[Federal Register Volume 84, Number 123 (Wednesday, June 26, 2019)]
[Proposed Rules]
[Pages 30460-30522]
[FR Doc No: 2019-13255]

Vol. 84

Wednesday,

No. 123

June 26, 2019

Part III

Securities and Exchange Commission

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17 CFR Parts 210, 227, 230, et al.

Concept Release on Harmonization of Securities Offering Exemptions;
Proposed Rule

Federal Register / Vol. 84 , No. 123 / Wednesday, June 26, 2019 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 227, 230, 239, 240, 249, 270, 274, and 275

[Release Nos. 33-10649; 34-86129; IA-5256; IC-33512; File No. S7-08-19]
RIN 3235-AM27

Concept Release on Harmonization of Securities Offering
Exemptions

AGENCY: Securities and Exchange Commission.

ACTION: Concept release; request for comment.

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SUMMARY: The Securities and Exchange Commission is publishing this
release to solicit comment on several exemptions from registration
under the Securities Act of 1933 that facilitate capital raising. Over
the years, and particularly since the Jumpstart Our Business Startups
Act of 2012, several exemptions from registration have been introduced,
expanded, or otherwise revised. As a result, the overall framework for
exempt offerings has changed significantly. We believe our capital
markets would benefit from a comprehensive review of the design and
scope of our framework for offerings that are exempt from registration.
More specifically, we also believe that issuers and investors could
benefit from a framework that is more consistent and addresses gaps and
complexities. Therefore, we seek comment on possible ways to simplify,
harmonize, and improve the exempt offering framework to promote capital
formation and expand investment opportunities while maintaining
appropriate investor protections.

DATES: Comments should be received on or before September 24, 2019.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/concept.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-08-19 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-08-19. This file number
should be included on the subject line if email 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
website (https://www.sec.gov/rules/concept.shtml). Comments are also
available for website viewing and copying in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. All
comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Jennifer Riegel or Amy Reischauer,
Office of Small Business Policy, Division of Corporation Finance, at
(202) 551-3460; Timothy White or Geeta Dhingra, Division of Trading and
Markets, at<PHONE_NUMBER>; or Mark T. Uyeda, Division of Investment
Management, at<PHONE_NUMBER>, U.S. Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Current Exempt Offering Framework Request for Comment
    A. Accredited Investor Definition
    1. Background
    2. Implications Outside of the Regulation D Context
    3. Accredited Investor Staff Report
    4. Comments on the Accredited Investor Staff Report
    5. Request for Comment
    B. Private Placement Exemption and Rule 506 of Regulation D
    1. Section 4(a)(2) of the Securities Act
    2. Rule 506 of Regulation D
    3. Request for Comment
    C. Regulation A
    1. Scope of the Exemption
    2. Disclosure Requirements
    3. Solicitation of Interest
    4. Relationship With State Securities Laws
    5. Analysis of Regulation A in the Exempt Market
    6. Request for Comment
    D. Limited Offerings--Rule 504 of Regulation D
    1. Scope of the Exemption
    2. Filing Requirements and Relationship With State Securities
Laws
    3. Analysis of Rule 504 in the Exempt Market
    4. Request for Comment
    E. Intrastate Offerings
    1. Section 3(a)(11) of the Securities Act
    2. Securities Act Rules 147 and 147A
    3. Request for Comment
    F. Regulation Crowdfunding
    1. Scope of the Exemption
    2. Disclosure Requirements
    3. Relationship With State Securities Laws
    4. Analysis of Regulation Crowdfunding in the Exempt Market
    5. Request for Comment
    G. Potential Gaps in the Current Exempt Offering Framework
    1. Micro-Offerings
    2. Request for Comment
III. Integration
    A. Facts and Circumstances Analysis
    B. Safe Harbors
    1. Regulation D
    2. Rule 152
    3. Abandoned Offerings: Rule 155
    4. Regulation A, Rules 147 and 147A, and Regulation Crowdfunding
    5. Other Integration Provisions
    C. Request for Comment
IV. Pooled Investment Funds
    A. Background
    1. Interval Funds and Tender Offer Funds
    2. Private Funds
    B. Pooled Investment Funds as Accredited Investors
    C. Retail Investor Access to Pooled Investment Funds That Invest
in Exempt Offerings
    D. Request for Comment
V. Secondary Trading of Certain Securities
    A. Resale Exemptions
    1. Section 4(a)(1) and Rule 144
    2. Rule 144A
    3. Section 4(a)(3)
    4. Section 4(a)(4)
    5. Section 4(a)(7)
    B. Relationship With State Law
    1. Section 18: Federal Preemption for Secondary Offerings
    2. State Exemptions for Secondary Sales
    C. Request for Comment
VI. Conclusion

I. Introduction

    The Securities Act of 1933 \1\ (the ``Securities Act'') requires
that every offer \2\ and sale of securities be registered with the
Securities and Exchange Commission (the ``Commission''), unless an
exemption is available. The purpose of registration is to provide
investors with full and fair disclosure of material information so that
they are able to make their own informed investment and voting
decisions.\3\ Congress recognized, however, that in certain situations
there is no practical need for registration or the public benefits from
registration are too remote.\4\ Accordingly, the Securities Act
contains a number of exemptions from its registration requirements and
authorizes the Commission to adopt

additional exemptions. As described in more detail below, the scope of
exempt offerings has evolved over time through Commission rules and
legislative changes. Significantly, the Jumpstart Our Business Startups
Act of 2012 (``JOBS Act'') greatly expanded the options to raise
capital in exempt offerings.\5\ Since then, the Fixing America's
Surface Transportation Act of 2015 (the ``FAST Act'') \6\ and the
Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018
(the ``Economic Growth Act'') \7\ resulted in further revisions to our
exemptions.\8\ As a result, the current exempt offering framework is
complex and made up of differing requirements and conditions, which may
be difficult for issuers, who bear the burden of demonstrating the
availability of any exemption,\9\ to navigate. Smaller companies with
more limited resources, which may be more likely to need to rely on
these exemptions given the costs associated with conducting a
registered offering and becoming a reporting company, may find it
particularly difficult to manage this complexity.
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    \1\ 15 U.S.C. 77a et seq.
    \2\ See 15 U.S.C. 77b(a)(3) (noting that an offer includes every
attempt to dispose of a security or interest in a security, for
value; or any solicitation of an offer to buy a security or interest
in a security).
    \3\ See, e.g., Commissioner Francis M. Wheat, Disclosure to
Investors--A Reappraisal of Federal Administrative Policies under
the '33 and '34 Acts (Mar. 1969) (often referred to as the ``Wheat
Report'').
    \4\ H.R. Rep. No. 73-85, at 5 (1933).
    \5\ Public Law 112-106, 126 Stat. 306 (2012). The JOBS Act,
among other things: Directed the Commission to revise 17 CFR 230.506
(``Rule 506'') to eliminate the prohibition against general
solicitation or general advertising for offers and sales of
securities to accredited investors (see Section II.B.2.b); added
Section 4(a)(6) [15 U.S.C. 77d(a)(6)] and Section 4A [15 U.S.C. 77d-
1(b)] to the Securities Act and directed the Commission to issue
rules to permit certain crowdfunding offerings (see Section II.F);
and directed the Commission to expand Regulation A [17 CFR 230.250
et seq.] (see Section II.C).
    \6\ Public Law 114-94, 129 Stat. 1312 (2015).
    \7\ Public Law 115-174, 132 Stat. 1296 (2018).
    \8\ The FAST Act added Section 4(a)(7) to the Securities Act [15
U.S.C. 77d(a)(7)], providing a new exemption for private resales of
securities. See Section V.A.5. Among other changes, the Economic
Growth Act required the Commission to amend Regulation A to permit
entities subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act to use the exemption. See Section II.C.
    \9\ See SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953)
(``Keeping in mind the broadly remedial purposes of federal
securities legislation, imposition of the burden of proof on an
issuer who would plead the exemption seems to us fair and
reasonable.'').
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    Market participants have conveyed concerns about the complexity of
the exempt offering framework and have recommended that the Commission
undertake a comprehensive review of the available exemptions.\10\ For
example, the 2012 Small Business Forum recommended that the Commission
initiate a top-to-bottom review of the exempt offering landscape to
ensure a rational regulatory scheme, including providing greater
guidance regarding integration of the new, as well as existing,
exemptions from registration.\11\ In addition, the 2018 Small Business
Forum recommended that the Commission rationalize, harmonize, simplify,
consolidate, and prioritize the regulatory regime for exempt offerings,
including communications restrictions, issuer eligibility, size of the
offering, type of investors, disclosure, and other conditions of
exemption.\12\
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    \10\ Given the impact of the JOBS Act on the exempt offering
framework, generally, this release references comments and
recommendations provided by various market participants, including
any relevant recommendations from the advisory committees to the
Commission and the SEC Government-Business Forums on Small Business
Capital Formation (each, a ``Small Business Forum''), received since
the adoption of the JOBS Act in 2012 or, if later, the adoption of
the relevant rule or the most recent amendment or request for
comment.
    \11\ See Final Report of the 2012 SEC Government-Business Forum
on Small Business Capital Formation (Apr. 2013) available at https://www.sec.gov/info/smallbus/gbfor31.pdf (``2012 Forum Report'').
     The Small Business Investment Incentive Act of 1980 directed
the Commission to conduct an annual government-business forum to
undertake an ongoing review of the financing problems of small
businesses. 15 U.S.C. 80c-1. The Small Business Forum has met
annually since 1982 to provide a platform to highlight perceived
unnecessary impediments to small business capital formation and
address whether they can be eliminated or reduced. Each forum seeks
to develop recommendations for government and private action to
improve the environment for small business capital formation,
consistent with other public policy goals, including investor
protection. Information about the Small Business Forum is available
at https://www.sec.gov/corpfin/infosmallbussbforum-2shtml.
    \12\ See Final Report of the 2018 SEC Government-Business Forum
on Small Business Capital Formation (Jun. 2019) available at https://www.sec.gov/info/smallbus/gbfor37.pdf (``2018 Forum Report'').
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    In this concept release, we undertake a broad review of available
exemptions to the registration requirements of the federal securities
laws that facilitate capital raising and seek input in order to assess
whether our exempt offering framework, as a whole, is consistent,
accessible, and effective for both issuers and investors or whether we
should consider changes to simplify, improve, or harmonize the exempt
offering framework. In this regard, we seek to explore whether
overlapping exemptions may create confusion for issuers trying to
determine and navigate the most efficient path to raise capital. At the
same time, we seek to identify gaps in our framework that may make it
difficult, especially for smaller issuers, to rely on an exemption from
registration to raise capital at key stages of their business cycle. We
also consider whether the limitations on who can invest in certain
exempt offerings, or the amount they can invest, provide an appropriate
level of investor protection (i.e., whether the current levels of
investor protection are insufficient, appropriate, or excessive) or
pose an undue obstacle to capital formation or investor access to
investment opportunities. For example, we explore whether we should
revise our investor eligibility limitations to focus more particularly
on the sophistication of the investor, the amount of the investment, or
other criteria rather than just the income or wealth of the individual
investor. In addition, this release looks at whether we can and should
do more to allow issuers to transition from one exempt offering to
another and, ultimately, to a registered public offering, if desired,
without undue friction or delay. We also examine whether we should take
steps to expand issuers' ability to raise capital through pooled
investment funds, and whether retail investors should be allowed
greater exposure to growth-stage issuers through pooled investment
funds in light of the potential advantages of investing through such
funds, including the ability to have an interest in a diversified
portfolio. Finally, we look at secondary trading of securities
initially issued in exempt offerings and consider whether we should
revise our rules governing exemptions for resales of securities to
facilitate capital formation and to promote investor protection by
improving secondary market liquidity.
    Each section of this release can be read, and commented on,
independently. We welcome all feedback and encourage interested parties
to submit comments on any or all topics of interest and to respond to
one, multiple, or all questions asked in this release. In responding to
comments, it would be most helpful if commenters provide an explanation
why we should or should not take a particular action or approach, as
appropriate.

II. Current Exempt Offering Framework

    The Securities Act contains a number of exemptions to its
registration requirements and authorizes the Commission to adopt
additional exemptions. Section 3 of the Securities Act generally
identifies certain classes of securities that are exempt from the
registration requirements of the Securities Act.\13\ Most of these
exemptions are based on characteristics of the securities themselves,
though some exempted securities are identified based on the transaction
in which they are offered or sold.\14\ Section 4 of the

Securities Act identifies a number of transactions that are exempt from
the registration requirements.\15\ In addition, Section 28 of the
Securities Act, which was added by the National Securities Markets
Improvement Act of 1996 (``NSMIA''),\16\ authorizes the Commission to
exempt other persons, securities, or transactions to the extent
``necessary or appropriate in the public interest [and] consistent with
the protection of investors.'' \17\
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    \13\ 15 U.S.C. 77c.
    \14\ For example, Section 3(b)(1) of the Securities Act
authorizes the Commission to exempt certain issues of securities
where the aggregate amount offered does not exceed $5 million to the
extent that ``the enforcement of this title with respect to such
securities is not necessary in the public interest and for the
protection of investors by reason of the small amount involved or
the limited character of the public offering.'' 15 U.S.C. 77c(b)(1).
    \15\ 15 U.S.C. 77d.
    \16\ Public Law 104-290, 110 Stat. 3416 (Oct. 11, 1996).
    \17\ 15 U.S.C. 77z-3.
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    The statutory exemptions and those established by the Commission's
rules and regulations include a variety of requirements, investor
protections, and other conditions. For example, some exemptions limit
the amount of securities that may be offered or sold. Some exemptions
limit the manner in which the offering can be conducted, such as by
prohibiting the use of general solicitation or general advertising to
solicit investors. Some offerings are exempt if they restrict sales to
certain sophisticated or ``accredited'' investors that are presumed to
possess sufficient financial sophistication and ability to sustain the
risk of loss of their investment or to fend for themselves to render
the protections of the Securities Act's registration process
unnecessary.\18\ In addition, some exemptions specify disclosures
required to be included in prescribed forms to be filed with the
Commission or otherwise provided to all or a subset of prospective
investors. Many exemptions exclude certain types of issuers, such as
non-U.S. issuers, issuers subject to the reporting requirements of the
Securities Exchange Act of 1934 (the ``Exchange Act''),\19\ or
investment companies, or specifically disqualify offerings involving
certain ``bad actors'' from relying on the exemption.
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    \18\ See Regulation D Revisions; Exemption for Certain Employee
Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015] (the
``Regulation D Revisions Proposing Release'').
    \19\ 15 U.S.C. 78a et seq.
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    Table 1 summarizes some of the characteristics of the most commonly
used exemptions \20\ from registration.\21\
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    \20\ Commission rules also provide exemptions for certain
offerings where the purpose of the offering is other than to raise
capital. For example, 17 CFR 230.701 (``Rule 701'') exempts certain
sales of securities made to compensate employees, consultants, and
advisors. See note 512 for a brief discussion of Rule 701.
    \21\ Generally, Table 1 is organized by typical offering size
from largest to smallest. Certain regulatory exemptions from
registration are based on statutory provisions, but provide specific
frameworks or safe harbors to comply with the statutory exemptions.
For example, as discussed in more detail in Section II.B.2.a, Rule
506(b) provides a safe harbor to comply with the exemption under
Section 4(a)(2) [15 U.S.C. 77d(a)(2)], or, as discussed in Section
II.E.2, Rule 147 provides a safe harbor under Section 3(a)(11) [15
U.S.C. 77c(a)(11)]. An issuer may choose not to avail itself of one
of these specific regulatory exemptions and instead conduct an
offering pursuant to the statutory exemption itself, such as Section
4(a)(2), following principles-based requirements that have been
developed over time.
    \22\ 346 U.S. 119, 126 (1953).
    \23\ Regulation D [17 CFR 230.501 et seq.] relates to
transactions exempted from the registration requirements of Section
5 of the Securities Act under 17 CFR 230.504 (``Rule 504''), Rule
506(b) and Rule 506(c). Rule 504 provides an exemption for the
public offer and sale of up to $5 million of securities in a 12-
month period. General solicitation and general advertising are
permitted if the offering is registered in a state requiring the use
of a substantive disclosure document or sold exclusively to
accredited investors under a corresponding state exemption. See
Section II.D for a discussion of Rule 504.
    \24\ While it is not a filing requirement, offerings relying on
Rule 506(b) require additional information to be provided to non-
accredited investors purchasing in the offering.
    \25\ While the exemptions identified here as excluding blank
check companies do not use the term ``blank check company,'' they
exclude development stage issuers that have no specific business
plan or purpose or have indicated that their business plan is to
engage in a merger or acquisition with an unidentified company or
companies, which is substantially similar to the definition of blank
check company in Securities Act Rule 419, used elsewhere in
Commission rules. See 17 CFR 230.419.

                                                     Table 1--Overview of Capital-Raising Exemptions
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                                Offering limit                                                                                Preemption of
       Type of offering         within 12-month      General           Issuer          Investor        SEC filing    Restrictions on  state registration
                                    period         solicitation     requirements     requirements     requirements        resale       and qualification
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Section 4(a)(2)..............  None............  No.............  None...........  Transactions by  None...........  Yes. Restricted  No.
                                                                                an issuer not                     securities.
                                                                                involving any
                                                                                public
                                                                                offering. See
                                                                                SEC v. Ralston
                                                                                Purina Co.\22\
Rule 506(b) of Regulation D    None............  No.............  ``Bad actor''    Unlimited        Form D \24\....  Yes. Restricted  Yes.
 \23\.                                                             disqualificati   accredited                        securities.
                                                                   ons apply.       investors. Up
                                                                                to 35
                                                                                sophisticated
                                                                                but non-
                                                                                accredited
                                                                                investors.
Rule 506(c) of Regulation D..  None............  Yes............  ``Bad actor''    Unlimited        Form D.........  Yes. Restricted  Yes.
                                                                   disqualificati   accredited                        securities.
                                                                   ons apply.       investors;
                                                                                Issuer must
                                                                                take
                                                                                reasonable
                                                                                steps to
                                                                                verify that
                                                                                all purchasers
                                                                                are accredited
                                                                                investors.
Regulation A: Tier 1.........  $20 million.....  Permitted;       U.S. or          None...........  Form 1-A,        No.............  No.
                                                  before           Canadian                          including two
                                                  qualification,   issuers.                          years of
                                                  testing the      Excludes blank                    financial
                                                  waters           check                             statements.
                                                  permitted        companies,\25\                    Exit report.
                                                  before and       registered
                                                  after the        investment
                                                  offering         companies,
                                                  statement is     business
                                                  filed.           development
                                                                   companies,
                                                                   issuers of
                                                                   certain
                                                                   securities,
                                                                   and certain
                                                                   issuers
                                                                   subject to a
                                                                   Section 12(j)
                                                                   order. ``Bad
                                                                   actor''
                                                                   disqualificati
                                                                   ons apply. No
                                                                   asset-backed
                                                                   securities.
Regulation A: Tier 2.........  $50 million.....  ...............  ...............  Non-accredited   Form 1-A,        No.............  Yes.
                                                                                investors are    including two
                                                                                subject to       years of
                                                                                investment       audited
                                                                                limits based     financial
                                                                                on annual        statements.
                                                                                income and net   Annual, semi-
                                                                                worth, unless    annual,
                                                                                securities       current, and
                                                                                will be listed   exit reports.
                                                                                on a national
                                                                                securities
                                                                                exchange.

Rule 504 of Regulation D.....  $5 million......  Permitted in     Excludes blank   None...........  Form D.........  Yes. Restricted  No.
                                                  limited          check                                              securities
                                                  circumstances.   companies,                                         except in
                                                                   Exchange Act                                       limited
                                                                   reporting                                          circumstances.
                                                                   companies, and
                                                                   investment
                                                                   companies.
                                                                   ``Bad actor''
                                                                   disqualificati
                                                                   ons apply.
Intrastate: Section 3(a)(11).  No federal limit  Offerees must    In-state         Offerees and     None...........  Securities must  No.
                                (generally,       be in-state      residents        purchasers                        come to rest
                                individual        residents.       ``doing          must be in-                       with in-state
                                state limits                       business'' and   state                             residents.
                                between $1 and                     incorporated     residents.
                                $5 million).                       in-state;
                                                                   excludes
                                                                   registered
                                                                   investment
                                                                   companies.
Intrastate: Rule 147.........  No federal limit  Offerees must    In-state         Offerees and     None...........  Yes. Resales     No.
                                (generally,       be in-state      residents        purchasers                        must be within
                                individual        residents.       ``doing          must be in-                       state for six
                                state limits                       business'' and   state                             months.
                                between $1 and                     incorporated     residents.
                                $5 million).                       in-state;
                                                                   excludes
                                                                   registered
                                                                   investment
                                                                   companies.
Intrastate: Rule 147A........  No federal limit  Yes............  In-state         Purchasers must  None...........  Yes. Resales     No.
                                (generally,                        residents and    be in-state                       must be within
                                individual                         ``doing          residents.                        state for six
                                state limits                       business'' in-                                     months.
                                between $1 and                     state;
                                $5 million).                       excludes
                                                                   registered
                                                                   investment
                                                                   companies.
Regulation Crowdfunding;       $1.07 million...  Permitted with   Excludes non-    Investment       Form C,          12-month resale  Yes.
 Section 4(a)(6).                                 limits on        U.S. issuers,    limits based     including two    limitations.
                                                  advertising      blank check      on annual        years of
                                                  after Form C     companies,       income and net   financial
                                                  is filed.        Exchange Act     worth.           statements
                                                  Offering must    reporting                         that are
                                                  be conducted     companies, and                    certified,
                                                  on an internet   investment                        reviewed or
                                                  platform         companies.                        audited, as
                                                  through a        ``Bad actor''                     required.
                                                  registered       disqualificati                    Progress and
                                                  intermediary.    ons apply.                        annual reports.
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    As Table 1 illustrates, the current exemptions impose a variety of
conditions designed to protect investors. Exemptions tend to
incorporate more investor protection measures where non-accredited or
less sophisticated investors are permitted to participate in the
offering. This focus on the characteristics of the investors involved
in a particular offering is articulated in the context of the Section
4(a)(2) exemption in the leading case interpreting that provision, SEC
v. Ralston Purina.\26\ In that case, the Supreme Court set forth the
position that the availability of the Section 4(a)(2) exemption
``should turn on whether the particular class of persons affected needs
the protection of the Act. An offering to those who are shown to be
able to fend for themselves is a transaction `not involving any public
offering.' '' \27\ The emphasis on the characteristics of the investors
extends throughout the current exempt offering framework, in which the
fewest conditions apply to an offering under an exemption where sales
are restricted to accredited investors, while offerings that permit
less wealthy or sophisticated investors to participate are subject to
an assortment of disclosure requirements, offering and investment
limits, and other conditions meant to mitigate the risk of not having
the traditional protections of registration under the Securities Act.
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    \26\ 346 U.S. 119 (1953).
    \27\ Id. at 125.
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    As discussed below, we seek comment on how an investor's
characteristics should be considered in determining whether an investor
is able to participate in a particular type of exempt offering. In
addition, we seek comment throughout this concept release on specific
conditions of each of the current capital-raising exemptions from
registration and whether the investment protections of those exemptions
are appropriately structured to encourage capital formation, while
mitigating the risk of not having the traditional investor protections
of registration.
    We also seek input on the framework as a whole, in light of the
many changes implemented over the years. The current exemptions were
not adopted as part of one cohesive regulatory scheme but rather
developed and evolved over time through Commission rules and
legislative changes. In addition to the JOBS Act and the adoption over
time of each of the exemptions from registration discussed in this
concept release, the evolution of the existing framework and exempt
offering market has been significantly affected by other legislative
developments over the years. For example, as noted above, NSMIA added
Section 28 to the Securities Act, providing the Commission with
significant flexibility to tailor the exempt offering framework by
giving the Commission authority to exempt persons, securities, and
transactions, or classes thereof, from the Securities Act. NSMIA also
preempted the state registration and review of transactions involving
``covered securities'' and amended Section 18 of the Securities Act to
establish classes of covered securities, including securities offered
or sold to ``qualified purchasers.'' \28\ The authority granted to the
Commission under Section 18(b)(3) to adopt rules that define a
``qualified purchaser'' is another significant source of flexibility
for the Commission with respect to the exempt offering framework.\29\
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    \28\ Public Law 104-290, 110 Stat. 3416 (Oct. 11, 1996).
    \29\ In 2015, the Commission used this authority to define
``qualified purchaser'' to include any person to whom securities are
offered or sold in a Regulation A Tier 2 offering. See 17 CFR
230.256.
    In 2001, the Commission proposed a definition of ``qualified
purchaser'' that mirrored the definition of accredited investor in
Regulation D in an effort to identify well-established categories of
persons it had previously determined to be financially sophisticated
and therefore not in need of the protection of state registration
when they were offered or sold securities. The Commission intended
the definition to facilitate capital formation, especially for small
businesses, to impose uniformity in the regulation of transactions
to these financially sophisticated persons, and to reduce burdens on
capital formation. See Defining the Term ``Qualified Purchaser''
under the Securities Act of 1933, Release No. 33-8041 (Dec. 19,
2001) [66 FR 66839 (Dec. 27, 2001)]. Although the Commission
solicited comment from interested parties, it took no further action
on the proposal.
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    Over time, Congress and the Commission have made changes to the
federal securities laws and Commission

rules that may enable issuers to remain private longer than in the
past. For example, the JOBS Act and the FAST Act revised the thresholds
for registration under Section 12(g) of the Exchange Act, with the
result that an issuer that is not a bank, bank holding company, or
savings and loan holding company is required to register a class of
equity securities under the Exchange Act if it has more than $10
million of total assets and the securities are ``held of record'' by
either 2,000 persons or 500 persons who are not accredited
investors.\30\
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    \30\ 15 U.S.C. 78l(g)(1); 17 CFR 240.12g-1. An issuer that is a
bank, bank holding company, or savings and loan holding company is
required to register a class of equity securities if it has more
than $10 million of total assets and the securities are ``held of
record'' by 2,000 or more persons. Prior to the JOBS Act, Section
12(g) of the Exchange Act required an issuer to register a class of
its equity securities if, at the end of the issuer's fiscal year,
the securities were ``held of record'' by 500 or more persons and
the issuer had total assets exceeding $1 million.
     Securities are deemed to be ``held of record'' by each person
identified as the owner of such securities on the records maintained
by or on behalf of the issuer, subject to certain conditions and
exceptions. See 17 CFR 240.12g5-1.
    For securities issued in an offering under Regulation A,
Regulation Crowdfunding [17 CFR 230.227 et seq.], or Rule 701, there
is a conditional exemption from the mandatory registration
provisions of Section 12(g) if certain conditions are met. See
Sections II.C.1.d and II.F.1.g. See also 17 CFR 240.12h-1.
---------------------------------------------------------------------------

    The Commission also has taken steps to address uncertainties with
respect to the integration of one exempt offering with another exempt
offering or with a registered offering, as discussed in detail in
Section III below, by providing some guidance to issuers as to their
ability to transition from one offering to another.
    The exempt markets have also been affected by Commission rule
changes and market developments that provide for some measure of
liquidity for securities in exempt offerings. Secondary market
liquidity is a key concern of investors and may have a significant
impact on an issuer's choices with respect to capital raising. In other
words, an investor's willingness to participate in an exempt offering
and the price he or she would be willing to pay may depend on the
investor's assessment of whether, when, and on what terms the security
can be resold. With regard to secondary market resales of securities
initially sold pursuant to an exemption from registration, the
Commission adopted 17 CFR 230.144 (``Rule 144'') in 1972, providing a
non-exclusive safe harbor for resales of securities acquired in
transactions not involving a public offering.\31\ In 1990, the
Commission created a safe harbor for resales of securities by persons
other than issuers to ``qualified institutional buyers'' (``QIBs'') in
17 CFR 230.144A (``Rule 144A'').\32\ In 2015, the FAST Act added
Section 4(a)(7) to the Securities Act, which exempts certain private
resales of securities to accredited investors.\33\ Further, in recent
years, markets have developed that facilitate the resale of securities
of non-reporting companies.\34\ However, resales of securities
originally purchased in a transaction exempt from registration raise a
variety of issues, including whether the primary and secondary sales
should be considered part of the same distribution of securities and
whether secondary sales have an impact on the availability of the
exemption from registration relied on for the primary offering.\35\
While the primary focus in this concept release is on the harmonization
of the exemptions from registration for primary offerings, we also seek
public input on whether we should consider rule changes that in certain
cases would allow for more or less flexibility with regard to
resales.\36\
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    \31\ See Release No. 33-5223 (Jan. 11, 1972) [37 FR 591] (``Rule
144 Adopting Release''). For a discussion of Rule 144, see Section
V.A.1.
    \32\ See Resale of Restricted Securities; Changes to Method of
Determining Holding Period of Restricted Securities under Rules 144
and 145, Release No. 33-6862 (Apr. 23, 1990) [55 FR 17933 (Apr. 30,
1990)] (``Rule 144A Adopting Release''). For a discussion of Rule
144A, see Section V.A.2.
    \33\ Public Law 114-94, 129 Stat. 1312 (2015). See Section
V.A.5.
    \34\ See, e.g., David F. Larcker, Brian Tayan, and Edward Watts,
Cashing it in: Private-Company Exchanges and Employee Stock Sales
Prior to IPO, Stanford Closer Look Series (Sep. 12, 2018).
    \35\ Persons reselling securities must consider whether they
could be an ``underwriter'' if they acquired the securities with a
view to ``distribution'' or if they are participating in a
``distribution.'' See Section 2(a)(11) of the Securities Act [15
U.S.C. 77b(a)(11)] (defining the term ``underwriter''). The Section
4(a)(1) [15 U.S.C. 77d(a)(1)] exemption, discussed in Section IV, is
not available to a seller that is deemed to be an underwriter, and
the resale by such an underwriter may be considered part of the
primary offering by the issuer of the securities, calling into
question the availability of the exemption for the original
offering.
    \36\ See Section IV.
---------------------------------------------------------------------------

    Separate and apart from these regulatory changes, the exempt
markets have been influenced by changes over the years in information
and communications technologies. Given the rise of social media and
other forms of communication, as well as online trading platforms for
unregistered securities, information about exempt securities offerings
is far more readily available to potential investors and to the general
public and at a lower cost than at the time many of the exemptions were
promulgated.

    As the regulatory and operational framework for exempt offerings
has evolved, the amount raised in exempt markets has increased both
absolutely and relative to the public registered markets. In 2018,
registered offerings accounted for $1.4 trillion of new capital
compared to approximately $2.9 trillion that we estimate was raised
through exempt offering channels.\37\
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    \37\ Unless otherwise indicated, information in this release on
Regulation D offerings, including offerings under Rule 504 and Rule
506, is based on analysis by staff in the Commission's Division of
Economic Risk and Analysis (``DERA'') of data collected from Form D
[17 CFR 239.500] filings on the Commission's Electronic Data
Gathering, Analysis and Retrieval system (``EDGAR'') from January
2009 through December 2018. DERA staff determined the amount raised
based on the amounts reported as ``Total amount sold'' in all Form D
filings (new filings and amendments) on EDGAR. Subsequent amendments
to a new filing were treated as incremental fundraising and recorded
in the calendar year in which the amendment was filed. It is likely
that the reported data on Regulation D offerings underestimates the
actual amount raised through these offerings. First, as discussed in
Section II.B.2, 17 CFR 230.503 (``Rule 503'') of Regulation D
requires issuers to file a Form D no later than 15 days after the
first sale of securities, but a failure to file the notice does not
invalidate the exemption. Accordingly, it is possible that some
issuers do not file Forms D for offerings relying on Regulation D.
Second, underreporting could also occur because a Form D may be
filed prior to completion of the offering, and our rules do not
require issuers to amend a Form D to report the total amount sold on
completion of the offering or to reflect additional amounts offered
if the aggregate offering amount does not exceed the original
offering size by more than 10%.
    Data on Regulation A offerings was collected from Form 1-Z [17
CFR 239.94] and 1-K [17 CFR 239.91] filings on EDGAR from May 2015
through December 2018. DERA staff supplemented information from
Forms 1-Z and 1-K by manually reviewing semi-annual reports on Form
1-SA [17 CFR 239.92], available current reports on Form 1-U [17 CFR
239.93], and offering circular supplements filed during the sample
period, and for issuers whose securities have become exchange-
listed, information from other public sources. However, data on
amounts raised may remain incomplete, and discrepancies in
classification may arise. Estimates are based on available reports
filed during this period and represent a lower bound on the amounts
raised given: (1) The time frames for reporting proceeds following
completed or terminated offerings; and (2) that offerings qualified
during the report period may be ongoing. As discussed in Section
II.C.2.b, Regulation A requires issuers in Tier 1 offerings to
report sales and to update certain issuer information by filing a
Form 1-Z exit report with the Commission not later than 30 calendar
days after termination or completion of an offering. Tier 2 issuers
are required to report sales in their first annual report on Form 1-
K after termination or completion of a qualified offering, or in
their exit report on Form 1-Z. Therefore, some issuers that have
completed offerings during the sample period might not have reported
proceeds during this period. Accordingly, amounts provided for these
offerings likely underestimate the actual amount of capital raised
during the period.
    Data on Regulation Crowdfunding offerings was collected from
Form C [17 CFR 239.900] filings on EDGAR from May 2015 through
December 2018. For offerings that have been amended, the data
reflects information reported in the latest amendment as of the end
of the considered period. As discussed in Section II.F, Regulation
Crowdfunding requires an issuer to file a progress update on Form C-
U within 5 business days after reaching 100% of its target offering
amount. The data on Regulation Crowdfunding excludes 107 withdrawn
offerings (involving a Form C-W filing or an intermediary that has
withdrawn its registration as of the report date). Some withdrawn
offerings may be failed offerings. Amounts raised may be lower than
the target or maximum amounts sought.
    See note 41 for a discussion of the data on other exempt
offerings, which includes Section 4(a)(2), Regulation S [17 CFR
230.901 et seq.], and Rule 144A offerings.
    See also Scott Bauguess, Rachita Gullapalli and Vladimir Ivanov,
Capital Raising in the U.S.: An Analysis of the Market for
Unregistered Securities Offerings, 2009-2017 (Aug. 2018) (the
``Unregistered Offerings White Paper''), available at https://www.sec.gov/files/DERA%20white%20paper_Regulation%20D_082018.pdf.
The methodology DERA staff used to analyze data in this release is
consistent with the methodology described in more detail in the
Unregistered Offerings White Paper.
    We do not have data available on, and are unable to estimate,
amounts raised under the intrastate exemptions under Securities Act
Section 3(a)(11) or Rule 147 or 147A. See Section 70.
---------------------------------------------------------------------------

    Figure 1 shows registered and exempt offerings over the period
2009-2018.\38\ The data shows that exempt offerings have accounted for
significantly larger amounts of new capital compared to registered
offerings during the period under consideration. Both markets exhibit
an upward trend, which is consistent with the favorable macroeconomic
environment during this period. Although the magnitudes of exempt
capital and registered capital raised vary over time, the amount
reported raised in exempt offerings is always larger than the amount
raised in registered offerings during this time period.
---------------------------------------------------------------------------

    \38\ The sample period begins in 2009 due to data availability:
Form D, from which we obtain data on exempt offerings under
Regulation D, was required to be filed electronically starting in
2009. We note that, as a result, the sample period excludes the
years of the 2007-2008 financial crisis. The sample period ends in
2018, which is the last full year of data on offerings.
[GRAPHIC] [TIFF OMITTED] TP26JN19.000

    Of the approximately $2.9 trillion estimated as raised in exempt
offerings in 2018, Table 2 shows the amounts that we estimate were
raised under each of the identified exemptions in 2018.

    Table 2--Overview of Amounts Raised in the Exempt Market in 2018
------------------------------------------------------------------------
                                                              Amounts
                                                            reported or
                        Exemption                          estimated as
                                                          raised in 2018
                                                             (billion)
------------------------------------------------------------------------
Rule 506(b) of Regulation D.............................          $1,500
Rule 506(c) of Regulation D.............................             211
Regulation A: Tier 1....................................      \39\ 0.061
Regulation A: Tier 2....................................      \40\ 0.675
Rule 504 of Regulation D................................               2
Regulation Crowdfunding; Section 4(a)(6)................           0.055
Other exempt offerings \41\.............................           1,200
------------------------------------------------------------------------

    The amounts estimated as raised in other exempt offerings include
estimated amounts raised in offerings under Rule 144A and Regulation S.
Rule 144A is a non-exclusive safe harbor for resales of certain
restricted securities. However, Rule 144A is typically used by market
participants to facilitate capital raising by issuers by means of a
two-step process in which the first step is a primary offering on an
exempt basis to one or more financial intermediaries, and the second
step is a resale to QIBs in reliance on Rule 144A.\42\ Regulation S
provides a safe harbor for offers and sales of securities outside the
United States so long as the securities are sold in an offshore
transaction and there are no ``directed selling efforts'' in the United
States.\43\ Although Rule 144A and Regulation S transactions account
for a significant proportion of the transaction activity in the exempt
markets, we have opted to focus this concept release on other commonly
used safe harbors and exemptions from registration for primary
offerings.
---------------------------------------------------------------------------

    \39\ See Table 8.
    \40\ See id.
    \41\ ``Other exempt offerings'' includes Section 4(a)(2),
Regulation S, and Rule 144A offerings. The data used to estimate the
amounts raised in 2018 for other exempt offerings includes:
Offerings under Section 4(a)(2) of the Securities Act that were
collected from Thomson Financial's SDC Platinum, which uses
information from underwriters, issuer websites, and issuer SEC
filings to compile its Private Issues database; offerings under
Regulation S that were collected from Thomson Financial's SDC
Platinum service; and resale offerings under Rule 144A that were
collected from Thomson Financial SDC New Issues database, Dealogic,
the Mergent database, and the Asset[hyphen]Backed Alert and
Commercial Mortgage Alert publications, to further estimate the
exempt offerings under Section 4(a)(2) and Regulation S. We include
amounts sold in Rule 144A resale offerings because, as discussed
below, those securities are typically issued initially in a
transaction under Section 4(a)(2) or Regulation S but generally are
not included in the Section 4(a)(2) or Regulation S data identified
above. See Section V.A.2 for a discussion of the two-step process
typically used by market participants in Rule 144A offerings.
    These numbers are accurate only to the extent that these
databases are able to collect such information and may understate
the actual amount of capital raised under these offerings if issuers
and underwriters do not make this data available.
    \42\ See Section V.A.2.
    \43\ 17 CFR 230.901 et seq.
---------------------------------------------------------------------------

    Figures 2 and 3 show the trends in capital raising under various
offering exemptions during the period 2009-2018. The amounts raised in
Rule 506(b), Rule 506(c), other exempt offerings, Regulation A, and
Regulation Crowdfunding show an upward trend over the period under
consideration, while the amounts raised in Rule 504 offerings have
fluctuated significantly; however, as discussed in Section D.3, we
believe that the increase in Rule 504 offerings starting in 2016 is
largely due to the repeal of 17 CFR 230.505 (``Rule 505'').
[GRAPHIC] [TIFF OMITTED] TP26JN19.001

[GRAPHIC] [TIFF OMITTED] TP26JN19.002

    There are many possible reasons why the amount of capital raised in
exempt offerings exceeds the amount raised in registered offerings.
However, the focus of this concept release is to seek input on whether,
in light of the increased activity in the exempt markets, the current
exempt offering framework is working effectively to provide access to
capital for a variety of issuers, particularly smaller issuers, and
access to investment opportunities for a variety of investors while
maintaining investor protections. Historically, a retail investor's
primary investment option was registered offerings, and encouraging
registered offerings and facilitating investor access to such
investment opportunities continues to be a Commission priority, as
demonstrated by recent rule changes, proposals, guidance, and other
initiatives facilitating capital raising through registered
offerings.\45\ However, many issuers, including early-stage and smaller
issuers, may find that they need alternative access to capital in order
to build their businesses and grow to become public reporting
companies. For such issuers, an exempt offering market that allows for
efficient access to capital may make it more likely that they achieve
this growth.
---------------------------------------------------------------------------

    \44\ Due to data limitations, Regulation A totals reflect
amounts reported raised annually under Regulation A after the 2015
amendments.
    \45\ See, e.g., Solicitations of Interest Prior to a Registered
Public Offering, Release No. 33-10607 (Feb. 19, 2019) [84 FR 6713
(Feb. 28, 2019)]; Disclosure Update and Simplification, Release No.
33-10532 (Aug. 17, 2018) [83 FR 50148 (Oct. 4, 2018)]; Amendments to
Smaller Reporting Company Definition, Release No. 33-10513 (Jun. 28,
2018) [83 FR 31992 (Jul. 10, 2018)]; FAST Act Modernization and
Simplification of Regulation S-K, Release No. 33-10618 (Mar. 20,
2019) [84 FR 12674 (Apr. 2, 2019)]. See also Division of Corporation
Finance, Draft Registration Statement Processing Procedures Expanded
(Jun. 29, 2017; supplemented Aug. 17, 2017), available at https://www.sec.gov/corpfin/announcement/draft-registration-statement-processing-procedures-expanded.
---------------------------------------------------------------------------

    In addition, it may be argued that the increased amount raised in
exempt offerings relative to registered offerings leaves certain types
of investors with fewer investment opportunities than might have been
available to them if the public markets were used more frequently. The
current framework permits non-accredited investors some limited access
to unregistered offerings. Based on available data,\46\ non-accredited
investors participate primarily \47\ in offerings under Regulation
A,\48\ Rule 504, and Regulation Crowdfunding.\49\ In 2018, however,
aggregate investments in exempt offerings in which non-accredited
investors participated \50\ represented less than one percent of
investment in all exempt offerings, and approximately two percent of
all exempt offerings, excluding other exempt offerings.\51\
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    \46\ We do not have data on, and are unable to estimate, amounts
raised under the intrastate exemptions under Securities Act Section
3(a)(11) or Rule 147 or 147A. See Section 70.
    \47\ While Rule 506(b) offerings can have up to 35 non-
accredited but sophisticated investors, issuers reported non-
accredited investors as participating in only six percent of Rule
506(b) offerings in each of 2015, 2016, 2017, and 2018, which
offerings reported raising between two and three percent of the
total capital raised under Rule 506(b) in each of 2015, 2016, 2017,
and 2018. See Unregistered Offerings White Paper at Table 12. See
also Sections II.B.2 and II.B.2.f for a discussion of the
requirements for Rules 506(b) and 506(c).
    \48\ 17 CFR 230.251 et seq.
    \49\ 17 CFR 227.100 et seq.
    \50\ This data includes offerings under Rule 506(b) but is
limited to those offerings where issuers reported one or more
participating non-accredited investor.
    \51\ See note 41 for a discussion of the data on other exempt
offerings.
---------------------------------------------------------------------------

    A significant number of attractive investment opportunities in the
exempt market, including access to many growth-stage issuers, may be
available only to investors with certain characteristics, such as
accredited investors who, if natural persons, must meet an income or
net worth test. For example, the amount of capital raised in Rule
506(b) offerings to accredited investors is greater than amounts raised
in registered offerings, and significantly greater than the amounts
raised in the types of exempt offerings that are more broadly
accessible to non-accredited investors.\52\ Accordingly, while a non-
accredited investor may be able to invest in multiple offerings across
the exempt market, such an investor would likely not have the same
level of access to the full range of investment opportunities in the
exempt market as an accredited investor would. We seek comment below on
whether it would be consistent with capital formation and investor
protection for us to consider steps to make a broader range of
investment opportunities available to

those investors currently considered non-accredited.
---------------------------------------------------------------------------

    \52\ See Section II.B.2.f.
---------------------------------------------------------------------------

    All securities offerings are (1) registered with the Commission,
(2) exempt from registration, or (3) conducted in violation of the
federal securities laws as a result of a failure to register when an
exemption is not available. The distinction between fraudulent exempt
offerings and illegal offerings as a result of a failure to register is
an important one. A failure to comply with the registration provisions
of Section 5 of the Securities Act is distinct from a violation of the
antifraud provisions of the federal securities laws. Due to data
limitations, it is difficult to draw rigorous conclusions about the
extent of fraud in exempt securities offerings. Accordingly, we seek
data about fraudulent activity in the exempt markets. In particular, we
seek quantitative data on fraudulent activity in the context of
securities offerings conducted pursuant to a valid exemption from
registration, as opposed to illegal securities offerings that fail to
comply with the registration provisions of Section 5. Such data may
assist us in considering the incidence of fraud in these markets.
    Due to data limitations, it is also difficult to draw rigorous
conclusions about the average magnitude of investor gains and losses in
exempt securities offerings.\53\ Accordingly, we also seek data about
the performance of investments in exempt markets. We also seek public
input on the review of the exempt offering framework as a whole, and
whether and how to best achieve our goal of improving and harmonizing
the framework. Because the responses to the following requests for
comment may overlap with responses to the more specific requests for
comment elsewhere in this release, commenters may wish to consider
these broader themes in the context of their responses to those more
specific requests for comment.
---------------------------------------------------------------------------

    \53\ It is difficult to perform a comprehensive market-wide
analysis of investor gains and losses in exempt offerings given the
significant limitations on the availability of data about the
performance of these investments. Where partial data is available
for some types of investments in exempt offerings, it does not lend
itself to a comprehensive estimate of investment performance and
risks across the entire market of exempt offerings. A typical
startup issuer may require a long period of time to experience a
liquidity event or close its business, and we lack comprehensive
data on such events and associated investor gains and losses. The
lack of a secondary trading market for many securities issued in
exempt offerings further limits our ability to examine investor
gains and losses.
---------------------------------------------------------------------------

Request for Comment

    1. Does the existing exempt offering framework provide appropriate
options for different types of issuers to raise capital at key stages
of their business cycle? For example, are there capital-raising needs
specific to any of the following that are not being met by the current
exemptions: Small issuers; start-up issuers; issuers in a particular
industry, such as technology, biotechnology, manufacturing, or consumer
products; issuers in different geographic regions, including those in
rural areas or those affected by natural disasters; or issuers led by
minorities, women, or veterans? What types of changes should we
consider to address any such gaps in the exempt offering framework?
Would legislative changes be necessary or beneficial to address any
such gaps?
    2. Do the existing exemptions from registration appropriately
address capital formation and investor protection considerations? If
so, should we retain our current exempt offering framework as it is?
Are there burdens imposed by the rules that can be lifted while still
providing adequate investor protection?
    3. Is the existing exempt offering framework too complex? Should we
reduce or simplify the number of exemptions available? If so, should we
focus on having a limited number of exemptions based on the amount of
capital sought (for example, a micro exemption, an exemption for
offerings up to $75 million, and an unlimited offering exemption)? Or
should we focus our exemptions on the type of investor allowed to
participate? Would legislative changes be necessary or beneficial if we
were to replace the current exempt offering framework with a simpler
offering framework?
    4. Are the exemptions themselves too complex? Can issuers
understand their options and effectively choose the one best suited to
their needs? Do any exemptions present pitfalls for small businesses,
especially for issuers that may be unfamiliar with the general concepts
underlying the federal securities laws?
    5. In light of the fact that some exemptions impose limited or no
restrictions at the time of the offer, should we revise our exemptions
across the board to focus consistently on investor protections at the
time of sale rather than at the time of offer? If our exemptions
focused on investor protections at the time of sale rather than at the
time of offer, should offers be deregulated altogether? How would that
affect capital formation in the exempt market and what investor
protections would be necessary or beneficial in such a framework? Would
legislative changes be necessary or beneficial if we were to focus on
the sale of a security, rather than the offer and sale?
    6. What metrics should we consider in evaluating the impact of our
exemptions on efficiency, competition, capital formation, and investor
protection? In particular:
     How should we evaluate whether our existing exemptions
appropriately promote efficiency, competition, and capital formation?
For example, in evaluating our exempt offering market, should we
consider whether investors have more opportunities to participate in
exempt offerings? To appropriately evaluate the market, should we
consider the cost of capital for a variety of issuers? What other
indicators should we consider?
     How should we evaluate whether our exemptions provide
adequate investor protection? For example, is there quantitative data
available that shows an increased incidence of fraud in particular
types of exempt offerings or in the exempt market as a whole? If so,
what are the causes or explanations and what should we do to address
it? What other factors should we consider in assessing investor
protection?
    7. How has technology affected an issuer's ability to communicate
with its potential and current investors? Do our exempt offering rules
limit an issuer's ability to provide disclosure promptly to its
potential and current investors? Are there technologies or means of
communication (e.g., online chat or message boards) that would
effectively provide updated disclosure to potential and current
investors that are currently not being used due to provisions in our
rules or regulations? If so, what rules are limiting this disclosure
and what changes should we consider? Given the transformation of
information dissemination that has occurred since our rules were
adopted and particularly over the last two decades, should we consider
any rule changes to enhance an issuer's ability to communicate with
investors throughout the exempt offering framework? How would such
changes affect capital formation in the exempt market and what investor
protections would be necessary or beneficial in such a framework? Would
legislative changes be necessary or beneficial to make such changes?
    8. Are there rule changes we should consider to ease issuers'
transition from one exempt offering to another as their businesses
develop and grow?
    9. Would rule changes that simplify, harmonize, and improve the
exempt offering framework have an effect on the registered public
markets? For example, would a more streamlined exempt market encourage
more issuers to

remain private longer or forgo registered offerings, and result in less
capital being raised in the registered market over time? Are there
changes to the current exempt offering framework that we should
consider to help issuers transition to a registered public offering
without undue friction or delay? Are there changes to the exempt
offering framework that we should consider to encourage more issuers to
enter the registered public markets? Would these changes increase the
costs to issuers? Would these changes benefit investors or particular
classes of investors? Would legislative changes be necessary or
beneficial to address any such changes?
    10. Which conditions or requirements are most or least effective at
protecting investors in exempt offerings? Are there changes to these
investor protections or additional measures we should implement to
provide more effective investor protection in exempt offerings? Are
there investor protection conditions that we should eliminate or modify
because they are ineffective or unnecessary? Would legislative changes
be necessary or beneficial to address any changes to investor
protection conditions?
    11. In light of the increased amount of capital raised through the
exempt offering framework, should we consider rule changes that will
help make exempt offerings more accessible to a broader group of retail
investors than those who currently qualify as accredited investors? If
so, what types of changes should we consider? For example, should we
expand the definition of accredited investor to take into account
characteristics other than an individual's wealth? Should we allow
investors, after receiving disclosure about the risks, to opt into
accredited status? Should we amend the existing exemptions or adopt new
exemptions to accommodate some form of non-accredited investor
participation such that these exemptions may be more attractive to, or
more widely used by, issuers?
    12. When the current exemptions from registration include offering
limits or limits on the amount an individual investor may invest, what
should we take into account to determine whether the limits and amounts
are appropriate? Should the amounts of all offering limits or
investment limits be subject to periodic inflation adjustments? If so,
what inflation measure should we use for such adjustments and how often
should the adjustments occur? Should we use dollar limits, or some
other measure? For example, should individual investment limits be
based on a percentage of the investor's income or investment portfolio?
Do these limits impose any particular challenges, for example, by
having different effects in different parts of the country due to
regional differences? \54\ Should any investors be limited in how much
they can invest?
---------------------------------------------------------------------------

    \54\ See, e.g., Table 4.
---------------------------------------------------------------------------

    13. Many of the existing exemptions from registration require
issuers to provide specified disclosure to investors at the time of the
offering and, in some cases, on an ongoing basis following the
offering. The type of information required to be provided, and the
frequency with which the disclosures are required, vary from exemption
to exemption. Should we harmonize the disclosure requirements of the
various exemptions? If so, how? Should we focus on making the
requirements more uniform or more scaled to the characteristics of the
issuer or of the offering? Could changes to the various disclosure
requirements of the exemptions help to facilitate issuers' transition
from one exempt offering to another or to a registered offering? Would
legislative changes be necessary or beneficial if we were to replace
the current exempt offering framework with such a framework?
    14. Should the availability of any exemptions be conditioned on the
involvement of a registered intermediary, such as the registered
funding portal or broker-dealer in crowdfunding offerings, particularly
where the offering is open to retail investors who may not currently
qualify as accredited investors? \55\
---------------------------------------------------------------------------

    \55\ The status of persons that provide introductions or
otherwise solicit potential investors for an issuer (generally,
``finders'') is not discussed within this release. The Division of
Trading and Markets is reviewing the status of finders for purposes
of Section 15(a) of the Exchange Act [15 U.S.C. 78o(a)].
---------------------------------------------------------------------------

    15. Should the availability of any exemptions be conditioned on
particular characteristics of the issuer or lead investor(s)? For
example, in an offering to non-accredited investors where there is one
or more lead investors, should we require that the lead investor(s)
hold a minimum amount of the same security type (or a junior security)
sold to the non-accredited investors?
    16. Should we consider a more unified approach to the exempt
offering framework that focuses on the types of investors permitted to
invest in the offering and the size of the offering, tailoring the
additional investor protections and conditions to be applied based on
those characteristics? For example, should we consider changes to the
requirements for any or all of the existing exemptions from
registration so that specific requirements (such as disclosure
requirements or individual investment limits) will not apply if
participation in the offering is limited to accredited investors? Would
legislative changes be necessary or beneficial if we were to replace
the current exempt offering framework with a more unified approach?
    17. Should we consider rule changes that would allow non-accredited
investors to participate in exempt offerings of all types, subject to
conditions such as a limit on the size of the offering, a limit on the
amount each non-accredited investor could invest in each offering,
across all offerings, or across all offerings of a certain type, a
decision by the investor--after receiving disclosure about the risks--
to opt into the offering, and/or specific disclosure requirements? If
so, should we scale the type and amount of information required to be
disclosed to non-accredited investors based on the characteristics of
the investors or the offering, such as the net worth or sophistication
of the non-accredited investors, or whether the offering amount is
capped, individual investment limits apply, or an intermediary is
involved in the offering? What benefits would be conferred by such an
approach? What would be the investor protection concerns? Would
legislative changes be necessary or beneficial if we were to replace
the current exempt offering framework with such an approach?
    18. Should we move one or more current exemptions into a single
regulation, such as currently provided by Regulation D with respect to
the exemptions under Rules 506(b), 506(c), and 504? What, if any,
current exemptions should be included in a single set of regulations?
Would a new single set of exemptions be overly complicated and obscure
any possible benefits of coordination and harmonization?
    19. Are we effectively communicating information about the exempt
offering framework, including the requirements of each exemption, to
the issuers seeking to raise capital and investors seeking investment
opportunities in this market? What types of communications have worked
best? How can we improve our communications to issuers and investors
about the exempt offering framework? Are there additional technologies
or means of communication that we should use to convey information
about exempt offerings to issuers and investors?
* * * * *

    The remainder of this concept release discusses the requirements
for each of the capital-raising exemptions from registration that make
up our current exempt offering framework. As indicated in the requests
for comment set forth following the discussion of each exemption, we
are seeking feedback from issuers, investors, and other market
participants on whether any changes to Commission rules or the
underlying statutes are needed or desired to improve the utility of the
exemptions or the entire exempt offering framework consistent with
investor protection. This release also discusses other broad topics
that are relevant to the entire, or a significant portion of, the
framework, including the definition of ``accredited investor,'' the
integration analyses applied in the context of exempt offerings, exempt
offerings by pooled investment funds,\56\ and the current regulatory
landscape affecting the secondary trading market for securities
originally sold in exempt offerings.
---------------------------------------------------------------------------

    \56\ We refer in this release to ``pooled investment funds''
because that term is used in Form D.
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A. Accredited Investor Definition \57\
---------------------------------------------------------------------------

    \57\ Section 413(b)(2)(A) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act [Pub. L. 111-203, 124 Stat. 1376 (2010)]
(the ``Dodd-Frank Act'') directed the Commission to review the
accredited investor definition as it relates to natural persons
every four years to determine whether the definition should be
modified or adjusted for the protection of investors, in the public
interest, and in light of the economy. We intend the discussion in
this Section II.A to satisfy that requirement. See Report on the
Review of the Definition of ``Accredited Investor'' (Dec. 18, 2015)
(``Accredited Investor Staff Report''), available at https://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf. See also Section II.A.3 for a
discussion of the Accredited Investor Staff Report, which was
prepared in connection with the first review in 2015.
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1. Background
    The ``accredited investor'' definition is set forth in 17 CFR
230.501(a) (``Rule 501(a)'') of Regulation D \58\ and is ``intended to
encompass those persons whose financial sophistication and ability to
sustain the risk of loss of investment or ability to fend for
themselves render the protections of the Securities Act's registration
process unnecessary.'' \59\ The definition is a central component of
several exemptions from registration, including Rules 506(b) and 506(c)
of Regulation D.\60\
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    \58\ In addition, Securities Act Section 2(a)(15) [15 U.S.C.
77b(a)(15)] and 17 CFR 230.215 (``Rule 215'') under the Securities
Act define accredited investor for purposes of Securities Act
Section 4(a)(5) [15 U.S.C. 77d(a)(5)]. Section 4(a)(5) exempts non-
public offers and sales of up to $5 million made solely to
accredited investors. However, based on DERA staff's review of Form
D filings from January 1, 2009 through December 31, 2018, no issuer
has reported relying on the Section 4(a)(5) exemption. The
definition of accredited investor in Section 2(a)(15) enumerates
certain categories of persons and authorizes the Commission to
prescribe additional categories. Pursuant to this authority, the
Commission has prescribed additional categories in Rule 215. The
definition contained in Rule 215 is substantially similar to Rule
501(a).
    \59\ See, e.g., Regulation D Revisions Proposing Release; see
also Amendments for Small and Additional Issues Exemptions under the
Securities Act (Regulation A), Release No. 33-9741 (March 25, 2015)
[80 FR 21805 (April 20, 2015)] (``2015 Regulation A Release'') at
note 146.
    \60\ See Section II.B for a discussion of Rule 506.
---------------------------------------------------------------------------

    Accredited investors may, under Commission rules, participate in
investment opportunities that are generally not available to non-
accredited investors, such as investments in many private issuers and
offerings by hedge funds, private equity funds, and venture capital
funds.\61\ The Rule 506 market has become a large and vibrant market
for raising capital, especially for small business capital
formation.\62\ Rule 506 offerings to accredited investors occur with
greater frequency than any other type of offering surveyed by the
staff.\63\ Issuers in those offerings are not required to provide any
substantive disclosure and are permitted to sell securities to an
unlimited number of accredited investors with no limit on the amount of
money that can be raised from each investor or in total.\64\
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    \61\ Purchasers in Rule 506(c) offerings are limited to
accredited investors. See note 47 for data reflecting non-accredited
investors' participation in Rule 506(b) offerings. See Sections
II.B.2 and II.B.2.f for a discussion of the requirements for Rules
506(b) and 506(c). See Section IV.A.2 for a discussion of private
funds.
    Recent research has examined the importance of the pool of
accredited investors for the entry of new businesses and employment.
In their working paper, Lindsey and Stein (2019) examine the effects
on angel finance stemming from Dodd-Frank Act's elimination of the
value of the primary residence in the determination of net worth for
purposes of accredited investor status. See note 66 and accompanying
text. Lindsey and Stein find that geographic areas experiencing a
larger reduction in the number of potential accredited investors
experienced negative effects on new firm entry and employment levels
at small entrants. See Laura Lindsey and Luke C.D. Stein (2019)
Angels, Entrepreneurship, and Employment Dynamics: Evidence from
Investor Accreditation Rules, Working paper.
    \62\ The aggregate amount of capital raised through Rule 506(b)
and (c) offerings is large, but the median size of offerings by
non[hyphen]financial issuers is less than $1 million, indicating a
large number of small offerings, consistent with the original
regulatory objective to target the capital formation needs of small
businesses. See Unregistered Offerings White Paper.
    \63\ See Unregistered Offerings White Paper.
    \64\ See 17 CFR 230.506(b) and 17 CFR 230.506(c).
---------------------------------------------------------------------------

    Under the Regulation D accredited investor definition, natural
persons are accredited investors if:
     Their income exceeds $200,000 in each of the two most
recent years (or $300,000 in joint income with a person's spouse) and
they reasonably expect to reach the same income level in the current
year; \65\ or
---------------------------------------------------------------------------

    \65\ 17 CFR 230.501(a)(6).
---------------------------------------------------------------------------

     Their net worth exceeds $1 million (individually or
jointly with a spouse), excluding the value of their primary
residence.\66\
---------------------------------------------------------------------------

    \66\ 17 CFR 230.501(a)(5). Section 413(a) of the Dodd-Frank Act
excluded the value of a person's primary residence from the net
worth calculation and directed the Commission to adjust similarly
any accredited investor net worth standard in its Securities Act
rules. In 2011, the Commission revised Rules 215 and 501 to exclude
any positive equity that individuals have in their primary
residences. See Net Worth Standard for Accredited Investors, Release
No. 33-9287 (Dec. 21, 2011) [76 FR 81793 (Dec. 29, 2011)] (``Primary
Residence Adopting Release''). The revised calculation requires that
any excess of indebtedness secured by the primary residence over the
estimated fair market value of the residence be considered a
liability for purposes of determining accredited investor status on
the basis of net worth. The Commission also added a 60-day look-back
period to prevent investors from artificially inflating their net
worth by incurring incremental indebtedness secured by their primary
residence, thereby effectively converting their home equity into
cash or other assets that would be included in the net worth
calculation.
---------------------------------------------------------------------------

    In addition, directors, executive officers, and general partners of
the issuer selling the securities are accredited investors for purposes
of that issuer.\67\ Certain enumerated entities with over $5 million in
assets qualify as accredited investors,\68\ while others, including
regulated entities such as banks and registered investment companies,
are not subject to the assets test.\69\ The definition of an accredited
investor includes, among others, the following entities:
---------------------------------------------------------------------------

    \67\ 17 CFR 230.501(a)(4). In addition, directors, executive
officers, and general partners of a general partner of the issuer
are accredited investors for purposes of the issuer. 17 CFR
230.501(a)(4).
    \68\ 17 CFR 230.501(a)(1), (3), and (7).
    \69\ 17 CFR 230.501(a)(1), (2), and (8).
---------------------------------------------------------------------------

     A bank, registered broker-dealer, insurance company,
registered investment company, business development company (``BDC'')
as defined in the Investment Company Act of 1940 (``Investment Company
Act''),\70\ or small business investment company (``SBIC''); \71\
---------------------------------------------------------------------------

    \70\ 15 U.S.C. 80a-2(a)(48). In this release, unless otherwise
specified, we use the term ``BDC'' to refer to a business
development company as defined in the Investment Company Act. See
note 526 for a description of a BDC.
    \71\ 17 CFR 230.501(a)(1). See Section IV for a discussion of
pooled investment funds.
---------------------------------------------------------------------------

     A private business development company as defined in the
Investment Advisers Act of 1940 (``Advisers Act''); \72\
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 80b-2(a)(22).
---------------------------------------------------------------------------

     An employee benefit plan (within the meaning of the
Employee Retirement Income Security Act

(``ERISA'') \73\) if a bank, insurance company, or registered
investment adviser makes the investment decisions, or if the plan has
total assets in excess of $5 million; \74\
---------------------------------------------------------------------------

    \73\ Public Law 93-406, 88 Stat. 829 (1974).
    \74\ 17 CFR 230.501(a)(1).
---------------------------------------------------------------------------

     A tax exempt charitable organization, corporation, or
partnership with assets in excess of $5 million; \75\
---------------------------------------------------------------------------

    \75\ 17 CFR 230.501(a)(3).
---------------------------------------------------------------------------

     An enterprise in which all the equity owners are
accredited investors; \76\ and
---------------------------------------------------------------------------

    \76\ 17 CFR 230.501(a)(8).
---------------------------------------------------------------------------

     A trust with assets of at least $5 million, not formed
only to acquire the securities offered, and the purchases of which are
directed by a person who meets the legal standard of having sufficient
knowledge and experience in financial and business matters to be
capable of evaluating the merits and risks of the prospective
investment.\77\
---------------------------------------------------------------------------

    \77\ 17 CFR 230.501(a)(7).
---------------------------------------------------------------------------

    An entity that is not covered specifically by one of the enumerated
categories is generally not an accredited investor under the rule.
    Below we estimate the number of U.S. households that qualify as
accredited investors under the existing criteria.\78\
---------------------------------------------------------------------------

    \78\ For this analysis, we use the same methodology and variable
definitions as the 2015 Accredited Investor Staff Report. The
underlying household data for this analysis was obtained from the
Federal Reserve Board's Survey of Consumer Finances (the ``SCF'')
for 2016, available at https://www.federalreserve.gov/econresdata/scf/scfindex.htm. The SCF is a triennial survey that provides
insights into household income and net worth, where the household is
considered to be the primary economic unit within a family. As of
the date of this release, the most recent SCF data is from the 2016
survey. The SCF employs weights to make the data representative of
the U.S. population.
     The 2015 Accredited Investor Staff Report used the definitions
from Jesse Bricker, Lisa J. Dettling, Alice Henriques, Joanne W.
Hsu, Kevin B. Moore, John Sabelhaus, Jeffrey Thompson, and Richard
A. Windle, Changes in U.S. Family Finances from 2010 to 2013:
Evidence from the Survey of Consumer Finances, Federal Reserve
Bulletin, Vol. 100, No. 4 (2014).
    We estimate households and not individuals due to data
limitations because the database underlying our analysis measures
wealth and income at the household level. It should be noted that in
the SCF database, income is reported at the household level. Similar
to the 2015 Accredited Investor Staff Report, we do not attempt to
differentiate income based on marital status of the household
because data on individual income from all sources is not publicly
available in the database. As a result, accredited investor
(household) estimates based on individual income thresholds are
likely to be overestimated and would represent upper bounds. A
household can have multiple family members with independent sources
of income that qualify them as accredited investors based on income.
We count them as one accredited investor for each household, which
implies we are also likely underestimating the actual pool of
accredited investors when we provide household estimates.
Consequently, the household estimates we derive using the joint
income threshold would represent a lower bound for individuals
qualifying on the basis of income. The actual number of individuals
that qualify as accredited investors on an income basis (individual
or joint) would, in all likelihood, lie between the estimates that
we derive for the individual income threshold and the joint income
threshold.

    Table 3--Households Qualifying Under Existing Accredited Investor
                                Criteria
------------------------------------------------------------------------
                                                           Qualifying
                                        Number of       households as %
                                       qualifying           of U.S.
            Criterion                  households          households
                                    (Standard errors    (Standard errors
                                         are in              are in
                                      parentheses)        parentheses)
------------------------------------------------------------------------
Individual income \79\ threshold   11.2 million (0.3   8.9% (0.2%).
 ($200,000).                        million).
Joint income \80\ threshold        5.8 million (0.2    4.6% (0.2%).
 ($300,000).                        million).
Net worth \81\ ($1,000,000)......  11.8 million (0.3   9.4% (0.2%).
                                    million).
Overall number of qualifying       16.0 million (0.3   13.0% (0.2%).
 households \82\.                   million).
------------------------------------------------------------------------

    The data above provides an estimate of the overall pool of
qualifying households in the United States. It does not, however,
represent the actual number of accredited investors that do or would
invest in the Regulation D market or in other exempt offerings.\83\
---------------------------------------------------------------------------

    \79\ For purposes of this analysis, income is defined to include
wage income, business income, rent income, interest and dividend
income, pension income, social security income, income from
retirement accounts, transfers, and other income. According to the
SCF documentation, income data is collected for the year prior to
the year of the SCF while family balance sheet data covers the
status of the family at the time of the interview. Thus, we use
income data inflation-adjusted to 2016. Further, for comparability,
income data is adjusted for inflation by a factor of 1.05914411 from
2016 dollars to March 2019 dollars using Consumer Price Index
(``CPI'') data from the U.S Department of Labor Bureau of Labor
Statistics (``BLS'').
    \80\ See note 79.
    \81\ For purposes of this analysis, net worth is defined as the
difference between household assets and household debt. Assets
include all financial assets (stocks, bonds, mutual funds, cash and
cash management accounts, retirement assets, life insurance, managed
assets like trusts and annuities, and other financial assets like
deferred compensation, royalties, futures, etc.) and non-financial
assets. Debt includes mortgage and home equity loans, lines of
credit, credit card debt, installment loans including vehicle loans,
margin loans, pension loans, and other debt (e.g., loans against
insurance). We exclude the value of the household's principal
residence and any outstanding mortgages associated with the
principal residence. Further, for comparability, net worth data is
adjusted for inflation by a factor of 1.05914411 from 2016 dollars
to March 2019 dollars using BLS CPI data.
    \82\ The number of households qualifying under either the income
or net worth criterion is smaller than the sum of the number of
households qualifying under the income and the number of households
qualifying under the net worth criterion because some households may
qualify under both criteria.
    \83\ Form D data and other data available to us on private
placements do not allow us to estimate the number of unique
accredited investors participating in the exempt offerings.
---------------------------------------------------------------------------

    Below we also present information on median and mean income and net
worth of U.S. households in major U.S. geographic regions. The data
shows that household income and net worth tend to be much higher in the
Northeast and West regions. This indicates that households that would
qualify as accredited investors are more likely to be located in these
two regions.

                          Table 4--U.S. Household Income and Net Worth, by Region \84\
----------------------------------------------------------------------------------------------------------------
                  ($ thousands)                      Northeast        Midwest          South           West
----------------------------------------------------------------------------------------------------------------
Mean household income (before-tax)..............           136.5           102.0           100.0           108.5
Median household income (before-tax)............            64.4            54.7            51.5            57.5
Mean household net worth........................           851.3           658.8           636.9           873.7
Median household net worth......................           154.5           103.2            87.0           114.3
----------------------------------------------------------------------------------------------------------------

    Below we also provide an overview of the educational attainment
level of the estimated accredited investor pool, based on the existing
criteria. As can be seen below, accredited investors tend to be more
highly educated relative to the general population.
---------------------------------------------------------------------------

    \84\ The Federal Reserve Board's 2016 SCF Chartbook, available
at https://www.federalreserve.gov/econres/files/BulletinCharts.pdf,
at 28, 29, 64, 65. The public version of the SCF database does not
provide information regarding geographical location of households.
As a result, we are unable to identify in which states households
that qualify as accredited investors are likely to be concentrated.
Unlike Table 3, in which we exclude the value of the primary
residence from net worth, Table 4 does not exclude the value of the
primary residence from the net worth of households. The figures were
adjusted for inflation to March 2019 dollars using BLS CPI data.
[GRAPHIC] [TIFF OMITTED] TP26JN19.003

    We lack data to generate a comprehensive estimate of the overall
number of institutional accredited investors because disclosure of
accredited investor status across all institutional investors is not
required and because, while we have information to estimate the number
of some categories of institutional accredited investors, we lack
comprehensive data that will allow us to estimate the unique number of
investors across all categories of institutional accredited investors
under Rule 501.86
---------------------------------------------------------------------------

    \85\ The data underlying these charts was obtained from the 2016
SCF, adjusted for inflation to March 2019 dollars.
    \86\ For example, Form ADV filers report information about the
number of clients of different types, such as pooled investment
vehicles, banking institutions, corporations, charities, pension
plans, etc., some of which are potential institutional accredited
investors. However, the data available to us does not allow
identification of unique clients (to account for cases where a
client has multiple advisers) or institutional accredited investors
that do not retain services of a Form ADV filer. Further, Form D
filings do not provide a breakdown of investors by type--
institutions or natural persons--that invested in an offering.
---------------------------------------------------------------------------

2. Implications Outside of the Regulation D Context
    The Regulation D accredited investor definition plays an important
role in other federal securities law contexts. For example:
     Regulation A limits the amount of securities non-
accredited investors can purchase in certain of those offerings to no
more than 10% of the greater of their annual income or their net
worth.\87\ Accredited investors are not subject to investment limits
under Regulation A.
---------------------------------------------------------------------------

    \87\ 17 CFR 230.251(d)(2)(i)(C). See Section II.C.1.c.
---------------------------------------------------------------------------

     Under Section 12(g) of the Exchange Act,\88\ an issuer
that is not a bank, bank holding company or savings and loan holding
company is required to register a class of equity securities under the
Exchange Act if it has more than $10 million of total assets and the
securities are ``held of record'' by either 2,000 persons, or 500
persons who are not accredited investors.\89\ As a result, issuers
seeking to rely on these thresholds must differentiate between record
holders who are accredited investors and non-accredited investors.
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78l(g).
    \89\ See id.; see also 17 CFR 240.12g-1 (``Rule 12g-1'')
(clarifying that accredited investor status for this purpose is
determined as of the last day of its most recent fiscal year rather
than at the time of the sale of the securities); Changes to Exchange
Act Registration Requirements to Implement Title V and Title VI of
the JOBS Act, Release No. 33-10075 (May 3, 2016) [84 FR 6713 (Feb.
28, 2019)] (``Changes to Exchange Act Registration Requirements
Release'') at Section II.B. (``Under amended Rule 12g-1, an issuer
will need to determine, based on facts and circumstances, whether
prior information provides a basis for a reasonable belief that the
security holder continues to be an accredited investor as of the
last day of the fiscal year.'').
---------------------------------------------------------------------------

     Under Section 5(d) of the Securities Act, an emerging
growth company \90\ is permitted to ``test the waters'' \91\ with
potential investors that are QIBs \92\ or

institutional accredited investors \93\ before or after filing a
registration statement to gauge such investors' interest in a
contemplated securities offering. In February 2019, the Commission
proposed expanding this testing the waters accommodation to all
issuers, including registered investment companies and BDCs.\94\
---------------------------------------------------------------------------

    \90\ An emerging growth company refers to an issuer that had
total annual gross revenues of less than $1.07 billion during its
most recently completed fiscal year and, as of December 8, 2011, had
not sold common equity securities under a registration statement.
That issuer continues to be an emerging growth company for the first
five fiscal years after the date of the first sale of its common
equity securities pursuant to an effective registration statement,
unless one of the following occurs: Its total annual gross revenues
are $1.07 billion or more; it has issued more than $1 billion in
non-convertible debt in the past three years; or it becomes a
``large accelerated filer,'' as defined in 17 CFR 240.12b-2 (``Rule
12b-2'') under the Exchange Act. See 17 CFR 230.405 (``Rule 405'')
and Rule 12b-2 (defining ``emerging growth company'').
    \91\ Communications between an issuer and potential investors
for the purpose of assessing investor interest before having to
commit the time and expense necessary to carry out a contemplated
securities offering are often referred to as ``testing the waters.''
    \92\ See Section V.A.2 for a discussion of the definition of a
QIB.
    \93\ An institutional accredited investor refers to any
institutional investor who is also an accredited investor.
    \94\ See Solicitations of Interest Prior to a Registered Public
Offering, Release No. 33-10607 (Feb. 19, 2019) [84 FR 6713 (Feb. 28,
2019)].
---------------------------------------------------------------------------

    In addition, some states use the accredited investor definition to
determine whether investment advisers to certain private funds are
required to be registered.\95\ States also incorporate the definition
in a variety of other contexts. For example, the definition is used in
government finance,\96\ finance lending,\97\ mortgage lending,\98\
insurance,\99\ and financial institution regulation.\100\ The
accredited investor definition also served as a model for an exemption
under the Uniform Securities Act of 2002.\101\
---------------------------------------------------------------------------

    \95\ See, e.g., Final Order Granting Exemption From the
Registration Requirements for Investment Advisers to Private Funds
and Their Investment Adviser Representatives, Wisconsin Department
of Financial Institutions, Division of Securities (Feb. 17, 2012);
Certificate Exemption for Investment Advisers to Private Funds, Cal.
Code Regs. Title 10 Sec.  260.204.9; Sixth Transition Order
administering the Michigan Uniform Securities Act, State of Michigan
Department of Energy, Labor & Economic Growth, Office of Financial
and Insurance Regulation (Mar. 11, 2011).
    \96\ See, e.g., Cal. Gov't Code Sec.  64111.
    \97\ See, e.g., Cal. Fin. Code Sec.  22064.
    \98\ See, e.g., Fla. Stat. Sec. Sec.  494.001 and 494.00115.
    \99\ See, e.g., Tex. Ins. Code Sec.  1111A.002.
    \100\ See, e.g., Conn. Gen. Stat. Sec.  36a-2 (2014).
    \101\ Uniform Securities Act of 2002 Sec. Sec.  102(11)(F)
through 102(11)(K), 102(11)(O) and 202(13), National Conference of
Commissioners on Uniform State Laws (also known as the Uniform Law
Commission). The Uniform Law Commission provides states with model
legislation in areas of state statutory law when uniformity is
desired and practicable. The Uniform Securities Act of 2002 is a
model state securities law available at https://www.uniformlaws.org/committees/community-home?communitykey=8c3c2581-0fea-4e91-8a50-27eee58da1cf&tab=groupdetails.
---------------------------------------------------------------------------

    FINRA Rule 5123 uses the accredited investor definition to provide
an exemption from the general requirement that each member firm that
sells an issuer's securities in a private placement file with FINRA a
copy of any private placement memorandum, term sheet, or other offering
document the firm used within 15 calendar days of the date of the sale,
or indicate that it did not use any such offering documents.\102\ The
exemption applies to offerings sold to, among other persons, accredited
investors described in Rule 501(a)(1), (2), (3), or (7). The rule does
not incorporate the entire accredited investor definition and in
particular excludes the net worth and income criteria set forth in Rule
501(a)(5) and (6) respectively.\103\
---------------------------------------------------------------------------

    \102\ FINRA Rule 5123(b)(1)(J).
    \103\ The Commission release approving FINRA's adoption of this
rule noted the following rationale:
    ``Several commenters requested additional exemptions from
coverage under Rule 5123. [One commenter], for example, requested an
exemption for all accredited investors. FINRA stated that it does
not believe that the exemption should extend to offers to accredited
investors under Rule 501(a)(4), (5), or (6) of Regulation D. In
particular, FINRA stated that it believes that the criteria used to
measure whether a person meets the accredited investor standard do
not necessarily reflect a sufficiently high level of sophistication
to justify exemption from the proposed rule.''
    Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendments No. 2 and No. 3 and
Order Granting Accelerated Approval of Proposed Rule Change, as
Modified by Amendments No. 1, No. 2, and No. 3 to Adopt FINRA Rule
5123 (Private Placements of Securities) in the Consolidated FINRA
Rulebook, Release No. 34-67157 (June 7, 2012) [77 FR 35457 (June 13,
2012)].
---------------------------------------------------------------------------

3. Accredited Investor Staff Report
    In December 2015, the Commission issued a staff report on the
accredited investor definition.\104\ The report examined the history of
the accredited investor definition \105\ and considered comments on the
definition received from a variety of sources, including public
commenters, the Commission's Investor Advisory Committee,\106\ the
Commission's Advisory Committee on Small and Emerging Companies,\107\
and the 2014 Small Business Forum.\108\ The report considered
alternative approaches to defining ``accredited investor,'' provided
staff recommendations for potential updates and modifications to the
existing definition, and analyzed the impact potential approaches may
have on the pool of accredited investors. The report noted that any
change to the accredited investor definition would have to consider
both the impact the change could have on investors and the supply of
capital to the Regulation D market. The report acknowledged the
tradeoff between using a principles-based accredited investor
definition and the need for bright-line standards that investors,
issuers, and their advisors can understand and apply easily. In the
report, the staff recommended that the Commission consider any one or
more of the methods of revising the accredited investor definition
described in Table 5 below.
---------------------------------------------------------------------------

    \104\ See Accredited Investor Staff Report. The report focused
on the accredited investor definition as used in Regulation D, with
the understanding that any revisions to the definition should be
made to the Rule 215 definition as well.
    \105\ See id at Section II.
    \106\ See Recommendation of the Investor Advisory Committee:
Accredited Investor Definition (Oct. 9, 2014) available at http://www.sec.gov/spotlight/investor-advisory-committee-2012/accredited-investor-definition-recommendation.pdf.
    \107\ See Advisory Committee on Small and Emerging Companies:
Recommendations Regarding the Accredited Investor Definition (Feb.
17, 2015) available at http://www.sec.gov/info/smallbus/acsec/acsec-accredited-investor-definition-recommendation-030415.pdf.
    \108\ See Final Report of the 2014 SEC Government-Business Forum
on Small Business Capital Formation (May 2015) available at http://www.sec.gov/info/smallbus/gbfor33.pdf (``2014 Forum Report'').
---------------------------------------------------------------------------

    In addition to the staff recommendations described in Table 5
below, the report also discussed whether individuals with certain
professional degrees or licenses or financial experience, or who are
advised by professionals, should be considered accredited investors.
The report, however, did not include any staff recommendations about
whether individuals with certain professional degrees or licenses or
financial experience, or who are advised by professionals, should be
considered accredited investors.
4. Comments on the Accredited Investor Staff Report
    Following the release of the Accredited Investor Staff Report, the
Commission has continued to receive recommendations about revisions to
the accredited investor definition from the Advisory Committee on Small
and Emerging Companies and the annual Small Business Forum.
    In July 2016, the Advisory Committee on Small and Emerging
Companies recommended, among other things, that the Commission:
     Not change the current financial thresholds in the
accredited investor definition except to adjust on a going-forward
basis to reflect inflation;
     Expand the pool of accredited investors to include
individuals who have passed examinations that test their knowledge and
understanding in the areas of securities and investing, including the
Series 7, Series 65, Series 82, and CFA Examinations and equivalent
examinations; and
     Explore ways to allow participation by potential investors
with specific industry or issuer knowledge or expertise who would not
otherwise be considered accredited investors.\109\
---------------------------------------------------------------------------

    \109\ See Advisory Committee on Small and Emerging Companies:
Recommendations Regarding the Accredited Investor Definition (July
20, 2016) available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendations-accredited-investor.pdf.
---------------------------------------------------------------------------

    The recommendation also noted that the Committee would support
expanding the definition to take into account measures of non-financial

sophistication, regardless of income or net worth, thereby expanding
rather than contracting the pool of accredited investors; however, the
recommendations cautioned that any non-financial criteria should be
able to be ascertained with certainty as ``simplicity and certainty are
vital to the utility of any expanded definition of accredited
investor.'' \110\ The Committee also recommended that the Commission
continue to gather data for ongoing analysis of what ``attributes best
encompass those persons whose financial sophistication and ability to
sustain the risk of loss of investment or ability to fend for
themselves render the protections of the Securities Act's registration
process unnecessary.'' \111\
---------------------------------------------------------------------------

    \110\ Id.
    \111\ Id.
---------------------------------------------------------------------------

    The 2016, 2017, and 2018 Forum Reports all included a
recommendation that, consistent with the recommendations of the
Advisory Committee on Small and Emerging Companies, the Commission
should: (a) Maintain the monetary thresholds for accredited investors;
and (b) expand the categories of qualification for accredited investor
status based on various types of sophistication, such as education,
experience, and training, including without limitation persons holding
FINRA licenses or CPA or CFA designations, passing a test that
demonstrates sophistication, or status as managerial or key employees
affiliated with the issuer.\112\
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    \112\ See Final Report of the 2016 SEC Government-Business Forum
on Small Business Capital Formation (Mar. 2017) available at https://www.sec.gov/info/smallbus/gbfor35.pdf (``2016 Forum Report'');
Final Report of the 2017 SEC Government-Business Forum on Small
Business Capital Formation (Mar. 2018) available at https://www.sec.gov/files/gbfor36.pdf (``2017 Forum Report''); and 2018
Forum Report.
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    In October 2017, the U.S. Department of the Treasury prepared a
report that included recommendations to, among other things, revise the
accredited investor definition.\113\ The 2017 Treasury Report
recommended that the Commission undertake amendments to the accredited
investor definition with the objective of expanding the eligible pool
of sophisticated investors. The 2017 Treasury Report stated that the
definition could be broadened to include: (a) Any investor who is
advised on the merits of making a Regulation D investment by a
fiduciary, such as an SEC- or state-registered investment adviser; and
(b) financial professionals, such as registered representatives and
investment adviser representatives, who are considered qualified to
recommend Regulation D investments to others.\114\
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    \113\ See A Financial System That Creates Economic Opportunities
Capital Markets, U.S. Dept. of the Treasury (Oct. 2017 (``2017
Treasury Report''), available at https://www.treasury.gov/press-center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf, at p. 44.
    \114\ See 2017 Treasury Report, at p. 44.
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    In addition, the Commission received over 50 comment letters on the
Accredited Investor Staff Report.\115\ While a few commenters opposed
changes to the definition,\116\ most commenters generally supported at
least one of the staff's recommended changes to the definition.\117\ In
addition, some commenters advocated for lower thresholds or an
elimination of the need for the accredited investor definition
altogether.\118\
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    \115\ The comment letters received in response to the Accredited
Investor Staff Report are available at https://www.sec.gov/comments/4-692/4-692.shtml.
    \116\ See, e.g., Letter from Jillian Sidoti dated Jan. 25, 2016
available at https://www.sec.gov/comments/4-692/4692-10.htm (raising
concerns about increasing the financial thresholds to ``higher, and
perhaps unbearable, thresholds'') (``Sidoti Letter''); Letter from
Michael John Sewell dated Dec. 23, 2015 available at https://www.sec.gov/comments/4-692/4692-2.htm (``Sewell Letter'') (raising
concerns about increasing the complexity of defining an accredited
investor); and Letter from Robert Kent dated May 4, 2016 available
at https://www.sec.gov/comments/4-692/4692-1736913-151030.htm.
    \117\ See Table 3 for a summary of the responses from commenters
on each staff recommendation.
    \118\ See, e.g., Letter from Ryan Carpel dated May 12, 2016
available at https://www.sec.gov/comments/4-692/4692-30.htm; Letter
from Nader Rahelan dated Apr. 23, 2016 available at https://www.sec.gov/comments/4-692/4692-25.htm; Letter from Darrell J.
Leamon dated Apr. 29, 2016 available at https://www.sec.gov/comments/4-692/4692-27.htm; Letter from Andrew Thompson, J.D. dated
Feb. 9, 2016 available at https://www.sec.gov/comments/4-692/4692-12.htm (``Thompson Letter''); Letter from Caroline B. Austin dated
Jan. 30, 2016 available at https://www.sec.gov/comments/4-692/4692-11.htm; Letter from Public Startup Company, Inc. dated Feb. 16, 2016
available at https://www.sec.gov/comments/4-692/4692-13.pdf (``PSC
Letter''); Letter from Roger Q. Doctor dated Jun. 14, 2016 available
at https://www.sec.gov/comments/4-692/4692-36.htm; Letter from Karl
T. Muth, Lecturer, Northwestern University dated May 17, 2016
available at https://www.sec.gov/comments/265-27/26527-58.htm
(``Muth Letter''); Anonymous Letter dated Jul. 5, 2016 available at
https://www.sec.gov/comments/4-692/4692-39.pdf (``Anon 2 Letter'');
Letter from Martha J. Escudero Acosta dated Oct 15, 2016 available
at https://www.sec.gov/comments/4-692/4692-45.htm (``Escudero
Letter''); Letter from The TAN2000 International Regulatory
Corporation dated Dec. 10, 2016 available at https://www.sec.gov/comments/4-692/4692-46.pdf (``TAN2000 Letter''); Letter from Cole
Hyland dated Jan. 27, 2017 available at https://www.sec.gov/comments/4-692/4692-1536599-131180.htm; Letter from Charles A. Gokas
dated Jul. 7, 2017 available at https://www.sec.gov/comments/4-692/4692-1840627-154975.htm; Letter from David Kinsfather dated Aug. 5,
2017 available at https://www.sec.gov/comments/4-692/4692-2185513-159906.htm; Michael K. Smith dated Jan. 23, 2018 available at
https://www.sec.gov/comments/4-692/4692-2945318-161851.htm; and
Letter from Anonymous Lawyer dated Aug. 2, 2016 available at https://www.sec.gov/comments/4-692/4692-41.htm (``Anon 3 Letter'')
(recommending that there should be different and lower thresholds
for service providers of the issuer to be deemed an accredited
investor).

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    Of the staff's recommended changes, commenters were overwhelmingly
supportive of the creation of additional methods of accreditation other
than financial criteria.\119\ Many commenters expressed that financial
thresholds are not effective in defining a population of sophisticated
investors and that one or more of the alternative methods of
accreditation may be more indicative of sophistication than income and
net worth alone.\120\ A few commenters recommended investment limits
\121\ or an additional financial net worth qualification for these
investors.\122\
    Table 5 provides an overview of the feedback provided by commenters
about each of the specific recommendations.
---------------------------------------------------------------------------

    \119\ See, e.g., Letter from Consumer Federation of America and
Americans for Financial Reform dated Apr. 27, 2016 available at
https://www.sec.gov/comments/4-692/4692-26.pdf (``CFA/AFR Letter'');
Letter from Crowdfund Intermediary Regulatory Advocates dated Jan.
14, 2016 available at https://www.sec.gov/comments/4-692/4692-6.pdf
(``CFIRA Letter''); Letter from Biotechnology Innovation
Organization dated Apr.8, 2016 available at https://www.sec.gov/comments/4-692/4692-21.pdf (``BIO Letter''); Letter from National
Small Business Association dated Mar. 29, 2016 available at https://www.sec.gov/comments/4-692/4692-18.pdf (``NSBA Letter''); Letter
from North American Securities Administrators Association, Inc.
(``NASAA'') dated May 25, 2016 available at https://www.sec.gov/comments/4-692/4692-34.pdf (``NASAA Letter''); Letter from Engine
dated Mar. 14, 2016 available at https://www.sec.gov/comments/4-692/4692-17.pdf (``ENGINE Letter''); Letter from Investment Management
Consultants Association dated Mar. 29, 2016 available at https://www.sec.gov/comments/4-692/4692-19.pdf (``IMCA Letter''); Letter
from Dar'shun Kendrick, Kendrick Law Practice dated May 1, 2016
available at https://www.sec.gov/comments/4-692/4692-29.htm
(``Kendrick Letter''); Letter from Anonymous Investment Banker dated
Apr. 13, 2016 available at https://www.sec.gov/comments/4-692/4692-22.htm (``Banker Letter''); Letter from Keith J. Johnson, JD dated
Mar. 6, 2016 available at https://www.sec.gov/comments/4-692/4692-16.pdf (``Johnson Letter''); Letter from Cornell Securities Law
Clinic dated Apr. 30, 2016 available at https://www.sec.gov/comments/4-692/4692-28.pdf (``Cornell Law Clinic Letter''); Letter
from the Small Business Investor Alliance dated Mar. 7, 2016
available at https://www.sec.gov/comments/4-692/4692-15.pdf (``SBIA
Letter''); PSC Letter; Letter from Leonard A. Grover, Founder/CEO,
FinToolbox/Screener.co dated Jun. 13, 2016 available at https://www.sec.gov/comments/4-692/4692-35.pdf (``Grover Letter''); Letter
from Investment Adviser Association dated Jun. 29, 2016 available at
https://www.sec.gov/comments/4-692/4692-38.pdf (``IAA Letter'');
Anon 2 Letter; Letter from Tom C.W. Lin, Associate Professor of Law,
Temple University Beasley School of Law dated Jul. 14, 2016
available at https://www.sec.gov/comments/4-692/4692-40.pdf (``Lin
Letter''); Escudero Letter; Letter from Jeff Carlsen, CPA dated Jan.
17, 2017 available at https://www.sec.gov/comments/4-692/4692-1497754-130754.htm (``Carlsen Letter''); Letter from Kyle Beagle
dated Jan. 13, 2016 available at https://www.sec.gov/comments/4-692/4692-4.htm (``Beagle Letter''); Letter from Ava Badiee dated May 10,
2016 available at https://www.sec.gov/comments/4-692/4692-31.pdf
(``Badiee Letter''); Letter from Chase R. Morello, Esq. dated Jan.
13, 2016 available at https://www.sec.gov/comments/4-692/4692-5.pdf
(``Morello Letter''); Mark R. Maisonneuve, CFA dated Apr. 26, 2017
available at https://www.sec.gov/comments/4-692/4692-1722772-150627.htm (``Maisonneuve Letter''); TAN2000 Letter; Letter from
Managed Funds Association dated Jun. 16, 2016 available at https://www.sec.gov/comments/4-692/4692-37.pdf (``MFA-1 Letter''); and
Letter from Managed Funds Association dated May 18, 2017 available
at https://www.sec.gov/comments/s7-07-16/s70716-1761663-152156.pdf
(``MFA-2 Letter'').
    \120\ See, e.g., CFA/AFR Letter; CFIRA Letter; Banker Letter;
Cornell Law Clinic Letter; Grover Letter; Anon 2 Letter; Carlsen
Letter; and Maisonneuve Letter.
    \121\ See, e.g., Badiee Letter.
    \122\ See, e.g., NASAA Letter.

 Table 5--Responses to Staff Recommendations on the Accredited Investor
                               Definition
------------------------------------------------------------------------
          Staff recommendation              Responses from commenters
------------------------------------------------------------------------
Leave the current income and net worth   --A few commenters generally
 thresholds in place, subject to          supported the recommendation;
 investment limits.                       \123\
                                         --Several commenters supported
                                          leaving the current income and
                                          net worth thresholds in place;
                                          \124\
                                         --Several commenters were
                                          either opposed to, or raised
                                          concerns about, adding
                                          investment limits to investors
                                          that met these thresholds;
                                          \125\ and
                                         --One commenter was opposed
                                          both to leaving the current
                                          income and net worth threshold
                                          in place and to adding
                                          investment limits on those
                                          investors.\126\
                                         A few commenters stated that
                                          the structure would add costs
                                          and complexity to the capital-