[Federal Register Volume 77, Number 172 (Wednesday, September 5, 2012)]
[Proposed Rules]
[Pages 54464-54481]
[FR Doc No: 2012-21681]

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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 /
Proposed Rules

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 239

[Release No. 33-9354; File No. S7-07-12]
RIN 3235-AL34

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

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing amendments to Rule 506 of Regulation D and
Rule 144A under the Securities Act of 1933 to implement Section 201(a)
of the Jumpstart Our Business Startups Act. The proposed amendment to
Rule 506 would provide that the prohibition against general
solicitation and general advertising contained in Rule 502(c) of
Regulation D would not apply to offers and sales of securities made
pursuant to Rule 506, provided that all purchasers of the securities
are accredited investors. The proposed amendment to Rule 506 would also
require that, in Rule 506 offerings that use general solicitation or
general advertising, the issuer take reasonable steps to verify that
purchasers of the securities are accredited investors. The proposed
amendment to Rule 144A(d)(1) would provide that securities may be
offered pursuant to Rule 144A to persons other than qualified
institutional buyers, provided that the securities are sold only to
persons that the seller and any person acting on behalf of the seller
reasonably believe are qualified institutional buyers. We are also
proposing to revise Form D to add a separate check box for issuers to
indicate whether they are using general solicitation or general
advertising in a Rule 506 offering.

DATES: Comments should be received on or before October 5, 2012.

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-07-12 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

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

All submissions should refer to File Number S7-07-12. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549-1090 on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Charles Kwon, Special Counsel, or Ted
Yu, Senior Special Counsel, Office of Chief Counsel, Division of
Corporation Finance, at<PHONE_NUMBER>, or, with respect to privately
offered funds, Holly Hunter-Ceci, Senior Counsel, Office of Chief
Counsel, or Alpa Patel, Attorney-Adviser, Private Funds Branch, Office
of Investment Adviser Regulation, Division of Investment Management, at
(202) 551-6825 or<PHONE_NUMBER>, Securities and Exchange Commission,
100 F Street NE., Washington, DC 20549-1090.

SUPPLEMENTARY INFORMATION: We are proposing amendments to Rule 144A,\1\
Form D,\2\ and Rules 500,\3\ 501,\4\ 502 \5\ and 506 \6\ of Regulation
D \7\ under the Securities Act of 1933.\8\
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    \1\ 17 CFR 230.144A.
    \2\ 17 CFR 239.500.
    \3\ 17 CFR 230.500.
    \4\ 17 CFR 230.501.
    \5\ 17 CFR 230.502.
    \6\ 17 CFR 230.506.
    \7\ 17 CFR 230.500 through 230.508.
    \8\ 15 U.S.C. 77a et seq.
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Table of Contents

I. Introduction
II. Proposed Amendments to Rule 506 and Form D
    A. Eliminating the Prohibition Against General Solicitation
    B. Reasonable Steps to Verify Accredited Investor Status
    C. Reasonable Belief that All Purchasers Are Accredited
Investors
    D. Form D Check Box for Rule 506(c) Offerings
    E. Specific Issues for Privately Offered Funds
    F. Technical and Conforming Amendments
    G. Request for Comment
III. Proposed Amendment to Rule 144A
    A. Offers to Persons Other Than Qualified Institutional Buyers
    B. Request for Comment
IV. Integration With Offshore Offerings
V. General Request for Comment
VI. Paperwork Reduction Act
VII. Economic Analysis
    A. Background and Summary of Proposed Rule and Form Amendments
    B. Baseline
    C. Eliminating the Prohibition Against General Solicitation in
Rule 506 Offerings and Rule 144A Offerings
    D. Verifying Accredited Investor Status in Rule 506(c) Offerings
    E. Form D Check Box for Rule 506(c) Offerings
    F. Request for Comment
VIII. Small Business Regulatory Enforcement Fairness Act
IX. Initial Regulatory Flexibility Analysis
    A. Reasons for, and Objectives of, the Action
    B. Small Entities Subject to the Proposed Rule and Form
Amendments
    C. Projected Reporting, Recordkeeping and Other Compliance
Requirements
    D. Duplicative, Overlapping or Conflicting Federal Rules
    E. Significant Alternatives
    F. General Request for Comment
X. Statutory Authority and Text of Proposed Rule and Form Amendments

I. Introduction

    The Jumpstart Our Business Startups Act (the ``JOBS Act'') was
enacted on April 5, 2012.\9\ Section 201(a)(1) of the JOBS Act directs
the Commission, not

later than 90 days after the date of enactment, to amend Rule 506 of
Regulation D \10\ under the Securities Act of 1933 (the ``Securities
Act'') to permit general solicitation or general advertising in
offerings made under Rule 506, provided that all purchasers of the
securities are accredited investors. Section 201(a)(1) also states that
``[s]uch rules shall require the issuer to take reasonable steps to
verify that purchasers of the securities are accredited investors,
using such methods as determined by the Commission.'' Section 201(a)(2)
of the JOBS Act directs the Commission, not later than 90 days after
the date of enactment, to revise Rule 144A(d)(1) \11\ under the
Securities Act to permit offers of securities pursuant to Rule 144A to
persons other than qualified institutional buyers (``QIBs''),\12\
including by means of general solicitation or general advertising,
provided that the securities are sold only to persons that the seller
and any person acting on behalf of the seller reasonably believe are
QIBs.
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    \9\ Public Law 112-106, 126 Stat. 306.
    \10\ The Commission adopted Regulation D in 1982 as a result of
the Commission's evaluation of the impact of its rules on the
ability of small businesses to raise capital. See Revision of
Certain Exemptions From Registration for Transactions Involving
Limited Offers and Sales, Release No. 33-6389 (Mar. 8, 1982) [47 FR
11251]. Over the years, the Commission has revised various
provisions of Regulation D in order to address, among other things,
specific concerns relating to facilitating capital-raising as well
as abuses that have arisen under Regulation D. See, e.g., Additional
Small Business Initiatives, Release No. 33-6996 (Apr. 28, 1993) [58
FR 26509] and Revision of Rule 504 of Regulation D, the ``Seed
Capital'' Exemption, Release No. 33-7644 (Feb. 25, 1999) [64 FR
11090].
    \11\ 17 CFR 230.144A(d)(1).
    \12\ The term ``qualified institutional buyer'' is defined in
Rule 144A(a)(1) [17 CFR 230.144A(a)(1)] and includes specified
institutions that, in the aggregate, own and invest on a
discretionary basis at least $100 million in securities of issuers
that are not affiliated with such institutions. Banks and other
specified financial institutions must also have a net worth of at
least $25 million. A registered broker-dealer qualifies as a QIB if
it, in the aggregate, owns and invests on a discretionary basis at
least $10 million in securities of issuers that are not affiliated
with the broker-dealer.
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    Rule 506 is a non-exclusive safe harbor under Section 4(a)(2)
(formerly Section 4(2)) of the Securities Act,\13\ which exempts
transactions by an issuer ``not involving any public offering'' from
the registration requirements of Section 5 of the Securities Act.\14\
Under existing Rule 506, an issuer may offer and sell securities,
without any limitation on the offering amount, to an unlimited number
of ``accredited investors,'' as defined in Rule 501(a) of Regulation
D,\15\ and to no more than 35 non-accredited investors who meet certain
``sophistication'' requirements.\16\ The availability of the Rule 506
safe harbor is subject to a number of requirements \17\ and is
currently conditioned on the issuer, or any person acting on its
behalf, not offering or selling securities through any form of
``general solicitation or general advertising.'' \18\ Although the
terms ``general solicitation'' and ``general advertising'' are not
defined in Regulation D, Rule 502(c) does provide examples of general
solicitation and general advertising, including advertisements
published in newspapers and magazines, communications broadcast over
television and radio, and seminars whose attendees have been invited by
general solicitation or general advertising.\19\ By interpretation, the
Commission has confirmed that other uses of publicly available media,
such as unrestricted Web sites, also constitute general solicitation
and general advertising.\20\ In this release, we will refer to both
general solicitation and general advertising as ``general
solicitation.''
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    \13\ 15 U.S.C. 77d(a)(2).
    \14\ 15 U.S.C. 77e.
    \15\ The definition of the term ``accredited investor'' is set
forth in Rule 501(a) of Regulation D [17 CFR 230.501(a)] and
includes any person who comes within one of the definition's
enumerated categories of persons, or whom the issuer ``reasonably
believes'' comes within any of the enumerated categories, at the
time of the sale of the securities to that person.
    \16\ Under Rule 506(b)(2)(ii) [17 CFR 230.506(b)(2)(ii)], each
purchaser in a Rule 506 offering who is not an accredited investor
must possess, or the issuer must reasonably believe immediately
before the sale that such purchaser possesses, either alone or with
his or her purchaser representative, ``such knowledge and experience
in financial and business matters that he [or she] is capable of
evaluating the merits and risks of the prospective investment.''
    \17\ Offerings under Rule 506 are subject to all the terms and
conditions of Rules 501 and 502. If securities are sold to any non-
accredited investors, specified information requirements apply. See
Rule 502(b) [17 CFR 230.502(b)].
    \18\ Rule 502(c) of Regulation D [17 CFR 230.502(c)].
    \19\ Id.
    \20\ See Use of Electronic Media for Delivery Purposes, Release
No. 33-7233 (Oct. 6, 1995) [60 FR 53458] at Ex. 20; Use of
Electronic Media, Release No. 33-7856 (Apr. 28, 2000) [65 FR 25843]
at footnotes 79-80 and accompanying text.
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    Rule 144A is a non-exclusive safe harbor exemption from the
registration requirements of the Securities Act for resales of certain
``restricted securities'' \21\ to QIBs. Resales to QIBs in accordance
with the conditions of Rule 144A \22\ are exempt from registration
pursuant to Section 4(a)(1) (formerly Section 4(1)) of the Securities
Act,\23\ which exempts transactions by any person ``other than an
issuer, underwriter, or dealer.'' Although Rule 144A does not include
an express prohibition against general solicitation, offers of
securities under Rule 144A currently must be limited to QIBs, which has
the same practical effect. By its terms, Rule 144A is available solely
for resale transactions; however, since its adoption by the Commission
in 1990, market participants have used Rule 144A to facilitate capital-
raising by issuers. The term ``Rule 144A offering'' in this release
refers to a primary offering of securities by an issuer to one or more
financial intermediaries--commonly known as the ``initial
purchasers''--in a transaction that is exempt from registration
pursuant to Section 4(a)(2) or Regulation S,\24\ followed by the
immediate resale of those securities by the initial purchasers to QIBs
in reliance on Rule 144A.
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    \21\ ``Restricted securities'' are defined in Securities Act
Rule 144(a)(3) [17 CFR 230.144(a)(3)] to include, in part,
``[s]ecurities acquired directly or indirectly from the issuer, or
from an affiliate of the issuer, in a chain of transactions not
involving a public offering.''
    \22\ In order for a transaction to come within existing Rule
144A, a seller must have a reasonable basis for believing that the
offeree or purchaser is a QIB and must take reasonable steps to
ensure that the purchaser is aware that the seller may rely on Rule
144A. Further, only securities that were not, when issued, of the
same class as securities listed on a U.S. securities exchange or
quoted on a U.S. automated interdealer quotation system are eligible
for resale under Rule 144A. Also, the seller and a prospective
purchaser designated by the seller must have the right to obtain
from the issuer, upon request, certain information on the issuer,
unless the issuer falls within specified categories as to which this
condition does not apply.
    \23\ 15 U.S.C. 77d(a)(1).
    \24\ Regulation S under the Securities Act [17 CFR 230.901
through 230.905] was adopted in 1990 as a safe harbor from the
registration requirements of the Securities Act for any offer or
sale of securities made outside the United States. It provides that
any ``offer,'' ``offer to sell,'' ``sell,'' ``sale'' or ``offer to
buy'' that occurs outside the United States is not subject to the
registration requirements of Section 5. Regulation S does not limit
the scope or availability of the antifraud or other provisions of
the Securities Act to offers and sales made in reliance on
Regulation S.
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    Rule 506 offerings and Rule 144A offerings are widely used by U.S.
and foreign issuers to raise capital. In 2011, the estimated amount of
capital (including both equity and debt) raised in Rule 506 offerings
and Rule 144A offerings was $895 billion and $168 billion,
respectively, compared to $984 billion raised in registered offerings.
In 2010, the estimated amount of capital (including both equity and
debt) raised in Rule 506 offerings and Rule 144A offerings was $902
billion and $233 billion, respectively, compared to $1.07 trillion
raised in registered offerings.\25\

These data points underscore the importance of the Rule 506 and Rule
144A exemptions for issuers seeking access to the U.S. capital markets.
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    \25\ These statistics are based on a review of Form D electronic
filings with the Commission--specifically, the ``total amount sold''
as reported in Form D--and data regarding other types of offerings
(e.g., public debt offerings and Rule 144A offerings) from
Securities Data Corporation's New Issues database (Thomson
Financial). See Vlad Ivanov and Scott Bauguess, Capital Raising in
the U.S.: The Significance of Unregistered Offerings Using the
Regulation D Exemption (Feb. 2012) (the ``Ivanov/Bauguess Study''),
available at: http://www.sec.gov/info/smallbus/acsec/acsec103111_analysis-reg-d-offering.pdf. The amount of capital raised through
offerings under Regulation D may be considerably larger than what is
reported on Form D because, although the filing of a Form D is a
requirement of Rule 503(a) of Regulation D [17 CFR 230.503(a)], it
is not a condition to the availability of the exemptions under
Regulation D. Further, once a Form D is filed, the issuer is not
required to file an amendment to the notice to reflect a change that
occurs after the offering terminates or a change that occurs solely
with respect to certain information, such as the amount sold in the
offering. For example, if the amount sold does not exceed the offer
size by more than 10% or the offer closes within a year, the filing
of an amendment to the initial Form D is not required. Therefore, a
Form D filed for a particular offering may not reflect the total
amount of securities sold in the offering in reliance on the
exemption.
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    To implement Section 201(a) of the JOBS Act, we are proposing to
amend Rule 506 to provide that the prohibition against general
solicitation contained in Rule 502(c) shall not apply to offers and
sales of securities made pursuant to Rule 506, as amended, provided
that all purchasers of the securities are accredited investors and the
issuer takes reasonable steps to verify that the purchasers are
accredited investors. In addition, we are proposing to amend Form D,
which is a notice required to be filed with the Commission by each
issuer claiming a Regulation D exemption, to add a check box to
indicate whether an offering is being conducted pursuant to the
proposed amendment to Rule 506 that would permit general solicitation.
We are also proposing to amend Rule 144A to provide that securities
sold pursuant to Rule 144A may be offered to persons other than QIBs,
including by means of general solicitation, provided that the
securities are sold only to persons that the seller and any person
acting on behalf of the seller reasonably believe are QIBs.
    We have considered comment letters received to date on Section
201(a) of the JOBS Act, and we are requesting comment on various issues
relating specifically to the proposed amendments described above.\26\
In this release, we are proposing only those rule and form amendments
that are, in our view, necessary to implement the mandate in Section
201(a). We recognize that commentators have urged us to consider and
propose other amendments to Regulation D or to Form D that they believe
are appropriate in connection with implementation of the rule and form
amendments proposed here. For example, several commentators have
recommended that the Commission also amend the definition of
``accredited investor'' as it relates to natural persons.\27\ Other
commentators have suggested that we amend the Form D filing
requirement, including conditioning the availability of the proposed
Rule 506 exemption on the filing of Form D,\28\ requiring the Form D to
be filed in advance of any general solicitation,\29\ and adding to the
information requirements of Form D.\30\ Other commentators have
suggested that we propose rules governing the content and manner of
advertising and solicitations used in offerings conducted under the
proposed Rule 506 exemption,\31\ particularly with respect to privately
offered funds.\32\
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    \26\ To facilitate public input on JOBS Act rulemaking before
the issuance of rule proposals, the Commission has invited members
of the public to make their views known on various JOBS Act
initiatives in advance of any rulemaking by submitting comment
letters to the Commission's Web site at http://www.sec.gov/spotlight/jobsactcomments.shtml. Comment letters received to date on
Section 201(a) of the JOBS Act are available at http://www.sec.gov/comments/jobs-title-ii/jobs-title-ii.shtml, and we cite to many of
them in this release. Comment letters on this release should be
submitted as directed in ``Addresses'' above.
    \27\ See letters from Cambridge Innovation Center (suggesting
that the Commission consider offering investor education classes
whereby investors who meet a lower financial threshold but pass a
qualifying test could be granted accredited investor status); Fund
Democracy, Consumer Federation of America, Consumer Action, AFL-CIO,
and Americans for Financial Reform (``Fund Democracy'')
(recommending higher financial thresholds for natural persons
claiming to be accredited investors); Investment Company Institute
(``ICI'') (May 21, 2012) (recommending increased income and net
worth thresholds in the accredited investor definition and inclusion
of a new category of ``accredited natural persons'' in the
accredited investor definition); Managed Funds Association (``MFA'')
(May 4, 2012) (recommending adding ``knowledgeable employee'' under
the Investment Company Act to the definition of ``accredited
investor''); Public Citizen (recommending higher income and net
worth thresholds in the accredited investor definition); Office of
the Secretary of the Commonwealth of Massachusetts Securities
Division (``Massachusetts Securities Division'') (same); Ilan
Moscovitz and John Maxfield (``Moscovitz and Maxfield'') (same);
Ohio Division of Securities (``Ohio Division'') (same). One
commentator opposed increasing the thresholds for accredited
investor status. See letter from National Small Business Association
(``NSBA'') (June 12, 2012).
    \28\ See letters from Massachusetts Securities Division (``The
filing of a Form D should be a condition of the availability of the
new Rule 506 exemption.''); North American Securities Administrators
Association, Inc. (``NASAA'') (July 3, 2012) (recommending that the
failure to file a Form D prior to the use of general solicitation
must result in the loss of the exemption and warning that without
such a filing requirement, regulators would ``have no way of knowing
whether a promoter is legitimately trying to comply with Rule 506,
so a fraudulent offering will be allowed to continue until the
regulators have gathered sufficient evidence to prove fraud has
already occurred'').
    \29\ See letters from Fund Democracy; NASAA (July 3, 2012);
Public Citizen.
    \30\ See, e.g., letters from NASAA (July 3, 2012) (listing a
number of recommended amendments to Form D, such as the disclosure
of the issuer's Web site address); Ohio Division (recommending that
Form D provide more background information to allow broker-dealers,
regulators, and investors to assess whether an issuer has been
disqualified from using Rule 506).
    \31\ Letters from NASAA (July 3, 2012) (stating that advertising
materials used in Rule 506 offerings should include a ``balanced
presentation of risks and rewards'' and be subject to a requirement
that statements in the advertising materials are consistent with
representations in the offering documents); Ohio Division
(recommending that, among other things, the Commission adopt a
uniform set of required disclosures and content restrictions for
general solicitation materials, such as a mandatory legend
disclosing those jurisdictions where the offering is being made (and
disclaiming sales in any others) and a prohibition on financial
projections or statements of future performance).
    \32\ See, e.g., letters from ICI (May 21, 2012); Moscovitz and
Maxfield; and Fund Democracy (Aug. 16, 2012).
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    We appreciate the suggestions made by these commentators; however,
at this time, we are not proposing these or any other amendments to
Regulation D or to Form D.

II. Proposed Amendments to Rule 506 and Form D

A. Eliminating the Prohibition Against General Solicitation

    Section 4(a)(2) exempts transactions by an issuer ``not involving
any public offering.'' An issuer relying on Section 4(a)(2) is
restricted in its ability to make public communications to attract
investors for its offering because public advertising is incompatible
with a claim of exemption under Section 4(a)(2).\33\ As noted above,
Rule 506 currently conditions the availability of the safe harbor under
Section 4(a)(2) on the issuer, or any person acting on its behalf, not
offering or selling securities through any form of general
solicitation.\34\ Section 201(a)(1) of the JOBS Act directs the
Commission to amend Rule 506 to provide that the prohibition against
general solicitation contained in Rule 502(c) shall not apply to offers
and sales of securities made pursuant to Rule 506, as so amended,
provided that purchasers of the securities are accredited investors.
This mandate affects only the Rule 506 safe harbor, and not Section
4(a)(2) offerings in general.\35\
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    \33\ See Non-Public Offering Exemption, Release No. 33-4552
(Nov. 6, 1962) [27 FR 11316].
    \34\ See Rule 502(c) and Rule 506(b)(1) of Regulation D [17 CFR
230.506(b)(1)].
    \35\ In this regard, we note that bills that would have amended
Section 4(a)(2) itself to permit the use of general solicitation
were introduced and considered by Congress but not enacted. See
Access to Capital for Job Creators, H.R. 2940, 112th Cong. (2011)
(proposing to amend Section 4(a)(2) by adding the phrase ``whether
or not such transactions involve general solicitation or general
advertising''); Access to Capital for Job Creators, S.1831, 112th
Cong. (2011) (same).

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    To implement the mandated rule change, we are proposing new Rule
506(c), which would permit the use of general solicitation to offer and
sell securities under Rule 506, provided that certain conditions are
satisfied.\36\ These conditions are:
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    \36\ We note that broker-dealers participating in offerings in
conjunction with issuers relying on proposed Rule 506(c) would
continue to be subject to the rules of the Financial Industry
Regulatory Authority (``FINRA'') regarding communications with the
public. See FINRA Rule 2210.
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     The issuer must take reasonable steps to verify that the
purchasers of the securities are accredited investors;
     All purchasers of securities must be accredited investors,
either because they come within one of the enumerated categories of
persons that qualify as accredited investors or the issuer reasonably
believes that they do, at the time of the sale of the securities; \37\
and
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    \37\ Rule 501(a) of Regulation D.
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     All terms and conditions of Rule 501 and Rules 502(a) and
502(d) must be satisfied.\38\
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    \38\ Securities acquired under proposed Rule 506(c) would be
subject to the resale limitations under Rule 502(d) [17 CFR
230.502(d)] and therefore would be ``restricted securities'' as
defined in Rule 144(a)(3)(ii) [17 CFR 230.144(a)(3)(ii)]. Further,
Section 201(b) of the JOBS Act added Section 4(b) of the Securities
Act, which provides that ``[o]ffers and sales exempt under [Rule 506
as amended pursuant to Section 201 of the JOBS Act] shall not be
deemed public offerings under the Federal securities laws as a
result of general advertising or general solicitation.'' Thus,
securities acquired under proposed Rule 506(c) would also meet the
definition of ``restricted securities'' under Rule 144(a)(3)(i) [17
CFR 230.144(a)(3)(i)] (``[s]ecurities acquired directly or
indirectly from the issuer, or from an affiliate of the issuer, in a
transaction or chain of transactions not involving any public
offering'').

Offerings under proposed Rule 506(c) would not be subject to the
requirement to comply with Rule 502(c), which contains the prohibition
against general solicitation.\39\
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    \39\ Offerings under proposed Rule 506(c) would also not be
subject to the information requirements in Rule 502(b), because all
purchasers in proposed Rule 506(c) offerings would be accredited
investors.
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    While we are proposing Rule 506(c) to allow for Rule 506 offerings
that use general solicitation, we are preserving, under existing Rule
506(b), the existing ability of issuers to conduct Rule 506 offerings
without the use of general solicitation. We recognize that offerings
under existing Rule 506 represent an important source of capital for
issuers of all sizes and believe that the continued availability of
existing Rule 506 will be important for those issuers that either do
not wish to engage in general solicitation in their Rule 506 offerings
(and become subject to the new requirement to take reasonable steps to
verify the accredited investor status of purchasers) or wish to sell
privately to non-accredited investors who meet Rule 506(b)'s
sophistication requirements. Retaining the safe harbor under existing
Rule 506 may also be beneficial to investors with whom an issuer has a
pre-existing substantive relationship.\40\ In this regard, we do not
believe that Section 201(a) requires the Commission to modify Rule 506
to impose any new requirements on offers and sales of securities that
do not involve general solicitation. Therefore, the amendments to Rule
506 we are proposing today would not amend or modify the requirements
relating to existing Rule 506.
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    \40\ In a series of no-action and interpretive letters, the
Commission staff has indicated that an issuer would not contravene
Rule 502(c)'s prohibition against general solicitation if the issuer
has a pre-existing substantive relationship with the offerees. See,
e.g., Mineral Lands Research and Marketing Corp. (Nov. 3, 1985). The
Commission staff has also addressed how an intermediary, such as a
broker-dealer acting as a placement agent, can establish a
sufficient pre-existing substantive relationship with its customers
such that there would be no general solicitation when an issuer
engages that intermediary to offer securities to the intermediary's
customers. See, e.g., E.F. Hutton & Co. (Dec. 3, 1985). The
framework set forth by this staff guidance on pre-existing
substantive relationships has also provided flexibility in the use
of the Internet in Regulation D offerings. See, e.g., IPONET (July
26, 1996); Lamp Technologies, Inc. (May 29, 1998).
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B. Reasonable Steps to Verify Accredited Investor Status

    While Section 201(a)(1) of the JOBS Act mandates that our
amendments to Rule 506 require issuers using general solicitation in
Rule 506 offerings ``to take reasonable steps to verify that purchasers
of the securities are accredited investors,'' it does not specify the
methods necessary to satisfy this requirement and instead requires
issuers to use ``such methods as determined by the Commission.'' We
believe that the purpose of the verification mandate is to address
concerns, and reduce the risk, that the use of general solicitation
under Rule 506 may result in sales to investors who are not, in fact,
accredited investors.\41\ We also recognize, however, that it would be
necessary that our proposed amendment to Rule 506 provide sufficient
flexibility to accommodate the different types of issuers that would
conduct offerings under proposed Rule 506(c) and the different types of
accredited investors (such as natural persons, public and private for-
profit and not-for-profit corporations, general and limited
partnerships, business and other types of trusts, and funds and other
types of collective investment vehicles) that may purchase securities
in these offerings.
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    \41\ See, e.g., Markup of H.R. 2940, Access to Capital for Job
Creators Act, Subcommittee on Capital Markets and Government
Sponsored Enterprises, House Financial Services Committee, 112th
Cong. (Oct. 5, 2011) (remarks of Representative Waters, explaining
that she is introducing the amendment that requires issuers to take
reasonable steps to verify accredited investor status because ``we
must take steps to ensure that those folks are indeed
sophisticated''); 157 Cong. Rec. H7291 (daily ed. Nov. 3, 2011)
(remarks of Representative Maloney (same)); 157 Cong. Rec. H7294
(daily ed. Nov. 3, 2011) (remarks of Representative Lee (same)).
---------------------------------------------------------------------------

    We are proposing a requirement in Rule 506(c) that issuers using
general solicitation ``take reasonable steps to verify'' that the
purchasers of the offered securities are accredited investors. Whether
the steps taken are ``reasonable'' would be an objective determination,
based on the particular facts and circumstances of each transaction.
    Under this proposed approach, issuers would consider a number of
factors when determining the reasonableness of the steps to verify that
a purchaser is an accredited investor. Some examples of these factors
include:
     The nature of the purchaser and the type of accredited
investor that the purchaser claims to be;
     The amount and type of information that the issuer has
about the purchaser; and
     The nature of the offering, such as the manner in which
the purchaser was solicited to participate in the offering, and the
terms of the offering, such as a minimum investment amount.

We discuss each of these factors in greater detail below.

    Nature of the Purchaser. The definition of ``accredited investor''
in Rule 501(a) includes natural persons and entities that come within
any of eight enumerated categories in the rule, or that the issuer
reasonably believes come within one of those categories, at the time of
the sale of securities to that natural person or entity. Some
purchasers may be accredited investors based on their status, such as:
     A broker or dealer registered pursuant to Section 15 of
the Securities Exchange Act of 1934 (the ``Exchange Act''); \42\ or
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    \42\ See 17 CFR 230.501(a)(1).
---------------------------------------------------------------------------

     An investment company registered under the Investment
Company Act of 1940 (the ``Investment Company Act'') or a business
development company as defined in Section 2(a)(48) of that Act.\43\
---------------------------------------------------------------------------

    \43\ See id.

Some purchasers may be accredited investors based on a combination of

---------------------------------------------------------------------------
their status and the amount of their total assets, such as:

     A plan established and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state or
its political subdivisions, for the benefit of its employees, if such
plan has total assets in excess of $5 million; \44\ or
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    \44\ See id.
---------------------------------------------------------------------------

     An Internal Revenue Code (``IRC'') Section 501(c)(3)
organization, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5 million.\45\
---------------------------------------------------------------------------

    \45\ See 17 CFR 230.501(a)(3).

Natural persons may be accredited investors based on either their net
---------------------------------------------------------------------------
worth or their annual income, as follows:

     A natural person whose individual net worth, or joint net
worth with that person's spouse, exceeds $1 million, excluding the
value of the person's primary residence (the ``net worth test''); \46\
or
---------------------------------------------------------------------------

    \46\ See 17 CFR 230.501(a)(5).
---------------------------------------------------------------------------

     A natural person who had an individual income in excess of
$200,000 in each of the two most recent years, or joint income with
that person's spouse in excess of $300,000 in each of those years, and
has a reasonable expectation of reaching the same income level in the
current year (the ``income test'').\47\
---------------------------------------------------------------------------

    \47\ See 17 CFR 230.501(a)(6).
---------------------------------------------------------------------------

    As Rule 501(a) sets forth different categories of accredited
investors, we expect the steps that would be reasonable for an issuer
to take to verify whether a purchaser is an accredited investor under
proposed Rule 506(c) would likely vary depending on the type of
accredited investor that the purchaser claims to be. For example, the
steps that may be reasonable to verify that an entity is an accredited
investor by virtue of being a registered broker-dealer--such as by
going to FINRA's BrokerCheck Web site \48\--would necessarily differ
from the steps that would be reasonable to verify whether a natural
person is an accredited investor.
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    \48\ This Web site is available at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/.
---------------------------------------------------------------------------

    We recognize that taking reasonable steps to verify the accredited
investor status of natural persons poses greater practical difficulties
as compared to other categories of accredited investors, and these
practical difficulties likely would be exacerbated by natural persons'
privacy concerns about the disclosure of personal financial
information.\49\ As between the net worth test and the income test for
natural persons, we recognize that commentators have suggested that it
might be more difficult for an issuer to obtain information about a
person's assets and liabilities than it would be to obtain information
about a person's annual income,\50\ although there could be privacy
concerns with respect to either test. The question of what type of
information would be sufficient to constitute reasonable steps to
verify accredited investor status under the particular facts and
circumstances of each purchaser would also depend on other factors, as
described below.
---------------------------------------------------------------------------

    \49\ See, e.g., letters from BrokerBank Securities, Inc.
(``BrokerBank'') (``By the time most people accumulate a net worth
of $1,000,000+ not counting their principal residence, they usually
really want to keep their financial information very close to the
vest.''); Federal Regulation of Securities Committee of the Business
Law Section of the American Bar Association (``ABA'') (stating that
``the Commission should be sensitive to the legitimate privacy
concerns of purchasers'' when considering the steps that issuers
should take to verify accredited investor status); SecondMarket
Holdings, Inc. (``SecondMarket'') (``In addition, legitimate privacy
concerns may result in potential investors being unwilling to
provide highly sensitive personal information outside of a clearly
protective framework, which may cause such investors to avoid
participating in Rule 506 offerings.'').
    \50\ See letters from NASAA (July 3, 2012) (``Verification of
net worth is more challenging because an individual could provide
proof of assets but not liabilities.''); SecondMarket (indicating
that, in its experience, the majority of natural persons who
indicated that they were accredited investors did so based on the
income test of Rule 501(a)(6), which can be verified through tax
returns, Form W-2, Form 1099, or other income documentation, in
addition to a pay stub from the current year, whereas verifying that
a purchaser satisfies the net worth test may be very difficult;
therefore, this commentator recommended that a ``substantial minimum
investment requirement,'' coupled with representations by the
purchaser, should be deemed sufficient evidence to presume that a
purchaser satisfies the net worth test without requiring additional
verification of that purchaser's accredited investor status).
---------------------------------------------------------------------------

    Information about the Purchaser. The amount and type of information
that an issuer has about a purchaser would be a significant factor in
determining what additional steps would be reasonable to verify the
purchaser's accredited investor status. The more information an issuer
has indicating that a prospective purchaser is an accredited investor,
the fewer steps it would have to take, and vice versa.\51\ Examples of
the types of information that issuers could review or rely upon--any of
which might, depending on the circumstances, in and of themselves
constitute reasonable steps to verify a purchaser's accredited investor
status--include, without limitation:
---------------------------------------------------------------------------

    \51\ If an issuer has actual knowledge that the purchaser is an
accredited investor, then the issuer would not have to take any
steps at all.
---------------------------------------------------------------------------

     Publicly available information in filings with a federal,
state or local regulatory body--for example, without limitation:
    [cir] The purchaser is a named executive officer of an Exchange Act
registrant, and the registrant's proxy statement discloses the
purchaser's compensation for the last three completed fiscal years; or
    [cir] The purchaser claims to be an IRC Section 501(c)(3)
organization with $5 million in assets, and the organization's Form 990
series return filed with the Internal Revenue Service discloses the
organization's total assets; \52\
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    \52\ Such an organization is required to make the Form 990
series returns available for public inspection. See Internal Revenue
Service, Public Disclosure and Availability of Exempt Organizations
Returns and Applications: Documents Subject to Public Disclosure,
http://www.irs.gov/charities/article/0,,id=135008,00.html (last
updated Sept. 21, 2011).
---------------------------------------------------------------------------

     Third-party information that provides reasonably reliable
evidence that a person falls within one of the enumerated categories in
the accredited investor definition--for example, without limitation:
    [cir] The purchaser is a natural person and provides copies of
Forms W-2; or
    [cir] The purchaser works in a field where industry or trade
publications disclose average annual compensation for certain levels of
employees or partners, and specific information about the average
compensation earned at the purchaser's workplace by persons at the
level of the purchaser's seniority is publicly available; or
     Verification of a person's status as an accredited
investor by a third party, such as a broker-dealer, attorney or
accountant, provided that the issuer has a reasonable basis to rely on
such third-party verification.\53\
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    \53\ For example, in the future, services may develop that
verify a person's accredited investor status for purposes of
proposed Rule 506(c) and permit issuers to check the accredited
investor status of possible investors, particularly for web-based
Rule 506 offering portals that include offerings for multiple
issuers. This third-party service, as opposed to the issuer itself,
could obtain appropriate documentation or otherwise verify
accredited investor status. Several commentators, in fact, have
recommended that the Commission take action to facilitate the
ability of issuers to rely on third parties to perform the necessary
verification. See letters from NASAA (July 3, 2012) (recommending
that the Commission allow an issuer to obtain the necessary
verification through registered broker-dealers, provided that there
are independent liability provisions for failure to adequately
perform the verification); Massachusetts Securities Division (urging
the Commission to adopt as a safe harbor or best practice the use of
an independent party, such as a broker-dealer, bank, or other
financial institution, that would verify the accredited investor
status of potential purchasers). One commentator, however, expressed
concerns that some of the Web sites that currently offer lists of
accredited investors could be used to facilitate fraud, noting that
some offer lists based on ``ethnicity, gender, and lifestyle--
presumably to make [it] easier for scammers to relate to marks--and
ominously, `seniors.' '' Letter from Moscovitz and Maxfield.

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

    Nature and Terms of the Offering. The nature of the offering--such
as the means through which the issuer publicly solicits purchasers--may
be relevant in determining the reasonableness of the steps taken to
verify accredited investor status. An issuer that solicits new
investors through a Web site accessible to the general public or
through a widely disseminated email or social media solicitation would
likely be obligated to take greater measures to verify accredited
investor status than an issuer that solicits new investors from a
database of pre-screened accredited investors created and maintained by
a reasonably reliable third party, such as a registered broker-dealer.
In the case of the former, we do not believe that an issuer would have
taken reasonable steps to verify accredited investor status if it
required only that a person check a box in a questionnaire or sign a
form, absent other information about the purchaser indicating
accredited investor status. In the case of the latter, we believe an
issuer would be entitled to rely on a third party that has verified a
person's status as an accredited investor, provided that the issuer has
a reasonable basis to rely on such third-party verification.
    The terms of the offering would also affect whether the
verification methods used by the issuer are reasonable. Some
commentators have expressed the view that a purchaser's ability to meet
a high minimum investment amount could be relevant to the issuer's
evaluation of the types of steps that would be reasonable to take in
order to verify that purchaser's status as an accredited investor.\54\
We believe that there is merit to this view. By way of example, the
ability of a purchaser to satisfy a minimum investment amount
requirement that is sufficiently high such that only accredited
investors could reasonably be expected to meet it, with a direct cash
investment that is not financed by the issuer or by any other third
party, could be taken into consideration in verifying accredited
investor status.
---------------------------------------------------------------------------

    \54\ See, e.g., letters from MFA (May 4, 2012) (stating that
many hedge funds managed by its members obtain further assurance
that investors meet the qualification standards in the Investment
Company Act or the Investment Advisers Act of 1940, as applicable,
through minimum investment thresholds that meet or exceed the net
worth test of the accredited investor definition); NASAA (July 3,
2012) (``For example, if an investor makes an investment of $1
million in the issuer's securities, it would be reasonable for the
issuer to assume that the investor has $1 million in net worth, even
though it is not necessarily a certainty. NASAA would not oppose the
creation of this type of specific safe harbor, provided the factors
used to demonstrate the requisite net worth are set sufficiently
high.''); SecondMarket (recommending that a ``substantial minimum
investment requirement,'' coupled with representations by the
purchaser, should be deemed sufficient evidence to presume that a
purchaser satisfies the net worth test without requiring additional
verification of that purchaser's accredited investor status). One
commentator, however, disagreed with this approach, noting that
``[w]hile a large investment amount may indicate that the investor
is wealthy, it also might indicate that a non-wealthy investor is
over-concentrated in the investment.'' Letter from Massachusetts
Securities Division.
---------------------------------------------------------------------------

    These factors are interconnected, and the information gained by
looking at these factors would help an issuer assess the reasonable
likelihood that a potential purchaser is an accredited investor, which
would, in turn, affect the types of steps that would be reasonable to
take to verify a purchaser's accredited investor status. After
consideration of the facts and circumstances of the purchaser and of
the transaction, if it appears likely that a person qualifies as an
accredited investor, the issuer would have to take fewer steps to
verify accredited investor status, and vice versa. For example, if an
issuer knows little about the potential purchaser who seeks to qualify
under the natural person tests for accredited investor status, but the
terms of the offering require a high minimum investment amount, then it
may be reasonable for the issuer to take no steps to verify accredited
investor status other than to confirm that the purchaser's cash
investment is not being financed by the issuer or by a third party,
absent any facts that may indicate that the purchaser is not an
accredited investor.
    Regardless of the particular steps taken, it would be important for
issuers to retain adequate records that document the steps taken to
verify that a purchaser was an accredited investor. Any issuer claiming
an exemption from the registration requirements of Section 5 has the
burden of showing that it is entitled to that exemption.\55\
---------------------------------------------------------------------------

    \55\ SEC v. Ralston Purina, 346 U.S. 119, 126 (1953) (``Keeping
in mind the broadly remedial purposes of federal securities
legislation, imposition of the burden of proof on an issuer who
would plead the exemption seems to us fair and reasonable.'').
---------------------------------------------------------------------------

    We are mindful of the differing views expressed by commentators to
date on how the Commission should implement the verification mandate of
Section 201(a). A number of commentators have cautioned that unduly
prescriptive or burdensome rules for verifying a purchaser's accredited
investor status would have the potential to result in significant
economic harm, could lead to reluctance on the part of issuers to
access the relevant capital markets, or would contravene the purposes
of the JOBS Act.\56\ Some commentators recommended approaches based on
current practices or standards.\57\ One commentator, for example,
stated that whether a purchaser is an accredited investor depends on
the particular facts and circumstances, that the current practices
already take these considerations into account, and that the Commission
should therefore refrain from imposing any additional burdens on
issuers or purchasers.\58\ Another commentator expressed similar views,
recommending that the Commission adopt a principles-based non-exclusive
safe harbor that would be flexible enough to accommodate new offering
techniques and that would build on existing practices (such as broker-

dealers' account-opening and suitability procedures).\59\
---------------------------------------------------------------------------

    \56\ See, e.g., letters from Committee on Securities Regulation
of the New York City Bar Association (``NYC Bar Association'')
(stating that unduly detailed or prescriptive verification rules
would ``have the potential to result in significant economic
harm''); SecondMarket (asserting that ``[p]lacing too heavy a burden
on issuers and investors could have the undesired effect of
inhibiting private capital formation'' and that ``issuers are likely
to be unwilling or unable to assume the liability and cost that
would arise from a significant documentary verification
requirement''); NSBA (Aug. 2, 2012) (stating that ``imposing
additional burdens on Rule 506 issuers who engage in general
solicitation or general advertising would make it more difficult for
small firms to raise capital''); Small Biotechnology Business
Coalition (``SBBC'') (stating that additional burdens on issuers
seeking to utilize Rule 506 would make it more difficult for small
firms to raise capital, and make it less likely that investors will
invest in small firms); ABA (asserting that a verification
requirement that imposes additional burdens on issuers or purchasers
``would contravene the fundamental impetus for the JOBS Act''); MFA
(June 26, 2012) (stating that ``overly restrictive procedures * * *
would have the effect of thwarting the purposes of Title II of the
JOBS Act'').
    \57\ See, e.g., letters from BrokerBank (noting that self-
certification of accredited investor status has been the ``procedure
that has been followed by the industry for decades'' and urging the
Commission to continue to allow self-certification of accredited
status of individuals wishing to participate in Rule 506 offerings
that utilize general solicitation); Phillip Goldstein, Bulldog
Investors (``Goldstein'') (July 18, 2012) (urging that the
Commission ``promptly create a simple form that an issuer can
provide to an investor to certify that he or she is accredited'');
MFA (May 4, 2012) (stating that methods similar to those currently
used by hedge fund managers, which include the identification by the
purchaser of the qualification standards that it meets and minimum
investment thresholds, would achieve the objectives of Section
201(a)); Securities Industry and Financial Markets Association
(``SIFMA'') (urging that the requirement to take reasonable steps to
verify should not impose a higher burden than the ``reasonable
belief'' standard currently applicable to Rule 506 offerings and
that an issuer should be deemed to have taken reasonable steps to
verify if it has reasonable belief that the offeree is an eligible
offeree).
    \58\ Letter from ABA.
    \59\ Letter from NYC Bar Association. For example, in connection
with complying with anti-money laundering requirements, broker-
dealers already obtain certain identifying information about their
customers.
---------------------------------------------------------------------------

    Other commentators stated that the verification mandate of Section
201(a) requires the Commission to enhance the current standard under
which issuers determine that purchasers are accredited investors.\60\
In their view, the verification mandate of Section 201(a) calls for a
standard that is higher than the current reasonable belief standard in
the Rule 501(a) definition of accredited investor and such higher
standard is needed in light of the greater likelihood of fraudulent
activities resulting from the removal of the prohibition against
general solicitation. Therefore, these commentators believe that the
Commission must mandate the specific steps that issuers must take in
order to form a reasonable belief that a purchaser is an accredited
investor.\61\
---------------------------------------------------------------------------

    \60\ See letters from Fund Democracy; Moscovitz and Maxfield;
NASAA (July 3, 2012); Ohio Division; Public Citizen.
    \61\ Id.
---------------------------------------------------------------------------

    We also received a number of comments on specific methods that
should or should not be viewed as reasonable steps for verifying
accredited investor status. For example, some viewed a representation
from the purchaser that it is an accredited investor as sufficient,\62\
while others asserted that such a representation alone would not be
enough.\63\ Several commentators stated that the verification of
accredited investor status should require the production of documentary
evidence.\64\ One commentator recommended that only registered broker-
dealers, and not other intermediaries, be permitted to verify
accredited investor status on behalf of issuers because registered
broker-dealers are subject to existing regulatory schemes, including
Commission oversight.\65\ Other commentators recommended allowing
issuers to rely on third-party firms to verify accredited investor
status.\66\ Some commentators suggested that purchasers be required to
submit a letter from a third party with knowledge of the purchaser's
financial status (such as a certified public accountant or attorney)
indicating that the purchaser is an accredited investor,\67\ while
another commentator suggested that, in combination with an independent
professional's certification as to the purchaser's accredited investor
status, the purchaser be required to certify his or her accredited
investor status under penalty of perjury.\68\ Another commentator
stated that issuers should be allowed to rely on basic information
about a purchaser that they may already have (for example, that the
purchaser is an officer of a Fortune 500 company).\69\ One commentator
suggested that the Commission adopt an approach under which a minimum
investment of 50% of the net worth or total assets requirement under
the applicable category of accredited investor, coupled with a
certification by the investor, would be deemed to constitute
``reasonable steps'' to verify accredited investor status.\70\ Another
commentator suggested that investors be permitted to self-certify their
accredited investor status so long as at least 30 days have passed
between the first date of public solicitation and the date of
investment.\71\
---------------------------------------------------------------------------

    \62\ Letters from Goldstein (June 3, 2012); Mona Shah &
Associates; SIFMA; JC Williams II, Tucson Business Development Group
(``Williams'').
    \63\ Letters from Fund Democracy (stating that a representation
from the purchaser that it is an accredited investor would not
satisfy the statutory mandate that the issuer take steps to verify
accredited investor status); John C. Nimmer (``Nimmer''); Ohio
Division (``A `check-the-box' approach to investor self-verification
of accredited status will not suffice because the Title II issuer
must have more than a belief that a prospective purchaser is
accredited.'').
    \64\ See letters from Massachusetts Securities Division (stating
that verification should require issuers to determine whether
investors are accredited based on documentary evidence, rather than
just representations from potential investors); NASAA (July 3, 2012)
(recommending that the Commission require issuers to obtain
documents such as tax returns, recent pay stubs, brokerage
statements, tax assessment valuations, appraisals, list of
liabilities (including a sworn statement that all material
liabilities have been disclosed), organizational documents, balance
sheets, and quarterly statements); Ohio Division (recommending that
the issuer should ``review financial statements and/or tax returns
evidencing actual satisfaction of accredited investor thresholds''
and, with respect to entities claiming to be accredited investors,
should review ``regulatory letters or certificates approving or
confirming the entity's status as a bank, insurance company,
registered investment company, business development company, or
small business investment company'').
    \65\ Letter from SecondMarket (also suggesting that the
Commission establish specific guidelines that registered broker-
dealers must follow with respect to the verification process in
order to be an approved ``accreditation verification provider'').
    \66\ See letters from National Investment Banking Association
(``NIBA'') (recommending that if a FINRA member firm is not involved
in the offering, then the issuer could satisfy the verification
mandate by relying on a third-party report obtained from an
investigatory firm indicating that a purchaser is an accredited
investor; if a broker-dealer is involved in the offering as a
placement agent, the issuer could satisfy the verification mandate
by obtaining and reviewing a form from the broker-dealer that
describes the process undertaken by the broker-dealer to establish
accredited investor status for a purchaser); NSBA (Aug. 2, 2012)
(stating that ``[r]equiring investors to provide to issuers an
independent professional's certification as to the investor's
accredited investor status and requiring the investor to certify his
or her own status under penalty of perjury would provide a high
degree of protection against non-accredited investors asserting
accredited investor status in Regulation D offerings''); Sigelman
Law Corporation (asserting that third-party verification of
accredited investor status should not be limited to broker-dealers
but that independent third-party professional intermediaries
``registered with the Commission and sworn to follow the protocol
rules'' should be allowed to provide such services).
    \67\ See letters from Frank Nagy; Williams.
    \68\ Letter from NSBA (Aug. 2, 2012) (stating that Section 1746
of Title 28 of the United States Code authorizes this approach). One
commentator stated that self-certification under penalty of perjury,
in and of itself, should be sufficient. Letter from Nimmer.
    \69\ Letter from AngelList.
    \70\ Letter from MFA (June 26, 2012).
    \71\ Letter from SBBC (noting that such a ``cooling off'' period
will help discourage impulse investments and will permit the issuer
and the investor to assess one another).
---------------------------------------------------------------------------

    We believe that the approach we are proposing appropriately
addresses these concerns by obligating issuers to take reasonable steps
to verify that the purchasers are accredited investors, as mandated by
Section 201(a), but not requiring them to follow uniform verification
methods that may be ill-suited or unnecessary to a particular offering
or purchaser, given the facts and circumstances. We also expect that
such an approach would give issuers and market participants the
flexibility to adopt different approaches to verification depending on
the circumstances, to adapt to changing market practices, and to
implement innovative approaches to meeting the verification
requirement, such as the development of third-party databases of
accredited investors. In addition, we anticipate that many practices
currently used by issuers in connection with existing Rule 506
offerings would satisfy the verification requirement proposed for
offerings pursuant to Rule 506(c).
    We considered but have decided not to propose requiring issuers to
use specified methods of verification. We believe that, at present,
proposing to require issuers to use specified methods of verification
would be impractical and potentially ineffective in light of the
numerous ways in which a purchaser can qualify as an accredited
investor, as well as the potentially wide range of verification issues
that may arise, depending on the nature of the purchaser and the facts
and circumstances of a particular Rule 506(c) offering. We are also
concerned that a prescriptive rule that specifies required verification
methods could be overly burdensome in some cases, by requiring issuers
to follow the same steps, regardless of their particular circumstances,
and ineffective in others, by requiring steps that, in the particular

circumstances, would not actually verify accredited investor status.
    For similar reasons, we considered but have decided not to propose
providing a non-exclusive list of specified methods for satisfying the
verification requirement.\72\ We are concerned that, in designating
such a list--for example, by setting forth particular types of
information that issuers may rely upon as conclusive means of verifying
accredited investor status--there may be circumstances where such
information would not actually verify accredited investor status or
where issuers may unreasonably overlook or disregard other information
indicating that a purchaser is not, in fact, an accredited investor.
Indeed, a method that is reasonable under one set of circumstances may
not be reasonable under a different set of circumstances. In addition,
we are concerned that a non-exclusive list of specified verification
methods could be viewed by market participants as the required
verification methods, in which compliance with at least one of the
enumerated methods could be viewed, in the practical application of the
verification requirement, as necessary in all circumstances to
demonstrate that the verification requirement has been satisfied,
thereby eliminating the flexibility that proposed Rule 506(c) is
intended to provide. Such flexibility is likely to mitigate the cost to
issuers of complying with proposed Rule 506(c) because it would allow
them to select the most cost-effective verification method for each
offering, based on the particular facts and circumstances of the
offering and of the investors.
---------------------------------------------------------------------------

    \72\ See letters from MFA (June 26, 2012) (suggesting that the
Commission publish a non-exclusive list of the types of third-party
evidence that an investor could provide to establish accredited
investor status, in conjunction with certifying that he or she is an
accredited investor); NASAA (July 3, 2012) (recommending that the
Commission set forth non-exclusive safe harbors to specify the types
of actions that would be deemed ``reasonable steps to verify'' for
three types of accredited investors: natural persons who purport to
satisfy the income test; natural persons who purport to satisfy the
net worth test; and entities who purport to meet one of the other
tests set forth in Rule 501(a)).
---------------------------------------------------------------------------

    We are soliciting comment on a variety of possible approaches to
verification. In addition, following the completion of this rulemaking,
we intend to monitor and study the development of verification
practices by issuers, securities intermediaries and others as well as
the impact of compliance with this requirement on investor protection
and capital formation.

C. Reasonable Belief That All Purchasers Are Accredited Investors

    A number of commentators have raised concerns that the language of
Section 201(a) could be interpreted as precluding the use of the
``reasonable belief'' standard in Rule 501(a) in determining whether a
purchaser is an accredited investor, such that an issuer's
determination as to whether a purchaser is an accredited investor is
subject to an absolute, rather than a ``reasonable belief,''
standard.\73\ Section 201(a)(2) of the JOBS Act, which calls for
amendments to Rule 144A, specifically refers to a ``reasonable belief''
standard as to whether a purchaser is a QIB, whereas Section 201(a)(1)
does not mention a similar ``reasonable belief'' standard with respect
to the amendments to Rule 506.\74\ From this, some commentators have
requested that our proposed rule amendments ``confirm'' that the
reasonable belief standard for accredited investor status in Rule
501(a) continues to apply.\75\ In their view, issuers may be more
reluctant to use general solicitation in Rule 506 offerings if their
determinations as to whether a purchaser is an accredited investor are
subject to an absolute standard. One commentator added that the
Commission should adopt a safe harbor under which an issuer or broker-
dealer would not be penalized if it took the steps required by the
Commission to verify a purchaser's accredited investor status, but
later learned that the purchaser was not, in fact, an accredited
investor.\76\ Other commentators have interpreted this omission as
indicating Congress's intent that the Commission ``raise the
`reasonable belief' standard for Rule 506 offerings. * * * '' \77\
---------------------------------------------------------------------------

    \73\ See, e.g., letters from ABA; BlackRock, Inc.
(``BlackRock''); NYC Bar Association; William K. Sjostrom, Jr.
    \74\ See, e.g., letters from ABA; Fund Democracy; NYC Bar
Association.
    \75\ See, e.g., letter from ABA.
    \76\ Letter from NIBA. To facilitate third-party verification of
accredited investor status, another commentator requested
clarification that a third party providing verification services for
issuers would not incur any liability as long as it had a reasonable
belief that a purchaser was an accredited investor, based on its
knowledge of the investor. Letter from AngelList.
    \77\ Letter from Fund Democracy. See also letter from
Massachusetts Securities Division.
---------------------------------------------------------------------------

    Both Rule 506 and Rule 144A currently provide for a reasonable
belief standard regarding the eligibility of an investor to participate
in an offering under the respective rules, but they reach that result
in different ways. For Rule 506, the Commission chose to include the
reasonable belief standard within the Rule 501(a) definition of
``accredited investor''; for Rule 144A, the Commission chose to include
the standard as a condition, in paragraph (d)(1), to the use of the
exemption.\78\ The definition of accredited investor remains unchanged
with the enactment of the JOBS Act and includes persons that come
within any of the listed categories of accredited investors, as well as
persons that the issuer reasonably believes come within any such
category. In our view, the difference in the language between Section
201(a)(1) and Section 201(a)(2) reflects only the differing manner in
which the reasonable belief standard was included in the respective
rules at the time they were adopted, and does not represent a
Congressional intent to eliminate the existing reasonable belief
standard in Rule 501(a) or for Rule 506 offerings.
---------------------------------------------------------------------------

    \78\ Regulation S also has a reasonable belief standard with
respect to the requirement that the offer or sale be made to a
person outside the United States. See Rule 902(h)(1)(ii)(A) [17 CFR
230.902(h)(1)(ii)(A)] (``At the time the buy order is originated,
the buyer is outside the United States, or the seller and any person
acting on its behalf reasonably believe that the buyer is outside
the United States.'').
---------------------------------------------------------------------------

    We recognize that a person could provide false information or
documentation to an issuer in order to purchase securities in an
offering made under proposed Rule 506(c). Thus, even if an issuer has
taken reasonable steps to verify that a purchaser is an accredited
investor, it is possible that a person nevertheless could circumvent
those measures.\79\ If a person who does not meet the criteria for any
category of accredited investor purchases securities in a Rule 506(c)
offering, we believe that the issuer would not lose the ability to rely
on the proposed Rule 506(c) exemption for that offering, so long as the
issuer took reasonable steps to verify that the purchaser was an
accredited

investor and had a reasonable belief that such purchaser was an
accredited investor.\80\
---------------------------------------------------------------------------

    \79\ We note that several federal courts have been unsympathetic
to attempts by investors who represented that they were accredited
investors at the time of the sale of securities to subsequently
disavow those representations in order to pursue a cause of action
under the federal securities laws. See, e.g., Wright v. Nat'l
Warranty Co., 953 F.2d 256 (6th Cir. 1991) (rejecting the
plaintiffs' argument that Rule 505 was unavailable because the
plaintiffs ``specifically warranted and represented in the
subscription agreement * * * that they were accredited investors'');
Goodwin Properties, LLC v. Acadia Group, Inc., 2001 U.S. Dist. LEXIS
9975 (D. Me. 2001) (noting that the plaintiffs ``provided the
defendants with reason to believe that they were accredited
investors as defined by 17 C.F.R. Sec.  230.501(a)'' and stating
that therefore ``[t]hey cannot now disavow those representations in
order to support their claims against the defendants''); Faye L.
Roth Revocable Trust v. UBS Painewebber Inc., 323 F. Supp. 2d 1279
(S.D. Fla. 2004) (stating that the plaintiffs ``cannot disavow their
representations that they were accredited investors'' and concluding
that there was no material dispute that the offering complied with
Regulation D).
    \80\ Our views regarding an issuer's ability to maintain the
exemption for a proposed Rule 506(c) offering notwithstanding the
fact that not all purchasers are accredited investors are consistent
with our views regarding the effect of attempts by prospective
investors to circumvent the requirement in Regulation S that offers
and sales be made only to non-U.S. persons. See Statement of the
Commission Regarding Use of Internet Web Sites to Offer Securities,
Solicit Securities Transactions or Advertise Investment Services
Offshore, Release No. 33-7516 (Mar. 23, 1998) [63 FR 14806] (``In
our view, if a U.S. person purchases securities or investment
services notwithstanding adequate procedures reasonably designed to
prevent the purchase, we would not view the Internet offer after the
fact as having been targeted at the United States, absent
indications that would put the issuer on notice that the purchaser
was a U.S. person.'').
---------------------------------------------------------------------------

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

    Form D is the notice of an offering of securities made without
registration under the Securities Act in reliance on an exemption
provided by Regulation D.\81\ Under Rule 503 of Regulation D, an issuer
offering or selling securities in reliance on Rule 504, 505 or 506 must
file a notice of sales on Form D with the Commission for each new
offering of securities no later than 15 calendar days after the first
sale of securities in the offering. Form D is currently organized
around 16 numbered ``items'' or categories of information. The
information required to be provided in a Form D filing includes basic
identifying information, such as the name of the issuer of the
securities and the issuer's year and place of incorporation or
organization; information about related persons (executive officers,
directors, and promoters); identification of the exemption or
exemptions being claimed for the offering; and factual information
about the offering, such as the duration of the offering, the type of
securities offered, and the total offering amount.
---------------------------------------------------------------------------

    \81\ Form D also applies to offerings conducted using the
Section 4(a)(5) exemption. The Commission adopted Form D when it
adopted Regulation D in 1982. Release No. 33-6389 (adopting Form D
as a replacement for Forms 4(6), 146, 240 and 242).
---------------------------------------------------------------------------

    We are proposing a revision to Form D to add a separate field or
check box for issuers to indicate whether they are claiming an
exemption under Rule 506(c). Item 6 of Form D currently requires the
issuer to identify the claimed exemption or exemptions for the offering
from among Rule 504's paragraphs and subparagraphs, Rule 505, Rule 506
and Section 4(5), as applicable. A new check box in Item 6 of Form D
would require issuers to indicate specifically whether they are relying
on the proposed Rule 506(c) exemption. In addition, the current check
box for ``Rule 506'' would be renamed ``Rule 506(b),'' and the current
check box for ``Section 4(5)'' would be renamed ``Section 4(a)(5)'' to
update the reference to former Section 4(5) of the Securities Act.
    We are proposing to require this additional information in order to
assist our efforts to monitor the use of general solicitation in Rule
506(c) offerings and the size of this offering market. This information
would also help us to look into the practices that would develop to
satisfy the verification requirement, which would help us assess the
effectiveness of various verification practices in identifying and
excluding non-accredited investors from participation in proposed Rule
506(c) offerings.

E. Specific Issues for Privately Offered Funds

    Privately offered funds, such as hedge funds, venture capital funds
and private equity funds, typically rely on Section 4(a)(2) and the
Rule 506 safe harbor to offer and sell their interests without
registration under the Securities Act.\82\ In addition, privately
offered funds generally rely on one of two exclusions from the
definition of ``investment company'' under the Investment Company Act,
which enables them to be excluded from the regulatory provisions of
that Act. Privately offered funds are precluded from relying on either
of the two exclusions set forth in Section 3(c)(1) \83\ and Section
3(c)(7) \84\ of the Investment Company Act if they make a public
offering of their securities.\85\ Section 3(c)(1) excludes from the
definition of ``investment company''any issuer whose outstanding
securities (other than short-term paper) are beneficially owned by not
more than 100 beneficial owners,\86\ and which is not making and does
not presently propose to make a public offering of its securities.
Section 3(c)(7) excludes from the definition of ``investment company''
any issuer whose outstanding securities are owned exclusively by
persons who, at the time of acquisition of such securities, are
``qualified purchasers,'' \87\ and which is not making and does not at
that time propose to make a public offering of its securities.
---------------------------------------------------------------------------

    \82\ See, e.g., Implications of the Growth of Hedge Funds, Staff
Report to the Securities and Exchange Commission (Sept. 2003),
available at: http://www.sec.gov/news/studies/hedgefunds0903.pdf.
    \83\ 15 U.S.C. 80a-3(c)(1).
    \84\ 15 U.S.C. 80a-3(c)(7).
    \85\ See also Section 202(a)(29) of the Investment Advisers Act
of 1940 [15 U.S.C. 80b-2(a)(29)] (defining a ``private fund'' as an
issuer that would be an investment company under the Investment
Company Act, but for Sections 3(c)(1) and 3(c)(7) of that Act). Many
issuers of asset-backed securities (``ABS'') also rely on the
exclusions contained in Sections 3(c)(1) and 3(c)(7) of the
Investment Company Act. These ABS issuers frequently participate in
Rule 144A offerings.
    \86\ See also Rule 3c-5 under the Investment Company Act [17 CFR
270.3c-5] (providing that the section's limit of 100 beneficial
owners does not include ``knowledgeable employees,'' as defined in
the rule).
    \87\ See Section 2(a)(51) of the Investment Company Act [15
U.S.C. 80a-2(a)(51)] and the rules thereunder. See also Rule 3c-5
under the Investment Company Act (excluding ``knowledgeable
employees'' from the determination of whether all of the outstanding
securities of the Section 3(c)(7) fund are owned exclusively by
qualified purchasers).
---------------------------------------------------------------------------

    The JOBS Act directs the Commission to eliminate the prohibition
against general solicitation for a new subset of Rule 506 offerings,
and makes no specific reference to privately offered funds. Section
201(b) of the JOBS Act also provides that ``[o]ffers and sales exempt
under [Rule 506, as revised pursuant to Section 201(a)] shall not be
deemed public offerings under the Federal securities laws as a result
of general advertising or general solicitation.'' We historically have
regarded Rule 506 transactions as non-public offerings for purposes of
Sections 3(c)(1) and 3(c)(7).\88\ We believe the effect of Section
201(b) is to permit privately offered funds to make a general
solicitation under amended Rule 506 without losing either of the
exclusions under the Investment Company Act.
---------------------------------------------------------------------------

    \88\ See Release No. 33-6389 (noting that the ``Commission
regards rule 506 transactions as non-public offerings for purposes
of the definition of `investment company' in section 3(c)(1) of the
Investment Company Act''); Privately Offered Investment Companies,
Release No. IC-22597 (Apr. 3, 1997) [62 FR 17512], at n.5 (noting
that the ``Commission believes that section 3(c)(7)'s public
offering limitation should be interpreted in the same manner as the
limitation in section 3(c)(1)'').
---------------------------------------------------------------------------

F. Technical and Conforming Amendments

    We are proposing a number of technical and conforming amendments to
Rules 502 and 506 of Regulation D. We are proposing amendments to
various provisions in Rule 502(b) to clarify that the references to
sales to non-accredited investors under Rule 506, and the corresponding
informational requirements, would be applicable to offerings under Rule
506(b) and not to offerings under proposed Rule 506(c). We are also
proposing an amendment to Rule 502(c) to clarify that Rule 502(c)'s
prohibition against general solicitation would not apply to offerings
under proposed Rule 506(c).

    As Section 201(c) of the JOBS Act renumbered Section 4 of the
Securities Act, we are also proposing amendments to Regulation D and
Rule 144A to update the references to Section 4. We are also proposing
to update references to Section 2 of the Securities Act in these rules
as some of the references have not been updated to reflect the current
numbering scheme in Section 2.

G. Request for Comment

    1. Will the Commission's proposed approach to implementing the
verification mandate of Section 201(a) be effective in limiting
issuers' sales to only accredited investors in Rule 506 offerings that
use general solicitation? Should the Commission adopt a rule that
specifies the methods that issuers must use or could use to verify
accredited investor status? Would such an approach provide greater
certainty for issuers than the approach that we are proposing? Would
the inclusion of a specified list result in an assumption or practice
that the listed methods are ``de facto'' requirements, thereby
inappropriately reducing flexibility and effectiveness of the new rule?
What are the benefits and costs of each approach? In the case of the
latter, if the Commission were to adopt such a rule, should it be in
the form of a safe harbor for compliance with the verification
requirement? What would be examples of the types of methods that
issuers could use to verify accredited investor status, and what would
be the merits of each such method?
    2. Some commentators have recommended that the Commission look to
current market practices in determining the methods that should be
required or permitted for verifying accredited investor status. As
noted above, we anticipate that many practices currently used by
issuers in connection with existing Rule 506 offerings would satisfy
the verification requirement proposed for offerings pursuant to Rule
506(c). How effective have these practices been in assessing the
eligibility of purchasers to participate in an offering made under
Regulation D? Are certain practices more effective than others? If so,
please describe these practices with specificity. What are the costs
and benefits of these practices (to issuers, investors and other market
participants)?
    3. Under what circumstances, if any, should an issuer be deemed to
have taken ``reasonable steps to verify'' if the only action taken by
the issuer is to request a representation from a purchaser that it is
an accredited investor, as some have suggested? \89\ Should the
Commission provide that an issuer is deemed to have taken ``reasonable
steps to verify'' if the issuer ``reasonably believes'' that such a
purchaser is an accredited investor, as some have suggested? \90\ What
are the potential benefits and potential harms of such an approach?
---------------------------------------------------------------------------

    \89\ See, e.g., letter from SIFMA.
    \90\ See id.
---------------------------------------------------------------------------

    4. As we noted above, depending on the facts and circumstances, we
believe there is merit to the view that the ability of a purchaser to
satisfy the high minimum investment amount required to participate in
an offering may be a relevant factor in determining whether that
purchaser is an accredited investor. At the same time, we also believe
that issuers must be mindful of any indications that the purchaser,
despite the ability to provide the funds needed to satisfy a high
minimum investment amount requirement, may not actually be an
accredited investor. We have noted that the financing of a purchaser's
cash investment by the issuer or a third party is a factor that an
issuer should consider. Are there other factors? In light of these
considerations, should the Commission specifically provide that a high
minimum investment amount is sufficient, in and of itself, to satisfy
the requirement that the issuer has taken reasonable steps to verify a
purchaser's accredited investor status, provided that the high minimum
investment amount is not being financed by the issuer or any third
party? If so, should the rule specify an amount, and, if so, what
amount would be appropriate?
    5. Are there certain types of issuers (e.g., shell companies, blank
check companies or issuers of penny stock, as defined by Exchange Act
Rule 3a51-1 \91\) that would present heightened investor protection
concerns as a result of the removal of the prohibition against general
solicitation? If so, what actions should the Commission take to address
these concerns? Should these issuers be subject to a different
verification standard for offerings made under proposed Rule 506(c)?
---------------------------------------------------------------------------

    \91\ 17 CFR 240.3a51-1.
---------------------------------------------------------------------------

    6. Verification methods could include obtaining information from
prospective purchasers, such as Forms W-2, personal bank and brokerage
account statements and similar documentation. We are cognizant that
prospective purchasers may have privacy concerns when undergoing a
verification process by issuers.\92\ Do any other concerns in addition
to privacy concerns arise from a requirement to provide such
information? How, if at all, could the Commission address these
concerns? \93\ What other documentation could be used to verify
accredited investor status while minimizing privacy concerns? Does use
of a reasonably reliable third party to provide this information
respond to those concerns?
---------------------------------------------------------------------------

    \92\ See, e.g., letter from ABA.
    \93\ See, e.g., letter from NASAA (July 3, 2012) (recommending
that the Commission require issuers to maintain the confidentiality
of any information received for the purpose of verifying accredited
investors status).
---------------------------------------------------------------------------

    7. Currently, Rule 508 of Regulation D \94\ provides that the
exemption in Rule 506 will not be lost due to an ``insignificant''
deviation from a term, condition, or requirement of Regulation D.
Should Rule 508 be amended to include any additional provisions
specifically related to proposed Rule 506(c)?
---------------------------------------------------------------------------

    \94\ 17 CFR 230.508.
---------------------------------------------------------------------------

    8. Should the Commission amend Form D to include a check box for
issuers to indicate whether they are claiming an exemption under Rule
506(c), as proposed? If not, why not?
    9. Are there any other rule amendments necessary or appropriate to
implement the statutory mandate of Section 201(a) of the JOBS Act? Are
there any other measures that the Commission should consider taking in
connection with the removal of the prohibition against general
solicitation?

III. Proposed Amendment to Rule 144A

A. Offers to Persons Other Than Qualified Institutional Buyers

    Section 201(a)(2) of the JOBS Act directs the Commission to revise
Rule 144A(d)(1) under the Securities Act to provide that securities
sold pursuant to Rule 144A may be offered to persons other than QIBs,
including by means of general solicitation, provided that securities
are sold only to persons that the seller and any person acting on
behalf of the seller reasonably believe is a QIB. In the amendment to
Rule 144A that we are proposing, we would amend Rule 144A(d)(1) to
eliminate the references to ``offer'' and ``offeree.'' As amended, the
rule would require only that the securities are sold to a QIB or to a
purchaser that the seller and any person acting on behalf of the seller
reasonably believe is a QIB.\95\ Under this proposed amendment, resales
of securities pursuant to Rule 144A could be conducted using general
solicitation, so long as the purchasers are limited in this manner.
---------------------------------------------------------------------------

    \95\ Proposed Rule 144A(d)(1).
---------------------------------------------------------------------------

B. Request for Comment

    10. Rule 144A currently provides a list of non-exclusive methods of

establishing a prospective purchaser's ownership and discretionary
investments of securities for purposes of determining whether the
prospective purchaser is a QIB.\96\ How has this non-exclusive list
worked in practice? Do issuers favor a non-exclusive list? Why or why
not? Has the non-exclusive list resulted in an assumption or practice
that the listed methods are ``de facto'' requirements?
---------------------------------------------------------------------------

    \96\ Rule 144A(d)(1).
---------------------------------------------------------------------------

IV. Integration with Offshore Offerings

    Regulation S provides a safe harbor for offers and sales of
securities outside the United States and includes an issuer and a
resale safe harbor. Two general conditions apply to both safe harbors:
(1) The securities must be sold in an offshore transaction and (2)
there can be no directed selling efforts \97\ in the United States.\98\
The safe harbors are important when U.S. and foreign companies engage
in global offerings of securities in which the U.S. portion of the
offering is conducted in accordance with Rule 144A or Rule 506 and the
offshore portion is conducted in reliance on Regulation S.
---------------------------------------------------------------------------

    \97\ Rule 902(c)(1) [17 CFR 230.902(c)(1)] broadly defines
``directed selling efforts'' as: any activity undertaken for the
purpose of, or that could reasonably be expected to have the effect
of, conditioning the market in the United States for any of the
securities offered in reliance on Regulation S. Such activity
includes placing an advertisement in a publication ``with a general
circulation in the United States'' that refers to the offering of
securities being made in reliance upon Regulation S.
    \98\ See Rules 903 [17 CFR 230.903] and 904 [17 CFR 230.904]
under the Securities Act.
---------------------------------------------------------------------------

    The mandate in Section 201(a) that the Commission amend Rule 506
and Rule 144A to permit the use of general solicitation in transactions
under those rules has raised questions from some commentators regarding
the impact of the use of general solicitation on the availability of
the Regulation S safe harbors for concurrent unregistered offerings
inside and outside the United States.\99\ One commentator recommended
that the Commission reexamine the directed selling efforts concept in
light of the terms and policy objectives of Section 201 of the JOBS
Act, as well as evolving technology and offering techniques.\100\
Another recommended that, although the JOBS Act does not explicitly
address Section 4(a)(2) or the definition of directed selling efforts
in Regulation S, there is no policy reason for distinguishing between
the various exemptions and maintaining a prohibition against general
solicitation in some but not others.\101\ We also received requests
that the Commission confirm that the use of general solicitation in
offerings conducted pursuant to Rule 506 or Rule 144A, as amended,
would not be deemed to constitute directed selling efforts by that
issuer in connection with a contemporaneous offering under Regulation
S.\102\ One commentator asked for clarification that the limitations in
Securities Act Rule 135c \103\ do not apply to offerings pursuant to
Rule 506 or Rule 144A where general solicitation is permitted,\104\
while another commentator suggested that the information on Regulation
S offerings that is permitted to be communicated in the United States
continue to be limited to the information permitted under Rule 135c,
but regardless of whether the issuer meets the eligibility criteria in
Rule 135c.\105\
---------------------------------------------------------------------------

    \99\ See, e.g., letters from ABA; Lee D. Neumann (``Neumann'');
NYC Bar Association; SecuritiesLawUSA, PC (``SecuritiesLawUSA'');
SIFMA.
    \100\ Letter from NYC Bar Association.
    \101\ Letter from SIFMA.
    \102\ Letters from ABA; SecuritiesLawUSA.
    \103\ 17 CFR 230.135c.
    \104\ Letter from SecuritiesLawUSA.
    \105\ Letter from Neumann.
---------------------------------------------------------------------------

    In the adopting release for Regulation S, the Commission stated
that ``[o]ffshore transactions made in compliance with Regulation S
will not be integrated with registered domestic offerings or domestic
offerings that satisfy the requirements for an exemption from
registration under the Securities Act.'' \106\ We believe that this
approach continues to apply. Consistent with the historical treatment
of concurrent Regulation S and Rule 144A/Rule 506 offerings, concurrent
offshore offerings that are conducted in compliance with Regulation S
would not be integrated with domestic unregistered offerings that are
conducted in compliance with Rule 506 or Rule 144A, as proposed to be
amended.
---------------------------------------------------------------------------

    \106\ See Offshore Offers and Sales, Release 33-6863 (Apr. 24,
1990) [55 FR 18306], at Section III.C.1. In addressing the offshore
transaction component of the Regulation S safe harbor, the
Commission stated, ``Offers made in the United States in connection
with contemporaneous registered offerings or offerings exempt from
registration will not preclude reliance on the safe harbors.'' Id.
at fn. 36. Likewise, in addressing directed selling efforts, the
Commission stated, ``Offering activities in contemporaneous
registered offerings or offerings exempt from registration will not
preclude reliance on the safe harbors.'' Id. at fn. 47. See also
Rule 500(g) of Regulation D [17 CFR 230.500(g)] (formerly
Preliminary Note No. 7 to Regulation D) (``Regulation S may be
relied upon for such offers and sales even if coincident offers and
sales are made in accordance with Regulation D inside the United
States.'').
---------------------------------------------------------------------------

V. General Request for Comment

    We request and encourage any interested person to submit comments
regarding the proposed rule and form amendments, specific issues
discussed in this release, and other matters that may have an effect on
the proposed rules. We request comment from the point of view of
issuers, investors and other market participants. With regard to any
comments, we note that such comments are of particular assistance to us
if accompanied by supporting data and analysis of the issues addressed
in those comments. Commentators are urged to be as specific as
possible.

VI. Paperwork Reduction Act

    The proposed amendment to Form D contains a ``collection of
information'' requirement within the meaning of the Paperwork Reduction
Act of 1995 (``PRA'').\107\ The title of this requirement is: ``Form
D'' (OMB Control No. 3235-0076).\108\ We adopted Regulation D and Form
D as part of the establishment of a series of exemptions for offerings
and sales of securities under the Securities Act. We are submitting
this requirement to the Office of Management and Budget (``OMB'') for
review and approval in accordance with the PRA and its implementing
regulations.\109\
---------------------------------------------------------------------------

    \107\ 44 U.S.C. 3501 et seq.
    \108\ Form D was adopted pursuant to Sections 2(a)(15), 3(b),
4(a)(2), 19(a) and 19(c)(3) of the Securities Act (15 U.S.C.
77b(a)(15), 77c(b), 77d(a)(2), 77s(a) and 77s(c)(3)).
    \109\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    The information collection requirements related to the filing of
Form D with the Commission are mandatory to the extent that an issuer
elects to make an offering of securities in reliance on the relevant
exemption. Responses are not confidential. The hours and costs
associated with preparing and filing forms and retaining records
constitute reporting and cost burdens imposed by the collection of
information requirements. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
requirement unless it displays a currently valid OMB control number.
    The Form D filing is required to be made by issuers as a notice of
sales without registration under the Securities Act based on a claim of
exemption under Regulation D or Section 4(a)(5) of the Securities Act.
The Form D is required to include basic information about the issuer,
certain related persons, and the offering. This information is needed
for implementing the exemptions and monitoring their use.

    We are proposing to amend Form D to add a check box to indicate an
offering relying on the Rule 506(c) exemption. We believe this proposed
change would have a negligible effect on the paperwork burden of the
form. Accordingly, we estimate that under the proposed amendment to
Form D, the burden for responding to the collection of information in
Form D would be substantially the same as before the proposed amendment
to Form D because the additional information required in the form is
minimal. However, we believe that the proposed amendment to Rule 506
would increase the number of Form D filings that are made with the
Commission.
    The table below shows the current total annual compliance burden,
in hours and in costs, of the collection of information pursuant to
Form D. For purposes of the PRA, we estimate that, over a three-year
period, the average burden estimate will be 4 hours per Form D. Our
burden estimate represents the average burden for all issuers. This
burden is reflected as a one hour burden of preparation on the company
and a cost of $1,200 per filing. In deriving these estimates, we assume
that 25% of the burden of preparation is carried by the issuer
internally and that 75% of the burden of preparation is carried by
outside professionals retained by the issuer at an average cost of $400
per hour. The portion of the burden carried by outside professionals is
reflected as a cost, while the portion of the burden carried by the
issuer internally is reflected in hours.

                                       Table 1--Estimated Paperwork Burden Under Form D, Pre-Amendment to Rule 506
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                External
                                                       Number of      Burden hours/     Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                         (A) \110\              (B)                (C) = (A)*(B)  (D)              (E)   (F) = (E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D............................................          25,000                4          100,000           25,000           75,000      $30,000,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    According to our Division of Risk, Strategy, and Financial
Innovation, in 2011, 15,930 companies made 18,174 new Form D filings.
The annual number of new Form D filings rose from 13,764 in 2009 to
18,174 in 2011, an average increase of approximately 2,205 Form D
filings per year, or approximately 15%. Assuming the number of Form D
filings continues to increase by 2,205 filings per year for each of the
next three years, the average number of Form D filings in each of the
next three years would be approximately 22,584.
---------------------------------------------------------------------------

    \110\ The information in this column is based on the number of
responses for Form D as reported in the OMB's Inventory of Currently
Approved Information Collections, available at http://www.reginfo.gov/public/do/PRAMain;jsessionid=D37174B5F6F9148DB767D63DF6983A65.
---------------------------------------------------------------------------

    We estimate that the proposed amendment to Rule 506 would result in
an even greater annual increase in the number of Form D filings. As a
reference point, we use the impact of a past rule change on the market
for Regulation D offerings. In 1997, the Commission amended Rule 144(d)
under the Securities Act \111\ to reduce the holding period for
restricted securities from two years to one year,\112\ thereby
increasing the attractiveness of Regulation D offerings to investors
and to issuers. There were 10,341 Form D filings in 1996. This was
followed by a 20% increase in the number of Form D filings in each of
the subsequent three calendar years, reaching 17,830 by 1999. Although
it is not possible to predict with any degree of accuracy the increase
in the number of Rule 506 offerings following the elimination of the
prohibition against general solicitation, we anticipate that there
would be a similarly significant increase. For purposes of the PRA, we
estimate that the proposed amendment to Rule 506 would result in a 20%
increase in Form D filings relying on the Rule 506 exemption, or
approximately 5,000 filings, based on the number of responses as
reported in the OMB's Inventory of Currently Approved Information
Collections.\113\ We also assume that the number of Form D filings
would increase by approximately 5,000 in each year following the
adoption of the rule.
---------------------------------------------------------------------------

    \111\ 17 CFR 230.144(d).
    \112\ See Revision of Holding Period Requirements in Rules 144
and 145, Release No. 33-7390 (Feb. 20, 1997) [62 FR 9242].
    \113\ Based on the 18,174 new Form D filings that were actually
made in 2011, the annual increase would be 3,635 filings.
---------------------------------------------------------------------------

    Based on this increase, we estimate that the annual compliance
burden of the collection of information requirements for issuers making
Form D filings after Rule 506 is amended to eliminate the prohibition
against general solicitation would be an aggregate 30,000 hours of
issuer personnel time and $36,000,000 for the services of outside
professionals per year.
---------------------------------------------------------------------------

    \114\ The information in this column is based on the 25,000
filings reported in the OMB's Inventory of Currently Approved
Information Collections, plus the additional 5,000 filings we
estimate would be filed as result of proposed Rule 506(c).

                                      Table 2--Estimated Paperwork Burden Under Form D, Post-Amendment to Rule 506
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                External
                                                       Number of      Burden hours/     Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                         (A) \114\              (B)                (C) = (A)*(B)  (D)              (E)   (F) = (E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D............................................          30,000                4          120,000           30,000           90,000      $36,000,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We request comment on the accuracy of our estimates. Pursuant to 44
U.S.C. 3506(c)(2)(A), the Commission solicits comments to: (1) Evaluate
whether the collection of information is necessary for the proper
performance of the functions of the agency, including whether the
information will have practical utility; (2) evaluate the accuracy of
the Commission's estimate of burden of the collection of information;
(3) determine whether there are ways to enhance the quality, utility
and clarity of the information to be collected; and (4) evaluate
whether there are ways to minimize the burden of the collection of
information on those who are required to respond, including

through the use of automated collection techniques or other forms of
information technology.
    Persons submitting comments on the collection of information
requirements should direct the comments to the Office of Management and
Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and send a copy to Elizabeth M. Murphy, Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090,
with reference to File No. S7-07-12. Requests for materials submitted
to OMB by the Commission with regard to these collections of
information should be in writing, refer to File No. S7-07-12, and be
submitted to the Securities and Exchange Commission, Office of Investor
Education and Advocacy, 100 F Street NE., Washington, DC 20549-1090.
OMB is required to make a decision concerning the collection of
information between 30 and 60 days after publication of this release.
Consequently, a comment to OMB is assured of having its full effect if
OMB receives it within 30 days of publication.

VII. Economic Analysis

A. Background and Summary of Proposed Rule and Form Amendments

    We are proposing amendments to Rule 506 and Rule 144A to implement
the requirements of Section 201(a) of the JOBS Act. Section 201(a)(1)
directs the Commission to revise Rule 506 to provide that the
prohibition against general solicitation contained in Rule 502(c) shall
not apply to offers and sales of securities made pursuant to Rule 506,
as amended, provided that all purchasers of the securities are
accredited investors. Section 201(a)(1) also provides that ``such rules
shall require the issuer to take reasonable steps to verify that
purchasers of the securities are accredited investors, using such
methods as determined by the Commission.'' Section 201(a)(2) of the
JOBS Act directs the Commission to revise Rule 144A(d)(1) to provide
that securities sold pursuant to Rule 144A may be offered to persons
other than QIBs, including by means of general solicitation, provided
that securities are sold only to persons that the seller and any person
acting on behalf of the seller reasonably believe are QIBs.
    We are mindful of the costs imposed by and the benefits obtained
from our rules. The discussion below attempts to address the economic
effects of the proposed amendments, including the likely costs and
benefits of the amendments as well as the effect of the amendments on
efficiency, competition and capital formation.\115\ Some of the costs
and benefits stem from the statutory mandate of Section 201(a), while
others are affected by the discretion we exercise in implementing this
mandate. These two types of costs and benefits may not be entirely
separable to the extent our discretion is exercised to realize the
benefits that we believe were intended by Section 201(a). We request
comment on all aspects of the economic effects, such as the costs and
benefits, of the amendments that we are proposing. We particularly
appreciate comments that distinguish between the economic effects that
are attributed to the statutory mandate itself and the economic effects
that are the result of policy choices made by the Commission in
implementing the statutory mandate.
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    \115\ Section 2(b) of the Securities Act requires the
Commission, when engaging in rulemaking that requires it to consider
whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action would promote efficiency, competition, and
capital formation. 15 U.S.C. 77b(b).
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B. Baseline

    The baseline for our economic analysis is the market for Rule 506
offerings and the market for Rule 144A offerings, as they exist today.
    The Regulation D market is large compared to other markets, and
offerings claiming the Rule 506 exemption are by far the dominant type
of offering in the Regulation D market. In 2011, 2010 and 2009, issuers
raised an estimated $895 billion, $902 billion and $581 billion,
respectively, in transactions claiming the Rule 506 exemption.\116\
These amounts represent approximately 99% of the capital reported as
raised under Regulation D during this period and approximately 93% of
the number of Regulation D offerings during this period. In 2011 and
2010, the estimated amounts raised in Regulation D offerings exceeded
the amounts raised in all other private offerings (Rule 144A offerings,
Regulation S offerings, and other Section 4(a)(2) offerings), public
debt and public equity offerings, combined. In 2009, the estimated
amounts raised in Regulation D offerings were second only to the
amounts raised in public debt offerings.
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    \116\ The statistics in this section are based on a review of
Form D electronic filings with the Commission--specifically, the
``total amount sold'' as reported in Form D--and data regarding
other types of offerings (e.g., public debt offerings and Rule 144A
offerings) from Securities Data Corporation's New Issues database
(Thomson Financial). See note 25, supra.
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    The Rule 144A market is also an important market for raising
capital. In 2011 and 2010, the estimated amount of capital (including
both equity and debt securities) raised in Rule 144A offerings was $168
billion and $233 billion, compared to $984 billion and $1.07 trillion,
respectively, raised in registered offerings.

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

    The elimination of the prohibition against general solicitation for
a subset of Rule 506 offerings would likely have a number of effects on
issuers and investors. When using general solicitation, issuers would
be able to reach a greater number of potential investors, thus
increasing their access to capital. The proposed amendment to Rule 506
would likely reduce search costs associated with finding accredited
investors who may be interested in a particular private offering, thus
enhancing efficiency. The increase in the number of potential investors
could result in greater competition among investors interested in
investing in an issuer, which may result in a lower cost of capital for
issuers. We expect these benefits to issuers to generally be lower for
Rule 144A offerings because QIBs, who are the investors in Rule 144A
offerings, are generally fewer in number, known by market participants,
and better networked than accredited investors. Thus, the elimination
of the prohibition against general solicitation for Rule 144A offerings
is unlikely to dramatically increase issuers' access to QIBs in such
offerings or to have a meaningful effect on the cost of capital in Rule
144A offerings.
    When using general solicitation, issuers may be able to reach
investors directly, without the need of an intermediary, which could
result in lower transaction costs, and perhaps a lower cost of capital,
for issuers. An analysis of all Form D filings on EDGAR made during the
period from 2009 to 2011 shows that approximately 11% of all new
offerings reported sales commissions of greater than zero because the
issuers used intermediaries.\117\ The average commission paid to these
intermediaries was 5.7% of the offering size, with the median
commission being approximately 5%. For a $5 million offering, which was
the median size of a Regulation D offering with a commission during
this period, an

issuer could potentially save up to $250,000 if the issuer reaches
investors directly rather than through an intermediary, minus the cost
of its own solicitation efforts and the cost associated with verifying
accredited investor status.\118\ This potential benefit would likely be
larger for smaller issuers. Based on the analysis of these Form D
filings as described above, issuers reporting annual revenues up to $25
million pay on average a 6.4% commission, while issuers with annual
revenues over $100 million pay approximately a 3.3% commission and
hedge funds and other privately offered funds pay approximately a 2.7%
commission.
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    \117\ Ivanov/Bauguess Study.
    \118\ We recognize, of course, that the involvement of an
intermediary can provide benefits in addition to locating investors.
For example, an intermediary may be able to help an issuer obtain
better pricing and terms or provide access to investors that can
provide strategic or other advice to the issuer.
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    The elimination of the prohibition against general solicitation
also would reduce the uncertainty for issuers as to whether a Rule 506
offering can be completed in certain situations, and would eliminate
the costs of complying with the prohibition.\119\ Under existing Rule
506, an inadvertent leak of information about an offering to entities
or persons with whom the issuer does not have a pre-existing
substantive relationship has been viewed by some as raising questions
about the issuer's ability to rely on the exemption for the entire
offering.\120\ In addition, some privately offered funds have been
reluctant to respond to press inquiries or to correct inaccurate
reports due to concerns about these discussions being misconstrued as a
general solicitation.\121\ Under proposed Rule 506(c), any such
uncertainty as to the availability of the exemption would likely be
reduced, so long as issuers take reasonable steps to verify that they
are selling only to accredited investors.
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    \119\ Letter from MFA (May 4, 2012).
    \120\ See, e.g., letter from Simon M. Lorne and Joseph
McLaughlin (Aug. 5, 2008) on Revisions of Limited Offering
Exemptions in Regulation D, Release No. 33-8828 (Aug. 3, 2007) [72
FR 45116] (``On occasion, the prohibition forces issuers to delay or
even cancel offerings because of communications--sometimes
inadvertent--that could be viewed in hindsight as a solicitation.
The need to police communications by transaction participants, and
to analyze and remedy inadvertent communications, also adds
significantly to the cost of effecting private placements.'').
    \121\ See, e.g., letters from D.E. Shaw & Co. (Apr. 3, 2006) on
Exposure Draft of Final Report of Advisory Committee on Smaller
Public Companies, Release No. 33-8666 (Feb. 28, 2006); MFA (May 4,
2012).
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    From the standpoint of investors, accredited investors who
previously have found it difficult to identify investment opportunities
in Rule 506 offerings would be able to identify, and potentially invest
in, a larger and more diverse pool of potential investment
opportunities. In addition, the elimination of the prohibition against
general solicitation in some Rule 506 offerings would likely increase
the flow of information about issuers to investors that may not have
been publicly available previously, thereby potentially leading to more
efficient pricing for the offered securities.\122\ Thus, the proposed
rule amendment may increase capital formation and at the same time
improve its allocative efficiency.\123\ With respect to privately
offered funds in particular, eliminating the prohibition would allow
accredited investors to gather information about privately offered
funds at relatively lower costs and to allocate their capital more
efficiently.\124\ Increased information about privately offered fund
strategies, management fees and performance information would likely
lead to greater competition among privately offered funds for investor
capital.
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    \122\ This may not be applicable with respect to every issuer
(e.g., certain privately offered funds that offer their shares
continuously at net asset value).
    \123\ Allocative efficiency is a condition that is reached when
resources are allocated in a way that allows the maximum possible
net benefit from their use. In this context, it means the right
number of dollars from the right types of investors going to the
most suitable investments on efficient terms.
    \124\ See, e.g., letter from MFA (May 4, 2012) and Managed Funds
Association, Petition for Rulemaking on Rule 502 of Regulation D
under the Securities Act of 1933, File No. 4-643 (Jan. 9, 2012).
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    Although proposed Rule 506(c) would directly affect the private
offering market, it could also have an indirect effect on other
markets. The elimination of the prohibition against general
solicitation for a subset of Rule 506 offerings may lower the degree of
information asymmetry between Rule 506 issuers and potential investors.
The lower search costs associated with finding Rule 506(c) offerings
may cause some investors that currently invest in public equity and
debt markets or other private offering markets to reallocate capital to
the offerings made under proposed Rule 506(c). If a significant number
of investors make a greater proportion of their investments in the Rule
506(c) market, such investor behavior may have a negative effect on the
supply of capital and prices in the public equity and debt markets and
in other non-registered offering markets. For example, issuers
currently using the exemptions in Regulation A \125\ and in Rule
504(b)(1)(i)-(iii) to solicit investors could prefer to rely on the
exemption under proposed Rule 506(c) because they would be able to
raise unlimited amounts of capital under proposed Rule 506(c) and state
blue sky securities registration requirements would not apply to these
offerings. While it is difficult to estimate how many of these issuers
would choose to rely on proposed Rule 506(c) in lieu of the other
available exemptions from registration, we believe that it is likely
that Rule 506(c) would have a larger impact on issuers using Rule 504
rather than Regulation A, mainly because very few issuers have been
using the Regulation A exemption in recent years.\126\ In addition, to
the extent that accredited investors have invested in registered
investment companies instead of privately offered funds because of
information asymmetry between privately offered funds and registered
investment companies, it is possible that registered investment
companies' assets may be negatively affected if these investors now
transfer their assets to privately offered funds.
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    \125\ 17 CFR 230.251 through 17 CFR 230.263.
    \126\ From 2009 to 2011, based on our review of Form D filings
and Forms 1-A, 1,735 issuers relied on the Rule 504 exemption, and
10 issuers relied on Regulation A. The number of issuers using
Regulation A to raise capital may increase once the Commission
adopts rules implementing Title IV of the JOBS Act.
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    We believe that retaining the existing Rule 506 as Rule 506(b)
would generate benefits for both issuers and investors. It would allow
issuers that do not wish to generally solicit in their private
offerings to avoid the added expense of complying with the rules
applicable to Rule 506(c) offerings. It would also allow issuers to
continue selling privately to up to 35 non-accredited investors who
meet existing Rule 506's sophistication requirements. The continued
availability of Rule 506(b) may also be beneficial to investors with
whom the issuer has a pre-existing substantive relationship and who do
not wish to bear additional verification costs that may be associated
with participation in Rule 506(c) offerings.
    On the other hand, eliminating the prohibition against general
solicitation could make it easier for promoters of fraudulent schemes
to reach potential investors through public solicitation and other
methods previously not allowed. This could result in an increase in the
level of due diligence conducted by investors in assessing proposed
Rule 506(c) offerings, and in the event of fraud, would likely lead to
costly lawsuits for investors seeking damages. In general, an increase
in fraud in this market would harm investors who are defrauded, would
undermine investor confidence in Rule 506 offerings and could
negatively affect

capital-raising by legitimate issuers--for example, by reducing
investor participation in Rule 506 offerings--thus inhibiting capital
formation and reducing efficiency. Further, one commentator is
concerned that investors may confuse privately offered funds with
registered investment companies.\127\ In such cases, fraud that occurs
with privately offered funds may cause investors to associate the
wrongdoing with registered investment companies, and therefore refrain
from investing in registered investment companies. In addition, some
issuers with publicly-traded securities may use general solicitation
for a purported Rule 506 offering to generate investor interest in the
secondary trading markets, especially in the over-the-counter markets,
which could be used by insiders to resell securities at inflated
prices. This ``pump and dump'' activity would impose costs to investors
in these secondary markets, as well as investors in Rule 506 offerings,
and could erode investor confidence in Rule 506 offerings, thus
potentially raising the cost of capital for issuers in this market.
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    \127\ See letter from ICI re: Rulemaking Petition File No. 4-
463: Request by MFA for Rulemaking to Amend Rule 502(c) of
Regulation D to Eliminate the Prohibition on Offers or Sales of
Securities by General Solicitation or Advertising With Respect to