IMDG Letter all supported, recommended revising Rule 501(a)(1) to
include ``any plan established and maintained by a tribal
government, its political subdivisions, or any agency or
instrumentality of a tribal government or its political
subdivisions, for the benefit of its citizens (members), if such
plan has total assets in excess of $5,000,000 in non-trust assets,''
with the term ``non-trust asset'' defined as ``an asset that is
under the direct control of a tribe or tribal entity, and which is
not held in trust by the United States for the benefit of the
tribe.'' In addition, the 2019 Small Business Forum Report included
a recommendation that the Commission revise the accredited investor
definition to provide tribal governments parity with state
governments.
    \151\ See CMTA Letter (supporting the inclusion of state and
local governments having $100 million of assets under management as
accredited investors).
---------------------------------------------------------------------------

    The Concept Release also requested comment on whether the
Commission should replace all $5-million-total-assets thresholds with
$5-million-total-investments thresholds, while including all entities
instead of enumerating certain entities. While one commenter opposed
replacing the asset test with an investments test,\152\ several
commenters supported allowing all entities owning $5 million in
investments to qualify as an accredited investor.\153\
---------------------------------------------------------------------------

    \152\ See IPA Letter (asserting that such a change would
``unduly [shrink] the current pool of eligible investors'').
    \153\ See CMTA Letter; EquityZen Letter; ICI Letter; BlackRock
Letter; Artivest Letter; ABA FR of Sec. Comm. Letter; Sec. Reg.
Comm. of N.Y.St. B.A. Letter; and letter from PFM Asset Management
LLC dated December 6, 2019 (``PFM Letter'').
---------------------------------------------------------------------------

    In response to these comments and recommendations, we are proposing
to add a new category in the accredited investor definition for any
entity owning investments in excess of $5 million that is not formed
for the specific purpose of acquiring the securities being
offered.\154\ As shown by the emergence of limited liability companies,
it is possible that an entirely new corporate form could gain
acceptance but not come within the scope of Rule 501(a). Proposed Rule
501(a)(9) is intended 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.
---------------------------------------------------------------------------

    \154\ Proposed Rule 501(a)(9).
---------------------------------------------------------------------------

    We believe requiring $5 million in investments instead of assets
for this ``catch-all'' category of entities may better demonstrate that
the investor has experience in investing and is therefore more likely
to have a level of financial sophistication similar to that of other
institutional accredited investors. For example, certain types of
entities that would be covered by the proposed amendment, such as
governmental entities, may have $5 million in non-financial assets such
as land, buildings, and vehicles, but not have any investment
experience. With respect to this new category of entities, we believe
that an investments test may be more likely than an assets-based test
to serve as a reliable method for ascertaining whether an entity is
likely to require the protections of Securities Act registration.
    To assist both issuers and investors, we propose to incorporate the
definition of investments from Rule 2a51-1(b) under the Investment
Company Act, which includes, among other things: securities; real
estate, commodity interests, physical commodities, and non-security
financial contracts held for investment purposes; and cash and cash
equivalents.\155\ By using an existing definition, we hope to alleviate
confusion and facilitate compliance.
---------------------------------------------------------------------------

    \155\ See Rule 2a51-1(b), which was adopted by the Commission in
Privately Offered Investment Companies, Release No. IC-22597 (Apr.
3, 1997) [62 FR 17512 (April 9, 1997)].
---------------------------------------------------------------------------

Request for Comment
    24. Should we add a new category to the accredited investor
definition for any entity with investments in excess of $5 million that
is not formed for the specific purpose of acquiring the securities
being offered, while maintaining the current $5 million assets test for
entities currently listed in Rules 501(a)(3) and (a)(7), as proposed?
Are the entities that would be eligible under proposed Rule 501(a)(9)
sufficiently different in nature from the enumerated entities in Rules
501(a)(3) and (a)(7) such that an investment test should be applied to
demonstrate financial sophistication? If not, should Rule 501(a)(3) be
expanded to include any entity that has more than $5 million in assets?
    25. Instead of using the catch-all ``any entity'' in proposed Rule
501(a)(9), should we enumerate specific entity types? If so, which
entity types should we enumerate?
    26. Should any restrictions be applied with respect to entities
covered by proposed Rule 501(a)(9)? For example, should we consider any
restrictions on entities organized or incorporated under the laws of a
foreign country?
    27. Should we use an asset test instead of an investments test in
proposed Rule 501(a)(9)? Should the current $5 million asset test be
adjusted?
    28. Is $5 million in investments the appropriate threshold for the
proposed new category?
    29. Proposed Rule 501(a)(9) is intended to capture all existing
entity forms not already included within Rule 501(a), including Indian
tribes and governmental bodies, that meet the proposed $5 million
investments test. Would the investments test have a disproportionate
impact on Indian tribes?
    30. Should we use the definition of investments from Rule 2a51-1(b)
under the Investment Company Act? If not, what definition should we
use? Are market participants familiar with the definition such that
implementation would not be unduly difficult?
    31. We are not proposing to revise Rule 501(a)(7). As a result,
trusts with investments of more than $5 million would not need
purchases to be directed by a sophisticated person in order to

qualify as an accredited investor. Is this an appropriate result?
Should trusts have purchases directed by a sophisticated person in
order to qualify under proposed Rule 501(a)(9)?
    32. In addition to, or in lieu of, proposed Rule 501(a)(9), should
we revise the definition of accredited investor by replacing the $5
million assets test that currently applies to certain entities with a
$5 million investments test? If so, should we also grandfather issuers'
existing investors that are accredited investors under the current
definition with respect to future offerings of their securities?
Alternatively, should we retain the current assets test but revise the
$5 million threshold? If so, what threshold would be appropriate?
5. Proposed Note to Rule 501(a)(8)
    Under Rule 501(a)(8), an entity qualifies as an accredited investor
if all of the equity owners of that entity are accredited investors.
Because in some instances, an equity owner of an entity is another
entity, not a natural person, we are proposing to add a note to Rule
501(a)(8) that would clarify that, in determining accredited investor
status under Rule 501(a)(8), one may look through various forms of
equity ownership to natural persons.\156\ Thus, if those natural
persons are themselves accredited investors, and if all other equity
owners of the entity are accredited investors, the entity would be an
accredited investor under Rule 501(a)(8). We believe this approach is
appropriate because the intent of Rule 501(a)(8) is to qualify as
accredited investors those entities that are 100% owned by accredited
investors and, for this purpose, it should not matter whether the
ownership is direct or indirect.
---------------------------------------------------------------------------

    \156\ This proposed note is consistent with an existing staff
interpretation. See question number 255.06 of Securities Act Rules
Compliance and Disclosure Interpretations, available at https://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm.
---------------------------------------------------------------------------

Request for Comment
    33. Should we add a note to clarify that one may look through
various forms of equity ownership to natural persons when determining
accredited investor status under Rule 501(a)(8)?
6. Certain Family Offices and Family Clients
    In response to the 2015 Staff Report, the Commission received
comments from a group of ``family offices'' recommending that the
Commission amend the accredited investor definition to include ``family
offices'' and ``family clients,'' as the Commission has defined those
terms.\157\ ``Family offices'' are entities established by wealthy
families to manage their wealth, plan for their families' financial
future, and provide other services to family members. The Commission
has previously observed that single family offices generally serve
families with at least $100 million or more of investable assets.\158\
Family offices generally meet the definition of ``investment adviser''
under the Advisers Act, as the Commission has interpreted the term,
because, among the variety of services provided, family offices are in
the business of providing advice about securities for compensation.
However, the Commission adopted the ``family office rule'' \159\ in
2011 to exclude single family offices from regulation under the
Advisers Act under certain conditions.\160\ Under that rule, a family
office generally is a company that has no clients other than ``family
clients.'' \161\ ``Family clients'' generally are family members,
former family members, and certain key employees of the family office,
as well as certain of their charitable organizations, trusts, and other
types of entities.\162\
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    \157\ See letter from Martin E. Lybecker, Perkins Coie LLP (on
behalf of Private Investor Coalition) dated August 8, 2016 (``2016
PIC Letter'').
    \158\ See Family Offices, Release No. IA-3098 (Oct. 12, 2010)
[75 FR 63753 (Oct. 18, 2010)] (``Family Office Proposing Release'').
Industry observers have estimated that there are 2,500 to 3,000
single family offices managing more than $1.2 trillion in assets.
See 2016 PIC Letter.
    \159\ 17 CFR 275.202(a)(11)(G)-1.
    \160\ See Family Offices, Release No. IA-3220 (June 22, 2011)
[76 FR 37983 (June 29, 2011)] (``Family Office Adopting Release'').
See also Family Office Proposing Release (``We viewed the typical
single family office as not the sort of arrangement that Congress
designed the Advisers Act to regulate. We also were concerned that
application of the Advisers Act would intrude on the privacy of
family members. . . . The Act was not designed to regulate the
interactions of family members in the management of their own
wealth.'').
    \161\ A family office also (1) must be wholly owned by family
clients and exclusively controlled (directly or indirectly) by one
or more family members or family entities (each as defined in the
rule), and (2) must not hold itself out to the public as an
investment adviser. See Rule 202(a)(11)(G)-1(b).
    \162\ For a full list of family clients, see 17 CFR
275.202(a)(11)(G)-1(d)(4). The family office rule defines a ``family
member'' to include ``all lineal descendants (including by adoption,
stepchildren, foster children, and individuals that were a minor
when another family member became a legal guardian of that
individual) of a common ancestor (who may be living or deceased),
and such lineal descendants' spouses or spousal equivalents;
provided that the common ancestor is no more than 10 generations
removed from the youngest generation of family members.'' 17
CFRSec.  275.202(a)(11)(G)-1(d)(6).
---------------------------------------------------------------------------

    A commenter on the 2015 Staff Report stated that the public policy
supporting the family office rule ``is based on the notion that members
of a family will protect each other, and that the investor protections
of the Investment Advisers Act do not need to apply. . . .'' \163\ The
commenter suggested this public policy should apply to other securities
laws as well.\164\ The commenter also explained that the different
standards under Commission rules sometimes result in an anomaly that a
particular family client might not meet the definition of accredited
investor while it could meet the definition of ``qualified purchaser,''
\165\ which has a higher financial threshold. The commenter reiterated
these assertions in its recent comment letter on the Concept Release
and suggested that we add a new category of investor to the accredited
investor definition that would apply to ``(i) a Family Office with
assets under management in excess of $5,000,000 and (ii) a Family
Office or a Family Client (a) that is not formed for the specific
purpose of acquiring the securities offered and (b) whose purchase is
directed by a person who has such knowledge and experience in financial
and business matters that such person is capable of evaluating the
merits and risks of a potential investment.'' \166\ Another commenter
on the Concept Release raised similar points and urged the Commission
to, among other things, amend the definition of accredited investor to
include a family client of a family office so long as it relied on
advice and sophistication of the family office.\167\
---------------------------------------------------------------------------

    \163\ See 2016 PIC Letter.
    \164\ See Id. (recommending changes not only to the definition
of ``accredited investor,'' but also to the definitions of
``qualified purchaser'' and ``investment company'' in the Investment
Company Act).
    \165\ Investment Company Act Section 2(a)(51)(A) (15 U.S.C. 80a-
2(a)(51)(A)).
    \166\ See 2019 PIC Letter.
    \167\ See letter from Institutional Limited Partners Association
dated September 24, 2019.
---------------------------------------------------------------------------

    We believe the policy rationale for adopting the family office rule
also supports considering amendments to the definition of accredited
investor for family offices and their family clients. We believe family
offices can sustain the risk of loss of investment, given their assets.
As a result, we are proposing to add new categories to the accredited
investor definition for ``family offices'' and ``family clients of
family offices.''
    Drawing from characteristics in the current definition of
accredited investor and from commenter feedback, we propose to amend
the definition to include any ``family office'' with at least $5
million in assets under

management \168\ and its ``family clients,'' \169\ each as defined in
the family office rule. We believe requiring the family office to have
a minimum amount of assets under management, as suggested by
commenters, would ensure the family office has sufficient assets to
sustain the risk of loss. In addition, the proposed definition would
apply only to a family office whose purchase 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. In order to avoid improper reliance on
the amended rule, we also propose that the family office not be formed
for the specific purpose of acquiring the securities offered \170\ and
that a family client must be a family client of a family office that
meets these requirements.\171\ We expect that all or most current
family offices would be accredited investors under the proposed
amendments to the definition.
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    \168\ Proposed Rule 501(a)(12).
    \169\ Proposed Rule 501(a)(13).
    \170\ Proposed Rule 501(a)(12)(i).
    \171\ Proposed Rule 501(a)(13).
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Request for Comment
    34. Should family offices and their family clients qualify as
accredited investors?
    35. Do the proposed new categories for these investors have the
proper scope? If not, what parameters would be more appropriate? If
yes, which ones and why? If not, why not? Are we correct that all or
most family offices and their clients would qualify as accredited
investors under the proposed amendments?
    36. Should we require that the purchase be directed by a person who
has the requisite knowledge and experience in financial and business
matters? How would issuers assess this in practice?
    37. Would it be appropriate to impose a financial threshold for a
family office to qualify as an accredited investor as proposed? Should
we also impose a financial threshold for a family client to qualify? In
either case, what is the appropriate threshold? For instance, should
there be a minimum investment amount or minimum assets under
management?
    38. Are there specific categories of family clients that should be
excluded? For instance, should the proposed rule exclude anyone who is
not a ``family member,'' as defined in the family office rule? \172\
Should a family client qualify as an accredited investor if it becomes
a ``former family client,'' as defined in the family office rule? \173\
---------------------------------------------------------------------------

    \172\ See Rule 202(a)(11)(G)-1(d)(6).
    \173\ See Rule 202(a)(11)(G)-1(d)(7).
---------------------------------------------------------------------------

    39. Rule 202(a)(11)(G) 1 under the Advisers Act deems a person who
receives assets upon the death of a family member (or other involuntary
transfer from a family member) to be a family client (``a
beneficiary'') for only one year following the involuntary
transfer.\174\ Should such a beneficiary qualify as an accredited
investor during that year if the beneficiary would not otherwise
qualify?
---------------------------------------------------------------------------

    \174\ See Rule 202(a)(11)(G) 1(b).
---------------------------------------------------------------------------

D. Permit Spousal Equivalents To Pool Finances for the Purposes of
Qualifying as Accredited Investors

    Under the current accredited investor definition, an individual,
together with a spouse, may qualify as an accredited investor by either
surpassing the $300,000 joint income threshold \175\ or the $1 million
joint net worth threshold.\176\ The Commission did not define the term
``spouse'' when it originally adopted Regulation D,\177\ nor did it do
so when adding the joint income test to the accredited investor
definition in 1988.\178\ Currently, references to ``spouse'' in Rule
501 include individuals married to persons of the same sex.
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    \175\ Rule 501(a)(6).
    \176\ Rule 501(a)(5).
    \177\ See Regulation D 1982 Adopting Release.
    \178\ See Regulation D 1988 Adopting Release.
---------------------------------------------------------------------------

    The 2015 Staff Report noted uncertainties regarding whether persons
in legally recognized unions, such as domestic partnerships, civil
unions, and same-sex marriages, were considered spouses for purposes of
the accredited investor definition. The 2015 Staff Report recommended
that the Commission consider adding the term ``spousal equivalent'' to
the accredited investor definition to permit spousal equivalents to
pool finances for the purpose of qualifying as accredited investors.
Commenters' responses were mixed, with several commenters generally
supporting the recommendation \179\ and one commenter opposing it.\180\
---------------------------------------------------------------------------

    \179\ See CFA/AFR Letter (stating that this recommended change
``helps to bring the securities laws up to date with modern values
and expectations''); NSBA Letter (noting that this recommended
change would ``expand opportunities to invest in small businesses to
more households''); and 2016 SBIA Letter.
    \180\ See Cornell Law Clinic Letter (noting that federal law
does not treat marriages as equivalent to civil unions and domestic
partnerships, and that ``the family office rule, accountant
independence standards, and crowdfunding rules are fundamentally
different in nature from the accredited investor definition'').
---------------------------------------------------------------------------

    To address any uncertainties, we propose to allow natural persons
to include joint income from spousal equivalents when calculating joint
income under Rule 501(a)(6), and to include spousal equivalents when
determining net worth under Rule 501(a)(5). We see no reason to
distinguish between different types of relationship structures for the
purpose of these rules and, in that regard, believe that the proposed
amendments would remove unnecessary barriers to investment
opportunities for spousal equivalents.
    The proposed amendments would define spousal equivalent as a
cohabitant occupying a relationship generally equivalent to that of a
spouse. The Commission previously has used this formulation of spousal
equivalent.\181\ As discussed above, a family office is exempted from
regulation under the Advisers Act when the family office advises
``family clients.'' \182\ The Commission defined ``family clients'' to
include ``family members,'' of which ``spousal equivalents'' are a
part, with ``spousal equivalent'' defined as a cohabitant occupying a
relationship generally equivalent to that of a spouse.\183\ The
crowdfunding rules adopted to implement the requirements of Title III
of the JOBS Act also use this definition of ``spousal equivalent.''
\184\ In Regulation Crowdfunding, the Commission included the term
``spousal equivalent'' in the definition of the term ``member of the
family of the purchaser or the equivalent,'' with ``spousal
equivalent'' having the same definition used in the Advisers Act and as
the one we propose in this release.\185\ In response to the Concept
Release, several commenters supported allowing spousal equivalents to
pool finances for purposes of qualifying as accredited investors.\186\
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    \181\ Though the Commission rule governing accountant
independence also includes ``spousal equivalents,'' the term is not
defined in that rule. See 17 CFR 210.2-01.
    \182\ See Family Office Adopting Release.
    \183\ Rule 202(a)(11)(G) 1(d)(9).
    \184\ The JOBS Act provides that securities issued in reliance
on the crowdfunding exemption may not be transferred by the
purchaser for one year after the date of purchase, except when
transferred to, among other persons, ``a member of the family of the
purchaser or the equivalent'' (emphasis added). JOBS Act Section
302(e)(1)(D).
    \185\ 17 CFR 227.501(c).
    \186\ See J. Wallin Letter; EquityZen Letter; 2019 SBIA Letter;
IPA Letter; Artivest Letter; ABA FR of Sec. Comm. Letter; Sec. Reg.
Comm. of N.Y.St. B.A. Letter; and CrowdCheck Letter. In addition to
these comments, the Commission previously received a request for
rulemaking petition from David L. Dallas, Jr. dated September 16,
2013, available at https://www.sec.gov/rules/petitions/2013/petn4-665.pdf, requesting that the Commission ``revise Rule 501 of
Regulation D to afford to persons in civil unions, domestic
partnerships, and similar relationships, the same right and
opportunity to qualify for accredited investor status as married
persons have.''

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

    We see no need to deviate from the definition of ``spousal
equivalent'' already used in Commission rules. Revising Rule 501(a)(5)
and (6) to permit spousal equivalents to pool their financial resources
would promote consistency with these existing rules.
Request for Comment
    40. Should we allow spousal equivalents to pool finances for the
purpose of qualifying as accredited investors? If so, is our proposed
definition of ``spousal equivalent'' appropriate? If not, what
definition should we use?

E. Proposed Amendment to Rule 215

    Rule 215 defines the term ``accredited investor'' under Section
2(a)(15) of the Securities Act \187\ for purposes of Section 4(a)(5) of
the Securities Act.\188\ The accredited investor definition in Rule 215
has historically been substantially consistent but not identical to the
accredited investor definition in Rule 501(a) of Regulation D. For
example, in contrast to the definition in Rule 501(a), the scope of the
accredited investor definition in Rule 215 does not include banks,
insurance companies, registered investment companies, business
development companies as defined in Section 2(a)(48) of the Investment
Company Act, or SBICs. In addition, the accredited investor definition
in Rule 215 does not contain a reasonable belief standard as in Rule
501(a).\189\
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    \187\ 15 U.S.C. 77b(a)(15). Section 2(a)(15) sets forth an
enumerated list of entities that qualify as accredited investors as
well as ``any person who, on the basis of such factors as financial
sophistication, net worth, knowledge, and experience in financial
matters, or amount of assets under management qualifies as an
accredited investor under rules and regulations which the Commission
shall prescribe.''
    \188\ 15 U.S.C. 77d(a)(5). Section 4(a)(5) of the Securities Act
provides an exemption for issuers for the offer and sale of
securities to accredited investors if the aggregate offering amount
does not exceed $5 million; the issuer, or anyone acting on its
behalf, does not engage in general solicitation or general
advertising; and the issuer files a notice on Form D with the
Commission. Based on DERA staff's review of Form D filings from
January 1, 2009 through November 30, 2019, no issuer reported
relying on the Section 4(a)(5) exemption during that time period.
    \189\ Under Rule 501(a), natural persons and entities that come
within any of eight enumerated categories in the definition, or that
the issuer reasonably believes comes within any of the categories,
are accredited investors.
---------------------------------------------------------------------------

    We propose to amend the accredited investor definition in Rule 215
to conform to the amendments to the accredited investor definition in
Rule 501(a). To ensure uniformity in the accredited investor definition
in both provisions, we propose to replace the existing definition in
Rule 215 with a cross reference to the accredited investor definition
in Rule 501(a). By including this cross reference, the definition of
``accredited investor'' in Rule 215 as amended would be expanded to
include any amendments to the accredited investor definition in Rule
501(a), as well as those entities that are presently included in the
definition in Rule 501(a) but not the definition in Rule 215. As
amended, the definition would also contain the same reasonable belief
standard as in Rule 501(a).
Request for Comment
    41. Should the Commission amend Rule 215 by replacing the existing
text with a cross reference to the accredited investor definition in
Rule 501(a) as proposed? Should the Commission instead incorporate any
amendments to the accredited investor definition in the text of Rule
215?
    42. Would amending the scope of the accredited investor definition
in Rule 215 to encompass any amendments to the accredited investor
definition in Rule 501(a) as well as certain entities that are
currently included in the definition in Rule 501(a) raise concerns
regarding the application of the Section 4(a)(5) exemption? Would
adding a reasonable belief standard to the definition in Rule 215 raise
concerns?
    43. Would the proposed amendment to the accredited investor
definition in Rule 215 affect an issuer's considerations in determining
whether to use the Section 4(a)(5) exemption? Would issuers be more
likely to use the Section 4(a)(5) exemption?

F. Proposed Amendment to Rule 163B

    In registered offerings under the Securities Act, issuers may
engage in test-the-waters communications with qualified institutional
buyers or institutional accredited investors to gauge their interest in
a contemplated offering. Under Section 5(d) of the Securities Act, an
emerging growth company, as defined in Securities Act Rule 405, is
permitted to engage in oral or written communications with potential
investors that are either qualified institutional buyers, as defined in
Rule 144A(a)(1), or institutions that are accredited investors as
defined in Rule 501(a), to offer securities before or after the filing
of a registration statement. In September 2019, the Commission adopted
Securities Act Rule 163B, which extends this testing-the-waters
accommodation to all issuers.\190\ Pursuant to Rule 163B, an issuer may
engage in test-the-waters communications with potential investors that
are, or that the issuer or person authorized to act on its behalf
reasonably believes are, qualified institutional buyers, as defined in
Rule 144A, or institutions that are accredited investors, as defined in
Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8).
---------------------------------------------------------------------------

    \190\ Solicitations of Interest Prior to a Registered Public
Offering, Release No. 33-10699 (Sept. 25, 2019) [84 FR 53011 (Oct.
4, 2019)].
---------------------------------------------------------------------------

    In connection with the proposed amendments to the accredited
investor definition in Rule 501(a), we propose to amend Rule 163B to
include a reference to proposed Rules 501(a)(9) and (a)(12). The
proposed amendment to Rule 163B would maintain consistency between Rule
163B and Section 5(d), in that institutional accredited investors under
proposed Rules 501(a)(9) and (a)(12), if adopted, would automatically
fall within the scope of Section 5(d). We believe that expanding the
types of entities with whom an issuer may engage in these test-the-
waters communications, by amending the accredited investor definition
and the qualified institutional buyer definition,\191\ may increase the
use of Rule 163B, as well as Section 5(d), and may result in issuers
more effectively gauging market interest in contemplated registered
offerings. We also believe that the expanded scope of entities that
would receive these test-the-waters communications under the proposed
amendment to Rule 163B have the financial sophistication to process
this information and to review the registration statement that is filed
with the Commission against the test-the-waters materials before making
an investment decision.
---------------------------------------------------------------------------

    \191\ The proposed amendments to the qualified institutional
buyer definition in Rule 144A are discussed below in Section IV.
---------------------------------------------------------------------------

Request for Comment
    44. Should the Commission amend Securities Act Rule 163B to include
a reference to proposed Rules 501(a)(9) and (a)(12)?
    45. Would the proposed amendments to the accredited investor
definition and the qualified institutional buyer definition raise
concerns in connection with the test-the-waters communications that
issuers may engage in pursuant to Rule 163B or Section 5(d) of the
Securities Act?

G. Proposed Amendment to Exchange Act Rule 15g-1

    Pursuant to Exchange Act Rule 15g-2 through Rule 15g-6, broker-
dealers are required to disclose certain specified

information to their customers prior to effecting a transaction in a
``penny stock,'' as defined in 17 CFR 240.3a51-1 under the Exchange
Act.\192\ Rule 15g-1 under the Exchange Act exempts certain
transactions from these disclosure requirements. In particular,
paragraph (b) of Rule 15g-1 exempts transactions in which the customer
is an institutional accredited investor, as defined in Rule 501(a)(1),
(2), (3), (7), or (8) of Regulation D.\193\
---------------------------------------------------------------------------

    \192\ Rules 15g-1 through 15g-9 under the Exchange Act [17 CFR
240.15g-2 through 15g-9] are collectively known as the ``penny stock
rules.'' See also Schedule 15G under the Exchange Act.
    \193\ In addition, Rule 15g-1(a), (d), (e), and (f) exempt
certain other transactions from the disclosure requirements in Rules
15g-2 through 15g-6. Rule 15g-1(c) exempts transactions that meet
the requirements of Regulation D or that are exempt from the
registration requirements of the Securities Act pursuant to Section
4(a)(2). Rule 15g-1 also includes a provision the Commission can use
to exempt by order any other transactions or persons from the penny
stock rules as consistent with the public interest and the
protection of investors.
---------------------------------------------------------------------------

    In connection with the proposed amendments to the accredited
investor definition in Rule 501(a), we propose to amend Rule 15g-1(b)
to include a reference to proposed Rules 501(a)(9) and (a)(12).\194\ We
believe that, like the institutional accredited investors currently
within the scope of Rule 15g-1(b) as well as those that we propose to
add to the accredited investor definition in Rule 501(a)(1), entities
owning investments in excess of $5 million that are not formed for the
specific purpose of acquiring the securities being offered and family
offices are less in need of the protections provided by Rules 15g-2
through 15g-6.\195\ We believe that, consistent with the categories of
institutional accredited investors presently listed in Rule 15g-1(b),
entities within the scope of proposed Rule 501(a)(9), family offices,
and the other types of entities we propose to add to the accredited
investor definition generally: Invest in speculative equity securities
as part of an overall investment plan, have a good understanding of the
risks of investing in penny stocks, and have the ability to obtain and
evaluate independent information regarding these stocks.\196\
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    \194\ We are also proposing a technical amendment to Rule 15g-
1(c) to update the reference to Section 4(2) of the Securities Act
to reflect the current numbering scheme in Section 4.
    \195\ As discussed above, we are also proposing to amend a
number of the existing categories in the accredited investor
definition relating to institutional investors that fall within the
scope of the exemption in Rule 15g-1(b).
    \196\ See Penny Stock Disclosure Rules, Release No. 34-29093
(Apr. 17, 1991) [56 FR 19165 (Apr. 25, 1991)] and Penny Stock
Disclosure Rules, Release No. 34-30608 (Apr. 20, 1992) [57 FR 18004
(Apr. 28, 1992)].
---------------------------------------------------------------------------

Request for Comment
    46. Should the Commission amend Rule 15g-1(b) to include a
reference to proposed Rule 501(a)(9)? Are there certain entities that
would fall within the scope of proposed Rule 501(a)(9) that have more
need for the disclosures required under Rules 15g-2 through 15g-6?
    47. Should the Commission amend Rule 15g-1(b) to include a
reference to proposed Rule 501(a)(12)?
    48. As discussed above, the Commission is proposing to expand the
list of entities that would qualify for accredited investor status
under Rule 501(a)(1). Should the entities that are proposed to be added
under Rule 501(a)(1) be included in the exemption set forth in Rule
15g-1(b)? Would certain of these entities have more need for the
disclosures required under Rules 15g-2 through 15g-6?
    49. As discussed above, the Commission is proposing to codify a
longstanding staff position that limited liability companies that
satisfy the other requirements of the definition are eligible to
qualify as accredited investors under Rule 501(a)(3). Should these
limited liability companies continue to be included in the exemption
set forth in Rule 15g-1(b)? Do limited liability company investors have
more need for the disclosures required under Rules 15g-2 through 15g-6?

III. Additional Requests for Comment on the Accredited Investor
Definition

    In the Concept Release, we requested comment on whether we should
revise the financial thresholds in the accredited investor definition.
Specifically, we requested comment on, among other things, three
recommendations that the Commission staff included in the 2015 Staff
Report: (1) Leaving the current income and net worth thresholds in
place, subject to investment limits; (2) creating new, additional
inflation-adjusted income and net worth thresholds that are not subject
to investment limits; or (3) indexing all financial thresholds for
inflation on a going-forward basis.\197\ Table 3 below provides an
overview of the feedback provided by commenters on the Concept Release
about each of the three recommendations.
---------------------------------------------------------------------------

    \197\ The comments on these recommendations received in response
to the 2015 Staff Report are described in Section II.A.4 of the
Concept Release. Following release of the 2015 Staff Report, the
Commission continued to receive recommendations about revising the
financial thresholds in the accredited investor definition from a
number of parties. In July 2016, the Advisory Committee on Small and
Emerging Companies recommended, among other things, that the
Commission not change the current financial thresholds in the
accredited investor definition except to adjust them, on a going-
forward basis, to reflect inflation. See 2016 ACSEC Recommendations.
The 2016, 2017, and 2018 Small Business Forum Reports all included a
recommendation that the Commission maintain the monetary thresholds
for accredited investors but did not include a recommendation for
future inflation adjustments. The 2019 Small Business Forum Report
included a recommendation that the Commission revise the dollar
amounts in the definition to scale for geography, lowering the
thresholds in states or regions with a lower cost of living.

  Table 3--Responses to Requests for Comment on Financial Thresholds in
                   the Accredited Investor Definition
------------------------------------------------------------------------
       Staff request for comment            Responses from commenters
------------------------------------------------------------------------
Leave the current income and net worth   --Several commenters opposed
 thresholds in place, subject to          subjecting the current
 investment limits.                       thresholds to investment
                                          limits.\198\
                                         --Several commenters supported
                                          making the net worth and
                                          income requirements more
                                          inclusive.\199\
Add new inflation-adjusted income and    --Two commenters supported
 net worth thresholds that are not        raising the income and net
 subject to investment limits.            worth thresholds
                                          immediately.\200\
                                         --Several commenters opposed
                                          raising the income and net
                                          worth thresholds.\201\
Index all financial thresholds in the    --Several commenters opposed
 definition for inflation on a going-     indexing financial thresholds
 forward basis.                           to inflation.\202\
                                         --Several commenters supported
                                          indexing financial thresholds
                                          to inflation going
                                          forward.\203\
------------------------------------------------------------------------

    In addition to comments received on the specific questions relating
to inflation adjustments, the Commission also received input from
commenters who questioned the correlation between wealth and financial
sophistication and were of the view that the income and net worth tests
fail to identify correctly those individuals who should be accredited
investors.\204\
---------------------------------------------------------------------------

    \198\ See J. Wallin Letter; 2019 SBIA Letter; ABA FR of Sec.
Comm. Letter; Sec. Reg. Comm. of N.Y.St. B.A. Letter; and CrowdCheck
Letter.
    \199\ See letter from Logan B. dated June 24, 2019 (suggesting
that the thresholds be lowered); letter from Herwig Konings dated
June 24, 2019 (requesting the inclusion of more retail investors
without specifically recommending that the thresholds be lowered);
letter from J.C. dated July 10, 2019 (suggesting that the thresholds
be lowered); letter from Stephen R. Steciak dated August 4, 2019
(suggesting a dollar credit against the net worth requirement if the
investor was a college graduate or held a securities license);
letter from Barry Hicks dated September 16, 2019 (suggesting that
the thresholds be lowered); P. Rutledge Letter (suggesting that the
thresholds be lowered if certain assets were excluded from the net
worth definition); letter from Silicon Prairie Holdings dated
September 24, 2019 (suggesting that the thresholds be lowered);
letter from Luke Carriere dated September 24, 2019 (suggesting that
the thresholds be lowered); letter from Steven Richards dated
September 24, 2019 (suggesting that the thresholds be lowered); and
REDCO Letter (suggesting that the net worth threshold be lowered for
certain regions of the country).
    \200\ See letter from Marc Steinberg dated August 5, 2019; and
letter from NASAA dated October 11, 2019 (``2019 NASAA Letter'').
    \201\ See Wefunder Letter; ACA Letter; HFA Letter; Funding
Circle Letter; MLA Letter; J. Wallin Letter; Republic Letter; MFA
and AIMA Letter; EquityZen Letter; D. Burton Letter; CoinList
Letter; 2019 SBIA Letter; IPA Letter; Sec. Reg. Comm. of N.Y.St.
B.A. Letter; and CrowdCheck Letter.
    \202\ See 2019 SBIA Letter; AngelList Letter; CCMC Letter; and
IPA Letter.
    \203\ See Wefunder Letter; P. Rutledge Letter; CFA Institute
Letter; MFA and AIMA Letter (stating that indexing to inflation
would ``help to ensure that the thresholds have not been diluted
over time''); Consumer Federation Letter; EquityZen Letter; ICI
Letter; MA Secretary Letter; Davis Polk Letter; PIABA Letter; ADISA
Letter; Artivest Letter; letter from Elizabeth D. de Fontenay et al.
dated September 24, 2019 (stating that ``inflation undermines the
effectiveness of the safeguards built into the Accredited Investor
net-worth and income tests''); 2019 NASAA Letter; Sec. Reg. Comm. of
N.Y.St. B.A. Letter; CrowdCheck Letter; and 2019 Advisory Committee
Recommendation.
    \204\ See, e.g., 2019 NASAA Letter; Consumer Federation Letter;
and 2014 Investor Advisory Committee Recommendation.
---------------------------------------------------------------------------

    We believe that the current wealth-based criteria are useful for
the identification of investors who do not require the protections
afforded by registration, even though we also believe they have
excluded investors who are financially sophisticated, such as those
with certain professional certifications and designations who do not
meet these criteria.\205\ Accordingly, we believe the use of financial
thresholds as one method of qualifying as an accredited investor is
appropriate. These financial thresholds have not been adjusted for
inflation since they were adopted.\206\ For example, the $5 million
asset test for certain entities, if adjusted for inflation since 1982
to 2019 dollars using the Consumer Price Index for All Urban Consumers
(``CPI-U'') published by the Bureau of Labor Statistics (``BLS''),
would result in a $13 million asset test. Similarly adjusting the
$200,000 income test for natural persons results in a $520,000
threshold, while adjusting the $300,000 joint income test for natural
persons from 1988 dollars to 2019 dollars would require a joint income
of $632,000. Table 4 below sets forth our estimation of the approximate
number and percentage of U.S. households that currently qualify as
accredited investors under the existing criteria and that qualified as
accredited investors in 1983 and 1989.\207\
---------------------------------------------------------------------------

    \205\ As described in the 2015 Staff Report, there are academic
studies that lend support to the theory that wealth is correlated to
financial sophistication. See Section IV.B of the 2015 Staff Report.
    \206\ See Regulation D 1982 Adopting Release; Regulation D 1988
Adopting Release; and Regulation D 1989 Adopting Release.
    \207\ For this analysis, we use the same methodology and
variable definitions as the 2015 Staff Report. The underlying
household data for this analysis was obtained from the Federal
Reserve Board's Survey of Consumer Finances (the ``SCF'') for 2016,
available at https://www.federalreserve.gov/econresdata/scf/scfindex.htm. The SCF is a triennial survey that provides insights
into household income and net worth, where the household is
considered to be the primary economic unit within a family. As of
the date of this release, the most recent SCF data is from the 2016
survey. The SCF employs weights to make the data representative of
the U.S. population. Thus, the 1983, 1989, and 2016 SCF and are
representative of the U.S. population in 1983 (approximately 83.9
million households), 1989 (approximately 92.8 million households),
and 2016 (approximately 125.9 million households), respectively.
    The 2015 Staff Report used the definitions of income and net
worth from Jesse Bricker, Lisa J. Dettling, Alice Henriques, Joanne
W. Hsu, Kevin B. Moore, John Sabelhaus, Jeffrey Thompson, and
Richard A. Windle, Changes in U.S. Family Finances from 2010 to
2013: Evidence from the Survey of Consumer Finances, Federal Reserve
Bulletin, Vol. 100, No. 4 (2014).
    We estimate households and not individuals due to data
limitations because the database underlying our analysis measures
wealth and income at the household level. It should be noted that in
the SCF database, income is reported at the household level. Similar
to the 2015 Staff Report, we do not attempt to differentiate income
based on marital status of the household because data on individual
income from all sources is not publicly available in the database.
As a result, accredited investor (household) estimates based on
individual income thresholds are likely to be overestimated and
would represent upper bounds. A household can have multiple family
members with independent sources of income that qualify them as
accredited investors based on income. We count them as one
accredited investor for each household, which implies we are also
likely underestimating the actual pool of accredited investors when
we provide household estimates. Consequently, the household
estimates we derive using the joint income threshold would represent
a lower bound for individuals qualifying on the basis of income. The
actual number of individuals that qualify as accredited investors on
an income basis (individual or joint) would, in all likelihood, lie
between the estimates that we derive for the individual income
threshold and the joint income threshold.

                                       Table 4--Households Qualifying Under Existing Accredited Investor Criteria
                                                          [Standard errors are in parentheses]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       1983                            1989                            2019
                                                         -----------------------------------------------------------------------------------------------
                                                             Number of      Qualifying       Number of      Qualifying       Number of      Qualifying
       Basis for qualifying as accredited investor          qualifying     households as    qualifying     households as    qualifying     households as
                                                            households       % of U.S.      households       % of U.S.     households *      % of U.S.
                                                            (millions)      households      (millions)      households      (millions)     households *
--------------------------------------------------------------------------------------------------------------------------------------------------------
Individual income \208\ threshold ($200,000)............     0.44 (0.10)     0.53 (0.12)       4.3 (0.4)       4.7 (0.5)      11.2 (0.3)       8.9 (0.2)
Joint income threshold \209\ ($300,000).................             N/A             N/A       2.1 (0.3)       2.3 (0.4)       5.8 (0.2)       4.6 (0.2)
Net worth \210\ ($1,000,000)............................     1.18 (0.17)      1.4 (0.20)       4.5 (1.0)       4.8 (1.1)      11.8 (0.3)       9.4 (0.2)
Overall number of qualifying households \211\...........     1.31 (0.18)      1.6 (0.21)       6.8 (1.0)       7.3 (1.1)      16.0 (0.3)      13.0 (0.2)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The  data above provides an estimate of the overall pool of
qualifying households in the United States. It does not, however,
represent the actual number of accredited investors that do or would
invest in the Regulation D market or in other exempt offerings.\212\ In
addition, while we have information to estimate the number of some
categories of accredited investor entities, we lack comprehensive data
that will allow us to estimate the unique number of accredited
investors across all categories of entities under Rule 501(a).
---------------------------------------------------------------------------

    \208\ For purposes of this analysis, income is defined to
include wage income, business income, rent income, interest and
dividend income, pension income, social security income, income from
retirement accounts, transfers, and other income. According to the
SCF documentation, income data is collected for the year prior to
the year of the SCF while family balance sheet data covers the
status of the family at the time of the interview. Thus, we use
income data inflation-adjusted to 2016. Further, for comparability,
income data is adjusted for inflation by a factor of 1.05914411 from
2016 dollars to March 2019 dollars using Consumer Price Index for
All Urban Consumers (``CPI-U'') data from the BLS.
    \209\ See supra note 207. Joint income was added to Rule 501(a)
in 1988.
    \210\ For purposes of this analysis, net worth is defined as the
difference between household assets and household debt. Assets
include all financial assets (stocks, bonds, mutual funds, cash and
cash management accounts, retirement assets, life insurance, managed
assets like trusts and annuities, and other financial assets like
deferred compensation, royalties, futures, etc.) and non-financial
assets. Debt includes mortgage and home equity loans, lines of
credit, credit card debt, installment loans including vehicle loans,
margin loans, pension loans, and other debt (e.g., loans against
insurance). For comparability, we exclude the value of the
household's principal residence and any outstanding mortgages
associated with the principal residence from the 1983, 1989, and
2016 SCF. Further, for comparability, net worth data is adjusted for
inflation by a factor of 1.05914411 from 2016 dollars to March 2019
dollars using BLS CPI data.
    \211\ The number of households qualifying under either the
income or net worth criterion is smaller than the sum of the number
of households qualifying under the income criterion and the number
of households qualifying under the net worth criterion because some
households may qualify under both criteria.
    \212\ Form D data and other data available to us on private
placements do not allow us to estimate the number of unique
accredited investors participating in exempt offerings.
---------------------------------------------------------------------------

    Notwithstanding the significant increase in the number of investors
that qualify as accredited investors since 1982, we do not believe it
necessary or appropriate to modify the definition's financial
thresholds at this time.\213\ According to the U.S. Census Bureau, the
number of U.S. households has grown from approximately 83.9 million
households to approximately 127.6 million households from 1983 to 2018,
and the population of U.S. residents has grown from 236.4 million to an
estimated 327.1 million over this same period.\214\ Although it may be
argued that an investor with an income of $200,000 or a net worth of $1
million in 2019 is not as ``wealthy'' as such an investor would have
been in 1982, the income and net worth levels currently required in the
definition still exceed, by a large margin, the mean and median
household income and household net worth in all regions of the
country.\215\ Also, in 1982, the calculation of net worth included the
value of the primary residence. In 2011, the Commission amended the net
worth standard to exclude the value of the investor's primary
residence.\216\ Further, we believe that in evaluating the
effectiveness of the current thresholds, it is appropriate to consider
changes beyond the impact of inflation, such as changes over the years
in the availability of information and advances in technologies. Given
the rise of the internet, social media, and other forms of
communication, information about issuers and other participants in the
exempt markets is more readily available to a wide range of market
participants. Technologies such as powerful home computers and mobile
computing devices, as well software-based tools with which to evaluate
investment opportunities, were not available to investors at the time
the accredited investor definition was promulgated. In addition, we are
not aware of widespread problems or abuses associated with Regulation D
offerings to accredited investors that would indicate that an immediate
and/or significant adjustment to the rule's financial thresholds is
warranted.
---------------------------------------------------------------------------

    \213\ The Commission has previously considered whether to revise
the financial thresholds in the accredited investor definition. In
the 2007 Proposing Release, the Commission proposed to maintain the
thresholds but to apply an inflation adjustor every five years. See
2007 Proposing Release at 45126. However, the Commission took no
further action on the proposing release.
    \214\ See the U.S. Census Bureau's time-series of U.S.
households, available at https://www2.census.gov/programs-surveys/demo/tables/families/time-series/households/ and the U.S. Census
Bureau's monthly estimates of the U.S. population, April 1, 1980 to
July 1, 1990, available at https://www2.census.gov/programs-surveys/popest/tables/1990-2000/national/totals/nat-total.txt and U.S.
Census Bureau's Quick Facts, available at https://www.census.gov/quickfacts/fact/table/US/PST045218.
    \215\ The median household income in the U.S. in 2018 was
$61,937. See Household Income: 2018, American Community Survey
Briefs, available at https://www.census.gov/content/dam/Census/library/publications/2019/acs/acsbr18-01.pdf. The median (average)
net worth in the U.S. was $29,410 ($196,200) in 2016. See the U.S.
Census Bureau's Survey of Income and Program Participation (SIPP),
Wealth, Asset Ownership, & Debt of Households Detailed Tables: 2016,
available at https://www.census.gov/data/tables/2016/demo/wealth/wealth-asset-ownership.html. The reported net worth estimates
exclude the value of personal home equity from the net worth
calculations.
    \216\ See Regulation D 2011 Adopting Release.
---------------------------------------------------------------------------

    We are also mindful that a significant reduction in the accredited
investor pool through an increase in the definition's financial
thresholds could have disruptive effects on the Regulation D market,
which, as noted above, plays a vital role in U.S. capital
formation.\217\ For example, a sharp decrease in the accredited
investor pool may result in a higher cost of capital for companies,
particularly companies in regions of the country with lower venture
capital activity who may rely on ``angel'' or other individual
investors as a primary source of funding.\218\ Placing limits on the
amount that a person may invest under the current income and net worth
thresholds could have similarly disruptive effects on the Regulation D
market.
---------------------------------------------------------------------------

    \217\ For example, substantially increasing the thresholds to,
for example, reflect inflation since they were adopted, would reduce
significantly the number of individuals that currently qualify as
accredited investors under those tests. Such an increase would
reduce the percentage of qualifying households from approximately
13.0% today to approximately 4.2%.
    \218\ For example, Lindsey and Stein (2019) examined the effects
of changes in angel financing stemming from the 2011 Dodd-Frank
Act's exclusion of an investor's primary residence in determining an
accredited investor's net worth. They found that a larger reduction
in the pool of potential accredited investors negatively affects
firm entry and reduces employment levels at small entrants and that
relative wages for the startup sector decline. As the pool of
potential accredited investors was reduced, they found negative
affects to firm entry, reduced employment levels at small entrants,
and a decline in relative wages for the startup sector.
---------------------------------------------------------------------------

    Further, raising the financial thresholds from current levels may
have disparate impacts on certain investors. For example, certain
geographic areas of the United States, such as the Midwest and South,
have a lower cost of living compared to other geographic areas and
employees in those areas may be earning lower wages relative to other
areas and therefore be less likely to qualify as accredited investors
under the current financial thresholds. An increase in the financial
thresholds would exacerbate this current disparity and would be more
likely to result in the loss of accredited investor status for
investors in those geographic areas. Adjusting the thresholds upward
could curtail the ability of many financially sophisticated people in
certain parts of the country from investing in local companies, about
which they have first-hand knowledge.
    Below we present information on median and mean income and net
worth of U.S. households in major U.S. geographic regions. The data
shows that household income and net worth tend

to be lower in the Midwest and South regions.

                          Table 5--U.S. Household Income and Net Worth, by Region \219\
----------------------------------------------------------------------------------------------------------------
                  ($ thousands)                      Northeast        Midwest          South           West
----------------------------------------------------------------------------------------------------------------
Mean household income (before-tax)..............           136.5           102.0           100.0           108.5
Median household income (before-tax)............            64.4            54.7            51.5            57.5
Mean household net worth........................           851.3           658.8           636.9           873.7
Median household net worth......................           154.5           103.2            87.0           114.3
----------------------------------------------------------------------------------------------------------------

    Moreover, increasing the total assets test to reflect inflation
could cause smaller entities that currently qualify as accredited
investors to no longer qualify. Such an immediate increase could be
highly disruptive for smaller entities, preventing them from accessing
an important segment of the private markets.
---------------------------------------------------------------------------

    \219\ The Federal Reserve Board's 2016 SCF Chartbook, available
at https://www.federalreserve.gov/econres/files/BulletinCharts.pdf,
at 28, 29, 64, and 65. The public version of the SCF database does
not provide information regarding geographical location of
households. As a result, we are unable to identify in which states
households that qualify as accredited investors are likely to be
concentrated. Unlike Table 4, in which we exclude the value of the
primary residence from net worth, Table 5 does not exclude the value
of the primary residence from the net worth of households. The
figures were adjusted for inflation to March 2019 dollars using BLS
CPI data.
---------------------------------------------------------------------------

    While we are not proposing to amend the financial thresholds in the
accredited investor definition at this time, we are requesting further
comment on possible approaches to adjusting these financial thresholds.
If the financial thresholds in the definition remain constant, the pool
of accredited investors would likely continue to expand as a result of
inflation. It is challenging to generate a precise forecast of how much
the pool of accredited investors will expand in the future,
particularly over longer time periods.\220\ We expect that the
Commission will continue to monitor the size of this pool as well as
the percentage and types of individuals from this pool who participate
in our private markets, including in connection with its quadrennial
review of the accredited investor definition required by the Dodd-Frank
Act.
---------------------------------------------------------------------------

    \220\ The proportion of households that meets the income or net
worth thresholds would depend on the evolution of nominal income
(i.e., income level affected by inflation and real growth,) and net
worth across different levels of income and net worth. With
inflation or real growth in the economy, the proportion of
households that meets these thresholds at their current levels is
expected to increase over time.
    For example, to illustrate the effects of inflation, assuming,
among other things, no change in savings, we expect households with
a current net worth between approximately $985,000 and $999,999
would meet the net worth threshold if their assets grew by 1.51%,
the estimated annual rate of inflation between 2013 and 2018, over
one year. (To calculate this inflation rate, we use CPI-U data from
the BLS, available at https://www.bls.gov/regions/mid-atlantic/data/consumerpriceindexhistorical_us_table.htm.) This could increase the
proportion of households that meets the net worth threshold by 0.1
percentage points, to 9.5%. Similarly, we expect that individuals
with a current income between approximately $197,000 and $199,999,
to the extent they experienced one year of income growth equal to
the estimated annual rate of inflation between 2013 and 2018, to
meet the income threshold for individuals. This could increase the
proportion of individuals that meets the income threshold by 0.31
percentage points, to 9.21%. See also supra Table 4.
---------------------------------------------------------------------------

    As a result, the investor protections provided by the current
thresholds could erode over time due to inflation to the extent the
effects of such inflation on the pool of potential accredited investors
were not offset by other changes in the investing environment that
enhanced the ability of investors to analyze investment opportunities
and make informed investment decisions in private markets. Rather than
mandate a prospective adjustment for the effects of inflation, we
believe it would be more appropriate for the Commission to consider the
impact, if any, of inflation on the pool of accredited investors in
connection with its quadrennial review of the accredited investor
definition. Under this approach, the Commission could take into account
not just inflation but all developments with respect to private
investing as it considers the need for any changes in the accredited
investor definition. However, adjusting the financial thresholds, for
example, by indexing for inflation, could raise some of the concerns
discussed above or have other adverse ramifications on the Regulation D
market.
    In addition to feedback on possible adjustments to the financial
thresholds in the definition, we are requesting further comment on
whether we should permit an investor, whether a natural person or an
entity, that is advised by a registered investment adviser or broker-
dealer to be considered an accredited investor. The 2017 Treasury
Report recommended that the Commission undertake amendments to the
accredited investor definition, including by broadening the definition
to include, among other things, any investor who is advised on the
merits of making a Regulation D investment by a fiduciary, such as an
SEC- or state-registered investment adviser. As noted in the Concept
Release, being advised by a financial professional has not been a
complete substitute historically for the protections of the Securities
Act registration requirements and, if applicable, the Investment
Company Act.\221\ Commenters on the Concept Release who addressed this
topic were generally supportive of expanding the accredited investor
definition in this manner,\222\ though other commenters were opposed to
or expressed concern regarding this approach.\223\ We are seeking
feedback on whether amending the accredited investor definition in this
manner would provide sufficient investor protections and whether
additional limitations on the types or amounts of investments or other
conditions may be appropriate if the Commission were to adopt such an
approach in expanding the accredited investor definition.
---------------------------------------------------------------------------

    \221\ See Concept Release at 30478.
    \222\ See, e.g., IAA Letter, Artivest Letter, MarketPlus Letter,
EquityZen Letter, 2019 SBIA Letter, IPA Letter, BlackRock Letter,
and Wefunder Letter.
    \223\ See, e.g., ICI Letter and PIABA Letter.
---------------------------------------------------------------------------

Request for Comment
    50. Should we maintain the current financial thresholds in the
definition of accredited investor and index the thresholds to inflation
on a going-forward basis? If so, what would be an appropriate interval
to index the thresholds to inflation? For example, should the
Commission consider whether adjustment for inflation is appropriate
every four years in connection with the Commission's quadrennial review
of the accredited investor definition required by the Dodd-Frank Act?
    51. Should we make a one-time adjustment to increase the thresholds
to take into account some or all of the effects of inflation on the
pool of

potential accredited investors since adoption? What would be the
effects of any such change on investors and issuers? Should we also
index the thresholds to inflation on a going-forward basis? Should we
consider other approaches such as the recommendation in the 2015 Staff
Report to leave the current thresholds for natural persons in place but
subject them to investment limits? If so, what investment limits should
we consider? What would be the impact of such changes on investors and
on the ability of companies to raise capital, particularly small
businesses?
    52. Should we increase the thresholds to take into account the
effects of inflation since adoption, but grandfather investors that
currently meet the accredited investor definition with respect to
existing investments?
    53. Is there any evidence that investor protections provided by the
existing thresholds have eroded over time?
    54. As noted above and in the Economic Analysis below, income
levels vary, sometimes substantially, in different geographic areas of
the country. Should we take into account income disparities that may be
attributable to different costs of living across the country in
establishing financial thresholds in the accredited investor
definition? If so, how should we categorize different geographic
regions for these purposes and how should we calculate income
differences that may be attributable to differences in cost of living?
     For example, should we categorize the regions by state, by
county or parish, or by census tract? If we should instead use larger
regions, how should those be defined? How often would we need to
reconsider how the regions are defined?
     If income disparities that may be due to local differences
in the cost of living were taken into account, would the financial
thresholds need to be adjusted for certain regions? How would we
determine which regions require adjustment? Similarly, how would we
determine which regions should maintain the current thresholds?
     If these income disparities that may be due to differences
in the local cost of living were taken into account, should we use the
United States Office of Personnel Management's general schedule
locality areas? Should we use a different adjustment mechanism?
     Should we consider any other changes to the accredited
investor definition to address the geographic disparity in the
proportion of the population that qualifies as accredited investors in
different regions of the country? If so, what types of changes would be
appropriate?
     Would there be difficulties for investors to demonstrate,
and issuers to form a reasonable belief about, the varying financial
thresholds? How would we address any such difficulties?
    55. Would an inflation adjustment on an on-going basis have a
disparate impact on certain types of investors, such as those in
particular geographic regions or those in specific age ranges?
    56. Is there evidence that any fraud in the private markets is
driven or affected by the levels at which the accredited investor
definition is set, or that maintaining the current financial thresholds
would place investors at a greater risk of fraud?
    57. Would providing for an inflation adjustment going forward have
an impact on the ability of companies to raise capital, particularly
small businesses? Would an inflation adjustment going forward have a
disparate impact on certain small businesses, such as those in
particular geographic regions with lower venture capital activity?
    58. Under the current definition, the value of a person's primary
residence is excluded from the net worth calculation.\224\ Should the
Commission consider any changes to the rules implementing this
requirement? Are there other assets or liabilities that should be
excluded from or included in the calculation? Should we consider
excluding all or a portion of an individual's retirement accounts when
calculating net worth, similar to the exclusion for an individual's
primary residence? If so, what percentage of an individual's retirement
account should be excluded?
---------------------------------------------------------------------------

    \224\ Section 413(a) of the Dodd-Frank Act excluded the value of
a person's primary residence from the net worth calculation and
directed the Commission to adjust similarly any accredited investor
net worth standard in its Securities Act rules. In 2011, the
Commission revised Rules 215 and 501 to exclude any positive equity
that individuals have in their primary residences. See Regulation D
2011 Adopting Release. The revised calculation requires that any
excess of indebtedness secured by the primary residence over the
estimated fair market value of the residence be considered a
liability for purposes of determining accredited investor status on
the basis of net worth. The Commission also added a 60-day lookback
period to prevent investors from artificially inflating their net
worth by incurring incremental indebtedness secured by their primary
residence, thereby effectively converting their home equity into
cash or other assets that would be included in the net worth
calculation.
---------------------------------------------------------------------------

    59. If we index the financial thresholds, is CPI-U the appropriate
inflation adjustor? 17 CFR 275.205-3(e) under the Advisers Act and
certain other Commission rules use as an inflation adjustor the
Personal Consumption Expenditures Chain-Type Price Index (``PCE'') (or
any successor index thereto), as published by the United States
Department of Commerce, which is an indicator of inflation in the
prices for goods and services paid by persons living in the United
States.\225\ Should we use PCE instead of CPI-U? Is indexing for
inflation the appropriate benchmark? Are there more appropriate
benchmarks?
---------------------------------------------------------------------------

    \225\ See https://www.bea.gov/data/personal-consumption-expenditures-price-index.
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    60. If we were to permit an investor advised by a registered
investment adviser or broker-dealer to be deemed an accredited
investor, under what circumstances would that registered financial
professional be likely to recommend investing in a Regulation D
offering? What types of investors would be likely to receive a
recommendation from that registered financial professional to invest in
a Regulation D offering?
    61. If an investor is to be considered an accredited investor by
virtue of being advised by a registered investment adviser or broker-
dealer, should we consider additional investor protections? For
example, should such financial professionals have to eliminate any
conflicts of interest related to such advice for its advice to render
an investor an accredited investor or should such a financial
professional have to mitigate such conflicts of interest in a
particular way? Should such financial professionals have to conduct any
different due diligence before advising the investor on such
investments? Should there be limits on the types or amounts of
investments that such an investor could make under these circumstances?

IV. Proposed Amendment to the Qualified Institutional Buyer Definition

    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.\226\ When originally proposing to define a
``qualified institutional buyer,'' the Commission noted that it was
``seeking 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.'' \227\
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    \226\ Rule 144A(b).
    \227\ 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)].
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    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 that qualified institutional buyer.\228\ Under Rule
144A(a)(1)(vi), banks and other specified financial institutions are
subject to an additional minimum audited net worth requirement of $25
million.\229\ Rule 144A(a)(1)(i) specifies the types of institutions
that are eligible for qualified institutional buyer status if they meet
this $100 million in securities owned and invested threshold, which
include insurance companies; registered investment companies; SBICs;
employee benefit plans established and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state or
its political subdivisions; employee benefit plans within the meaning
of Title I of the Employee Retirement Income Security Act (ERISA) of
1974; trust funds whose trustee is a bank or trust company and whose
participants are employee benefit plans within the scope of Rule
144A(a)(1)(i)(D) or (E), excluding trust funds that include individual
retirement accounts or H.R. 10 plans as participants; business
development companies; and registered investment advisers.\230\ In
addition, Rule 144A(a)(1)(i)(H) sets forth the following types of
eligible entities:
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    \228\ 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).
    \229\ Rule 144A(a)(1)(vi).
    \230\ Rule 144A(a)(1)(i)(A)-(G) and (I).
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     Organizations described in Section 501(c)(3) of the
Internal Revenue Code;
     Corporations (other than a bank as defined in Section
3(a)(2) of the Securities Act or a savings and loan association or
other institution referenced in Section 3(a)(5)(A) of the Securities
Act or a foreign bank or savings and loan association or equivalent
institution);
     Partnerships; and
     Massachusetts or similar business trusts.
    A number of commenters on the Concept Release recommended that the
Commission expand the list of entities that are eligible for qualified
institutional buyer status. One commenter recommended that the
Commission revise the qualified institutional buyer definition to
include any entity.\231\ Some commenters urged the Commission to expand
the qualified institutional buyer definition to encompass additional
state and local governmental entities and organizations \232\ or non-
U.S. entities such as sovereign wealth funds and non-U.S. pension funds
that are substantially equivalent to the entities that currently
qualify for qualified institutional buyer status.\233\ A number of
commenters recommended that the Commission permit bank-maintained
collective investment trusts that include certain H.R. 10 plans to
qualify as qualified institutional buyers \234\ and/or allow collective
investment trusts to qualify using the ``family of investment
companies'' test available to registered investment companies under
Rule 144A(a)(1)(iv).\235\
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    \231\ See PFM Letter.
    \232\ See letter from San Bernardino County Treasury dated
September 24, 2019; letter from South Dakota Investment Counsel
dated September 24, 2019; and CMTA Letter.
    \233\ See letter from Franklin Resources, Inc. dated September
24, 2019 (``Franklin Templeton Letter'') and IAA Letter.
    \234\ See letter from Wilmington Trust, N.A. dated September 24,
2019; BlackRock Letter (also recommending that bank maintained
common trust funds that include H.R. 10 plans similarly qualify);
letter from Coalition of Collective Investment Trusts dated
September 24, 2019; letter from Fidelity Investments dated September
24, 2019; Franklin Templeton Letter; and letter from American
Bankers Association dated September 24, 2019 (``Am. Bankers Assn.
Letter''). A number of these commenters noted that an H.R. 10 plan
(also known as a ``Keough plan'') may qualify as a qualified
institutional buyer in its own right under Rule 144A(a)(1)(i)(E) if
it meets the applicable conditions but that a collective investment
trust that includes such an H.R. 10 plan as a participant would not
be eligible for qualified institutional buyer status under Rule
144A(a)(1)(i)(F).
    \235\ See SIFMA Letter; Franklin Templeton Letter; Shartsis
Friese Letter; and Am. Bankers Assn. Letter (also recommending that
bank maintained common trust funds qualify under the same test).
---------------------------------------------------------------------------

    One commenter urged the Commission to clarify that the term
``similar business trust'' under Rule 144A(a)(1)(i)(H) includes central
managed trusts that otherwise qualify under the definition which are
managed by a foreign or domestic bank or a professional investment
manager that itself qualifies as a qualified institutional buyer.\236\
Another commenter recommended that the Commission adopt a calculation
method based on fair market value, rather than cost basis, in
determining the aggregate value of securities owned and invested for
purposes of Rule 144A(a)(3).\237\ Two commenters stated that the
Commission should consolidate the qualified institutional buyer
definition with other definitions.\238\
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    \236\ See ICI Letter.
    \237\ See Shartsis Friese Letter.
    \238\ See letter from CompliGlobe Ltd. dated September 24, 2019
(recommending that the Commission consolidate the definitions of
qualified purchaser, qualified investor, qualified institutional
buyer, major U.S. institutional investor, and U.S. institutional
investor into a single new definition) and letter from William J.
Williams, Jr. dated September 25, 2019 (recommending that the
Commission adopt a consolidated and simplified version of Rules 506,
144, and 144A that would limit sales to eligible purchasers).
---------------------------------------------------------------------------

    In light of these concerns and to avoid inconsistencies between the
entity types that are eligible for accredited investor status and
qualified institutional buyer status, we propose to expand the
qualified institutional buyer definition by making conforming changes
to Rule 144A(a)(1)(i)(C) and the list of entities in Rule
144A(a)(1)(i)(H) to correspond to the proposed amendments to Rule
501(a)(1) and Rule 501(a)(3). Specifically, we propose to add RBICs to
Rule 144A(a)(1)(i)(C) and limited liability companies to Rule
144A(a)(1)(i)(H). Further, to ensure that entities that qualify for
accredited investor status may also qualify for qualified institutional
buyer status when they meet the $100 million in securities owned and
invested threshold in Rule 144A(a)(1)(i), we propose to add new
paragraph (J) to Rule 144A(a)(1)(i) that would permit institutional
accredited investors under Rule 501(a), of an entity type not already
included in paragraphs 144A(a)(1)(i)(A) through (I) or 144A(a)(1)(ii)
through (vi), to qualify as qualified institutional buyers when they
satisfy the $100 million threshold.\239\ This new category in the
qualified institutional buyer definition would encompass the proposed
new category in the accredited investor definition for entities owning
investments in excess of $5 million that are not formed for the
specific purpose of acquiring the securities being offered under
Regulation D,\240\ as well as any other entities that may be added to
the accredited investor definition in the future, but such entities
would also have to meet the $100 million threshold in order to be
qualified institutional buyers under Rule 144A.
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    \239\ Because proposed Rule 144A(a)(1)(i)(J) would cover
entities not included in paragraphs (A) through (I), a bank or other
financial institution specified in those paragraphs would continue
to be required to satisfy the net worth test in Rule 144A(a)(vi).
    \240\ Proposed Rule 501(a)(9).

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

    We believe that these proposed changes would expand the qualified
institutional buyer definition to encompass all of the entity types
suggested by commenters on the Concept Release, so long as these
entities meet the $100 million threshold in Rule 144A(a)(1)(i).\241\
The $100 million threshold for these entities to qualify for qualified
institutional buyer status should ensure that these entities have the
financial sophistication and access to resources such that they do not
need the protections of registration under the Securities Act. Eligible
purchasers under Rule 144A(a)(1)(i) would continue to include entities
formed solely for the purpose of acquiring restricted securities under
Rule 144A, provided that they satisfy the test for qualified
institutional buyer status.\242\
---------------------------------------------------------------------------

    \241\ For example, proposed Rule 144A(a)(1)(i)(J) would
encompass bank-maintained collective investment trusts that include
as participants individual retirement accounts or H.R. 10 plans that
are currently excluded from the qualified institutional buyer
definition pursuant to Rule 144A(a)(1)(i)(F), so long as the
collective investment trust satisfies the $100 million threshold.
    \242\ This is in contrast to the proposed amendment to the
accredited investor definition in Rule 501(a)(3), which would
continue to require that the entity not be formed for the specific
purpose of acquiring the securities offered.
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Request for Comment
    62. Should Rule 144A(a)(1)(i)(C) be amended to include RBICs in a
manner consistent with the proposed amendments to Rule 501(a)(1)?
Should Rule 144A(a)(1)(i)(H) be amended to include limited liability
companies in a manner consistent with Rule 501(a)(3)? Rather than, or
in addition to, amending Rule 144A in this manner, should we add other
types of entities to those currently in Rule 144A(a)(1)(i)? Are there
any categories of entities included in the proposed amendment to Rule
501(a) that should not be included in the definition of qualified
institutional buyer under Rule 144A?
    63. Should we add a new paragraph (J) to Rule 144A(a)(1)(i) to
expand the list of entities eligible to be qualified institutional
buyers to include institutional accredited investors under Rule 501(a)
that meet the $100 million in securities owned and invested threshold
and that are an entity type not already included in paragraphs
144A(a)(1)(i)(A) through (I) or 144A(a)(1)(ii) through (vi)? Are there
any types of entities that should be included under new paragraph (J)
that would be excluded because of the limitation that these additional
entity types may not include entities otherwise listed in existing
paragraphs (a)(1)(i) through (vi) of Rule 144A? To the extent that
there is overlap between the types of entities listed in the accredited
investor definition and those listed in the qualified institutional
buyer definition, would adding new paragraph (J) render existing
paragraphs (A) through (I) under Rule 144A(a)(1)(i) unnecessary?
    64. Are there certain types of entities that are less likely to
have experience in the private resale market for restricted securities
and may have more need for the protections afforded by the Securities
Act's registration provisions? Are there concerns about amending the
definition of ``qualified institutional buyer'' to encompass an
expanded list of entities in Rule 144A(a)(1)(i) that meet the $100
million in securities owned and invested threshold?
    65. If we were to expand the definition of qualified institutional
buyer in this manner, would there be a greater likelihood of restricted
securities sold under Rule 144A flowing into the public market? If so,
should we consider additional modifications to Rule 144A to address
this possibility?

V. Implications for Other Contexts

    In addition to its central role in offerings conducted under
Regulation D, the accredited investor definition plays an important
role in other areas of federal securities law and in other contexts. To
assist the Commission in more fully understanding the implications of
amending the accredited investor definition, we are soliciting comment
on the implications of the proposed amendments for these other
contexts.
    An issuer that is not a bank, a savings and loan holding company,
or a bank holding company must register a class of equity securities
under Exchange Act Section 12(g) and become an reporting company under
the Exchange Act if, on the last day of its fiscal year, it has total
assets of more than $10 million and the class of equity securities is
held of record by either (i) 2,000 or more persons, or (ii) 500 or more
persons who are not accredited investors as defined in Rule
501(a).\243\ Under existing rules, a non-reporting issuer must analyze
at its fiscal year end whether its total assets and the number of its
record holders meet these thresholds in determining whether it must
commence reporting under the Exchange Act. For Section 12(g) purposes,
the determination of accredited investor status must be made as of the
last day of the issuer's most recent fiscal year rather than at the
time of the sale of the securities.\244\ As stated above, the
accredited investor definition in Rule 501(a) includes a reasonable
belief standard, such that any person who comes within one or more of
the categories in the definition, or whom the issuer reasonably
believes comes within such category or categories, is deemed to be an
accredited investor.\245\ To the extent that non-reporting issuers sell
securities to individuals or entities that qualify for accredited
investor status under the proposed new categories in the definition,
new issues and complexities in establishing a reasonable belief as to
whether these individuals or entities are accredited investors as of a
fiscal year end may be introduced to the Section 12(g) year-end
analysis. Depending on the circumstances, this could result in complex
and time-consuming determinations by issuers as of a subsequent fiscal
year end if they sell securities to such individuals or entities. On
the other hand, these issuers may be able to remain under the Section
12(g) thresholds and avoid having to register a class of equity
securities under Section 12(g) for a longer period if they are able to
sell securities to an expanded pool of accredited investors and to
fewer non-accredited investors.
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    \243\ 15 U.S.C. 78l(g) and 17 CFR 240.12g-1 under the Exchange
Act (``Rule 12g-1''). See Changes to Exchange Act Registration
Requirements to Implement Title V and Title VI of the JOBS Act,
Release No. 33-10075 (May 3, 2016) [81 FR 28689 (May 10, 2016)]
(``Changes to Exchange Act Registration Requirements Release'').
    \244\ Rule 12g-1(b)(1) under the Exchange Act.
    \245\ Whether an issuer has a reasonable belief depends on the
particular facts and circumstances of the determination.
---------------------------------------------------------------------------

    Regulation A limits the amount of securities that a person who is
not an accredited investor can purchase in an offering conducted under
Tier 2 of Regulation A when the issuer's securities are not listed on a
national securities exchange to no more than 10 percent of the greater
of annual income or net worth (for natural persons), or 10 percent of
the greater of annual revenue or net assets at fiscal year-end (for
entities).\246\ As a result of the proposed amendments to the
accredited investor definition, a wider pool of accredited investors
would not be subject to these investment limits applicable to non-
accredited investors, which could lead to more investor interest in
Tier 2 offerings under Regulation A.
---------------------------------------------------------------------------

    \246\ See 17 CFR 230.251(d)(2)(i)(C).
---------------------------------------------------------------------------

    In addition, some states use the accredited investor definition to
determine whether investment advisers to certain private funds must be

registered with the state \247\ or incorporate the definition in a
range of other contexts.\248\ Further, under Rule 504 of Regulation D,
issuers are permitted to use general solicitation or general
advertising to offer and sell securities when the offers and sales are
made (i) pursuant to state law exemptions from registration that permit
general solicitation and general advertising and (ii) sales are made
only to accredited investors as defined in Rule 501(a).\249\
---------------------------------------------------------------------------

    \247\ See, e.g., Final Order Granting Exemption From the
Registration Requirements for Investment Advisers to Private Funds
and Their Investment Adviser Representatives, Wisconsin Department
of Financial Institutions, Division of Securities (Feb. 17, 2012);
Certificate Exemption for Investment Advisers to Private Funds, Cal.
Code Regs. Title 10 Sec.  260.204.9; and Sixth Transition Order
administering the Michigan Uniform Securities Act, State of Michigan
Department of Energy, Labor & Economic Growth, Office of Financial
and Insurance Regulation (Mar. 11, 2011).
    \248\ See, e.g., Cal. Gov't Code Sec.  64111 (government
finance); Cal. Fin. Code Sec.  22064 (finance lending); Fla. Stat.
Sec. Sec.  494.001 and 494.00115 (mortgage lending); Tex. Ins. Code
Sec.  1111A.002 (insurance); and Conn. Gen. Stat. Sec.  36a-2 (2014)
(financial institution regulation).
    \249\ Rule 504(b)(1)(iii).
---------------------------------------------------------------------------

    Finally, any changes to the accredited investor definition may have
an impact on the use of the Rule 506(c) exemption, which requires
issuers to take reasonable steps to verify the accredited investor
status of purchasers in the offering. To the extent that it may be
difficult for issuers to comply with the verification requirement in
Rule 506(c) with respect to new or modified categories of accredited
investors, issuers may be reluctant to, or determine not to, sell
securities to these investors in Rule 506(c) offerings. Conversely, to
the extent that the verification requirement presents fewer
difficulties for new or modified categories of accredited investors,
for example, natural persons with certain professional certifications
or designations that are more readily verifiable, issuers may be more
willing to sell securities in Rule 506(c) offerings to these investors.
Request for Comment
    66. Would the proposed new categories of accredited investors and
the proposed modifications to the existing standards present issues for
non-reporting issuers in determining whether individuals and entities
that meet the accredited investor definition at the time of purchase
continue to be accredited investors as of the end of a fiscal year for
the purposes of Exchange Act Rule 12g-1?
    67. Would expanding the accredited investor definition to encompass
the proposed new categories of accredited investors, such as persons
with certain professional certifications or designations or
knowledgeable employees of private funds, raise concerns under state
law provisions that incorporate the Rule 501(a) accredited investor
definition? If so, what are those concerns?
    68. Would the proposed amendments to the accredited investor
definition give rise to issues under Rule 504 when issuers engage in
general solicitation or general advertising to offer and sell
securities pursuant to state law exemptions from registration that
permit general solicitation and general advertising when sales are made
only to accredited investors? If so, what are those issues?
    69. Would there be concerns about meeting the verification
requirement in Rule 506(c) with respect to the proposed new categories
of accredited investors or the modifications to the existing categories
in the definition? If so, what are those concerns? Would amending the
accredited investor definition in this manner make it more likely or
less likely that an issuer would conduct a Rule 506(c) offering?

VI. General Request for Comment

    We request and encourage any interested person to submit comments
regarding the proposed rule amendments, specific issues discussed in
this release, and other matters that may have an effect on the proposed
rule amendments. With regard to any comments, we note that such
comments are of particular assistance to our rulemaking initiative if
accompanied by supporting data and analysis of the issues addressed in
those comments.

VII. Economic Analysis

A. Introduction

    The Commission is proposing to amend the ``accredited investor''
definition in Rule 501(a) of Regulation D by: (1) Adding new categories
in 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, as a ``knowledgeable employee'' of the private fund; (2)
adding certain entity types to the current list of entities that may
qualify as accredited investors and a new category for any entity with
``investments,'' as defined in Rule 2a51-1(b) under the Investment
Company Act, in excess of $5 million and that was not formed for the
specific purpose of investing in the securities offered; (3) adding
family offices with at least $5 million in assets under management and
their family clients to the definition; (4) adding the term ``spousal
equivalent'' to the definition, so that spousal equivalents may pool
their finances for the purpose of qualifying as accredited investors;
and (5) codifying certain staff interpretive positions that relate to
the accredited investor definition. The Commission is also proposing to
amend the definition of ``qualified institutional buyer'' in Rule 144A
to expand the list of entities that are eligible to qualify as
qualified institutional buyers.
    We are attentive to the costs imposed by and the benefits obtained
from the proposed amendments. Section 2(b) of the Securities Act \250\
and Section 3(f) of the Exchange Act \251\ require us, when engaging in
rulemaking that requires us to consider or determine whether an action
is necessary or appropriate in the public interest, to consider, in
addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. Additionally,
Section 23(a)(2) of the Exchange Act \252\ requires us, when making
rules or regulations under the Exchange Act, to consider, among other
matters, the impact that any such rule or regulation would have on
competition and states that the Commission shall not adopt any such
rule or regulation which would impose a burden on competition that is
not necessary or appropriate in furtherance of the Exchange Act.
---------------------------------------------------------------------------

    \250\ 15 U.S.C. 77b(b).
    \251\ 15 U.S.C. 78c(f).
    \252\ 17 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The discussion below addresses the potential economic effects of
the proposed amendments, including the likely benefits and costs, as
well as the likely effects on efficiency, competition, and capital
formation. Where possible, we have attempted to quantify the benefits,
costs, and effects on efficiency, competition, and capital formation
expected to result from the proposed amendments. In many cases,
however, we are unable to quantify the economic effects because we lack
the information necessary to derive a reasonable estimate. For example,
we are unable to quantify, with precision, the costs to issuers and
investors of verifying an investor's accredited investor status and the
potential capital raising and compliance cost savings that may arise
from the proposed amendments to the accredited investor definition.

B. Broad Economic Effects

    Overall, because the accredited investor definition is an important

component of several exemptions from registration, including Rules
506(b) and 506(c) of Regulation D, we expect that the proposed
amendments, by expanding the pool of accredited investors, would
improve the ability of issuers to raise capital in the exempt markets
and reduce competition among issuers for investors, thus reducing the
cost of capital. Further, the proposed amendments would permit issuers
to engage in test-the-waters communications in registered offerings
with a larger set of investors as a result of changes to the definition
of institutional accredited investors and qualified institutional
buyers. Similarly, the proposed amendments to the qualified
institutional buyer definition in Rule 144A would increase the number
of entities that qualify for this status, thus improving the ability of
issuers to raise capital and enhancing competition among investors in
this market.\253\
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    \253\ Although Rule 144A is a non-exclusive safe harbor for
resale transactions, market participants have used Rule 144A since
its adoption in 1990 to facilitate capital raising by issuers. See,
e.g., Eliminating the Prohibition Against General Solicitation and
General Advertising in Rule 506 and Rule 144A Offerings, Release No.
33-9415 (July 10, 2013) [78 FR 44771 (July 24, 2013)].
---------------------------------------------------------------------------

    The proposed amendments also would impact investors, permitting
investors with different attributes of financial sophistication to
participate in investment opportunities that are often not available to
non-accredited investors, such as investments in issuers that are not
Exchange Act reporting companies, and offerings by certain private
equity funds, venture capital (VC) funds, and hedge funds, which are
frequently offered under Rule 506.\254\ Additionally, accredited
investors are not subject to investment limits in offerings made under
Tier 2 of Regulation A. Thus, expanding the definition of accredited
investor would permit additional investors to participate in these
offerings at higher amounts, subject to the $50 million offering limit.
---------------------------------------------------------------------------

    \254\ See supra Section II.A.
---------------------------------------------------------------------------

    The accredited investor concept in Regulation D was designed to
identify--with bright-line standards--a category of investors who do
not need the protections of registration under the Securities Act.
    The accredited investor definition uses income and net worth
thresholds to identify natural persons as accredited investors. The
Commission established the $200,000 individual income and $1 million
net worth threshold in 1982 and the $300,000 joint income threshold in
1988 and has not updated them since, with the exception of amending the
net worth standard to exclude the value of the investor's primary
residence in 2011. According to data from the SCF, we estimate the
number of U.S. households that qualify as accredited investors has
grown from being approximately 2% of the population of U.S. households
in 1983 to 13% in 2019 as a result of inflation.\255\
---------------------------------------------------------------------------

    \255\ See https://www.federalreserve.gov/econresdata/scf/scfindex.htm. For this analysis, we use the same methodology and
variable definitions as Table 4, and we exclude the value of a
household's primary residence when measuring net worth. See supra
note 207. We estimate the number of U.S. households, rather than
individuals, that qualify as accredited investors due to data
limitations because the database underlying our analysis measures
wealth and income at the household level. See supra Section III.
---------------------------------------------------------------------------

    Regulation D also designates certain entities as accredited
investors. Some entities, including but not limited to banks, savings
and loan associations, registered broker-dealers, insurance companies,
and investment companies registered under the Investment Company Act
qualify as accredited investors based on their status alone. Other
entities may qualify as accredited investors based on a combination of
their status and the amount of their total assets.
    While the effects of inflation have expanded the pool of accredited
investors, we are not aware from our enforcement experience or
otherwise of disproportionate fraud in this expanded space.
    We are mindful that it is difficult to reach rigorous conclusions
about the typical magnitude of investor gains and losses in exempt
offerings. Therefore, it is difficult to determine definitively how the
benefits to accredited investors of expanded access to the exempt
market compare to the loss of protections provided by registration.
While having an expanded set of investment opportunities in private
markets can potentially help investors to make more efficient
investment decisions, other factors--such as information asymmetry,
illiquidity, and prevailing market practices--can nevertheless limit
investors' opportunity set for private markets. For example, as
discussed below, given the presumed financial sophistication of
accredited investors, issuers may rely on Rule 506(b) and Rule 506(c)
to offer securities on an unregistered basis to accredited investors
without providing additional disclosure to those investors.
    The proposed amendments could increase the size and alter the
composition of the pool of accredited investors by providing additional
measures of financial sophistication (e.g., professional certifications
for individuals and an investments-owned threshold for entities) to
qualify for accredited investor status. If many individuals that would
qualify as accredited investors under the proposed amendments already
meet the income and wealth thresholds in the current accredited
investor definition, then the impact of the change on the pool of
individuals that qualify as accredited investors could be limited.
However, for entities, we anticipate that the impact of the proposed
amendments could be more significant, as we are proposing to amend the
accredited investor definition to include a broad range of entities
that are not covered under the current definition. Since we believe
family offices have generally qualified as accredited investors under
the existing definition, we expect that the effect of the amendments on
them would be much smaller than on other entities.
    We anticipate that the additional investors we propose to designate
as accredited investors would have the resources and financial
sophistication to assess private investment opportunities, despite the
fact that these investments may have unique risk profiles and limited
disclosure requirements. For example, investors in Regulation D
offerings can be subject to investment risks not associated with
registered offerings because (i) some securities law liability
provisions do not apply to private offerings, (ii) issuers of
securities in these offerings generally are not required to provide
information comparable to that included in a registration statement,
and (iii) Commission staff does not review any information that may be
provided to investors in these offerings.\256\
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    \256\ See 2015 Staff Report.
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    Such risks are mitigated for accredited investors that participate
in Regulation A offerings because they have access to information
comparable to that accompanying registered offerings--e.g., publicly
available offering circulars on Form 1-A (for both Tier 1 and Tier 2
offerings), ongoing reports on an annual and semiannual basis (Tier 2
offerings), and additional requirements for interim current event
updates (Tier 2 offerings). Additionally, Commission staff reviews
Forms 1-A and the test-the-waters materials that issuers file in
connection with Regulation A offerings.
    Generally, we believe any additional risk of accredited investors
experiencing harm in the capital markets as a result of the proposed
amendments likely would be limited because the proposed amendments are
intended to more

effectively identify individuals and entities that do not need the
protections rendered by registration under the Securities Act.
    We believe the proposed amendments would improve capital formation
by providing issuers with an expanded pool of accredited investors and
additional avenues--in certain circumstances--to verify an investor's
accredited investor status, while likely having a minimal impact on
issuers' compliance costs. In 2018, the estimated amount of capital
reported as being raised in Rule 506 offerings was $1.7 trillion,\257\
which was larger than the $1.4 trillion raised in registered
offerings.\258\ As private capital markets have grown, the vast
majority of the capital that has been raised in unregistered offerings
under Regulation D has been through investment by accredited investors.
For example, though securities sold in offerings conducted pursuant to
Rule 506(b) are permitted to be purchased by up to 35 non-accredited
investors who are sophisticated, we estimate that, from 2013 to 2018,
only 6% of the offerings conducted under Rule 506(b) included non-
accredited investor purchasers.\259\
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    \257\ See Concept Release at 30466.
    \258\ See id. at 30465.
    \259\ DERA staff analysis is based on Form D filings from 2013
to 2018. These estimates are based on the reported ``total amount
sold'' at the time of the original filing--required within 15 days
of the first sale--as well as any additional capital raised and
reported in amended filings. The data likely underreport the actual
amount sold due to two factors. First, underreporting could occur in
all years because Regulation D filings can be made prior to the
completion of the offering, and amendments to reflect additional
amounts sold generally are not required if the offering is completed
within one year and the amount sold does not exceed the original
offering size by more than 10%. Second, Rule 503 requires the filing
of a notice on Form D, but filing a Form D is not a condition to
claiming a Regulation D safe harbor or exemption. Hence, it is
possible that some issuers do not file a Form D for offerings
relying on Regulation D. Finally, in their annual amendments, some
funds appear to report net asset values for total amount sold under
the offering. Net asset values could reflect fund performance as
well as new investment into, and redemptions from, the fund. For
these reasons, based on Form D data, it is not possible to
distinguish between the two impacts.
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    By increasing potential access to private markets and providing
issuers with additional tests for accredited investor status that are
objective and therefore readily verifiable (e.g., professional
certifications and investment tests), the proposed amendments may make
unregistered offerings more attractive to certain issuers and
particularly facilitate small business capital formation. For example,
while the aggregate amount of capital raised through Rule 506 offerings
in 2018 ($1.7 trillion) is large, the median offering size was only
$1.7 million, indicating that offerings in the Regulation D market
typically involve relatively small issues, which is consistent with
these offerings being undertaken by smaller and growth-stage firms.
Unregistered offerings also can be important for these issuers, as a
significant share of businesses that establish new funding
relationships continue to experience unmet credit needs.\260\ According
to one survey, approximately 64% of small businesses relied on personal
or family savings, compared to 0.5% receiving venture capital.\261\ In
addition, small businesses owned by underrepresented minorities faced
significantly higher hurdles in obtaining external financing, which
suggests that these businesses may particularly benefit from amendments
intended to facilitate private market capital raising.\262\ Similarly,
businesses located in states or regions with a lower cost of living may
uniquely benefit from the proposed amendments as the pool of accredited
investors may be smaller in such states or regions. Recent research has
examined the importance of the pool of accredited investors for the
entry of new businesses and employment and finds that geographic areas
experiencing a larger reduction in the number of potential accredited
investors experienced negative effects on new firm entry and employment
levels at small entrants.\263\
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    \260\ See 2015 Staff Report.
    \261\ See 2019 Kauffman Foundation Access to Capital for
Entrepreneurs: Removing Barriers, available at https://www.kauffman.org/-/media/kauffman_org/entrepreneurship-landing-page/capital-access/capitalreport_042519.pdf. The study relies on the
data from the 2016 Annual Survey of Entrepreneurs, released in
August 2018.
    \262\ See id.
    \263\ See Laura Lindsey & Luke C.D. Stein, Angels,
Entrepreneurship, and Employment Dynamics: Evidence from Investor
Accreditation Rules (Working Paper, 2019) (``Lindsey & Stein
(2019)''). This study examines the effects on angel finance stemming
from the Dodd-Frank Act's elimination of the value of the primary
residence in the determination of net worth for purposes of
accredited investor status.
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    Lastly, we expect that the proposed amendments could have an impact
on the market for registered offerings. It is possible that newly
accredited investors shift capital away from registered offerings and
towards unregistered offerings. Such a switch of investment focus could
decrease the amount of capital flowing into registered offerings and
hence negatively affect registered issuers. Due to lack of data, we are
unable to quantify the magnitude of such a potential impact. It is also
conceivable that newly accredited investors do not change their
investment allocations to the registered offerings market but instead
increase investments in unregistered offerings by diverting capital
from other investment opportunities (e.g., savings, real estate). In
this case, we would not expect any significant effect on the market for
registered offerings. We cannot determine how likely each of these
scenarios is.
    The remainder of this economic analysis presents the baseline;
anticipated benefits and costs from the proposed amendments; potential
effects on efficiency, competition, and capital formation; and
alternatives to the proposed amendments.

C. Baseline and Affected Parties

    The main affected parties of the proposed amendments to the
accredited investor definition would be investors and issuers. For
example, certain non-accredited investors, such as entities that are
currently not designated accredited investors, would become accredited
investors under the proposed amendments and be able to participate in
an expanded array of private offerings. Correspondingly, current
accredited investors may have to compete more intensively to
participate in investment opportunities in this market. Similarly, we
anticipate that certain issuers, such as issuers that are smaller or in
early stages of development, would need to compete less intensively to
solicit accredited investors under the proposed amendments.
    We are not able to directly estimate the number of current
accredited investors that would be affected by the proposed amendments
as precise data on the number of individuals and entities that
currently qualify as accredited investors are not available to us. As
noted above, Rule 501(a) of Regulation D uses net worth and income as
bright-line standards to identify natural persons as accredited
investors.\264\
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    \264\ Under the current definition, individuals may qualify as
accredited investors if (i) their net worth exceeds $1 million
(excluding the value of the investor's primary residence), (ii)
their income exceeds $200,000 in each of the two most recent years,
or (iii) their joint income with a spouse exceeds $300,000 in each
of those years and the individual has a reasonable expectation of
reaching the same income level in the current year.
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    Using data on household wealth from the SCF database, we estimate
that under the current income and wealth thresholds noted above,
approximately 16.0 million U.S. households, representing 13% of the
total population of U.S. households, qualify as accredited investors.
The data provides

an estimate of the overall pool of households that qualify as
accredited investors in the United States. This estimate does not,
however, identify the precise number of accredited investors that do or
would invest in the Regulation D market or in other exempt
offerings.\265\
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    \265\ Form D data and other data available to us on private
placements do not allow us to estimate the number of unique
accredited investors that participate in exempt offerings.
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    Based on Form D filings during the period 2009-2018, we estimate
that there were on average approximately 293,700 accredited investors
participating annually in Regulation D offerings.\266\ However, because
an investor can participate in more than one Regulation D offering,
this aggregation likely overstates the actual number of unique
investors, and we lack data to estimate the extent of overlap.
Additionally, from the information reported on Form D, we do not have
the ability to distinguish accredited investors that are natural
persons from accredited investors that are institutions.\267\ The
average number of accredited investors per offering during the period
2009-2018 was 14, and the median number was four.
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    \266\ We estimate the number of accredited investors as the
number of total investors minus the number of non-accredited
investors reported on Form D.
    \267\ Other limitations of the data gathered from Form D may
reduce the accuracy of the estimated number of accredited investors.
For example, an issuer is required to file a Form D generally no
later than 15 calendar days after the first sale of securities in a
Regulation D offering, regardless of whether the offering will be
ongoing after the filing of the Form D. Further, issuers are
required to file amendments to Form D only in limited circumstances:
(i) To correct a material mistake of fact or error in a previously
filed Form D, (ii) to reflect a change in certain information
provided in a previously filed Form D, and (iii) on an annual basis
if the offering is continuing at that time. Also, because the Form D
filing requirement is not a condition to claiming an exemption under
Rule 506(b) or 506(c) but rather is a requirement of Regulation D,
it is possible that some issuers do not file Form D when conducting
Regulation D offerings.
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    Table 6 presents evidence on investor participation in Regulation D
offerings by industry type during the period 2009-2018. The
participation of accredited investors in Regulation D offerings during
that period varied by type of issuer as well, with offerings by real
estate investment trusts (REITs) having the largest average number of
accredited investors per offering, and those by operating companies
having the smallest average number.

                      Table 6--Investors Participating in Regulation D Offerings: 2009-2018
----------------------------------------------------------------------------------------------------------------
                                                                                Fraction of
                                                                                Median      offerings with
                                                   Total number   Mean investors   investors per    one or more
                                                  of investors *   per offering      offering     non-accredited
                                                                                investor (%)
----------------------------------------------------------------------------------------------------------------
Hedge Fund......................................          30,264              16               2               7
Private Equity Fund.............................          26,518              18               3               3
Venture Capital Fund............................           8,806              14               3               1
Other Investment Fund...........................          36,651              22               6               4
Financial Services..............................          12,097              15               4              12
Real Estate.....................................          67,532              26               8              13
Non-financial Issuers...........................         165,606              10               4               9
All offerings...................................         301,286              14               4               9
----------------------------------------------------------------------------------------------------------------
* 2009-2017 data is annualized.

    We are not able to directly estimate the number of individuals who
may newly qualify as accredited investors as a result of the proposed
professional certifications or designations as precise data on the
number of current holders of each professional certification or
designation are not available to us. According to data on state-
registered investment advisers compiled by NASAA, there were 17,543
registered investment advisers as of December 2018.\268\ Based on data
from FINRA, we estimate that there were 691,041 FINRA-registered
individuals as of December 2018.\269\ We estimate that 334,860
individuals were registered as only broker-dealers; 294,684 were dually
registered as broker-dealers and investment advisers; and 61,497 were
registered as only investment advisers. However, because FINRA-
registered representatives can hold multiple professional
certifications, this aggregation likely overstates the actual number of
individuals that hold a Series 7 or Series 82, and we have no method of
estimating the extent of overlap.
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    \268\ See 2019 NASAA Investment Adviser Section Annual Report,
available at https://www.nasaa.org/wp-content/uploads/2019/06/2019-IA-Section-Report.pdf.
    \269\ See 2019 FINRA Industry Snapshot, available at https://www.finra.org/sites/default/files/2019%20Industry%20Snapshot.pdf.
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    We are not able to directly estimate the number of knowledgeable
employees at private funds that would be immediately affected by the
proposed amendments as precise data on the number of knowledgeable
employees of private funds are not available to us. Using data on
private fund statistics compiled by the Commission's Division of
Investment Management, we estimate that there were 32,202 private funds
as of fourth quarter 2018.\270\
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    \270\ See U.S. Securities and Exchange Commission, Division of
Investment Management Fourth Quarter 2018 Private Fund Statistics,
available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2018-q4.pdf.
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    Industry observers have estimated that there are 2,500 to 3,000
single family offices managing more than $1.2 trillion in assets.\271\
We lack data to determine the number of family clients of family
offices.
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    \271\ See Pamela J. Black, The Rise of the Multi-Family Office,