Definitions and terms used in Regulation D.
* * * * *
(a) Accredited investor. ``Accredited investor'' shall mean any
person who comes within any of the following categories, or who the
issuer reasonably believes comes within any of the following
categories, at the time of the sale of the securities to that person:
(1) Any bank as defined in section 3(a)(2) of the Act, or any
savings and loan association or other institution as defined in section
3(a)(5)(A) of the Act, whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934; any insurance company as defined in
section 2(a)(13) of the Act; any investment company registered under
the Investment Company Act of 1940 or business development company as
defined in section 2(a)(48) of that Act; any Small Business Investment
Company licensed by the U.S. Small Business Administration under
section 301(c) or (d) of the Small Business Investment Act of 1958; any
plan established and maintained by a state, its political subdivisions,
or any agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees, if such plan has total
assets in excess of $5,000,000 or investments in excess of $5,000,000
(each as adjusted for inflation in accordance with the Note to
paragraph (a)); or any employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974 if the investment
decision is made by a plan fiduciary, as defined in section 3(21) of
such statute, which is either a bank, savings and loan association,
insurance company, or registered investment adviser, or if the employee
benefit plan has total assets in excess of $5,000,000 or investments in
excess of $5,000,000 (each as adjusted for inflation in accordance with
the Note to paragraph (a)) or, if a self-directed plan, with investment
decisions made solely by persons that are accredited investors;
(2) Any private business development company as defined in section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any corporation (including any non-profit corporation),
Massachusetts or similar business trust, partnership, limited liability
company, Indian tribe, labor union, governmental body, or other legal
entity with substantially similar legal attributes, not formed for the
specific purpose of acquiring the securities offered, with total assets
in excess of $5,000,000 or investments in excess of $5,000,000 (each as
adjusted for inflation in accordance with the Note to paragraph (a));
(4) Any director, executive officer, general partner, or managing
member of the issuer of the securities being offered or sold, or any
director, executive officer, general partner, or managing member of a
general partner or managing member of that issuer;
(5) Any natural person whose individual net worth, or aggregate net
worth with that person's spouse, at the time of purchase exceeds
$1,000,000 or whose individual investments, or joint investments with
that person's spouse, at the time of purchase exceeds $750,000 (each as
adjusted for inflation in accordance with the Note to paragraph (a));
(6) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or aggregate income with
that person's spouse in excess of $300,000 in each of those years (each
as adjusted for inflation in accordance with the Note to paragraph (a))
and has a reasonable expectation of reaching the same income level in
the current year;
(7) Any trust, with total assets in excess of $5,000,000 or
investments in excess of $5,000,000 (each as adjusted for inflation in
accordance with the Note to paragraph (a)), not formed for the specific
purpose of acquiring the securities offered, whose purchase is directed
by a sophisticated person as described in Rule 506(b)(2)(ii); and
(8) Any entity in which all of the equity owners are accredited
investors.
Note to paragraph (a): The dollar amounts of the accredited
investor thresholds as set forth in paragraphs (a)(1), (a)(3),
(a)(5), (a)(6) and (a)(7) of this section and the large accredited
investor thresholds as set forth in paragraphs (k)(1) through (k)(3)
of this section shall be adjusted for inflation every five years,
with the first adjustments effective July 1, 2012, by appropriate
publication by the Commission in the Federal Register. The inflation
adjustments shall be computed by: Dividing the annual value of the
Personal
[[Page 45143]]
Consumption Expenditures Chain-Type Price Index (or any successor
index thereto), as published by the Department of Commerce, for the
calendar year preceding the calendar year in which the adjustment is
being made by the annual value of such index (or successor) for the
calendar year ending December 31, 2006; and multiplying the dollar
amounts by the quotient obtained. The adjusted dollar amounts shall
be rounded to the nearest multiple of $10,000.
* * * * *
(g) Governmental body. ``Governmental body'' shall mean any:
(1) Nation, state, county, town, village, district or other
jurisdiction of any nature;
(2) Federal, State, local, municipal, foreign or other government;
(3) Governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official or
entity and any court or other tribunal);
(4) Multi-national organization or body; or
(5) Body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory or taxing
authority or power of any nature.
(h) Investments. ``Investments'' shall mean:
(1) Securities (as defined by section 2(a)(1) of the Act), other
than securities issued by an issuer that is controlled by the
prospective purchaser that owns such securities, unless such issuer is:
(i) An investment company, as defined in section 3(a) of the
Investment Company Act of 1940 (15 U.S.C. 80a-3(a)), or a company that
would be an investment company under section 3(a) but for the
exclusions from that definition provided by sections 3(c)(1) through
3(c)(9) of the Investment Company Act (15 U.S.C. 80a-3(c)(1) through
3(c)(9)), or the exclusions provided by Sec. 270.3a-6 or Sec. 270.3a-
7 of this chapter, or a commodity pool;
(ii) A company that:
(A) Files reports pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); or
(B) Has a class of securities that are listed on a ``designated
offshore securities market'' as such term is defined by Regulation S
under the Act (Sec. Sec. 230.901 through 230.904); or
(iii) A company with shareholders' equity of not less than $50
million (determined in accordance with generally accepted accounting
principles) as reflected on the company's most recent financial
statements, provided that such financial statements present the
information as of a date within 16 months preceding the date on which
the prospective purchaser acquires the offered securities;
(2) Real estate held for investment purposes;
(3) Commodity interests held for investment purposes. For purposes
of this section, commodity interests means commodity futures contracts,
options on commodity futures contracts, and options on physical
commodities traded on or subject to the rules of:
(i) Any contract market designated for trading such transactions
under the Commodity Exchange Act (7 U.S.C. 1 et seq.) and the rules
thereunder (17 CFR 1.1 through 190.10); or
(ii) Any board of trade or exchange outside the United States, as
contemplated in Part 30 of the rules under the Commodity Exchange Act
(17 CFR 30.1 through 30.12);
(4) Physical commodities held for investment purposes. For purposes
of this paragraph, physical commodities means any physical commodity
with respect to which a commodity interest is traded on a market
specified in paragraph (h)(3)(iii) of this section;
(5) To the extent not securities, financial contracts (as such term
is defined in section 3(c)(2)(B)(ii) of the Investment Company Act of
1940 (15 U.S.C. 80a-3(c)(2)(B)(ii))) entered into for investment
purposes; and
(6) Cash and cash equivalents (including foreign currencies) held
for investment purposes. For purposes of this section, cash and cash
equivalents include:
(i) Bank deposits, certificates of deposit, bankers acceptances and
similar bank instruments held for investment purposes; and
(ii) The net cash surrender value of an insurance policy.
Note 1 to paragraph (h): Solely for the purpose of determining
``investment purposes'' in this paragraph (h), real estate shall not
be considered to be held for investment purposes by a prospective
purchaser if it is used by the prospective purchaser, a sibling,
spouse or former spouse, a direct lineal descendant by birth or
adoption, or spouse of such lineal descendant or ancestor for
personal purposes or as a place of business, or in connection with
the conduct of the trade or business of the prospective purchaser or
such related person, provided that real estate owned by a
prospective purchaser who is engaged primarily in the business of
investing, trading or developing real estate in connection with such
business may be deemed to be held for investment purposes.
Residential real estate shall not be deemed to be used for personal
purposes if deductions with respect to such real estate are not
disallowed by section 280A of the Internal Revenue Code (26 U.S.C.
280A).
Note 2 to paragraph (h): Solely for the purpose of determining
``investment purposes'' in this paragraph (h), a commodity interest
or physical commodity owned, or a financial contract entered into,
by the prospective purchaser who is engaged primarily in the
business of investing, reinvesting, or trading in commodity
interests, physical commodities or financial contracts in connection
with such business may be deemed to be held for investment purposes.
Note 3 to paragraph (h): Solely for the purpose of determining
whether a prospective purchaser meets the dollar-amount investor
thresholds in Regulation D, the aggregate amount of investments
owned and invested on a discretionary basis shall be the
investments' fair market value on the most recent practicable date
or their cost provided that in the case of commodity interests, the
amount of investments shall be the value of the initial margin or
option premium deposited in connection with such commodity
interests. There shall be deducted from the amount of such
investor's investments the amount of any outstanding indebtedness
incurred to acquire or for the purpose of acquiring the investments
owned by such person.
* * * * *
(j) Joint investments. ``Joint investments'' shall mean:
(1) In the case of a purchase binding on both spouses and where
both spouses sign the investment documentation, the aggregate of their
investments held individually and their investments held jointly or as
community property or similar shared ownership interest; or
(2) In the case of a purchase made by an individual spouse or where
only an individual spouse signs the investment documentation, the
aggregate of the investments held individually by the purchaser and 50
percent of any investments held jointly with the individual's spouse or
as community property or similar shared ownership interest.
(k) Large accredited investor. ``Large accredited investor'' shall
mean an accredited investor as defined in paragraph (a) of this
section, except that:
(1) Any person described in paragraph (a)(1), (a)(3), or (a)(7) of
this section required to have a dollar amount of assets shall instead
be required to have investments in excess of $10,000,000 (as adjusted
for inflation in accordance with the Note to paragraph (a) of this
section);
(2) Any person described in paragraph (a)(5) of this section shall
be required to have investments, or joint investments with that
person's spouse, in excess of $2,500,000 (as adjusted for inflation in
accordance with the Note to paragraph (a) of this section);
(3) Any person described in paragraph (a)(6) of this section shall
be required to
[[Page 45144]]
have had an individual income in excess of $400,000 in each of the two
most recent years or aggregate income with that person's spouse in
excess of $600,000 in each of those years (each as adjusted for
inflation in accordance with the Note to paragraph (a) of this section)
and have a reasonable expectation of reaching the same income level in
the current year; and
(4) All of the equity owners of entities described in paragraph
(a)(8) of this section shall be required to be large accredited
investors.
* * * * *
10. Amend Sec. 230.502 by:
a. Revising the references that read ``six months'' in paragraph
(a) to read ``90 days'' and revising the reference that reads ``six
month periods'' in paragraph (a) to read ``90-day periods''.
b. Adding to the first sentence of paragraph (c) the phrase ``or
Sec. 230.507(b)(2)(ii)'' after the phrase ``Except as provided in
Sec. 230.504(b)(1)''.
c. Adding paragraph (e).
The addition reads as follows:
Sec. 230.502 General conditions to be met.
* * * * *
(e) Disqualification provisions. (1) An issuer may not rely on
Regulation D if the issuer, any predecessor of the issuer, any
affiliated issuer, any director, executive officer, general partner, or
managing member of the issuer, any beneficial owner of 20 percent or
more of any class of its equity securities, or any promoter currently
connected with the issuer:
(i) Within the last 5 years, has filed a registration statement
that is the subject of a currently effective permanent or temporary
injunction of a court or an administrative stop order or similar order
entered by the Commission or the securities commission (or any agency
or office performing like functions) of any state;
(ii) Within the last 10 years, has been convicted of a criminal
offense in connection with the offer, purchase or sale of any security
or involving the making of a false filing with the Commission;
(iii) Within the last 5 years, has been the subject of an
adjudication or determination, after notice and opportunity for
hearing, by a Federal or State regulator that the person violated
Federal or State securities or commodities law or a law under which a
business involving investments, insurance, banking, or finance is
regulated; or
(iv) Is currently subject to any order, judgment or decree of any
court of competent jurisdiction, entered within the last 5 years,
temporarily, preliminarily or permanently restraining or enjoining such
party from engaging in or continuing to engage in any conduct or
practice involving securities, commodities, investments, insurance,
banking, or finance, including an order for failure to comply with
Sec. 230.503;
(v) Is currently subject to a cease and desist order, entered
within the last 5 years, issued under Federal or State securities,
commodities, investment, insurance, banking or finance laws; or
(vi) Is suspended or expelled from membership in, or suspended or
barred from association with a member of, a national securities
exchange registered under section 6 of the Exchange Act or a national
securities association registered under section 15A of the Exchange Act
for any act or omission to act constituting conduct inconsistent with
just and equitable principles or trade.
(2) Paragraph (e)(1) of this section shall not apply if:
(i) Upon a showing of good cause and without prejudice to any other
action by the Commission, the Commission determines that it is not
necessary under the circumstances that the exemption be denied; or
(ii) The issuer establishes that it did not know, and in the
exercise of reasonable care could not have known, that a
disqualification existed under paragraph (e)(1).
Sec. 230.503 [Amended]
11. Amend Sec. 230.503 paragraph (a) by revising the reference
that reads ``Sec. 230.504, Sec. 230.505, or Sec. 230.506'' to read
``Sec. 230.504, Sec. 230.505, Sec. 230.506, or Sec. 230.507''.
Sec. 230.504 [Amended]
12. Amend Sec. 230.504 paragraph (b)(1) by revising the reference
that reads ``230.502(a), (c) and (d)'' to read ``230.502(a), (c), (d)
and (e)''.
Sec. 230.505 [Amended]
13. Amend Sec. 230.505 by removing paragraph (b)(2)(iii).
14. Amend Sec. 230.506 by adding a Note at the end to read as
follows:
Sec. 230.506 Exemption for limited offers and sales without regard to
dollar amount of offering.
* * * * *
Note to Sec. 230.506: Securities sold in compliance with Sec.
230.506 are ``covered securities'' within the meaning of section 18
of the Act by reason of section 18(b)(4)(D) of the Act, which limits
state regulation as provided in section 18 of the Act.
15. Revise Sec. 230.507 to read as follows:
Sec. 230.507 Exemption for limited offers and sales to large
accredited investors.
(a) Exemption. Offers and sales of securities that satisfy the
conditions in paragraph (b) of this section by an issuer shall be
exempt from the provisions of section 5 of the Act under section 28 of
the Act.
(b) Conditions to be met.-- (1) General conditions. To qualify for
an exemption under this section, offers and sales must satisfy all the
terms and conditions of Sec. Sec. 230.501 and 230.502(a), (c), (d) and
(e) to the extent not superseded by paragraph (b)(2)(ii) of this
section.
(2) Specific Conditions.--(i) Limitation on purchasers. All
purchasers are or the issuer reasonably believes that all purchasers
are large accredited investors.
(ii) Limited announcement. Notwithstanding Sec. 230.502(c), offers
and sales of securities may qualify for exemption under this section if
the issuer or a person acting on the issuer's behalf publishes in
written form an announcement of a proposed offering that prominently
states that sales will be made to large accredited investors only, no
money or other consideration is being solicited or will be accepted
through the announcement, and the securities have not been registered
with or approved by the U.S. Securities and Exchange Commission and are
being offered and sold pursuant to an exemption from registration, and
the announcement contains no more than the following optional
information:
(A) The name and address of the issuer;
(B) The name, type, number, price and aggregate amount of
securities being offered and a brief description of the securities;
(C) A description of what ``large accredited investor'' means;
(D) Any suitability standards and minimum investment requirements
for prospective purchasers in the offering;
(E) A brief description of the business of the issuer in 25 or
fewer words; and
(F) The name, address and telephone number of a person to contact
for additional information.
(iii) Additional Information. The issuer or a person acting on the
issuer's behalf may provide information in addition to the announcement
permitted under subparagraph (b)(2)(ii) of this section to a
prospective purchaser only if the issuer reasonably believes that the
prospective purchaser is a large accredited investor. Information may
be delivered to prospective purchasers through an electronic database
that is restricted to large accredited investors.
Note 1 to Sec. 230.507: Securities sold to large accredited
investors in compliance with
[[Page 45145]]
Sec. 230.507 are ``covered securities'' within the meaning of
section 18 of the Act by reason of section 18(b)(3) of the Act and
Sec. 230.146(c), which limits state regulation as provided in
section 18 of the Act.
Note 2 to Sec. 230.507: A private pooled investment vehicle
that would be an investment company but for the exclusion provided
by Sec. 3(c)(1) or Sec. 3(c)(7) of the Investment Company Act may
not rely on Sec. 230.507.
Sec. 230.508 [Amended]
16. Amend Sec. 230.508 by:
a. Revising the references that read ``Sec. 230.504, Sec. 230.505
or Sec. 230.506'' in paragraph (a), (a)(3) and (b) to read ``Sec.
230.504, Sec. 230.505, Sec. 230.506 or Sec. 230.507''.
b. Revising the reference that reads ``and paragraph (b)(2)(i) of
Sec. 230.506'' in paragraph (a)(2) to read ``, paragraph (b)(2)(i) of
Sec. 230.506 and paragraph (b)(2)(i) of Sec. 230.507''.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
17. The general authority citation for part 239 continues to read
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 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.
* * * * *
18. Amend Form D (referenced in Sec. 239.500), by adding a check
box that reads ``Rule 507'' between the ``Rule 506'' and ``Section
4(6)'' check boxes in the ``Filing Under'' information requested in the
forepart of the Form.
Note: The text of Form D does not, and the amendments will not,
appear in the Code of Federal Regulations.
Dated: August 3, 2007.
By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E7-15506 Filed 8-9-07; 8:45 am]
BILLING CODE 8010-01-P