[Federal Register Volume 85, Number 197 (Friday, October 9, 2020)]
[Rules and Regulations]
[Pages 64234-64278]
[FR Doc No: 2020-19189]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR PARTS 230 and 240

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

Accredited Investor Definition

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

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

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

SUPPLEMENTARY INFORMATION: We are adopting amendments to 17 CFR
230.144A (``Rule 144A''), 17 CFR 230.163B (``Rule 163B''), 17 CFR
230.215 (``Rule 215''), and 17 CFR 230.501 (``Rule 501'') of 17 CFR
230.500 through 230.508 (``Regulation D'') under the Securities Act of
1933 (``Securities Act''); \1\ and 17 CFR 240.15g-1 (``Rule 15g-1'')
under the Securities Exchange Act of 1934 (``Exchange Act'').\2\
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    \1\ 15 U.S.C. 77a et seq.
    \2\ 15 U.S.C. 78a et seq.
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Table of Contents

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

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

I. Introduction and Background

    On December 18, 2019, the Commission proposed amendments to the
definition of ``accredited investor'' in Securities Act Rules 215 and
501(a) and to the definition of ``qualified institutional buyer'' in
Rule 144A.\3\ The proposed amendments were intended to update and
improve the definitions to identify more effectively institutional and
individual investors that have sufficient knowledge and expertise to
participate in investment opportunities that do not have the rigorous
disclosure and procedural requirements, and related investor
protections, provided by registration under the Securities Act.
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    \3\ Amending the ``Accredited Investor'' Definition, Release
Nos. 33-10734; 34-87784 (Dec. 18, 2019) [85 FR 2574 (Jan. 15, 2020)]
(``Proposing Release'').
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    The Proposing Release and the amendments we are adopting are part
of a broader effort to simplify, harmonize, and improve the exempt
offering framework under the Securities Act to promote capital
formation and expand investment opportunities while maintaining and
enhancing appropriate investor protections.\4\ As we noted in the
Proposing Release, these amendments will provide a foundation for our
ongoing efforts to assess whether the exempt offering framework, in its
component parts and as a whole, is consistent, accessible, and
effective for both issuers and investors. The Securities Act contains a
number of exemptions from its registration requirements and authorizes
the Commission to adopt additional exemptions. As the Commission has
previously noted, the regulatory framework for exempt offerings has
evolved, and the significance of the exempt securities markets has
increased both in terms of the absolute amount raised and relative to
the public registered markets.\5\ In 2019, registered offerings
accounted for $1.2 trillion (30.8 percent) of new capital, compared to
approximately $2.7 trillion (69.2 percent) that we estimate was raised
through exempt offerings.\6\ Of this, the estimated amount of capital
reported as being raised in offerings under Rule 506(b) and 506(c) of
Regulation D was approximately $1.56 trillion.
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    \4\ See Concept Release on Harmonization of Securities Offering
Exemptions, Release No. 33-10649 (June 18, 2019) [84 FR 30460 (June
26, 2019)] (``Concept Release'') and Facilitating Capital Formation
and Expanding Investment Opportunities by Improving Access to
Capital in Private Markets, Release Nos. 33-10763; 34-88321 (Mar. 4,
2020) [85 FR 17956 (Mar. 31, 2020)] (``Access to Capital Proposing
Release'').
    \5\ See Concept Release at 30465. See also Access to Capital
Proposing Release at 17957.
    \6\ Unless otherwise indicated, information in this release on
offering amounts is based on analyses by staff in the Commission's
Division of Economic Risk and Analysis (``DERA'') of data collected
from SEC filings.
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    The accredited investor definition is a central component of the
Rule 506 exemptions from registration and plays an important role in
other exemptions and other federal and state securities law contexts.
Qualifying as an accredited investor, as an individual or an
institution, is significant because accredited investors may, under
Commission rules, participate in investment opportunities that are
generally not available to non-accredited investors, including certain
investments in private companies and offerings by certain hedge funds,
private equity funds, and venture capital funds. The final rules are
tailored to permit investors with reliable alternative indicators of
financial sophistication to participate in such investment
opportunities, while maintaining the safeguards necessary for investor
protection and public confidence in investing in areas of the economy
that disproportionately create new jobs, foster innovation, and provide
for growth opportunities.
    Historically, the Commission has stated that the accredited
investor definition is ``intended to encompass those persons whose
financial sophistication and ability to sustain the risk of loss of
investment or fend for themselves render the protections of the
Securities Act's registration process unnecessary.'' \7\ Prior to the
adoption of these final rules, in the case of individuals, the
accredited investor definition has used wealth--in the form of a
certain level of income or net worth--as a proxy for financial
sophistication. However, as stated in the Proposing Release, we do not
believe wealth should be the sole means of establishing financial
sophistication of an individual for purposes of the accredited investor
definition. Rather, the characteristics of an investor contemplated by
the definition can be demonstrated in a variety of ways. These include
the ability to assess an investment opportunity--which includes the
ability to analyze the risks and rewards, the capacity to allocate
investments in such a way as to mitigate or avoid risks of
unsustainable loss, or the ability to gain access to information about
an issuer or about an investment opportunity--or the ability to bear
the risk of a loss.\8\ Accordingly, the final rules create new
categories of individuals and entities that qualify as accredited
investors irrespective of their wealth, on the basis that such
investors have demonstrated the requisite ability to assess an
investment opportunity.
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    \7\ See Regulation D Revisions; Exemption for Certain Employee
Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015 (Jan.
30, 1987)]. See also SEC v. Ralston Purina Co., 346 U.S. 119, 125
(1953) (taking the position that the availability of the Section
4(a)(2) exemption ``should turn on whether the particular class of
persons affected needs the protection of the Act. An offering to
those who are shown to be able to fend for themselves is a
transaction `not involving any public offering' '').
    \8\ The accredited investor standard is similar to, but distinct
from, other regulatory standards in Commission rules that are used
to identify persons who are not in need of certain investor
protection features of the federal securities laws. For example,
Section 3(c)(7) of the Investment Company Act excepts from the
definition of investment company any issuer, the outstanding
securities of which are owned exclusively by persons who, at the
time of acquisition of such securities, are qualified purchasers,
and which is not making and does not at that time propose to make a
public offering of securities. Congress defined qualified purchasers
as: (i) Natural persons who own not less than $5 million in
investments; (ii) family-owned companies that own not less than $5
million in investments; (iii) certain trusts; and (iv) persons,
acting for their own accounts or the accounts of other qualified
purchasers, who in the aggregate own and invest on a discretionary
basis, not less than $25 million in investments (e.g., institutional
investors). Each of these regulatory standards serves a different
regulatory purpose. Accordingly, an accredited investor will not
necessarily meet these other standards and these other regulatory
standards are not designed to capture the same investor
characteristics as the accredited investor standard. See also Report
on the Review of the Definition of ``Accredited Investor'' (Dec. 18,
2015) (``2015 Staff Report''), available at https://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf.
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    The amendments we are adopting are the product of years of efforts
by the Commission and its staff to consider and analyze possible
approaches to revising the accredited investor definition. A number of
the amendments are consistent with those recommended by the Commission
staff

in a 2015 report on the accredited investor definition,\9\ while some
of the amendments are substantially similar to those the Commission
proposed in 2007.\10\ Many of the amendments have been recommended, in
one form or another, by the Small Business Capital Formation Advisory
Committee, the former Advisory Committee on Small and Emerging
Companies, the Investor Advisory Committee, and a wide array of public
commenters.
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    \9\ See 2015 Staff Report.
    \10\ Revisions of Limited Offering Exemptions in Regulation D,
Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)]
(``2007 Proposing Release'').
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    The definition of ``qualified institutional buyer'' in Rule 144A is
similarly intended to ``identify a class of investors that can be
conclusively assumed to be sophisticated and in little need of the
protection afforded by the Securities Act's registration provisions.''
\11\ With the exception of registered dealers, a qualified
institutional buyer must in the aggregate own and invest on a
discretionary basis at least $100 million in securities of issuers that
are not affiliated with such a qualified institutional buyer.\12\ The
final rules expand the list of entities eligible for qualified
institutional buyer status to be consistent with the amendments to the
accredited investor definition, maintaining the $100 million threshold
for these entities to qualify for qualified institutional buyer status.
In this way, the final rules avoid inconsistencies between the entity
types eligible for each status while continuing to ensure that these
entities have sufficient financial sophistication to participate in
investment opportunities that do not have the additional protections
provided by registration under the Securities Act.
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    \11\ See Resale of Restricted Securities; Changes to Method of
Determining Holding Period of Restricted Securities Under Rules 144
and 145, Release No. 33-6806 (Oct. 25, 1988) [53 FR 44016 (Nov. 1,
1988)]. Rule 144A provides a non-exclusive safe harbor exemption
from the registration requirements of the Securities Act for resales
to qualified institutional buyers of certain restricted securities.
Any person other than the issuer or a dealer who offers or sells
securities in compliance with Rule 144A is deemed not to be engaged
in a distribution of the securities and therefore not an underwriter
of the securities within the meaning of Section 2(a)(11) of the
Securities Act, such that the Section 4(a)(1) exemption is available
for the resales of the securities.
    \12\ Rule 144A(a)(1)(i). A registered dealer is a qualified
institutional buyer if it owns and invests in the aggregate at least
$10 million of securities of non-affiliated issuers on a
discretionary basis or if it is acting in a riskless principal
transaction on behalf of a qualified institutional buyer. Rules
144A(a)(1)(ii) and (iii).
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    We received more than 200 unique comment letters on the Proposing
Release.\13\ Many commenters supported expanding the accredited
investor definition,\14\ while some commenters did not.\15\ Other
commenters recommended eliminating the definition altogether so that
anyone could invest in exempt offerings.\16\ We also received comments
from several commenters in general support of expanding the definition
of qualified institutional buyer in Rule 144A.\17\ In addition, in
response to the Concept Release, the SEC's Small Business Capital
Formation Advisory Committee adopted a recommendation regarding changes
to the accredited investor definition,\18\ and the 2019 SEC Government-
Business Forum on Small Business Capital Formation (``SEC Small
Business Forum'') provided a recommendation on the accredited investor
definition.\19\ Prior to the Concept Release, the SEC's Investor
Advisory Committee adopted a recommendation regarding changes to the
accredited investor definition.\20\

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

A. Proposed Amendments

    In the Proposing Release, the Commission proposed to amend the
accredited investor definition to add categories of both natural
persons and entities. For natural persons, the Commission proposed to
add new categories to the definition that would permit natural persons
to qualify as accredited investors based on certain professional
certifications or designations or other credentials or, with respect to
investments in a private fund, based on the person's status as a
``knowledgeable employee'' of the fund. Specifically, the Commission
proposed to add the following natural persons:
     Natural persons holding in good standing one or more
professional certifications or designations or other credentials from
an accredited educational institution that the Commission has
designated as qualifying an individual for accredited investor status;
and
     natural persons who are ``knowledgeable employees,'' as
defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940
(the ``Investment Company Act''), of the private-fund issuer of the
securities being offered or sold.\21\
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    \21\ A private fund is an issuer that would be an investment
company, as defined in Section 3 of the Investment Company Act, but
for Sections 3(c)(1) or 3(c)(7) of that Act. See Section 202(a)(29)
of the Investment Advisers Act of 1940 (the ``Advisers Act'').
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    For entities, the Commission proposed to add:
     SEC- and state-registered investment advisers and rural
business investment companies to the list of entities specified in Rule
501(a)(1);
     limited liability companies to the list of entities
specified in Rule 501(a)(3);
     entities, of a type not listed in Rule 501(a)(1), (a)(2),
(a)(3), (a)(7), or (a)(8), not formed for the specific purpose of
acquiring the securities offered, owning investments in excess of
$5,000,000;
     ``family offices,'' as defined in Rule 202(a)(11)(G)-1
under the Advisers Act: (i) With assets under management in excess of
$5,000,000, (ii) that are not formed for the specific purpose of
acquiring the securities offered, and (iii) whose prospective
investment is directed by a person who has such knowledge and
experience in financial and business matters that such family office is
capable of evaluating the merits and risks of the prospective
investment; and
     ``family clients,'' as defined in Rule 202(a)(11)(G)-1
under the Advisers Act, of a family office meeting the requirements in
new Rule 501(a)(12).
    In the Proposing Release, the Commission also proposed to amend the
accredited investor definition to allow spousal equivalents to pool
finances for the purpose of qualifying as accredited investors.
Finally, the Commission proposed to codify several staff
interpretations by adding notes to Rule 501 to clarify that:
     The calculation of ``joint net worth'' for purposes of
Rule 501(a)(5) can be the aggregate net worth of an investor and the
investor's spouse (or spousal equivalent if ``spousal equivalent'' is
included in Rule 501(a)(5)); \22\
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    \22\ Throughout this release, references to an investor's spouse
include a spousal equivalent, as applicable, in light of the
adoption of the amendments to Rule 501(a)(5) and Rule 501(a)(6).
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     the securities being purchased by an investor relying on
the joint net worth test of Rule 501(a)(5) need not be purchased
jointly; and
     when determining the accredited investor status of an
entity under Rule 501(a)(8), one may look through various forms of
equity ownership to natural persons.

B. Final Amendments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    We also requested comment on the proposed non-exclusive list of
attributes that the Commission would consider in determining which
professional certifications and designations or other credentials
qualify for accredited investor status. A few commenters expressed
support for the proposed list.\91\ One proposed attribute was an
indication that an individual holds the certification or designation is
made publicly available by the relevant self-regulatory organization or
other industry body. One commenter expressed support for this attribute
but suggested that it be broadened to include not only publicly
available certifications, but also those relevant certifications that
may be ``otherwise independently verifiable.'' \92\ In addition, one
commenter urged the Commission to establish a routine review of the
defined list of eligible designations, certifications, and
licenses.\93\
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    \91\ See Fidelity Letter; CFA Institute Letter (noting that
``[w]e believe the Release articulates sound principles in its non-
exclusive list of attributes that it would consider in determining
which professional certifications and designations or other
credentials qualify for accredited investor status''); and ABA FR of
Sec. Comm. Letter (``[t]he Committee supports this approach, which
would be based on criteria that are verifiable and provide ongoing
flexibility for the Commission to add further appropriate investor
categories'').
    \92\ See Fidelity Letter (noting that such approach ``[p]rovides
the SEC flexibility as it considers additions to the list of
professional certifications that meet its specified criteria in the
future, which may not necessarily be searchable on a public website,
but would be otherwise verifiable, such as on an access-controlled
website'').
    \93\ See Carta Letter (``[t]he final rule should provide the
Commission with flexibility to reevaluate previously designated
certifications, designations, or credentials if they change over
time, and also designate other, possibly new, certifications,
designations, or credentials that meet specified criteria'').
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ii. Final Amendments

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

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

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

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

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

    We are also adopting a good-standing requirement, which was
supported by many commenters addressing the requirement, but are not
requiring that the individual practice in the fields related to the
certification, except to the extent that continued affiliation with a
firm is required to maintain the certification, designation, or
credential.\96\ We continue to believe that passing the requisite
examinations and maintaining an active certification, designation, or
license is sufficient to demonstrate the individual's financial
sophistication to invest in exempt offerings, even when the individual
is not practicing in an area related to the certification or
designation. We also continue to believe that an inactive
certification, designation, or license, particularly when the
certification or designation has been inactive for an extended period
of time, could lessen the validity of the certification or designation
as a measure of financial sophistication. We are not, however, adopting
a requirement that individuals holding qualifying credentials must
practice in the fields related to the certifications or designations or
that such individuals have practiced for a minimum number of years. We
are concerned that adding such additional criteria would make it more
difficult for financially sophisticated investors to demonstrate, and
issuers and other market professionals to verify, accredited investor
status, but would not provide significant additional protection for
investors.
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    \96\ For example, an individual's registration as a general
securities representative will lapse two years after the date that
his or her employment with a FINRA member has been terminated. See
FINRA Rule 1210.08. An individual who ceases to be employed by a
FINRA member but whose registration remains current will continue to
qualify as an accredited investor until such registration lapses.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    \127\ This is consistent with the American Bar Association
Section of Business Law, SEC Staff No-Action Letter (Apr. 22, 1999)
(``ABA Letter''). In the ABA Letter, staff stated that it would not
recommend enforcement action under Section 7 of the Investment
Company Act if a knowledgeable employee and his or her spouse who is
not a knowledgeable employee (or a qualified purchaser) invest
jointly in a Section 3(c)(7) fund. The staff took this position
because it believed Congress's intent to apply the spousal joint
interest position should apply in the context of Rule 3c-5.
    \128\ We do not believe it is appropriate to attribute a
knowledgeable employee's accredited investor status to joint
investments other than those held with the knowledgeable employee's
spouse. This is consistent with the Commission's position with
respect to qualified purchasers. Under Section 2(a)(51)(A)(i) of the
Investment Company Act, a spouse who is not a qualified purchaser
can hold a joint interest in a Section 3(c)(7) fund with his or her
qualified purchaser spouse. However, dependents of a qualified
purchaser who are not themselves qualified purchasers may not hold a
joint interest in a Section 3(c)(7) fund with the qualified
purchaser. See ABA Letter. See also Privately Offered Investment
Companies, Release No. IC-22597 (Apr. 3, 1997) [62 FR 17512 (Apr. 9,
1997).]
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    After considering comments, we are not modifying the definition of
accredited investor to include ``qualified purchasers'' as defined in
Section 2(a)(51)(A) of the Investment Company Act. Most qualified
purchasers already meet the definition of accredited investor by virtue
of the higher financial thresholds required to qualify as a qualified
purchaser.\129\ While there may be limited circumstances where this is
not the case, we do not believe it is appropriate at this time to
further extend the accredited investor definition to include qualified
purchasers, given that the ``accredited investor'' standard and
``qualified purchaser'' standard are distinct standards that each
serves a different regulatory purpose.\130\
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    \129\ See Section 2(a)(51) of the Investment Company Act.
    \130\ See supra note 8.
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    We are not able to estimate the number of individuals that will
qualify as accredited investors under the amendment to the definition.
Using data on private fund statistics compiled by the Commission's
Division of Investment Management, we estimate that there were 32,620
private funds as of second quarter 2019.\131\ However, we lack data on
the number of knowledgeable employees per fund. We also cannot estimate
how many individuals that meet the definition of ``knowledgeable
employee'' may already qualify as accredited investors under the
current financial thresholds.
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    \131\ See https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2019-q2.pdf.
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2. Entities
    In the Proposing Release, the Commission proposed to amend the
definition of accredited investor to add several categories of
entities: SEC- and state-registered investment advisers, rural business
investment companies, limited liability companies, family offices,
family clients, and a catch all category.
a. Registered Investment Advisers
    The Commission proposed to include in Rule 501(a)(1) investment
advisers registered under Section 203 of the Advisers Act \132\ and
investment advisers registered under the laws of the various states.
The Proposing Release also requested comment on whether exempt
reporting advisers should qualify as accredited investors.\133\
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    \132\ See Section 203 of the Advisers Act (15 U.S.C. 80b-3).
    \133\ An exempt reporting adviser is an investment adviser that
qualifies for the exemption from registration under Section 203(l)
of the Advisers Act because it is an adviser solely to one or more
venture capital funds, or under Rule 203(m)-1 of the Advisers Act
because it is an adviser solely to private funds and has assets
under management in the United States of less than $150 million. See
Exemptions for Advisers to Venture Capital Funds, Private Fund
Advisers With Less Than $150 Million in Assets Under Management, and
Foreign Private Advisers, Investment Advisers Act Release No. 3222
(June 22, 2011) [76 FR 39646 (July 6, 2011)].
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i. Comments
    Several commenters supported adding SEC- and state-registered
investment

advisers to the definition of accredited investor.\134\ Commenters
supporting their inclusion generally stated that registered investment
advisers have the investment acumen to make allocations of capital and
discern among investments, including in the private placement
market.\135\ While no commenters indicated they opposed this addition,
one commenter recommended that the Commission narrow the definition to
include only advisory firms, and not natural persons who are registered
investment advisers.\136\ This commenter expressed the view that
natural persons should be evaluated under the wealth tests that apply
to individuals. Other commenters, on the other hand, recommended that
the Commission expand the definition to include exempt reporting
advisers, noting that exempt reporting advisers are professionals
managing either venture capital funds or small investment funds as a
business.\137\
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    \134\ See P. Rutledge Letter; A. Hemmingsen Letter; CFA Letter;
Mercer Advisors Letter; CCMC Letter; SBIA Letter; NASAA Letter;
letter from Financial Planning Coalition dated Mar. 16, 2020 (``FPC
Letter''); IWI Letter; and D. Burton Letter.
    \135\ See, e.g., CCMC Letter and A. Hemmnigsen Letter.
    \136\ See NASAA Letter.
    \137\ See P. Rutledge Letter and A. Hemmingsen Letter.
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ii. Final Amendments
    We are adopting the amendment with certain modifications from our
proposal. We believe that registered investment advisers, including
those that are sole proprietorships, have the requisite financial
sophistication needed to conduct meaningful investment analysis. As
discussed in the Proposing Release, registered investment advisers are
generally considered to be institutional investors under state law, and
we see no compelling reason to distinguish SEC- and state-registered
investment advisers acting for their own account from other
institutional investors already treated as accredited investors.\138\
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    \138\ See Proposing Release at 2586 (describing the inclusion of
certain institutional investors in the definition of accredited
investor, including banks, insurance companies, certain employee
benefit plans, investment companies, small business investment
companies (``SBICs''), savings and loan associations, credit unions,
and registered broker-dealers).
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    As a result, we believe it is appropriate to extend accredited
investor status to all SEC- and state-registered investment advisers.
We estimate that there are currently approximately 13,400 SEC-
registered investment advisers and approximately 17,500 state-
registered investment advisers.\139\ We are not able to estimate,
however, how many of those SEC- or state-registered investment advisers
meet the $5 million assets test under Rule 501(a)(3) and therefore
currently qualify as accredited investors.
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    \139\ Of these, 72 SEC-registered investment advisers are sole
proprietorships and 1,712 advisers registered with one or more
states are sole proprietorships. We do not believe sole
proprietorships should be distinguished from other registered
investment advisers for purposes of determining accredited investor
status.
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    After considering comments, we also believe it is appropriate to
include exempt reporting advisers in the definition of accredited
investor. We believe exempt reporting advisers, as advisers to private
funds, have the requisite financial sophistication needed to conduct
meaningful investment analysis. To qualify as an exempt reporting
adviser under Section 203(m) or Section 203(l) of the Advisers Act, an
adviser would otherwise be required to register as an investment
adviser with the Commission and thereby meet the minimum asset
thresholds triggering such requirement.\140\ Additionally, private
funds themselves are institutional investors and all investors therein
are presumed to be financially sophisticated. We estimate that there
are currently approximately 4,244 exempt reporting advisers.\141\ We
are not able to estimate, however, how many of those exempt reporting
advisers may meet the $5 million assets test under Rule 501(a)(3) and
therefore currently qualify as accredited investors.
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    \140\ Advisers must apply for registration with the SEC if their
regulatory assets under management are at least $110 million or if
they have regulatory assets under management of at least $25 million
but less than $100 million and meet one of the requirements to be
classified as a ``mid-sized adviser.'' See Section 203A(a)(2) of the
Advisers Act. See also Form ADV: Instructions for Part 1A, instr.
2.b.
    \141\ Exempt reporting advisers are required to submit, and
periodically update, reports on Form ADV. See Rule 204-4 under the
Advisers Act.
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b. Rural Business Investment Companies
    The Commission proposed to include rural business investment
companies (``RBIC'') in Rule 501(a)(1). A RBIC is defined in Section
384A of the Consolidated Farm and Rural Development Act \142\ as a
company that is approved by the Secretary of Agriculture and that has
entered into a participation agreement with the Secretary.\143\ RBICs
are intended to promote economic development and the creation of wealth
and job opportunities in rural areas and among individuals living in
such areas.\144\ Their purpose is similar to the purpose of small
business investment companies (``SBICs''), which are intended to
increase access to capital for growth stage businesses.\145\ Because
SBICs and RBICs share the common purpose of promoting capital formation
in their respective sectors, advisers to SBICs and RBICs are treated
similarly under the Advisers Act in that they have the opportunity to
take advantage of expanded exemptions from investment adviser
registration.\146\ SBICs are already accredited investors under Rule
501(a)(1) and the Commission proposed to include RBICs as accredited
investors under Rule 501(a)(1).
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    \142\ 7 U.S.C. 2009cc.
    \143\ See Public Law 115-417 (2019). To be eligible to
participate as an RBIC, the company must be a newly formed for-
profit entity or a newly formed for-profit subsidiary of such an
entity, have a management team with experience in community
development financing or relevant venture capital financing, and
invest in enterprises that will create wealth and job opportunities
in rural areas, with an emphasis on smaller enterprises. See 7
U.S.C. 2009cc-3(a).
    \144\ See http://www.rd.usda.gov/programs-services/rural-business-investment-program.
    \145\ A SBIC is a type of privately owned and managed investment
fund that is licensed and regulated by the U.S. Small Business
Administration (``SBA''). A SBIC uses its own capital, plus funds
borrowed with an SBA guarantee, to make equity and debt investments
in qualifying small businesses. See https://www.sba.gov/partners/sbics.
    \146\ Advisers to solely RBICs and advisers to solely SBICs are
exempt from investment adviser registration. See Advisers Act
Sections 203(b)(8) and 203(b)(7), respectively. The venture capital
fund adviser exemption deems RBICs and SBICs to be venture capital
funds for purposes of the exemption. See 15 U.S.C. 80b-3(l). The
private fund adviser exemption excludes the assets of RBICs and
SBICs from counting towards the $150 million threshold. 15 U.S.C.
80b-3(m). See also Exemptions from Investment Adviser Regulation for
Advisers to Certain Rural Business Investment Companies, Investment
Advisers Act Release No. 5454 (Mar. 2, 2020) [85 FR 13734 (Mar. 10,
2020)].
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i. Comments
    Several commenters supported adding RBICs to the definition of
accredited investor,\147\ while no commenters opposed the addition.
Some commenters stated that including RBICs would serve as a critical
source of capital for rural communities.\148\ One commenter further
stated that including RBICs would reduce a significant burden that has
limited their ability to invest in private businesses.\149\ Commenters
also agreed that RBICs and SBICs should be treated in the same manner
and therefore agreed that RBICs also should be accredited
investors.\150\
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    \147\ See P. Rutledge Letter; SBIA Letter; NASAA Letter; CCMC
Letter; D. Burton Letter; and ABA FR of Sec. Comm. Letter.
    \148\ See CCMC Letter and SBIA Letter.
    \149\ See SBIA Letter.
    \150\ See SBIA Letter and D. Burton Letter.

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ii. Final Amendments
    We are adopting the amendment as proposed. Because of their common
purpose and similar treatment under other federal securities laws, we
believe that SBICs and RBICs should be treated similarly under the
Securities Act. As SBICs are already accredited investors under Rule
501(a)(1), we continue to believe that RBICs should be included as
accredited investors under Rule 501(a)(1).
c. Limited Liability Companies
    Rule 501(a)(3) sets forth the following types of entities that
qualify for accredited investor status if they have total assets in
excess of $5 million and were not formed for the specific purpose of
acquiring the securities being offered: Organizations described in
Section 501(c)(3) of the Internal Revenue Code, corporations,
Massachusetts or similar business trusts, and partnerships.\151\ Though
this list does not include limited liability companies, which have
become a widely adopted corporate form since the Commission last
updated the accredited investor rules in 1989 to include additional
entities,\152\ a longstanding staff position has been that limited
liability companies satisfying the other requirements of the definition
are eligible to qualify as accredited investors under Rule
501(a)(3).\153\
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    \151\ See Rule 501(a)(3).
    \152\ See Regulation D, Release No. 33-6825 (Mar. 15, 1989) [54
FR 11369 (Mar. 20, 1989)].
    \153\ See Division of Corporation Finance interpretive letter to
Wolf, Block, Schorr and Solis-Cohen (Dec. 11, 1996); and question
number 255.05 of Securities Act Rules Compliance and Disclosure
Interpretations, available at https://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm.
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i. Comments
    Several commenters supported adding LLCs,\154\ while no commenters
opposed the addition. One commenter also suggested that the Commission
include ``any similar business entity in order to encompass any new
form of entity that might be created in the future and thus avoid the
problem that has existed with respect to LLCs.'' \155\ The Proposing
Release also requested comment on whether the Commission should amend
its rules to specifically include all managers of limited liability
companies as executive officers under Rule 501(f) or whether the rule
should be limited to managing members, thereby precluding third-party
managers from being considered executive officers under Rule 501(f).
Several commenters supported allowing any manager of a limited
liability company to qualify as an ``executive officer'' under Rule
501(f).\156\ One commenter stated that it did not believe naming
managers was necessary because ``they are already covered, to the
extent appropriate, by the term `executive officer' as a `person who
performs similar policy making functions.' '' \157\
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    \154\ See P. Rutledge Letter; letter from Farrell Fritz PC dated
Jan. 13, 2020 (``Farrell Fritz Letter''); Md St. Bar Assn. Comm. on
Sec. Laws Letter; CCMC Letter; SBIA Letter; NASAA Letter; MFA and
AIMA Letter (stating that ``[w]e believe these changes[, including
adding LLCs and the catch-all provision,] are appropriate and will
provide objective, bright-line standards for issuers to determine
whether certain types of entities qualify as accredited
investors''); D. Burton Letter; ABA FR of Sec. Comm. Letter.
    \155\ See ABA FR of Sec. Comm. Letter (positing that ``the
concern identified in the Proposing Release regarding other
entities, like government bodies for which an asset would not be
meaningful, would be addressed'').
    \156\ See Farrell Fritz Letter; CCMC Letter; D. Burton Letter;
and ABA FR of Sec. Comm. Letter.
    \157\ See ABA FR of Sec. Comm. Letter.
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ii. Final Amendments
    We are adopting the amendment as proposed. We continue to believe
that limited liability companies that meet the requirements of Rule
501(a)(3), including the assets test, should be considered to have the
requisite financial sophistication to qualify as accredited investors.
Based on data from the Internal Revenue Service, there were 2,696,149
limited liability companies at the end of 2017.\158\ However, due to a
lack of more detailed publicly available information about limited
liability companies, such as the distribution of total assets across
companies, we are unable to estimate the number of these limited
liability companies that meet the requirements of Rule 501(a)(3). As
this amendment is a codification of a long standing staff
interpretation, we do not expect that the pool of accredited investors
will change significantly as a result of this amendment.
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    \158\ See IRS, Statistics of Income Division, Partnerships, May
2019, Table 8, available at https://www.irs.gov/pub/irs-soi/17pa08.xlsx. See also D. Burton Letter.
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    As the Commission noted in the Proposing Release, Rule 501(a)(4)
includes as an accredited investor any director, executive officer, or
general partner of the issuer of the securities being offered or sold.
The term ``executive officer'' is defined in Rule 501(f) as ``the
president, any vice president in charge of a principal business unit,
division or function, as well as any other officer who performs a
policy making function, or any other person who performs similar policy
making functions for the issuer.'' Regarding whether to list managers
in 501(f) or which managers should be included, while we continue to
believe that managers of limited liability companies, through their
knowledge and management of the issuer, are likely to be financially
sophisticated and capable of fending for themselves in evaluating
investments in the limited liability company's securities, we also
continue to believe that such a manager performs a policy making
function for the issuer equivalent to that of an executive officer of a
corporation under Rule 501(f), and therefore we do not believe it is
necessary to amend Rule 501(a)(4) or Rule 501(f) to specifically
include managers of limited liability companies. Further, consistent
with the views of commenters on this issue, we do not believe that it
is necessary to distinguish between member managers and third-party
managers, as either could be considered an executive officer under Rule
501(f).
    We are not expanding Rule 501(a)(3) to include any similar business
entity, as suggested by a commenter. As discussed below, we believe the
new catch-all category for entities in Rule 501(a)(9), which includes
an investments test, appropriately addresses new entity types that may
be created in the future.
d. Other Entities Meeting an Investments-Owned Test
    Certain types of entities, such as Indian tribes, labor unions,
governmental bodies and funds, and entities organized under the laws of
a foreign country, are not included in the accredited investor
definition. The Commission proposed to add a new category in the
accredited investor definition for any entity owning ``investments,''
as that term is defined in Rule 2a51-1(b) under the Investment Company
Act, in excess of $5 million that is not formed for the specific
purpose of acquiring the securities being offered.\159\ The Commission
indicated in the Proposing Release that the intent of this new category
was to capture all existing entity forms not already included within
Rule 501(a), such as Indian tribes and governmental bodies, as well as
those entity types that may be created in the future.
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    \159\ Rule 501(a)(9).
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