[Federal Register Volume 76, Number 250 (Thursday, December 29, 2011)]
[Rules and Regulations]
[Pages 81793-81806]
[FR Doc No: 2011-33333]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 239, 270, and 275

[Release Nos. 33-9287; IA-3341; IC-29891; File No. S7-04-11]
RIN 3235-AK90

Net Worth Standard for Accredited Investors

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting amendments to the accredited investor
standards in our rules under the Securities Act of 1933 to implement
the requirements of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. The Act requires the definitions of ``accredited
investor'' in our Securities Act rules to exclude the value of a
person's primary residence for purposes of determining whether the
person qualifies as an ``accredited investor'' on the basis of having a
net worth in excess of $1 million. This change to the net worth
standard was effective upon enactment by operation of the Dodd-Frank
Act, but it also requires us to revise our current Securities Act rules
to conform to the new standard. We also are adopting technical
amendments to Form D and a number of our rules to conform them to

the requirements of the Act and to correct cross-references to former
Section 4(6) of the Securities Act, which was renumbered Section 4(5)
by Section 944 of the Dodd-Frank Act.

DATES: Effective date: February 27, 2012.

FOR FURTHER INFORMATION CONTACT: Anthony G. Barone, Special Counsel;
Karen C. Wiedemann, Attorney Fellow; or Gerald J. Laporte, Chief;
Office of Small Business Policy, Division of Corporation Finance, U.S.
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-3628,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rule
144(a)(3)(viii),\1\ Rule 155(a),\2\ Rule 215,\3\ and Rule 501(a)(5) \4\
and 501(e)(1)(i) of Regulation D \5\ of our general rules under the
Securities Act of 1933 (``Securities Act'') \6\; Rule 500(a)(1) \7\ of
our Securities Act form rules; Form D \8\ under the Securities Act;
Rule 17j-1(a)(8) \9\ under the Investment Company Act of 1940; \10\ and
Rule 204A-1(e)(7) \11\ under the Investment Advisers Act of 1940.\12\
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    \1\ 17 CFR 230.144(a)(3)(viii).
    \2\ 17 CFR 230.155(a).
    \3\ 17 CFR 230.215.
    \4\ 17 CFR 230.501(a)(5).
    \5\ 17 CFR 230.501 through 230.508.
    \6\ 15 U.S.C. 77a et seq.
    \7\ 17 CFR 239.500(a)(1).
    \8\ 17 CFR 239.500.
    \9\ 17 CFR 270.17j-1(a)(8).
    \10\ 15 U.S.C. 80a-1 et seq.
    \11\ 17 CFR 275.204A-1(e)(7).
    \12\ 15 U.S.C. 80b-1 et seq.
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Table of Contents

I. Background and Summary
II. Discussion
    A. Net Worth Standard for Accredited Investors
    (1) Overview of the Amended Rules
    (2) Treatment of Mortgage Debt
    (3) Increases in Mortgage Debt in the 60 Days Before Sale of
Securities
    (4) Transition Rules
    (5) Other Issues Considered
    B. Technical and Conforming Amendments
III. Paperwork Reduction Act
IV. Cost-Benefit Analysis
V. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation
VI. Final Regulatory Flexibility Act Analysis
VII. Statutory Authority and Text of the Amendments

I. Background and Summary

    On January 25, 2011, we proposed amendments to the accredited
investor standards in our rules under the Securities Act of 1933 \13\
to implement the requirements of Section 413(a) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the ``Dodd-Frank Act'').\14\
The accredited investor standards, which are set forth in Rules 215 and
501 under the Securities Act, are used in determining the availability
of certain exemptions from Securities Act registration for private and
other limited offerings. Section 4(5) of the Securities Act exempts
transactions involving offers or sales by an issuer solely to one or
more accredited investors, if the aggregate offering price does not
exceed $5,000,000, there is no advertising or public solicitation in
connection with the transaction, and the issuer files a notice with the
Commission. Pursuant to Regulation D under the Securities Act, an
issuer conducting a limited offering of securities pursuant to the safe
harbor of Rule 505 or 506 does not have to comply with the information
requirements of Rule 502(b) if sales are made only to accredited
investors; and sales to accredited investors do not count towards the
35-purchaser limits under Rules 505 and 506.\15\ Moreover, accredited
investor status obviates the sophistication requirement that Rule 506
imposes on non-accredited investors.\16\ One purpose of the accredited
investor concept is to identify persons who can bear the economic risk
of an investment in unregistered securities, including the ability to
hold unregistered (and therefore less liquid) securities for an
indefinite period and, if necessary, to afford a complete loss of such
investment.\17\
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    \13\ See Net Worth Standard for Accredited Investors, Release
No. 33-9177 (Jan. 25, 2011) [76 FR 5307] (the ``Proposing
Release'').
    \14\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
    \15\ See note 26 below.
    \16\ Under Rule 506, each purchaser who is not an accredited
investor must, either alone or with a purchaser representative, have
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 CFR 230.506(b)(2)(ii).
    \17\ See, Release No. 33-5487 [39 FR 15261] (1974), at 15264
(discussing the previous safe harbor for private placements under
Rule 146), and Release No. 33-6339 [46 FR 41791] (1981), at 41793
(noting that the accredited investor concept was intended to
``eliminat[e] the need for subjective judgments by the issuer about
* * * suitability'', because investors that met the definition of
accredited investor would be ``presumed to meet the purchase
qualifications'').
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    Section 413(a) of the Dodd-Frank Act requires us to adjust the
accredited investor net worth standard that applies to natural persons
individually, or jointly with their spouse, to ``more than $1,000,000 *
* * excluding the value of the primary residence.'' \18\ Previously,
this standard required a minimum net worth of more than $1,000,000, but
permitted the primary residence to be included in calculating net
worth.\19\ Under Section 413(a), the change to remove the value of the
primary residence from the net worth calculation became effective upon
enactment of the Dodd-Frank Act. As discussed in detail below, we are
adopting amendments to our rules to conform them to the new standard.
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    \18\ The text of Section 413(a) states that: ``The Commission
shall adjust any net worth standard for an accredited investor, as
set forth in the rules of the Commission under the Securities Act of
1933, so that the individual net worth of any natural person, or
joint net worth with the spouse of that person, at the time of
purchase, is more than $1,000,000 (as such amount is adjusted
periodically by rule of the Commission), excluding the value of the
primary residence of such natural person, except that during the 4-
year period that begins on the date of enactment of this Act, any
net worth standard shall be $1,000,000, excluding the value of the
primary residence of such natural person.'' Id.
    \19\ See 17 CFR 230.215(e) and 230.501(a)(5) (2010).
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    In the Proposing Release, we requested comment in nine specific
areas. We received 43 comment letters in response.\20\ In addition, we
received 15 letters commenting on Section 413(a) of the Dodd-Frank Act
before the publication of the Proposing Release.\21\ These two sets of
letters came from a variety of groups and constituencies, including
state regulators, professional and trade associations, individual
investors, broker-dealers and investment advisers, fund managers,
consultants, academics and lawyers. Most comment letters expressed
general support for the proposed amendments and the objectives that we
articulated in the Proposing Release but suggested modifications to the
proposals. The final rules reflect changes made in response to these
comments, as well as other clarifying changes. As described in detail
in the release, the most significant revisions from the proposal
include the addition of (1) a grandfathering provision that permits the
application of the former accredited investor net worth test in certain
limited circumstances and (2) a provision addressing the treatment of
incremental debt secured

by the primary residence that is incurred in the 60 days before the
sale of securities to the individual. Finally, the language of the
proposed rules has been revised to make them clearer and easier to
apply.
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    \20\ The comment letters we received on the Proposing Release
are available on our Web site at http://www.sec.gov/comments/s7-04-11/s70411.shtml. In this release, we refer to these letters as the
``comment letters'' to differentiate them from the ``advance comment
letters'' described in footnote 21.
    \21\ To facilitate public input on its Dodd-Frank Act rulemaking
before issuance of rule proposals, the Commission provided a series
of email links, organized by topic, on its Web site at http://www.sec.gov/spotlight/regreformcomments.shtml. In this release, we
refer to letters we received in response to this invitation as
``advance comment letters.'' The advance comment letters we received
in anticipation of this rule proposal are available at http://www.sec.gov/comments/df-title-iv/accredited-investor/accredited-investor.shtml.
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    Section 413(b) specifically authorizes us to undertake a review of
the definition of the term ``accredited investor'' as it applies to
natural persons, and requires us to undertake a review of the
definition in its entirety every four years, beginning four years after
enactment of the Dodd-Frank Act. We are also authorized to engage in
rulemaking to make adjustments to the definition after each such
review. Section 415 of the Dodd-Frank Act requires the Comptroller
General of the United States to conduct a ``Study and Report on
Accredited Investors'' examining ``the appropriate criteria for
determining the financial thresholds or other criteria needed to
qualify for accredited investor status and eligibility to invest in
private funds.'' \22\ The study is due three years after enactment of
the legislation. We expect that the results of this study will be taken
into account in any rulemaking that takes place in this area after the
study is completed. Accordingly, we did not propose, and we are not
adopting, any amendments to the definitions of ``accredited investor''
that are not related to Section 413(a) of the Dodd-Frank Act at this
time.
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    \22\ Public Law 111-203, Sec.  415, 124 Stat. 1376, 1578 (to be
codified at 15 U.S.C. 80b-18c).
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    In addition to the changes to the definition of ``accredited
investor'' to implement the requirements of Section 413(a), we are also
adopting today technical amendments to update cross-references that
have changed as a result of the deletion of former Section 4(5) of the
Securities Act and the renumbering of former Section 4(6) as Section
4(5).\23\
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    \23\ Public Law 111-203, Sec.  944, 124 Stat. 1376, 1897
(renumbering Securities Act Section 4(6), 15 U.S.C. 77d(6) (2006),
as Section 4(5), 15 U.S.C. 77d(5)). Former Section 4(5) exempted
transactions involving mortgages with a minimum aggregate sales
price per purchaser of $250,000, as well as the resales of those
securities. 15 U.S.C. 77d(6) (2006).
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II. Discussion

A. Net Worth Standard for Accredited Investors

(1) Overview of the Amended Rules
    As discussed above, Section 413(a) of the Dodd-Frank Act requires
us to adjust the accredited investor net worth standard \24\ that
applies under our Securities Act rules to natural persons individually,
or jointly with their spouse, to ``more than $1,000,000 * * * excluding
the value of the primary residence.'' Previously, the standard required
a minimum net worth of more than $1,000,000, but permitted the primary
residence to be included in calculating net worth.
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    \24\ Neither the Securities Act nor our rules promulgated under
the Securities Act define the term ``net worth.'' The commonly
understood, or basic, meaning of the term is the difference between
the value of a person's assets and the value of the person's
liabilities. See, e.g., Barron's Financial Guides, Dictionary of
Finance and Investment Terms, at 457 (7th ed. 2006).
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    The relevant rules are Securities Act Rules 501 and 215.\25\ Rule
501 defines the term ``accredited investor'' for purposes of non-public
and limited offerings under Rules 504(b)(1)(iii), 505 and 506 of
Regulation D.\26\ The definition of ``accredited investor'' includes
persons who come within any of eight listed categories, or whom the
issuer reasonably believes come within one of those categories, at the
time of the sale of securities to that person.\27\ The $1 million
individual net worth standard is one such category.\28\
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    \25\ 17 CFR 230.501(a)(5) and 230.215(e).
    \26\ Under Regulation D, issuers are subject to fewer regulatory
requirements when the purchasers of their securities are accredited
investors. Both Rule 505 and Rule 506 require that there be no more
than, or the issuer reasonably believe there are no more than, 35
purchasers of securities in the offering. 17 CFR 230.505(b)(2)(ii)
and 230.506(b)(2)(i). However, Rule 501(e) provides that accredited
investors are not counted as purchasers for that purpose, with the
result that an unlimited number of accredited investors may
participate in an offering under Rule 505 or 506, provided that the
other requirements of the rules are satisfied. Further, specific
information requirements apply to issuers in Rule 505 and Rule 506
transactions if they sell to non-accredited investors, but not if
they sell only to accredited investors. 17 CFR 230.502(b)(1). Thus,
issuers in offerings under Rule 505 or 506 generally seek to
establish that potential purchasers in the offering are accredited
investors. In addition, Rule 504(b)(1)(iii) exempts offerings from
the manner of offering and resale restrictions that generally apply
under Rule 504, if they are made in accordance with certain state
law exemptions from registration that limit sales to accredited
investors. 17 CFR 230.504(b)(1)(iii).
    \27\ 17 CFR 230.501(a).
    \28\ Other categories include certain regulated financial
institutions; certain entities with total assets in excess of $5
million; directors, executive officers and general partners of the
issuer or its general partner; and natural persons who had an income
of at least $200,000 in each of the two most recent years (or
$300,000 together with their spouse) and have a reasonable
expectation of reaching the same income level in the current year.
Id.
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    Rule 215 defines the term ``accredited investor'' under Section
2(a)(15) of the Securities Act.\29\ Section 2(a)(15) and Rule 215 set
the standards for accredited investor status under Section 4(5) of the
Securities Act, formerly Section 4(6), which permits offerings solely
to accredited investors of up to $5 million, subject to certain
conditions.\30\ While Regulation D is frequently relied upon,\31\
exclusive reliance on Section 4(5) is rare.\32\
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    \29\ 15 U.S.C. 77b(a)(15).
    \30\ 15 U.S.C. 77d(5). As discussed above, former Section 4(6)
of the Securities Act was renumbered Section 4(5) by Section 944 of
the Dodd-Frank Act.
    \31\ In fiscal year 2010, we received 16,856 initial filings on
Form D notifying us of claims of exemption under Rules
504(b)(1)(iii), 505 and 506, 17 CFR 230.504(b)(1)(iii), 230.505 and
230.506, the three exemptive provisions in Regulation D where
accredited investor status affects the availability of an exemption.
This represented 96% of the 17,593 initial Form D filings we
received for that year.
    \32\ In fiscal year 2010, we received 900 initial filings on
Form D notifying us of a claim of exemption under Section 4(5),
formerly Section 4(6), representing 5% of the 17,593 initial Form D
filings we received for that year. Only 66 of those filings, or less
than 0.4% of total initial Form D filings, claimed the Section 4(5)
exemption exclusively. The other 834 of these Form D filings
indicated that both Section 4(5) and a Regulation D exemption were
being relied upon.
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    Historically, the accredited investor standards under Rule 215 and
Rule 501 have been identical. We are adopting identical language in the
amendments to Rule 501 and Rule 215, so the two rules will implement
Section 413(a) of the Dodd-Frank Act in the same way. As amended, the
new individual net worth standard in the accredited investor definition
is:

    Any natural person whose individual net worth, or joint net
worth with that person's spouse, exceeds $1,000,000.
    (1) Except as provided in paragraph (2) of this section, for
purposes of calculating net worth under this paragraph:
    (i) The person's primary residence shall not be included as an
asset;
    (ii) Indebtedness that is secured by the person's primary
residence, up to the estimated fair market value of the primary
residence at the time of the sale of securities, shall not be
included as a liability (except that if the amount of such
indebtedness outstanding at the time of the sale of securities
exceeds the amount outstanding 60 days before such time, other than
as a result of the acquisition of the primary residence, the amount
of such excess shall be included as a liability); and
    (iii) Indebtedness that is secured by the person's primary
residence in excess of the estimated fair market value of the
primary residence at the time of the sale of securities shall be
included as a liability.
    (2) Paragraph (1) of this section will not apply to any
calculation of a person's net worth made in connection with a
purchase of securities in accordance with a right to purchase such
securities, provided that:
    (i) Such right was held by the person on July 20, 2010;
    (ii) The person qualified as an accredited investor on the basis
of net worth at the time the person acquired such right; and
    (iii) The person held securities of the same issuer, other than
such right, on July 20, 2010.

    The final accredited investor definition is consistent with the
approach taken in the Proposing Release with respect to the basic
treatment of the primary residence and indebtedness

secured by the primary residence.\33\ We have revised the language of
this provision to make it easier for issuers, investors and other
market participants to apply the new net worth standard.\34\ We have
also included a provision addressing the treatment of incremental debt
secured by the primary residence that is incurred in the 60 days before
the sale of securities to the individual, and have revised the proposal
so that that the prior accredited investor net worth test will apply in
connection with the exercise of rights to acquire securities, so long
as the rights were in existence on July 20, 2010, the day before
enactment of the Dodd-Frank Act, the investor qualified as an
accredited investor on the basis of net worth at the time the rights
were acquired, and the investor held securities of the same issuer,
other than the rights, on July 20, 2010.
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    \33\ It is also consistent with the staff's initial analysis of
Section 413(a). See Securities Act Rules Compliance & Disclosure
Interpretation, Question No. 255.47 (July 23, 2010) (available at
http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#255.47).
    \34\ We have also deleted a reference to measuring net worth at
the time of the investor's purchase, as all standards under the
accredited investor definition are measured ``at the time of the
sale of securities to that person.'' 17 CFR 230.501(a).
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(2) Treatment of Mortgage Debt
    Under the final rules, as in the Proposing Release, individuals'
net worth will be calculated excluding any positive equity they may
have in their primary residence.\35\ As we discussed in the Proposing
Release, we believe this approach is the most appropriate way to
conform our rules to Section 413(a). It reduces the net worth measure
by the net amount that the primary residence contributed to net worth
before enactment of Section 413(a), which we believe is what is
commonly meant by ``the value of a person's primary residence.'' Most
comment letters supported defining ``excluding the value of the primary
residence'' in this way.\36\
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    \35\ Thus, for example, if an investor with a net worth of $2
million (calculated in the conventional manner before the enactment
of Section 413(a)--that is, by subtracting from the investor's total
assets, including primary residence, the investor's total
liabilities, including indebtedness secured by the residence) has a
primary residence with an estimated fair market value of $1.2
million and a mortgage loan of $800,000, the investor's net worth
for purposes of the new accredited investor standard is $1.6
million. Before enactment of Section 413(a), the primary residence
would have contributed a net amount of $400,000 to the investor's
net worth for purposes of the accredited investor net worth
standard--the value of the primary residence ($1.2 million) less the
mortgage loan ($800,000). Under the amendments, exclusion of the
value of the primary residence would reduce the investor's net worth
by the same $400,000 amount.
    \36\ See, e.g., comment letters from Business Law Section of the
American Bar Association (``ABA''), Cornell Securities Law Clinic
(``Cornell''), Investment Adviser Association (``IAA''), Managed
Funds Association, North American Securities Administrators
Association (``NASAA''), Public Investors Arbitration Bar
Association and Sullivan & Cromwell LLP (``S&C'').
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    Three letters supported excluding the fair market value of the
primary residence from net worth without excluding any associated
debt.\37\ This group of letters argued that our proposal to ``net out''
any associated debt from the fair market value of the primary residence
misinterprets the plain language of Section 413(a), and incentivizes
investors to increase the amount of debt secured by their primary
residence to acquire other assets for the purpose of inflating their
net worth as calculated under our rules. As we stated in the Proposing
Release, we believe that reducing an investor's net worth by the value
of the primary residence without also excluding associated indebtedness
would not accord with the manner in which net worth reflected home
equity before enactment of Section 413(a); excluding the residence
alone would reduce net worth by more than the amount the residence
contributes. We believe the approach in the final rule is the most
appropriate approach and is consistent with Section 413(a).\38\
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    \37\ See comment letters from Secretary of the Commonwealth of
Massachusetts (``Massachusetts Securities Division''), Professors
Manning G. Warren and Marc I. Steinberg; and David A. Marion.
    \38\ New paragraph (ii) of the final rule, discussed in Part
I.A.2 below, prohibits excluding incremental indebtedness secured by
the primary residence that is incurred in the 60 days before the
sale of securities. We believe this provision will mitigate
incentives to increase debt secured against the residence solely for
purposes of qualifying as an accredited investor.
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    Five comment letters advocated excluding from the net worth
calculation both the fair market value of the primary residence and all
indebtedness secured by the primary residence, regardless of whether
such indebtedness exceeds the fair market value of the primary
residence.\39\ Several of these commentators disagreed with our
proposal on the basis that the proposal would require an estimate of
the fair market value of the primary residence which, in their view,
would make the net worth calculation problematic and uncertain and
would force investors to incur additional expense to obtain a third
party appraisal of their residence. These commentators argued that
excluding both the value of the primary residence and all indebtedness
secured by the primary residence would simplify and provide greater
certainty regarding the net worth calculation.
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    \39\ See comment letters from Welton E. Blount, Investment
Program Association (``IPA''), Real Estate Investment Securities
Association (``REISA''), Steven J. Thayer and Georg Merkl. See also
advance comment letters from April Hamlin and Michael Scillia.
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    We disagree with this view, as did many commentators.\40\ In the
first instance, estimating the value of the primary residence did not
appear to cause problems before the Dodd-Frank Act, when that value was
included in net worth for purposes of the definition of accredited
investor. The rules did not then, and the rules we adopt today do not
now, require a third party opinion on valuation, either for the primary
residence or for any other assets or liabilities. All that is required
is an estimate of fair market value.\41\ Further, as we explained in
the Proposing Release, if the amount of mortgage debt exceeds the value
of the primary residence (i.e., an underwater mortgage), excluding the
entire debt from net worth for purposes of the accredited investor
definition would result in a higher net worth than under a basic net
worth calculation that takes into account all assets and all
liabilities. Net worth would be effectively increased by the amount by
which the mortgage exceeds the value of the primary residence, because
that excess amount is treated as a liability in a basic net worth
calculation but would be excluded under the standard proposed by these
commentators. We do not believe it would be appropriate for us to
implement Section 413(a) in a way that results in increased net worth
compared to a basic calculation for individuals with underwater
mortgages.\42\
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    \40\ See, e.g., letters from Massachusetts Securities Division,
Cornell, International Association of Small Broker Dealers and
Advisors, NASAA and the Public Investors Arbitration Association.
    \41\ See, e.g., Release No. 33-6455 (Mar. 3, 1983) at Question
21 (confirming that, under the net worth standard in effect at the
time, ``the estimated fair market value'' of a primary residence
could be considered as an asset) and Question 45 (individual
statement of net worth reflects estimated value of assets and
liabilities).
    \42\ Where the amount of debt secured by the primary residence
exceeds the estimated value of the residence, the new rules will not
trigger any adjustment to net worth as calculated before the
enactment of Section 413(a). In a pre-Section 413(a) basic net worth
calculation involving an underwater mortgage, the fair market value
of the residence and the amount of the mortgage up to that fair
market value are included in the calculation but net to zero, and
the excess of the amount of the mortgage over the fair market value
of the primary residence is included as a liability. Under the final
rules, the fair market value of the residence and the amount of the
mortgage up to that fair market value are excluded from the
calculation, and the excess of the amount of the mortgage over the
fair market value of the primary residence is included as a
liability. In both cases, the overall impact on net worth is a
reduction equal to the underwater amount (i.e., the excess of the
amount of the mortgage over the fair market value of the residence).
Take, for example, an investor whose primary residence has an
estimated fair market value of $1.2 million, with a mortgage of $1.4
million. The excess of mortgage loan over the fair market value of
the primary residence (in this case, $200,000) would be taken into
account as a liability and serve to reduce net worth both under a
conventional net worth calculation and under the accredited investor
definition adopted today. If, on the other hand, all debt secured by
the primary residence were excluded, including debt in excess of the
estimated fair market value of the residence, the investor's net
worth would be $200,000 higher than under a conventional calculation
because the mortgage debt in excess of the value of the primary
residence would not be treated as a liability.

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    Three comment letters argued that mortgage debt in excess of the
value of the primary residence should be excluded from the net worth
calculation if the borrower would not be subject to personal liability
by reason of contractual terms or state anti-deficiency statutes or
similar laws.\43\ In these situations, indebtedness in excess of the
value of the residence may not be legally collectible, either because
the loan by its terms provides recourse only to the underlying asset,
the residence, or because applicable law bars a lender from obtaining a
judgment for the shortfall when the fair market value of the residence
(or the price obtained in a foreclosure sale) is less than the loan
amount.\44\
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    \43\ See comment letters from ABA and IPA and advance comment
letter from Keith P. Bishop.
    \44\ See Ghent, Andra C. and Kudlyak, Marianna, ``Recourse and
Residential Mortgage Default: Theory and Evidence from U.S.
States,'' (February 25, 2011), Federal Reserve Bank of Richmond
Working Paper No. 09-10R. Available at SSRN: http://ssrn.com/abstract=1432437. In their Appendix A, the authors provide a summary
of mortgage foreclosure procedures and anti-deficiency statutes in
the 50 states and the District of Columbia. They classify 11 states
(Alaska, Arizona, California, Iowa, Minnesota, Montana, North
Carolina (for purchase mortgages only), North Dakota, Oregon,
Washington and Wisconsin) as non-recourse states.
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    Under the final rules, any excess of indebtedness secured by the
primary residence over the estimated fair market value of the residence
is considered a liability for purposes of determining accredited
investor status on the basis of net worth, whether or not the lender
can seek repayment from other assets in default. In our view, the full
amount of the debt incurred by the investor is the most appropriate
value to use in determining accredited investor status. That is the
basis on which interest accrues under the mortgage and the amount that
third parties would look to in assessing creditworthiness. We do not
believe that the treatment of a mortgage should vary solely because of
state laws that limit the rights of the lender in an action to enforce
the borrower's promise to repay. Such laws vary significantly in scope
and procedural requirements, and their operation is often contingent on
the specific foreclosure process chosen by the lender and other factors
beyond the borrower's control.\45\ We believe it would add substantial
complexity to the rule if market participants were called upon to
determine how an anti-deficiency statute would operate in the
individual circumstances of each prospective investor. Moreover, the
data available to us suggest that there would be no material difference
in the number of households that qualify as accredited investors if we
were to allow special treatment of non-recourse mortgages.\46\
Accordingly, the final rules specify that debt secured against the
primary residence in excess of the estimated fair market value of the
primary residence must be treated as a liability in the net worth
calculation.
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    \45\ See id.
    \46\ Using data from the 2007 Federal Reserve Board Survey of
Consumer Finances, staff from our Division of Risk, Strategy and
Financial Innovation estimate that in 2007 the same number of U.S.
households (approximately 7.6 million) would have qualified for
accredited investor status on the basis of net worth under our
amendments and under an alternative net worth calculation that
excluded both the fair market value of the primary residence and all
indebtedness secured by the residence, even indebtedness in excess
of the fair market value of the residence. Based on discussions with
staff economists at the Federal Reserve Board, estimates derived
from their unpublished 2009 supplemental update of the 2007 survey
are qualitatively similar. For both 2007 and 2009, the data suggest
that the number of households nationwide that qualify as accredited
investors is not affected by whether the net worth calculation
includes or excludes the underwater portion of debt secured by the
primary residence.
---------------------------------------------------------------------------

(3) Increases in Mortgage Debt in the 60 Days Before Sale of Securities
    We also solicited comment on whether the amendments should contain
a timing provision to prevent investors from artificially inflating
their net worth by incurring incremental indebtedness secured by their
primary residence, thereby effectively converting their home equity--
which is excluded from the net worth calculation under the rules
adopted today--into cash or other assets that would be included in the
net worth calculation. As an example, we indicated that the amendments
could provide that the net worth calculation must be made as of a date
30, 60, or 90 days before the sale of the securities, as well as at the
time of sale.
    State securities regulators strongly supported this approach,
noting that it would make the practice of advising investors to use
equity in their primary residence to purchase securities less
attractive, thereby helping to ensure that unregistered securities are
not sold to investors with limited assets other than their homes, who
may not be able to fend for themselves without the protections afforded
by registration.\47\ On the other hand, many commentators opposed
having special rules for debt secured by a primary residence incurred
close in time to the sale of securities, asserting that imposing such a
timing provision would unduly complicate the calculation of net
worth.\48\ Some were particularly concerned that the date when
accredited investor status has to be determined may not be known
sufficiently in advance to permit a full net worth calculation 30, 60,
or 90 days ahead of time, or that such a requirement would force delays
in capital raising efforts.\49\ We agree that we should avoid adding
undue complexity in the process for determination of accredited
investor status; however, we believe that the rule should address
potential incentives for individuals to incur debt secured by a primary
residence for the purpose of inflating their net worth to qualify as
accredited investors. If the rule does not address that issue, the
population Congress intended to protect--individuals whose net worth is
below $1 million unless their home equity is taken into account--may be
incentivized (or urged by unscrupulous salespeople) to take on debt
secured by their homes for the purpose of qualifying as accredited
investors and participating in investments without the protection to
which they are entitled.
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    \47\ Comment letter from NASAA. The other supporter of a timing
provision was the Cornell Securities Law Clinic. See comment letter
from Cornell (``The Clinic believes that a timing rule should not
require the `60 day' calculation to be performed on the date 60 days
before the purchase date; rather, the calculation should occur on
the intended purchase date, and estimate the investor's net worth as
it was on the date 60 days before the intended purchase date.'').
    \48\ See letters from ABA, Robert Edgerton, Georg Merkl, REISA
and S&C.
    \49\ See comment letters from ABA and Robert Edgerton.
---------------------------------------------------------------------------

    We believe we have addressed this concern in a manner that manages
the complexities noted by commentators that could arise from a
requirement to calculate net worth far in advance of a possible sale of
securities or to calculate net worth twice. The final rule provides a
specific provision addressing the treatment of incremental debt secured
by the primary residence that is incurred in the 60 days before the
sale of securities.\50\ As described above, debt secured by the primary
residence generally will not be included as a

liability in the net worth calculation under the rule, except to the
extent it exceeds the estimated value of the primary residence. Under
the final rule, any increase in the amount of debt secured by a primary
residence in the 60 days before the time of sale of securities to an
individual generally will be included as a liability, even if the
estimated value of the primary residence exceeds the aggregate amount
of debt secured by such primary residence.\51\ Net worth will be
calculated only once, at the time of sale of securities (the same time
as under current rules). The individual's primary residence will be
excluded from assets and any indebtedness secured by the primary
residence, up to the estimated value of the primary residence at of
that time, will be excluded from liabilities, except if there is
incremental debt secured by the primary residence incurred in the 60
days before the sale of securities. If any such incremental debt is
incurred, net worth will be reduced by the amount of the incremental
debt. In other words, the only additional calculation required by the
60-day look-back provision is to identify any increase in mortgage debt
over the 60-day period preceding the purchase of securities.
---------------------------------------------------------------------------

    \50\ See, e.g., New Rule 501(a)(i)(B).
    \51\ The fair market value of the primary residence is
determined as of the time of sale of securities, even if the
investor has changed his or her primary residence during the 60-day
period. The rule provides an exception to the 60-day look-back
provision for increases in debt secured by a primary residence where
the debt results from the acquisition of the primary residence.
Without this exception, an individual who acquires a new primary
residence in the 60-day period before a sale of securities may have
to include the full amount of the mortgage incurred in connection
with the purchase of the primary residence as a liability, while
excluding the full value of the primary residence, in a net worth
calculation. The 60-day look-back provision is intended to address
incremental debt secured against a primary residence that is
incurred for the purpose of inflating net worth. It is not intended
to address debt secured by a primary residence that is incurred in
connection with the acquisition of a primary residence within the
60-day period.
---------------------------------------------------------------------------

    This approach will make it more difficult for individuals to
manipulate their net worth as calculated under our rules by borrowing
against their primary residence shortly before seeking to qualify as an
accredited investor, to take advantage of any positive equity in the
primary residence. It should, therefore, significantly reduce the
incentive for individuals to try to ``game'' the accredited investor
net worth standard or for salespeople to attempt to induce individuals
to take on incremental debt secured against their homes to facilitate a
near-term investment in an offering. The new provision may impose
additional costs and burdens on investors who increase the indebtedness
secured by their primary residence shortly before seeking to invest in
a Rule 506 offering if the proceeds of such refinancing are invested in
the primary residence or are otherwise disposed of without acquiring an
asset that is included in the net worth calculation, because in such
circumstances the amount of such additional borrowing will be treated
as a liability, but the proceeds will not be treated as an asset. If
such an increase in liabilities causes an individual not to meet the
$1,000,000 net worth test, and he or she does not otherwise qualify as
an accredited investor, the individual may be excluded from investment
opportunities if issuers are unable or unwilling to permit the
participation of non-accredited investors. However, our approach should
not present the same practical difficulties as requiring a full net
worth calculation as of a date 30, 60, or 90 days before securities are
sold to an investor, in which all assets and liabilities of the
investor would have to be taken into account based on their values as
of the specified date.
    We have included a 60-day look-back period for this purpose because
we believe a 60-day period is long enough to decrease the likelihood
that parties will attempt to circumvent the standard by taking on new
debt and waiting for the look-back period to expire, while minimizing
the potential burden on investors who increase their mortgage debt for
other reasons. Both letters that commented favorably on the possible
requirement to calculate net worth as of a specified date before the
sale of securities supported a 60-day look-back period.\52\ Another
alternative to address this practice would have been to provide that
any debt secured by a primary residence that was incurred after the
original date of purchase of the primary residence would have to be
counted as a liability, whether or not the fair market value of the
primary residence exceeded the value of the total amount of debt
secured by the primary residence. We believe that such a standard would
be overly restrictive and not provide for ordinary course changes to
debt secured by a primary residence, such as refinancing and drawings
on home equity lines.
---------------------------------------------------------------------------

    \52\ See comment letters from Cornell (suggesting a 60-day
period) and NASAA (suggesting a 60- or 90-day period).
---------------------------------------------------------------------------

(4) Transition Rules
    We did not propose any rules for transition to the new accredited
investor net worth standards. In the Proposing Release, we questioned
whether any transition relief would be necessary or appropriate because
the new standards became effective upon enactment of the Dodd-Frank Act
on July 21, 2010. We did, however, solicit comment on whether we should
adopt provisions to permit investors who ceased to qualify as
accredited investors as a result of the changes effected by Section
413(a) to be treated as accredited for purposes of certain subsequent
or ``follow-on'' investments.
    Commentators generally supported a provision that would allow
investors in that situation to participate in certain types of follow-
on investments.\53\ Some letters argued that such a provision would be
appropriate to permit investors to protect their proportionate interest
in an issuer or to exercise rights associated with an existing
investment on the basis originally bargained for.\54\ Others argued
more broadly that investors should be permitted to maintain existing
investment plans to avoid adverse tax or other consequences.\55\
Commentators expressed a concern that issuers may be unwilling or
unable to provide the information required to be provided to non-
accredited investors under Rule 501(b)(1) of Regulation D,\56\ and may
simply exclude individuals from participating in securities offerings
who no longer qualify as accredited investors.\57\
---------------------------------------------------------------------------

    \53\ See comment letters from ABA, Robert Edgerton, IAA, IPA,
Georg Merkl, REISA, S&C, Sutherland Asbill & Brennan
(``Sutherland'') and Steven J. Thayer. Only one comment letter
objected to a transition provision, arguing that Congressional
intent is evident from the fact that Section 413(a) was effective
immediately upon enactment of the Dodd-Frank Act and that investors
who no longer qualify as accredited investors under Section 413(a)
may participate in follow-on offerings as non-accredited investors.
See letter from Cornell.
    \54\ Comment letters identified rights such as pre-emptive
rights, rights of first refusal and buy-sell agreements, as well as
provisions that impose dilution or other adverse consequences on
investors who do not invest in future rounds of financing.
    \55\ See, e.g., comment letters from REISA (roll over of real
estate investments) and Sutherland (roll over of private placement
insurance contracts).
    \56\ 17 CFR 230.501(b)(1).
    \57\ Several letters also argued that issuers would not attempt
to rely on the broader Section 4(2) exemption because it would
create unnecessary legal risk related to the offering process. See,
e.g., comment letters from Sutherland and Steven J. Thayer.
---------------------------------------------------------------------------

    We are not persuaded that grandfathering or other transition
provisions would be appropriate in all circumstances urged by
commentators. In cases where securities would be purchased based on an
investment decision made before enactment of the Dodd-Frank Act (for
example, a capital call that is not subject to conditions under the
investor's control, under an

agreement entered into before enactment of the Dodd-Frank Act),
accredited investor status would have been determined at the time of
the investment decision. A subsequent change in the investor's
accredited status would not be relevant, so special accommodation would
not be needed. With respect to new investment decisions, some
situations for which commentators requested special treatment could
raise significant investor protection concerns. For example, certain
rights to acquire securities in existence before the enactment of the
Dodd-Frank Act could involve different issuers than the original
investment. In such circumstances, an investor may not have been
sufficiently familiar with, or had an opportunity to conduct diligence
with respect to, such different issuers at the time the investor met
the accredited investor net worth standard and received such rights.
    We note also that the change in the accredited investor net worth
standard took effect in July 2010, upon enactment of Section 413(a) of
the Dodd-Frank Act. No grandfathering or transition provisions were
included in Section 413(a), so market participants have been operating
under the new standard for over a year. In particular, where existing
rights (for example, under derivative instruments such as options,
warrants and convertibles) give rise to a continuous offering of the
underlying securities, because no grandfathering was provided by
statute, issuers have already had to address any concerns that arose
upon the change in the accredited investor net worth standard.
    We do believe, however, that limited grandfathering would be
appropriate in connection with investors' exercise of certain pre-
existing rights to acquire securities. The final rules, therefore,
contain a provision under which the former accredited investor net
worth test will apply to purchases of securities in accordance with a
right to purchase such securities,\58\ so long as (i) The right was
held by a person on July 20, 2010, the day before the enactment of the
Dodd-Frank Act; (ii) the person qualified as an accredited investor on
the basis of net worth at the time the right was acquired; and (iii)
the person held securities of the same issuer, other than the right, on
July 20, 2010. For example, if an investor who qualified as accredited
based on net worth at the time of her original investment owned common
stock of an issuer on July 20, 2010, and on that date had pre-emptive
rights to acquire additional common stock of that issuer, then when the
issuer makes an offering of common stock that triggers the pre-emptive
rights, the investor's net worth will be calculated as it was before
enactment of the Dodd-Frank Act. Likewise, if the same investor owned
Series A preferred stock of an issuer on July 20, 2010 and on that date
had a right of first offer to purchase any equity securities offered by
the issuer in a future sale, and the issuer proposed to sell Series B
preferred stock at a future date, then the investor's net worth will be
calculated as it was before enactment of the Dodd-Frank Act for
purposes of exercising the right of first offer to purchase Series B
preferred stock from the issuer. The provision is limited to persons
who qualified as accredited investors on the basis of net worth at the
time the relevant rights were originally acquired, and who held
securities of the issuer other than the rights on July 20, 2010. We
believe this approach strikes an appropriate balance between preserving
investors' ability to exercise previously bargained-for rights, which
otherwise may have been impaired by the change in accredited investor
definition, and maintaining the investor protection benefits that
Section 413(a) seeks to achieve.
---------------------------------------------------------------------------

    \58\ The grandfathering provision applies to the exercise of
statutory rights, such as pre-emptive rights arising under state
law; rights arising under an entity's constituent documents; and
contractual rights, such as rights to acquire securities upon
exercise of an option or warrant or upon conversion of a convertible
instrument, rights of first offer or first refusal and contractual
pre-emptive rights.
---------------------------------------------------------------------------

(5) Other Issues Considered
    In our Proposing Release, we requested comment on two additional
issues discussed below, which we determined do not require any change
in our rules.
    Defining ``Primary Residence.'' We solicited comment on whether we
should define the term ``primary residence'' for purposes of the rules
we are amending. Our proposal did not contain a definition, consistent
with our past policies in this area \59\ and in an attempt to avoid
unnecessary complexity in a rule that is intended to be straightforward
in application.
---------------------------------------------------------------------------

    \59\ None of our three other rules that use the term ``primary
residence'' have a definition of the term. See 17 CFR 240.17a-
3(a)(17)(i)(A), 17 CFR 247.701(d)(1)(A) and 17 CFR 210.2-
01(c)(1)(ii)(A)(4). Regulation D also did not define the similar
term ``principal residence,'' as used in Rule 501(e)(1)(i) of
Regulation D. 17 CFR 230.501(e)(1)(i). Until now, Regulation D used
the term ``principal residence'' to exclude any purchasers who are
relatives or spouses of the purchaser and who share the same
principal residence as the purchaser for purposes of calculating the
number of purchasers in a Regulation D offering. As explained below,
we are adopting amendments to change this reference from ``principal
residence'' to ``primary residence'' so that it conforms to the
terminology of the Dodd-Frank Act. See text accompanying note 66
below.
---------------------------------------------------------------------------

    Several comment letters agreed with us that the term ``primary
residence'' is well understood, and does not require a legal
definition.\60\ Two comment letters advocated adoption of a legal
definition, but did not agree on what definition should apply.\61\
---------------------------------------------------------------------------

    \60\ See, e.g., comment letters from ABA, S&C and Steven J.
Thayer.
    \61\ See comment letter from Cornell (suggesting the definition
in Internal Revenue Code Sec.  121). A comment letter from an
individual suggested that the Commission use the definition of the
term ``primary residence'' of the Organization for Economic
Cooperation and Development, at least for non-U.S. investors. See
letter from Georg Merkl.
---------------------------------------------------------------------------

    We believe that ``primary residence'' has a commonly understood
meaning as the home where a person lives most of the time. Consistent
with the approach in Regulation D to reduce unnecessary complexity, we
are not adopting a definition of the term ``primary residence.''
    Proceeds of Debt Secured by Primary Residence Incurred to Invest in
Securities. We solicited comment on whether the accredited investor
definition should contain special provisions addressing the treatment
of debt secured by a primary residence where the proceeds of the debt
are used to invest in securities. Under the rules we are adopting
today, debt secured by the primary residence will generally be excluded
from the calculation of net worth to the extent of the estimated fair
market value of the primary residence. NASAA had urged in an advance
comment letter that netting of such debt not be permitted if proceeds
of the debt were used to invest in securities. NASAA's concern was
that, without such a rule, we would create an incentive for
unscrupulous salespeople to induce investors with significant equity in
their home to borrow against their home for the purpose of investing in
unsuitable unregistered offerings.\62\
---------------------------------------------------------------------------

    \62\ Advance comment letter from NASAA.
---------------------------------------------------------------------------

    NASAA made this suggestion again in its comment letter on the
Proposing Release, which was the only comment letter supporting this
idea.\63\ The other comment letters that addressed this issue opposed
it.\64\ Critics asserted that such a change would add substantial
complexity to the compliance process because of the difficulties of
tracing loan proceeds, and suggested that the concerns articulated by
NASAA could be better and more effectively addressed through
enforcement of existing Securities Act and broker-dealer rules.

After reviewing all the comment letters and further considering the
issue, we have included the 60-day look-back provision discussed in
Part II.A.3 above rather than a tracing provision. We believe that
requiring incremental debt secured by the primary residence to be
treated as a liability in the net worth calculation for 60 days after
it is incurred will be a substantial disincentive to inappropriate
sales practices, and will be much simpler and more certain in
application than a tracing rule.\65\
---------------------------------------------------------------------------

    \63\ See letter from NASAA.
    \64\ See, e.g., letters from ABA, REISA, S&C, Robert G.
Edgerton, Georg Merkl and Steven J. Thayer.
    \65\ The standards governing broker-dealer sales practices will
also apply in relation to the activities of broker-dealer personnel.
NASD (now known as FINRA) Rule 2310 requires registered
representatives of broker-dealers to make only suitable
recommendations to their customers. See Financial Industry
Regulatory Authority, NASD Rule 2310: Recommendations to Customers
(Suitability) (2010) (available at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=3638). Depending on
the facts and circumstances, such behavior may also rise to the
level of fraud under Section 17(a) of the Securities Act, 15 U.S.C.
77q(a), or Section 10(b) of the Securities Exchange Act, 15 U.S.C.
78j(b), or the Commission's antifraud rules issued under those
statutory provisions.
---------------------------------------------------------------------------

B. Technical and Conforming Amendments

    As proposed, we are changing the reference to ``principal
residence'' currently in Rule 501(e)(1)(i) of Regulation D \66\ to
``primary residence,'' to conform it to the new language in Rule 501.
We received one letter supporting this change,\67\ and no letters
objecting to this change.
---------------------------------------------------------------------------

    \66\ For purposes of calculating the number of purchasers in a
Regulation D offering, Rule 501(e)(1)(i) uses the term ``principal
residence'' to exclude any purchasers who are relatives or spouses
of a purchaser of a Regulation D security and who share the same
``principal residence'' as the purchaser of the security. 17 CFR
230.501(e)(1)(i).
    \67\ See letter from ABA.
---------------------------------------------------------------------------

    Also as proposed, we are amending the references to former
Securities Act Section 4(6) in Form D and several of our rules to refer
to Section 4(5), as former Section 4(6) was renumbered by Section
944(a)(2) of the Dodd-Frank Act. Specifically, we are amending Rule
144(a)(3)(viii) (definition of ``restricted securities'') and Rule
155(a) (integration of abandoned offerings) of the general Securities
Act rules; Rule 500(a)(1) of the Securities Act form rules; Item 6 and
the General Instructions to Form D under the Securities Act; Rule 17j-
1(a)(8) (personal investment activities of investment company
personnel) under the Investment Company Act, and Rule 204A-1(e)(7)
(investment adviser codes of ethics) under the Investment Advisers Act.
    We are also removing the authority citation preceding the
Preliminary Notes to Regulation D.

III. Paperwork Reduction Act

    The amendments we are adopting do not contain a ``collection of
information'' requirement within the meaning of the Paperwork Reduction
Act of 1995.\68\ Accordingly, the Paperwork Reduction Act is not
applicable.
---------------------------------------------------------------------------

    \68\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

IV. Cost-Benefit Analysis

A. Background and Summary of Proposals

    As discussed above, we are adopting amendments to the accredited
investor standards in our rules under the Securities Act to implement
the requirements of Section 413(a) of the Dodd-Frank Act.
    Section 413(a) of the Dodd-Frank Act requires the definitions of
``accredited investor'' in the Securities Act rules to exclude the
value of a person's primary residence for purposes of determining
whether the person qualifies as an ``accredited investor'' on the basis
of having a net worth in excess of $1 million. Under the previous
standard, individuals qualified as accredited investors if they had a
net worth of more than $1 million, including the value of their primary
residence. The substantive change to the net worth standard was
effected by operation of the Dodd-Frank Act upon enactment; however,
Section 413(a) also requires us to adjust the accredited investor
definitions in our Securities Act rules to conform to the new standard.
We are therefore adopting conforming amendments to Securities Act Rule
501(a)(5) of Regulation D and Securities Act Rule 215(e).
    This analysis focuses on the costs and benefits to the economy of
including the specific amendments described below, rather than on the
costs and benefits of the new accredited investor net worth standard
itself. The new standard was mandated by Congress in Section 413(a) of
the Dodd-Frank Act and does not reflect the exercise of our rulemaking
discretion.
    The language we are adopting reflects our exercise of discretion in
choosing a method to implement the statutory language set forth in
Section 413(a) (namely, that net worth for purposes of accredited
investor qualification should be calculated excluding the positive
equity, if any, in the primary residence) over two other possible
methods to implement the statutory language. As explained in our
Proposing Release, these two other methods of implementation of the
Section 413(a) language are: (1) excluding from net worth the fair
market value of the primary residence, but including all indebtedness
secured by the primary residence; and (2) excluding from net worth the
fair market value of the primary residence and all indebtedness secured
by the primary residence, even if it exceeds the fair market value of
the primary residence. We also exercised our discretion in requiring
that incremental debt secured by the primary residence that is incurred
in the 60 days before the accredited investor determination is made
(other than debt incurred in connection with the acquisition of a
primary residence) must be treated as a liability in the net worth
calculation (i.e., may not be netted against the value of the
residence, even if the value of the residence exceeds the amount of
debt secured against it), and in adding a limited grandfathering
provision under which, in certain circumstances, the former accredited
investor net worth standard will apply in connection with acquisitions
of securities pursuant to rights held by a person before enactment of
the Dodd-Frank Act.

B. Comments on the Cost-Benefit Analysis

    In the Proposing Release, we requested qualitative and quantitative
feedback on the nature of the benefits and costs described and any
benefits and costs we may have overlooked. No comment letters expressly
addressed the cost-benefit analysis in the Proposing Release, but some
comment letters cited certain costs and benefits consistent with those
described in this release in the course of making a variety of
suggestions and observations. For example, the rules that we are
adopting, which may result in individuals' having to estimate the value
of their primary residence in order to determine whether the amount of
debt secured against the residence exceeds the estimated fair market
value of the residence, was criticized by some commentators on the
basis that it would increase compliance costs.\69\ As indicated above,
individuals were required to estimate the value of their primary
residence to calculate net worth as defined before enactment of the
Dodd-Frank Act, and the Commission is not aware that this caused a
problem for individuals seeking to qualify as accredited investors on
that basis. Others asserted that the failure to include grandfathering
or other transition

provisions in the new rules would impose costs on investors (who may be
unable to protect their existing investments from dilution or to
exercise pre-existing rights) and on issuers (which may have a harder
time raising capital).\70\ We have attempted to respond to that comment
by providing for limited grandfathering.
---------------------------------------------------------------------------

    \69\ See letters from IPA, Georg Merkl.
    \70\ See e.g., letters from ABA, Investment Advisers
Association, Investment Program Association, Real Estate Investment
Securities Association, S&C, Sutherland Asbill & Brennan and Steven
J. Thayer.
---------------------------------------------------------------------------

C. Benefits

    We believe the rules we are adopting provide the most appropriate
method to implement Section 413(a), and will result in the following
benefits compared to other possible methods to implement Section
413(a):
     We believe the final amendments most accurately reflect
the manner in which individual net worth has traditionally been
determined and understood, and what is commonly understood by ``the
value of a person's primary residence.'' We believe investors and
issuers will benefit from implementing rules that are easy to
understand and consistent with conventional net worth calculation
concepts through reduced transaction costs relative to other
alternatives.\71\
---------------------------------------------------------------------------

    \71\ See notes 35-36 above and accompanying text.
---------------------------------------------------------------------------

     The amendments will result in a larger pool of accredited
investors than the first alternative method of implementation, under
which all indebtedness secured by the primary residence would be
included as a liability in the net worth calculation. The available
data suggest that there is no material difference in the size of the
accredited investor pool between the alternative we are adopting and
the second alternative method, under which all indebtedness secured by
the primary residence would be excluded from the net worth calculation,
even if in excess of the estimated value of the primary residence.\72\
To the extent that exempt offerings to accredited investors are less
costly for issuers to complete than registered offerings, a larger pool
of accredited investors that may participate in these offerings could
result in cost savings for issuers conducting these offerings.
---------------------------------------------------------------------------

    \72\ Using data from the 2007 Federal Reserve Board Survey of
Consumer Finances, our Division of Risk, Strategy and Financial
Innovation estimates that in 2007 approximately 8.3 million
households (7.2% of U.S. households) would have qualified as
accredited under the standards in our new rules on the basis of net
worth, annual income or both. Approximately 7.6 million of such
households (6.5% of U.S. households) would have qualified on the
basis of net worth. If we adopted a standard based on an alternative
method of implementation of Section 413(a) that excludes from the
net worth calculation the fair market value of the primary residence
but not any indebtedness secured by the primary residence, only 7.8
million households (6.7%) would have qualified as accredited.
Conversely, if we adopted a standard under which both the fair
market value of the primary residence and all indebtedness secured
by the primary residence, even indebtedness in excess of the fair
market value of the primary residence, were excluded from the net
worth calculation, the number of accredited U.S. households would
have been the same as under the approach we are adopting. More
information regarding the survey may be obtained at http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html. See also note 46
above and accompanying text. Staff at the Federal Reserve also
informed us that based on an unpublished 2009 supplemental Survey of
Consumer Finances, which surveyed the same households that were
surveyed in 2007, estimates of the number of qualifying households
in 2009 under the various methods of implementation of Section
413(a) are qualitatively similar to estimates derived from the 2007
survey. For both 2007 and 2009, the data suggest that the number of
households nationwide that qualify as accredited investors is not
affected by whether the net worth calculation includes or excludes
the underwater portion of debt secured by the primary residence.
---------------------------------------------------------------------------

     The additional provision in the final rules that requires
incremental debt secured against the primary residence to be treated as
a liability in the net worth calculation for 60 days after it is
incurred will eliminate individuals' ability to inflate their net worth
for purposes of the accredited investor definition by taking on
incremental debt secured against their primary residence shortly before
securities are sold to them. The look-back period will reduce
incentives to manipulate net worth calculations, should make investors
whose net worth reaches the accredited investor threshold only if value
of available home equity is included as part of a net worth calculation
less susceptible to high-pressure sales tactics, and generally will
provide investor protection benefits to households which, under the
criteria of Section 413(a), are less able to bear the economic risk of
an investment in unregistered securities.
     The provision in the final rules will apply the pre-Dodd-
Frank Act accredited investor net worth test to acquisitions of
securities pursuant to rights held on July 20, 2010 by persons who
qualified as accredited investor on the basis of net worth at the time
the rights were acquired and who held securities of the issuer other
than the rights on July 20, 2010. Under this provision, investors who
no longer qualify as accredited investors under the new net worth
standard, but who would qualify under the former standard, will qualify
as accredited investors in that limited context. This should provide a
benefit to both investors and issuers, in that investors who have
ceased to qualify as accredited investors because of the change in net
worth standard will be able to exercise pre-existing rights even if the
issuer is unable or unwilling to permit exercise by non-accredited
investors, and at lower cost than if the individuals did not qualify as
accredited investors.

D. Costs

    Like our analysis of the benefits, our analysis of the costs
focuses on the costs attributable to our adopted language on how to
treat the primary residence and debt secured by the primary residence
in the calculation of net worth, including the treatment of debt
incurred in the 60 days before the net worth calculation is performed,
and on the costs attributable to the transition provision included in
the final rules.
    Many of the potential costs of our amendments are dependent on a
number of factors. Costs may include the following:
     Our amendments involve more complex calculations than the
two alternative possible approaches we have identified.\73\ Although no
third party appraisal is required, our amendments may require
estimating the fair market value of the investor's primary residence to
determine whether it exceeds the amount of indebtedness secured by the
primary residence. In contrast, both of the alternative net worth
calculations could be performed merely by ignoring the primary
residence as an asset in determining the net worth amount, and in the
case of the second alternative method of implementation also ignoring
the indebtedness secured by the primary residence. However, this would
appear to be a manageable cost. Investors had to estimate the fair
market of their primary residence to calculate net worth under the net
worth standard for accredited investor that applied before enactment of
the Dodd-Frank Act, and the Commission is not aware that market
participants found the need for such an estimate to be problematic.
---------------------------------------------------------------------------

    \73\ Some commentators objected to the proposal on this basis.
See note 39 and accompanying text.
---------------------------------------------------------------------------

     Where indebtedness secured by the primary residence has
increased in the 60 days preceding the net worth calculation, other
than in connection with the acquisition of the primary residence, our
amendments will also require determining the amount of that increase,
and treating that amount as a liability in the net worth calculation.
     The amendments could encourage investors (or incentivize
salespeople to encourage investors) to take on indebtedness secured by
their primary

residence with the primary motive of inflating their net worth in order
to satisfy the new accredited investor net worth standard. As noted
above, we believe the requirement to treat as a liability any
incremental debt secured by the primary residence that is incurred in
the 60 days before the accredited investor determination will reduce
this incentive by requiring 60 days to pass before assets obtained with
the proceeds of incremental indebtedness secured by the primary
residence could result in an increase in net worth under the rule.
     Our amendments require that an investor's net worth
calculation include as a liability any amount by which the indebtedness
secured by the investor's primary residence exceeds the estimated fair
market value of the residence. It is possible that our amendments will
result in a smaller pool of eligible accredited investors than if we
implemented an alternative approach that would exclude all indebtedness
secured by the primary residence, even amounts in excess of the value
of the residence. The data available to us do not support this view.
The 2007 Federal Reserve Board Survey of Consumer Finances suggests
that there is no difference in the number of households that would have
qualified under the two standards in 2007 (that is, subject to sampling
error, there were no households that had a net worth of $1 million or
less if the underwater portion of the mortgage was considered as a
liability but greater than $1 million if it was disregarded).\74\ Staff
at the Federal Reserve have informed us that based on an unpublished
2009 supplemental Survey of Consumer Finances, estimates of the number
of qualifying households in 2009 under the two methods of
implementation are qualitatively similar to estimates derived from the
2007 survey. Nevertheless, if our amendments result in a smaller pool
of accredited investors than would otherwise be the case, that could
result in increased costs for companies and funds that are seeking
accredited investors to participate in their exempt offerings.
---------------------------------------------------------------------------

    \74\ See note 46 above.
---------------------------------------------------------------------------

     The treatment of indebtedness secured by the primary
residence that is incurred within 60 days before the accredited
investor determination may result in some individuals failing to meet
the $1 million net worth threshold for 60 days after entering into new
financing or refinancing arrangements, who would have met such
threshold if no look-back provision applied, if the proceeds of such
refinancing are invested in the primary residence or are otherwise
disposed of without acquiring an asset that is included in the net
worth calculation. Such individuals may lose investment opportunities
if issuers are not willing or able to allow them to participate in
offerings conducted during the period in which they do not qualify as
accredited investors.
     The transition provision we are including will, in limited
circumstances, permit investors who do not qualify as accredited
investors under the new net worth standard, but who do qualify under
the previous standard, to acquire securities pursuant to pre-existing
rights without the protections afforded to non-accredited investors.
This will impose costs to the extent that such investors would have
benefited from such protections. The transition provision applies only
in limited circumstances, which may prevent some investors from
participating in some offerings and may cause issuers to incur the cost
of seeking out other investors.

V. Consideration of Burden on Competition and Promotion of Efficiency,
Competition and Capital Formation

    Section 2(b) of the Securities Act requires us, when engaging in
rulemaking where we are required to consider or determine whether an
action is necessary or appropriate in the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. In the
Proposing Release, we considered our proposed amendments and requested
comment on their potential impact in light of those standards. We
believe the amendments adopted today may facilitate capital formation
and promote efficiency, relative to an alternative method of
implementation that would exclude only the fair market value of the
primary residence from the net worth calculation and would not provide
grandfathering to facilitate exercise of pre-existing rights under
certain circumstances. We do not anticipate that the amendments will
have any effects on competition.
    We believe the amendments impose no significant burden on
efficiency, competition and capital formation beyond any that may have
been imposed by enactment of the Dodd-Frank Act. As discussed in the
cost-benefit analysis in Part IV above, however, the language of
Section 413(a) could be subject to alternative methods of
implementation if our rules do not provide standards for how to
calculate the value of the primary residence. In this regard, we added
explanatory language to our rules on how to treat the primary residence
and indebtedness secured by the primary residence in determining
whether a person qualifies under the accredited investor net worth
standard. We believe these amendments further the purposes underlying
the requirements of Section 413(a) of the Dodd-Frank Act.
    The adopted explanatory language requires that in calculating net
worth:
     The primary residence not be included as an asset; and
     Debt secured by the primary residence not be included as a
liability, except that
     If the amount of debt secured by the primary residence has
increased in the 60 days preceding the accredited investor
determination, other than in connection with the acquisition of the
residence, the amount of such increase must be included as a liability;
and
     If the amount of debt secured by the primary residence
exceeds the estimated fair market value of the primary residence, the
amount of such excess must be included as a liability.
    As described above, we believe the approach we are adopting is
generally consistent with what is commonly understood by ``the value of
a person's primary residence,'' and is preferable to either of the two
alternative approaches. The addition of provisions related to any net
increase in the amount of debt secured by the primary residence in the
60 days preceding a sale of securities is a straightforward provision
to safeguard against manipulation of the general rule. Several comment
letters addressed the burden and uncertainty on investors and issuers
inherent in an approach that relies on a determination of the fair
market value of the primary residence, which is necessary in order to
determine whether any indebtedness secured by the primary residence
exceeds the value of the residence.\75\ These letters favored an
approach that excludes from the net worth calculation both the value of
the primary residence and all indebtedness secured by the primary
residence, which they argue would provide investors and their advisors
with certainty regarding the net worth calculation. We believe,
however, that it would be inappropriate to implement Section 413(a) in
this way, because it would result in a higher net worth for investors
with ``underwater'' mortgages as compared to the same investors' basic
net worth calculated without excluding the value of the

primary residence.\76\ Furthermore, we note that, before the enactment
of the Dodd-Frank Act, a net worth calculation in connection with
determining accredited investor status required estimating the fair
market value of the primary residence. The existing pool of accredited
investors and issuers should be familiar with this kind of estimate,
which should mitigate the burdens cited in these letters.
---------------------------------------------------------------------------

    \75\ See letters from IPA, Georg Merkl, REISA and Steven J.
Thayer.
    \76\ See note 42 above and accompanying text.
---------------------------------------------------------------------------

    The final amendments may result in a pool of accredited investors
that is larger than the first alternative approach, which would not net
out debt secured by the primary residence.\77\ To the extent that
exempt offerings to accredited investors are less costly for issuers to
complete compared to registered offerings, issuers conducting these
exempt offerings under the new amendments could potentially experience
greater cost savings than under the first alternative standard. Based
on the available data, the second alternative approach to excluding the
value of the primary residence under Section 413(a) (excluding from net
worth the fair market value of the primary residence and all
indebtedness secured by the primary residence, including all such
indebtedness in excess of the fair market value of the property) would
not result in a measurably larger pool of eligible accredited investors
than under our amendments, and therefore would not appear to result in
additional cost savings compared to our amendments.\78\
---------------------------------------------------------------------------

    \77\ See note 72 above and accompanying text.
    \78\ See note 46 above and accompanying text.
---------------------------------------------------------------------------

    We believe that the provisions in the final rules dealing with the
treatment of debt secured by the primary residence will not
significantly affect the costs of compliance for most market
participants, and therefore will not have a significant effect on
efficiency or capital formation. Where the estimated fair market value
of the primary residence may be less than the amount of debt secured by
the residence, individuals will have to estimate such fair market value
in order to establish whether any portion of the debt secured by the
primary residence must be included as a liability in the net worth
calculation. The rules require an estimated fair market value only; no
third party valuation will be required.
    There is some further complexity to the net worth calculation for
individuals who have increased the amount of debt secured by their
primary residence in the 60 days before seeking to qualify as
accredited investors, in that they will be required to treat the
incremental debt as a liability. This provision may also result in some
individuals' ceasing to satisfy the $1 million net worth threshold for
60 days after entering into new financing arrangements that increase
the amount of indebtedness secured by their primary residence, if the
proceeds of such financing are invested in the primary residence or are
otherwise disposed of without creating an asset for net worth purposes.
This may result in the individuals' losing investment opportunities,
and issuers' losing qualified investors during such 60-day period.
    Several commentators expressed concern that not providing
grandfathering could impose costs on both investors and issuers,
including increased transaction costs for offerings that no longer
qualify for exemption or that include non-accredited investors; \79\
dilution or other impairment of existing investments for investors that
are excluded from follow-on investment opportunities because they no
longer qualify as accredited; \80\ investors being forced to abandon
investment strategies; \81\ investors losing the benefit of previously
bargained-for rights; \82\ burdens on issuers because existing
investors may be ineligible to make follow-on investments; \83\ and the
impact on private company capital formation attributable to a decrease
in the number of accredited investors and the withdrawal of broker-
dealers from the private placement market.\84\
---------------------------------------------------------------------------

    \79\ Georg Merkl; REISA.
    \80\ Georg Merkl; S&C Sutherland; ABA; IPA; REISA; IAA; Steven
J. Thayer.
    \81\ Sutherland; IAA.
    \82\ Robert G. Edgerton; S&C IAA; Steven J. Thayer.
    \83\ IPA; REISA; IAA.
    \84\ REISA.
---------------------------------------------------------------------------

    While the Commission acknowledges these potential costs, there are
no available data tracking Regulation D investment by household, so we
cannot develop quantitative estimates of the economic impact of
eliminating from the pool of accredited investors the households that
no longer qualify based on the new net worth standard, or of providing
exemptive or other relief from the new standard, which would keep such
households in the accredited investor pool. This impact arises
principally as a result of the enactment of Section 413(a) of the Dodd-
Frank Act and only to a limited extent from our exercise of rulemaking
discretion.
    The final rules provide for limited transition relief by applying
the former accredited investor net worth test to acquisitions of
securities pursuant to rights to acquire securities, if the rights were
held on July 20, 2010, the person qualified as an accredited investor
on the basis of net worth at the time the rights were acquired, and the
person held securities of the issuer other than the rights on July 20,
2010. We believe this provision strikes an appropriate balance between
preserving investors' ability to exercise previously bargained-for
rights, which otherwise may have been impaired by the change in the
accredited investor definition, and maintaining the investor protection
benefits that Section 413(a) seeks to achieve.
    Where the transition provision is unavailable, the new accredited
investor net worth test will apply. This may prevent some investors
from participating in some offerings and cause issuers to seek out
other investors. However, we believe the final rules will provide
benefits for individuals who would meet the $1 million accredited
investor net worth standard only if their home equity were taken into
account, to the extent they are protected by the enhanced disclosures
required in registered offerings and offerings involving non-accredited
investors, or become ineligible to participate in investments in
restricted securities pursuant to Regulation D or Section 4(5), which
are generally substantially less liquid than securities issued in
registered offerings and may entail substantial additional risks.
    We do not believe the amendments affect competition beyond what is
required by Section 413(a). The amendments would apply equally to all
issuers participating in exempt offerings under Regulation D and
Section 4(5), in respect of all of their investors. We also do not
believe that Section 413(a) itself places a burden on competition that
our rules should ameliorate, except to the extent provided by the
transition provision.
    In addition to the effects described above, the amendments may
positively affect efficiency and capital formation in other ways by
providing a clear standard to calculate and exclude the value of the
primary residence. This should generally benefit issuers and investors
by making the requirements of Section 413(a) easier to apply and comply
with, reducing the risk of sales to investors who do not meet the new
accredited investor net worth standards, as well as the risk that an
issuer may violate Securities Act registration requirements. Clear
rules will also serve to promote efficiency by reducing the risk of
issuers' inability to raise capital because of uncertainty in
interpreting our rules. Greater clarity and certainty in our accredited
investor net worth standards also should foster greater

confidence in our private placement markets and ultimately reduce the
cost of capital, promoting increased capital formation, especially
small business capital formation, which Regulation D was originally
designed to promote.

VI. Final Regulatory Flexibility Act Analysis

    This final regulatory flexibility analysis has been prepared in
accordance with the Regulatory Flexibility Act.\85\ This final
regulatory flexibility analysis relates to amendments to our accredited
investor rules under the Securities Act to implement the requirements
of Section 413(a) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \85\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

A. Reasons for and Objectives of the Amendments

    The reason for the amendments is to implement the requirements of
the Dodd-Frank Act, primarily the requirements of Section 413(a) of
that statute. Section 413(a) requires the definitions of ``accredited
investor'' in the Securities Act rules to exclude the value of a
person's primary residence for purposes of determining whether the
person qualifies as an ``accredited investor'' on the basis of having a
net worth in excess of $1 million. Under the previous standard,
individuals qualified as accredited investors if they had a net worth
of more than $1 million, including the value of their primary
residence. The change to the net worth standard was effective upon
enactment by operation of the Dodd-Frank Act; but Section 413(a) also
requires us to revise the Securities Act accredited investor
definitions to conform to the new standard, which we are doing by
revising Securities Act Rule 501(a)(5) of Regulation D and Rule 215(e).
    Our primary objective is to implement the requirements for a new
accredited investor net worth standard in Section 413(a) of the Dodd-
Frank Act. We note that Section 413(a) does not prescribe the method
for calculating the value of the primary residence, nor does it address
specifically the treatment of indebtedness secured by the residence for
purposes of the net worth determination. Accordingly, we are exercising
our discretion by providing explicit requirements regarding the
treatment of the primary residence and indebtedness secured by the
primary residence in the calculation of net worth. We believe this
standard is generally consistent with conventional and commonly
understood methods of determining net worth, and what is commonly
understood by ``the value of a person's primary residence'' (with the
addition of a provision for the special treatment of debt secured by a
primary residence that is incurred in the 60 days preceding a sale of
securities), and is preferable to other possible methods of
implementation of the statutory language, such as: (1) Excluding from
net worth the fair market value of the primary residence without
netting out indebtedness secured by the primary residence; and (2)
excluding from net worth the fair market value of the primary residence
and all indebtedness secured by the primary residence, regardless of
whether it exceeds the fair market value of the primary residence.
    We are describing how to treat the primary residence and
indebtedness secured by the primary residence in the calculation of net
worth, so that implementation proceeds efficiently, with a minimum
amount of uncertainty. We believe these amendments will help to reduce
the cost of exempt offerings under Regulation D and Section 4(5),
relative to the cost of such transactions with less specific
implementation of Section 413(a), by reducing uncertainty among issuers
and investors in applying the new accredited investor net worth
standard mandated by Section 413(a) of the Dodd-Frank Act. By providing
greater specificity, we are attempting to remove a possible impediment
to issuers using these forms of offering, thereby potentially lowering
the cost of capital generally and facilitating capital formation,
especially for smaller issuers, while protecting investors.
    The final amendments also address incremental indebtedness secured
by the primary residence that is incurred within 60 days before the
relevant sale of securities. This provision will eliminate individuals'
ability to artificially inflate their net worth for purposes of the
accredited investor definition by taking on incremental debt secured
against their residence shortly before participating in an exempt
offering.
    The final amendments also include a transition provision, under
which the former accredited investor net worth test will apply to
acquisitions of securities pursuant to rights to acquire securities, if
the rights were held on July 20, 2010, the person qualified as an
accredited investor on the basis of net worth at the time the rights
were acquired, and the person held securities of the issuer other than
the rights on July 20, 2010. This provision should facilitate the
exercise of rights held at the time of enactment of the Dodd-Frank Act
by persons who would qualify as accredited investors under the former
test but not the new test in limited circumstances that should not give
rise to significant investor protection concerns.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on every aspect of
the initial regulatory flexibility analysis (``IRFA''), including the
number of small entities that would be affected by the proposed
amendments, the nature of the impact, how to quantify the number of
small entities that would be affected, and how to quantify the impact
of the proposed amendments. We did not receive comments specifically
addressing the IRFA.

C. Small Entities Subject to the Rule

    The amendments will affect issuers that are small entities, because
issuers that are small entities must believe or have a reasonable basis
to believe that prospective investors are accredited investors at the
time of the sale of securities if they are relying on the definition of
``accredited investor'' for an exemption under Regulation D or Section
4(5). For purposes of the Regulatory Flexibility Act under our rules,
an issuer is a ``small business'' or ``small organization'' if it has
total assets of $5 million or less as of the end of its most recent
fiscal year.\86\ For purposes of the Regulatory Flexibility Act, an
investment company is a small entity if it, together with other
investment companies in the same group of related investment companies,
has net assets of $50 million or less as of the end of its most recent
fiscal year. The amendments apply to all issuers that rely on the
accredited investor net worth standards in the exemptions to Securities
Act registration in Regulation D and Section 4(5).
---------------------------------------------------------------------------

    \86\ 17 CFR 230.157.
---------------------------------------------------------------------------

    All issuers that sell securities in reliance on Regulation D and
Section 4(5) must file a notice on Form D with the Commission. However,
the vast majority of companies and funds filing notices on Form D are
not required to provide financial reports to the Commission. For the
fiscal year ended September 30, 2010, 22,941 issuers filed a notice on
Form D. We believe that many of these issuers are small entities, but
we currently do not collect information on total assets of all issuers
to determine if they are small entities for purposes of this analysis.
We note, however, that for the fiscal year ended September 30, 2010,
the median offering size for offerings under Regulation D was
approximately $1 million, which is

consistent with the prevalence of small issuers.

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    None of our amendments will increase the information or time
required to complete the Form D that must be filed with the Commission
in connection with sales under Regulation D and Section 4(5). Our
amendments adjust our rules so they comply with the requirements of
Section 413(a) of the Dodd-Frank Act, including adding an anti-evasion
provision with respect to debt secured by a primary residence incurred
within the 60 days before a sale of securities and a limited transition
provision. The rules would not require any further disclosure than is
currently required in offerings made in reliance on Regulation D and
Section 4(5). To the extent that the amendments provide standards on
how to treat the primary residence and indebtedness secured by the
primary residence in calculating net worth under the accredited
investor definition, we believe that they will eliminate potential
ambiguity and facilitate compliance with the accredited investor net
worth standard mandated by the Dodd-Frank Act.

E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objective of our
amendments, while minimizing any significant adverse impact on small
entities. In connection with the amendments, we considered the
following alternatives:
     The establishment of different compliance or reporting
requirements or timetables that take into account the resources
available to small entities;
     The clarification, consolidation, or simplification of the
rule's compliance and reporting requirements for small entities;
     The use of performance rather than design standards; and
     An exemption from coverage of the amendments, or any part
thereof, for small entities.
    With respect to the establishment of special compliance
requirements or timetables under our amendments for small entities, we
do not think this is feasible or appropriate. Our amendments do not
establish any compliance requirements or timetables for compliance that
we could adjust to take into account the resources available to small
entities. Moreover, the amendments are designed to eliminate
uncertainty among issuers and investors that may otherwise result from
inserting only the bare operative language from Section 413(a) of the
Dodd-Frank Act in our rules. Providing greater specificity in our rules
should provide issuers, including small entities, and investors with
greater certainty concerning the availability of the Regulation D and
Section 4(5) exemptions to Securities Act registration that rely on the
accredited investor definition. This should facilitate efficient access
to capital for both large and small entities consistent with investor
protection.
    Likewise, with respect to potentially clarifying, consolidating, or
simplifying compliance and reporting requirements, the amendments do
not impose any new compliance or reporting requirements or change any
existing requirements.
    With respect to using performance rather than design standards, we
do not believe doing so in this context would be consistent with our
objective or with the statutory requirement. Our amendments seek to
specify how issuers should calculate the value of a person's primary
residence for purposes of excluding its value in determining whether
the person qualifies as an accredited investor on the basis of net
worth. Specifying that issuers should calculate net worth by excluding
the value of the primary residence and leaving the method of
calculation to the discretion of the issuer, as a performance standard
would, frustrates our purpose and denies small entities and others of
the benefits of certainty that the amendments are designed to provide.
    With respect to exempting small entities from coverage of these
amendments, we believe such a provision would have no impact on the
regulatory burdens on small entities, since Section 413(a) became
effective upon enactment. Our amendments are designed to provide for
the protection of investors without unduly burdening both issuers and
investors, including small entities and their investors. They also are
designed to minimize confusion among issuers and investors. Exempting
small entities could potentially increase their regulatory burdens and
increase confusion. We have endeavored to minimize the regulatory
burden on all issuers, including small entities, while meeting our
regulatory objectives.

VIII. Statutory Authority and Text of the Amendments

    The amendments described in this release are being adopted under
the authority set forth in Sections 2(a)(15), 3(b), 4(2), 19 and 28 of
the Securities Act, as amended,\87\ Section 38(a) of the Investment
Company Act,\88\ Section 211(a) of the Investment Advisers Act \89\ and
Sections 413(a) and 944(a) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 77b(a)(15), 77c(b), 77d(2), 77s and 77z-3.
    \88\ 15 U.S.C. 80a-38(a).
    \89\ 15 U.S.C. 80b-11(a).
---------------------------------------------------------------------------

List of Subjects in 17 CFR Parts 230, 239, 270 and 275

    Reporting and recordkeeping requirements, Securities.

    For the reasons set out above, the Commission amends Title 17,
Chapter II of the Code of Federal Regulations as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The general authority citation for Part 230 is revised to read as
follows:

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, unless otherwise noted.
* * * * *

Sec.  230.144  [Amended]

0
2. Amend Sec.  230.144, paragraph (a)(3)(viii), by removing the
reference to ``4(6) (15 U.S.C. 77d(6))'' and adding in its place ``4(5)
(15 U.S.C. 77d(5))''.

Sec.  230.155  [Amended]

0
3. Amend Sec.  230.155, paragraph (a), by removing the references to
``4(6)'' and ``77d(6)'' and adding in their places ``4(5)'' and
``77d(5)'', respectively.

0
4. Amend Sec.  230.215 by revising paragraph (e) to read as follows:

Sec.  230.215  Accredited investor.

* * * * *
    (e) Any natural person whose individual net worth, or joint net
worth with that person's spouse, exceeds $1,000,000.
    (1) Except as provided in paragraph (e)(2) of this section, for
purposes of calculating net worth under this paragraph (e):
    (i) The person's primary residence shall not be included as an
asset;
    (ii) Indebtedness that is secured by the person's primary
residence, up to the estimated fair market value of the primary
residence at the time of the sale of securities, shall not be included
as a liability (except that if the amount of such indebtedness
outstanding at the time of the sale of securities exceeds the amount
outstanding 60 days before such

time, other than as a result of the acquisition of the primary
residence, the amount of such excess shall be included as a liability);
and
    (iii) Indebtedness that is secured by the person's primary
residence in excess of the estimated fair market value of the primary
residence shall be included as a liability.
    (2) Paragraph (e)(1) of this section will not apply to any
calculation of a person's net worth made in connection with a purchase
of securities in accordance with a right to purchase such securities,
provided that:
    (i) Such right was held by the person on July 20, 2010;
    (ii) The person qualified as an accredited investor on the basis of
net worth at the time the person acquired such right; and
    (iii) The person held securities of the same issuer, other than
such right, on July 20, 2010.
* * * * *

0
5. Amend Part 230 by removing the authority citation after the
undesignated center heading ``Regulation D--Rules Governing the Limited
Offer and Sale of Securities Without Registration Under the Securities
Act of 1933'' and preliminary notes preceding Sec. Sec.  230.501 to
230.508.

0
6. Amend Sec.  230.501 by:
0
a. Revising paragraph (a)(5); and
0
b. Removing the word ``principal'' and adding in its place the word
``primary'' in paragraph (e)(1)(i).
    The revision reads as follows:

Sec.  230.501  Definitions and terms used in Regulation D.

* * * * *
    (a) * * *
    (5) Any natural person whose individual net worth, or joint net
worth with that person's spouse, exceeds $1,000,000.
    (i) Except as provided in paragraph (a)(5)(ii) of this section, for
purposes of calculating net worth under this paragraph (a)(5):
    (A) The person's primary residence shall not be included as an
asset;
    (B) Indebtedness that is secured by the person's primary residence,
up to the estimated fair market value of the primary residence at the
time of the sale of securities, shall not be included as a liability
(except that if the amount of such indebtedness outstanding at the time
of sale of securities exceeds the amount outstanding 60 days before
such time, other than as a result of the acquisition of the primary
residence, the amount of such excess shall be included as a liability);
and
    (C) Indebtedness that is secured by the person's primary residence
in excess of the estimated fair market value of the primary residence
at the time of the sale of securities shall be included as a liability;
    (ii) Paragraph (a)(5)(i) of this section will not apply to any
calculation of a person's net worth made in connection with a purchase
of securities in accordance with a right to purchase such securities,
provided that:
    (A) Such right was held by the person on July 20, 2010;
    (B) The person qualified as an accredited investor on the basis of
net worth at the time the person acquired such right; and
    (C) The person held securities of the same issuer, other than such
right, on July 20, 2010.
* * * * *

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
7. The general authority citation for Part 239 is revised to read as
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll,
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26,
80a-29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *

Sec.  239.500  [Amended]

0
8. Amend Sec.  239.500 by removing the reference to ``4(6)'' and adding
in its place ``4(5)'' in the heading and in the first sentence of
paragraph (a)(1).

0
9. Amend Item 6 in Form D (referenced in Sec.  239.500) by:
0
a. Removing the phrase ``Securities Act Section 4(6)'' and adding in
its place ``Securities Act Section 4(5)'' next to the appropriate check
box; and
0
b. Removing the reference to ``4(6)'' and adding in its place ``4(5)''
in the first sentence of the first paragraph of the General
Instructions.

    Note:  The text of Form D does not, and the amendments will not,
appear in the Code of Federal Regulations.

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
10. The general authority citation for Part 270 continues to read in
part as follows:

    Authority:  15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.
* * * * *

Sec.  270.17j-1  [Amended]

0
11. Amend Sec.  270.17j-1, paragraph (a)(8), by removing the references
to ``4(6)''and ``77d(6)'' and adding in their places ``4(5)'' and
``77d(5)'', respectively.

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
12. The authority citation for Part 275 continues to read in part as
follows:

    Authority:  15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless
otherwise noted.
* * * * *

Sec.  275.204a-1  [Amended]

0
13. Amend Sec.  275.204a-1, paragraph (e)(7) by removing the references
to ``4(6)'' and ``77d(6)'' and adding in their places ``4(5)''and
``77d(5)'', respectively.

    By the Commission.

     Dated: December 21, 2011.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-33333 Filed 12-28-11; 8:45 am]
BILLING CODE 8011-01-P