[Federal Register: August 10, 2007 (Volume 72, Number 154)]
[Proposed Rules]
[Page 45115-45145]
[DOCID:fr10au07-22]

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Part IV

Securities and Exchange Commission

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17 CFR Parts 200, 230, and 239

 Revisions of Limited Offering Exemptions in Regulation D; Proposed
Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 230, and 239

[Release No. 33-8828; IC-27922; File No. S7-18-07]
RIN 3235-AJ88

Revisions of Limited Offering Exemptions in Regulation D

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules; request for additional comments.

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SUMMARY: We propose to revise Regulation D to provide additional
flexibility to issuers and to clarify and improve the application of
the rules. We propose to create a new exemption from the registration
provisions of the Securities Act of 1933 for offers and sales of
securities to ``large accredited investors.'' The exemption would
permit limited advertising in an exempt offering where each purchaser
meets the definition of ``large accredited investor.'' We also propose
to revise the term ``accredited investor'' in Regulation D to clarify
the definition and reflect developments since its adoption. In
addition, we propose to shorten the timing required by the integration
safe harbor in Regulation D, and to apply uniform disqualification
provisions to all offerings seeking to rely on Regulation D. We are
soliciting comments on possible revisions to Rule 504. Finally, we also
solicit additional comments on the definition of ``accredited natural
person'' for certain pooled investment vehicles in Securities Act Rules
216 and 509 that we proposed in December 2006.

DATES: Comments should be received on or before October 9, 2007.

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml.
);     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number S7-18-07 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

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

All submissions should refer to File Number S7-18-07. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments

also are available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Room 1580,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. All comments received will be posted without change; we
do not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.

FOR FURTHER INFORMATION CONTACT: Gerald J. Laporte, Office Chief, or
Anthony G. Barone, Special Counsel, Office of Small Business Policy, at
(202) 551-3460, or Steven G. Hearne, Special Counsel, Office of
Rulemaking, at<PHONE_NUMBER>, Division of Corporation Finance, or, in
connection with the proposed definition of accredited natural person,
Elizabeth G. Osterman, Assistant Chief Counsel, Division of Investment
Management, at<PHONE_NUMBER>, U.S. Securities and Exchange Commission,
100 F Street, NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We propose to amend Rule 30-1,\1\ Rule
144A,\2\ Rule 146,\3\ Rule 215,\4\ and Form D,\5\ and revise Regulation
D \6\ under the Securities Act of 1933 \7\ by amending Rules 501,\8\
502,\9\ 503,\10\ 504,\11\ 505,\12\ 506 \13\ and 508,\14\ and replacing
Rule 507.\15\ We also request further comment on proposed new Rules 216
and 509 under the Securities Act.\16\
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    \1\ 17 CFR 200.30-1.
    \2\ 17 CFR 230.144A.
    \3\ 17 CFR 230.146.
    \4\ 17 CFR 230.215.
    \5\ 17 CFR 239.500.
    \6\ 17 CFR 230.501 through 230.508.
    \7\ 15 U.S.C. 77a et seq.
    \8\ 17 CFR 230.501.
    \9\ 17 CFR 230.502.
    \10\ 17 CFR 230.503.
    \11\ 17 CFR 230.504.
    \12\ 17 CFR 230.505.
    \13\ 17 CFR 230.506.
    \14\ 17 CFR 230.508.
    \15\ 17 CFR 230.507.
    \16\ See Release No. 33-8766 (Dec. 27, 2006) [72 FR 399] (the
``Private Pooled Investment Vehicle Release'').
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Table of Contents

I. Background and Overview of Proposals
II. Proposed Revisions of Regulation D
    A. Proposed Rule 507--Exemption for Limited Offers and Sales to
Large Accredited Investors
    1. ``Large Accredited Investor'' Standard
    2. Limited Advertising Permitted
    3. No Sales to Persons Who Do Not Qualify as Large Accredited
Investors
    4. Authority for Exemption
    5. Covered Security Status
    B. Proposed Revisions Related to Definition of ``Accredited
Investor''
    1. Adding Alternative Investments-Owned Standards to Accredited
Investor Standards
    a. Proposed Definition of ``Investments''
    b. Amount of Investments Required
    2. Proposed Definition of ``Joint Investments''
    3. Future Inflation Adjustments
    4. Adding Categories of Entities to List of Accredited and Large
Accredited Investors
    5. Proposed Definition of Accredited Natural Person
    C. Proposed Revisions to General Conditions of Regulation D
    1. Proposed Revisions to Regulation D Integration Safe Harbor
    2. Disqualification Provisions
    D. Possible Revisions to Rule 504
    E. Other Proposed Conforming Revisions
    1. Proposed Amendments to Rule 215
    2. Proposed Amendment to Rule 144A
    3. Delegated Authority
III. General Request for Comment
IV. Paperwork Reduction Act
V. Cost-Benefit Analysis
VI. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation
VII. Initial Regulatory Flexibility Act Analysis
VIII. Small Business Regulatory Enforcement Fairness Act
IX. Statutory Basis and Text of Proposed Amendments

I. Background and Overview of Proposals

    Regulation D, adopted in 1982, was designed to facilitate capital
formation while protecting investors by simplifying and clarifying
existing exemptions for private or limited offerings, expanding their
availability, and providing more uniformity between federal and state
exemptions.\17\ Although Regulation D originated as an effort to assist
small business capital formation and continues to play an important
role in that arena, all sizes of companies use the registration
exemptions in Regulation D.
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    \17\ See Release No. 33-6389 (Mar. 8, 1982) [47 FR 11251].
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    Regulation D consists of eight rules. Rules 501 through 503 contain
definitions, conditions, and other provisions that apply generally
throughout Regulation D. Rules 504 through 506 detail specific
exemptions from registration under the Securities Act. Rules 504 and
505 provide

exemptions adopted pursuant to the Commission's authority under Section
3(b) \18\ of the Securities Act. Rule 504 provides exemptions for
companies that are not subject to reporting requirements under the
Securities Exchange Act of 1934 \19\ for the offer and sale of up to
$1,000,000 of securities in a 12-month period. Rule 505 exempts offers
by companies of up to $5,000,000 of securities in a 12-month period, so
long as offers are made without general solicitation or advertising.
Rule 506 is a safe harbor under Section 4(2) \20\ of the Securities Act
and provides an exemption without any limit on the offering amount, so
long as offers are made without general solicitation or advertising and
sales are made only to ``accredited investors'' and a limited number of
non-accredited investors who satisfy an investment sophistication
standard. Rules 507 and 508 were added in 1989.\21\ Rule 507
disqualifies issuers from relying on Regulation D, under certain
circumstances, for failure to file a Form D notice.\22\ Rule 508
provides a safe harbor for certain insignificant deviations from a
term, condition, or requirement of Regulation D.
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    \18\ 15 U.S.C. 77c(b).
    \19\ 15 U.S.C. 78a et seq.
    \20\ 15 U.S.C. 77d(2).
    \21\ See Release No. 33-6825 (Mar. 14, 1989) [54 FR 11369]
(adding 17 CFR 230.507 and 230.508).
    \22\ Rule 503 requires the filing of a Form D notice with the
Commission no later than 15 days after the first sale of securities
in an offering under Regulation D.
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    Following our adoption in June 2005 of comprehensive amendments to
our rules and forms relating to registered public offerings,\23\ we
believe it is appropriate to propose revisions to our rules applicable
to private and limited offerings. Our objective in this effort is to
clarify and modernize our rules to bring them into line with the
realities of modern market practice and communications technologies
without compromising investor protection.\24\ Action in this area also
is timely because our Advisory Committee on Smaller Public Companies
made a number of recommendations relating to private and limited
offerings in its final report dated April 23, 2006.\25\ Several of the
proposals in this release build on the Advisory Committee's
recommendations.
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    \23\ See Release No. 33-8591 (Jul. 19, 2005) [70 FR 44722].
    \24\ The American Bar Association recently suggested that
revisions in this area would be appropriate, in view of the
implementation of the securities offering reform rules for
registered offerings. See comment letter in Commission Rulemaking
File No. S7-11-07 from American Bar Association (Mar. 22, 2007) (the
``ABA Private Offering Letter''), available at http://www.sec.gov/comments/s7-11-07/s71107-4.pdf
.

    \25\ See Final Report of the Advisory Committee on Smaller
Public Companies to the United States Securities and Exchange
Commission (April 23, 2006), at 74-81, 92-93, 94-96, 100-101 (the
``Advisory Committee Final Report''), available at http://www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf
.

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    As discussed in detail below, we propose to make changes in the
following four principal areas involving Regulation D:
     Creating a new exemption from the registration provisions
of the Securities Act for offers and sales to ``large accredited
investors'';
     Revising the definition of the term ``accredited
investor'' to clarify it and reflect developments since its adoption;
     Shortening the length of time required by the integration
safe harbor for Regulation D offerings; and
     Providing uniform disqualification provisions throughout
Regulation D.
    We propose to create a new exemption to the registration
requirements of the Securities Act under our general exemptive
authority in Section 28 of that Act.\26\ This exemption, set forth in
proposed new Rule 507, would be limited to sales of securities to
``large accredited investors,'' and would permit an issuer to publish a
limited announcement of the offering. The proposed definition of large
accredited investor would be based on the ``accredited investor''
definition, but with higher and somewhat different dollar-amount
thresholds. Large accredited investors that participate in these exempt
offerings would be considered ``qualified purchasers'' under Section
18(b)(3) of the Securities Act,\27\ thereby providing ``covered
security'' status and the resulting preemption of certain state
securities regulation.
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    \26\ 15 U.S.C. 77z-3. Section 28 states that the Commission, by
rule or regulation, may conditionally or unconditionally exempt any
person, security, or transaction, or any class or classes of
persons, securities, or transactions, from any provision or
provisions of this title or of any rule or regulation issued under
this title, to the extent that such exemption is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.
    \27\ 15 U.S.C. 77r(b)(3).
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    We also propose to update the ``accredited investor'' definition.
First, we propose to add an alternative ``investments-owned'' standard
for determining accredited investor and large accredited investor
status. This standard would include definitions of ``investments'' and
``joint investments'' similar to those we proposed in December 2006 in
our initiative to revise Regulation D as it relates to investments by
individuals in certain private pooled investment vehicles relying on
Rule 506.\28\ In addition, we propose a mechanism to adjust the dollar-
amount thresholds in the definition of ``accredited investor'' to
reflect future inflation. We propose to add categories of entities to
the list of permitted accredited investors. We also propose to shorten
the time frame for the integration safe harbor for Regulation D
offerings from six months to 90 days to help provide flexibility to
issuers. Finally, we propose to establish uniform disqualification
provisions for all offerings under Regulation D in order to prevent
certain issuers from relying on Regulation D exemptions.
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    \28\ See Private Pooled Investment Vehicle Release. We are
taking the opportunity to request additional comment on that
proposal here. See II.B.5 below.
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    In addition to these proposals, we also are soliciting comment on
whether Rule 504 of Regulation D, the ``seed capital'' exemption,
should be amended so that securities sold pursuant to a state law
exemption that permits sales only to accredited investors would be
deemed ``restricted securities'' for purposes of Rule 144.\29\
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    \29\ 17 CFR 230.144.
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    Finally, in last year's Private Pooled Investment Vehicle Release,
we solicited comment on two new rules that would establish a new
category of accredited investor, ``accredited natural person,'' that
individuals would need to satisfy in order to invest in certain private
pooled investment vehicles relying on Rule 506.\30\ We received
approximately 600 comments on that proposal, many of which generally
disfavored our proposal, which would raise individual investor
thresholds for such investments. We are continuing to consider those
comments, and solicit further comment on the proposed definition of
accredited natural person made in the Private Pooled Investment Vehicle
Release. The Commission may act on the new proposals in this release
and the December 2006 proposals at the same time.
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    \30\ Proposed Rules 216 and 509 under the Securities Act.
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II. Proposed Revisions of Regulation D

A. Proposed Rule 507--Exemption for Limited Offers and Sales to Large
Accredited Investors

    We propose to create a new exemption to the registration
requirements of the Securities Act for offers and sales of securities
to a new category of investors called ``large accredited investors.''
\31\ The exemption would permit limited advertising of

these offerings.\32\ Large accredited investors would consist of the
same categories of entities and individuals that qualify for accredited
investor status under existing Rule 506, but with significantly higher
dollar-amount thresholds for investors subject to such thresholds.\33\
Legal entities that are considered accredited investors if their assets
exceed $5 million would be required to have $10 million in investments
to qualify as large accredited investors. Individuals generally would
be required to own $2.5 million in investments or have annual income of
$400,000 (or $600,000 with one's spouse) to qualify as large accredited
investors, as compared to the current accredited investor standard of
$1 million in net worth or annual income of $200,000 (or $300,000 with
one's spouse). Legal entities that are not subject to dollar-amount
thresholds to qualify as accredited investors, generally government-
regulated entities, would not be subject to dollar-amount thresholds to
qualify as large accredited investors.
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    \31\ We propose to move the current contents of Rule 507 into
proposed Rule 502(e) and then include the new exemption in Rule 507.
    \32\ The exemption would not, however, be available to offers
and sales by pooled investment vehicles relying on Section 3(c)(1)
(15 U.S.C. 80a-3(c)(1)) or Section 3(c)(7) (15 U.S.C. 80a-3(c)(7))
of the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.). See
II.A.4 below.
    \33\ In II.B below, we propose to make certain changes to other
accredited investor qualifications. These changes would apply
equally to accredited investors in Rule 505 and 506 transactions and
to large accredited investors in Rule 507 transactions.
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    We believe that we may exempt certain offers and sales that may
involve limited advertising from the registration requirements of
Section 5 of the Securities Act \34\ without compromising investor
protection, due to the general increased sophistication and financial
literacy of investors in today's markets, coupled with the advantages
of modern communication technologies. Our proposal is patterned
generally after the Model Accredited Investor Exemption adopted by the
North American Securities Administrators Association (NASAA) in
1997.\35\ Like the Model Accredited Investor Exemption, our proposal
does not eliminate the prohibition on general solicitation and general
advertising from the conditions of the exemption. Both the Advisory
Committee on Smaller Public Companies and the American Bar
Association's Committee on Federal Regulation of Securities recommended
relaxing the ban on general solicitation for transactions with
purchasers who do not need the protection of registration.\36\ Our
proposal attempts to ease restrictions on limited offerings of
securities in a manner that is cognizant of the potential harm of
offerings by unscrupulous issuers or promoters who might take advantage
of more open solicitation and advertising to lure unsophisticated
investors to make investments in exempt offerings that do not provide
all the benefits of Securities Act registration. We believe easing the
restriction on limited offerings of securities as we have proposed is
appropriate, given the additional safeguards we have proposed.
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    \34\ 15 U.S.C. 77e.
    \35\ A copy of the Model Accredited Investor Exemption is
available on the NASAA Web site at http://www.nasaa.org/content/Files/Model%5FAccredited%5FInvestor%5FExemption.pdf
.

    \36\ See Advisory Committee Final Report at 74-81; ABA Private
Offering Letter, n. 24 above, at 26.
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    The proposed Rule 507 exemption would share the following
characteristics with the Rule 506 exemption:
     It would allow an issuer to sell an unlimited amount of
its securities to an unlimited number of investors who meet specified
criteria-accredited investors in the case of Rule 506 transactions and
large accredited investors in the case of Rule 507 transactions;
     Its availability would focus on purchasers, and not depend
on the characteristics of offerees;
     It would place no restrictions on the payment of
commissions or similar transaction-related compensation;
     It would be non-exclusive, meaning that the issuer could
choose to claim any other available exemption without the benefit of
the rule; \37\
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    \37\ An issuer engaging in the limited advertising permitted by
Rule 507 may not be able to claim the Section 4(2) exemption if the
activity has imparted a public character to the offering. See
Release No. 33-7943 (Jan. 26, 2001) [66 FR 8881] (text accompanying
n. 31), citing Release No. 33-4552 (Nov. 6, 1962) [27 FR 11316]
(public advertising incompatible with claim of private offering).
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     Securities acquired in a transaction under the rule would
be subject to the limitations on resale under Rule 502(d) \38\ and
therefore would be treated as ``restricted securities'' as defined in
Securities Act Rule 144(a)(3)(ii); \39\
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    \38\ 17 CFR 502(d).
    \39\ 17 CFR 230.144(a)(3)(ii). In a companion release, we have
proposed changes to Rule 144. Release No. 33-8813 (June 22, 2007)
[72 FR 36822].
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     The issuer would be required to exercise reasonable care
to assure that the purchasers of the securities are not underwriters;
\40\ and
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    \40\ Rule 502(d). The term ``underwriter'' is defined in Section
2(a)(11) of the Securities Act. 15 U.S.C. 77b(a)(11).
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     The issuer would have an obligation to file a notice of
sales in the offering with the Commission on Form D.\41\
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    \41\ In a companion release, we are proposing changes to Form D
to simplify and update it, as well as to require electronic filing.
Release No. 33-8814 (June 29, 2007) [72 FR 37376].
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    In addition, proposed Rule 507 would include the same
disqualification provisions as we propose below for other Regulation D
exemptions.\42\ Currently, Rule 506 has no bad actor disqualification
provisions.
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    \42\ See II.C.2 below.
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    Rule 507 would differ from Rule 506 in five ways:
     Large Accredited Investor Standard. Rule 507 would be
premised on the concept of large accredited investors. Rule 506 would
continue to be premised on the concept of accredited investors.
     Limited Advertising Permitted. Instead of a total ban on
general solicitation and general advertising, as is the case in Rule
506 transactions, issuers in Rule 507 transactions could engage in
limited advertising that satisfies the requirements of the rule. All
other general solicitation and advertising would be prohibited.
     No Sales to Persons Who Do Not Qualify as Large Accredited
Investors. Issuers in Rule 507 transactions would not be allowed to
sell securities to any investor who does not qualify as a large
accredited investor. In Rule 506 transactions, issuers may sell
securities to an unlimited number of accredited investors and up to 35
non-accredited investors.\43\
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    \43\ If an issuer sells to non-accredited investors in a Rule
506 transaction, the issuer must furnish them with the information
specified in Rule 502(b), 17 CFR 230.502(b). The issuer also must
assure that the non-accredited investors meet the investor
sophistication requirements of Rule 506(b)(2)(ii), 17 CFR
230.506(b)(2)(ii). We are not proposing these kinds of requirements
for Rule 507 transactions because issuers could not sell securities
to any non-accredited investors in Rule 507-exempt transactions.
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     Authority for Exemption. Rule 507 would be adopted as an
exemption primarily under the Commission's general exemptive authority
under Section 28 of the Securities Act, while Rule 506 was adopted as a
safe harbor under Section 4(2) of the Securities Act.
     Covered Security Status. Securities sold in accordance
with either of these rules would be considered ``covered securities,''
but under different provisions of Section 18 of the Securities Act.
Securities sold under Rule 507 would be covered securities because the
purchasing large accredited investors would be defined as ``qualified
purchasers'' under Section 18(b)(3) of the Securities Act. Securities
sold under Rule 506 would continue to be covered securities under
Section 18(b)(4)(D) of the Securities Act \44\ because Rule 506

was issued under Section 4(2) of the Securities Act.\45\
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    \44\ 15 U.S.C. 77r(b)(4)(D).
    \45\ State securities regulation of covered securities generally
is limited under Section 18(b) of the Securities Act to imposing
notice filing requirements on offerings, requiring the filing of a
consent to service of process, and assessing a filing fee.
Securities sold in offerings that are exempt under Rule 506 are
covered securities because Section 18(b)(4)(D) provides that
securities sold in transactions exempt under Commission rules issued
under Section 4(2), which includes Rule 506, are covered securities.
Securities sold in offerings that are exempt under Rule 507 would be
covered securities because our proposal provides for an amendment to
Rule 146 under the Securities Act that would define the term
``qualified purchaser'' in Section 18(b)(3) of the Act to include
large accredited investors with respect to offers or sales in
compliance with Rule 507. Under Section 18(b)(3), qualified
purchasers, as defined by the Commission under the Securities Act,
purchase covered securities in transactions so designated by the
Commission.
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    We discuss these five areas of difference in the sections
immediately below.
1. ``Large Accredited Investor'' Standard
    We propose to define a new category of investors, called ``large
accredited investors,'' \46\ which we would use in Rule 507. The
proposed definition of large accredited investor is based on the
``accredited investor'' definition, but with higher and somewhat
different dollar-amount thresholds.\47\ We have proposed higher
thresholds due to what we perceive are increased investor protection
risks relating to the limited advertising that would be allowed under
Rule 507.\48\ The higher thresholds would provide a cushion over the
accredited investor standards for determining eligibility for the new
exemption. The greater public access to investors that the new
exemption would provide warrants increased assurance of the ability of
investors in offerings under that exemption to fend for themselves.
Further, the higher thresholds may provide such assurance.
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    \46\ See Proposed Rule 501(a).
    \47\ See the discussion of the accredited investor definition in
II.B below.
    \48\ While the Model Accredited Investor Exemption is limited to
accredited investors, we propose to further limit the Rule 507
exemption to large accredited investors. NASAA, the organization of
state securities administrators, recently supported a similar higher
threshold for any new federal exemption that would relax the
prohibitions against general solicitation and general advertising.
See comment letter in Commission File No. 265-23 from NASAA to the
Advisory Committee (March 28, 2006) (the ``NASAA Letter''), at 2,
available at http://www.sec.gov/rules/other/265-23/rastaples1692.pdf
.

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    We propose that the entities or institutions that currently must
have more than $5 million in assets to qualify for accredited investor
status under Rule 501(a) would be required to have more than $10
million in investments to qualify as large accredited investors.
Individuals, or ``natural persons'' as the rule calls them, would be
able to qualify as large accredited investors if they own more than
$2.5 million in investments or have had individual annual income of
more than $400,000 (or $600,000 with one's spouse) in the last two
years and expect to maintain the same income level in the current
year.\49\ We propose to have alternative investments and income tests
for individuals because an investments test without an income test
tends to favor investors who have had time to build investment
portfolios.
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    \49\ We discuss our proposed use of the term ``aggregate
income'' instead of the term ``joint income,'' which currently is
used in Rule 501(a), 17 CFR 230.501(a), in II.B.2 below.
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    Based on estimates from our Office of Economic Analysis, 1.64
percent of U.S. households would qualify as large accredited investors,
compared with 8.47 percent that would qualify as accredited
investors.\50\ Our approach in selecting the dollar-amount thresholds
for investors to qualify as large accredited investors reflects an
attempt to approximate the standards adopted by the Commission in the
1980s for accredited investors in light of current knowledge and
changed circumstances.\51\
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    \50\ These estimates are based on Federal Reserve Board of
Governors, Survey of Consumer Finances, 2004. This survey used year-
end 2003 values. More information regarding the survey may be
obtained at http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html
.

    \51\ Our Office of Economic Analysis estimates that in 1982,
when Regulation D was adopted, approximately 1.87 percent of U.S.
households qualified for accredited investor status. This estimate
is based on Federal Reserve Board of Governors, Survey of Consumer
Finances, 1983. This survey used year-end 1982 values. More
information regarding the survey may be obtained at http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html
.

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    We selected the $10 million amount for institutions for two
additional reasons. First, in the interest of uniformity between
Federal and State securities regulation, we chose a standard similar to
the standard in the Uniform Securities Act of 2002, as amended, that
was approved by the National Conference of Commissioners of Uniform
State Laws.\52\ The model statute, which has been adopted by several
states, requires that most non-regulated institutional investors have
$10 million in assets to qualify as ``institutional investors.'' In
selecting a standard for large accredited investors, we chose to
substitute a $10 million investments-owned standard for the $10 million
assets-owned standard because, as discussed below, we believe that
investments owned may be a more accurate and more easily administered
standard than assets owned to determine whether an investor needs the
protection of Securities Act registration. The $10 million amount also
correlates closely with the inflation-indexed value of $5 million in
1982, when we adopted the $5 million assets-owned standard.\53\
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    \52\ See Uniform Securities Act (2002), as amended, available at
http://www.uniformsecuritiesact.org/usa/DesktopDefault.aspx?tabindex=2&tabid=48
.

    \53\ Our Office of Economic Analysis estimates that the
financial thresholds used in Rule 501(a), adjusted for inflation as
of July 1, 2006, would be as follows: the $5 million asset
requirement for certain legal entities would have increased to
approximately $9.5 million; the $1 million individual net worth test
would have increased to approximately $1.9 million; and the $200,000
individual income test and $300,000 joint income test would have
increased to approximately $388,000 and $582,000, respectively. Our
Office of Economic Analysis estimated these levels using the
Personal Consumption Expenditures Chain-Type Price Index, as
published by the Department of Commerce, available at http://www.bea.gov
.

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    We selected the $2.5 million investments-owned standard for
individuals and spouses based on the $2.5 million investments-owned
standard we proposed in December 2006 for individuals and spouses to
invest in private pooled investment vehicles.\54\ We selected the
$400,000 in annual income standard for individuals because it is
approximately the inflation-indexed value of $200,000 in 1982, when the
Commission first adopted the $200,000 in annual income standard for
individual accredited investors. Similarly, we selected the $600,000 in
aggregate income for spouses standard because it is approximately the
inflation-indexed value of $300,000 in 1982. Although the $300,000
combined standard was not adopted until 1988, it was adopted to
complement the $200,000 individual income standard adopted in 1982.\55\
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    \54\ See Private Pooled Investment Vehicle Release.
    \55\ See Release No. 33-6758 (March 3, 1988) [53 FR 7866].
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    Individuals and entities that currently are not subject to a
dollar-amount threshold to qualify as accredited investors also would
qualify as large accredited investors. As such, banks, registered
investment companies, private business development companies, and other
regulated entities identified in Rule 501(a)(1) and (2) that are not
subject to an assets test to qualify for accredited investor status
also would qualify for large accredited investor status without being
subject to an income, assets, or investments requirement.\56\ Further,
directors and executive officers of the issuer would be considered
large accredited investors in addition to being considered accredited
investors, without being subject to an income, assets, or investments

requirement.\57\ As in the accredited investor standard, these entities
and persons are generally deemed not to need the same level of
protection under the Securities Act as other entities and non-
affiliated persons.
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    \56\ See 17 CFR 230.501(a)(1) and (2).
    \57\ See 17 CFR 230.501(a)(4).
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Request for Comment
     Do the standards we propose for qualifying as a large
accredited investor provide a reasonable basis for determining that,
under the circumstances of Rule 507, those investors do not need all of
the protections of Securities Act registration? If not, what
qualifications should we set? Are other levels more appropriate than
$10 million in investments for legal entities and $2.5 million in
investments for individuals and spouses, or annual income of $400,000
for individuals and $600,000 with one's spouse? Should these levels be
lower? Should they be higher, especially because of the availability of
limited advertising? For example, would $7.5 million or $15 million in
investments for legal entities and $1.5 million or $3.5 million in
investments for individuals and spouses, or annual income of $300,000
or $600,000 for individuals and $400,000 or $800,000 with one's spouse
be more appropriate levels? Why? Should we adopt an eligible person
threshold of $1 million in investments for individuals, as suggested by
NASAA? \58\ If you propose thresholds, please provide the basis for
your belief that those thresholds are more appropriate.
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    \58\ See n. 48.
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     Should we adopt a definition of ``large accredited
investor'' that includes only an investments-owned test for individual
investors, as we proposed in the Private Pooled Investment Vehicle
Release for certain individual investors in private pooled investment
vehicles, or should we adopt alternative investments and income tests
as proposed? Please explain the reasons for your views.
     Should we retain the asset-based test instead of using an
investment-based test for determining status as a large accredited
investor for both individuals and legal entities? In this regard,
should the standard for legal entities be $10 million in assets--the
same as the requirement for institutional investors in the Uniform
Securities Act?
     Would it be appropriate to modify proposed Rule 507 to
include any additional safeguards in the definition of large accredited
investor?
2. Limited Advertising Permitted
    Rule 507 would permit an issuer in an exempt transaction to publish
a limited announcement of an offering.\59\ The announcement would be
required to state prominently that sales will be made to large
accredited investors only, that no money or other consideration is
being solicited or will be accepted through the announcement, and that
the securities have not been registered with or approved by the
Commission and are being offered and sold pursuant to an exemption.\60\
At the issuer's option, the announcement also could contain the
following additional information:
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    \59\ While the proposed statement is similar to the statement
permitted under Rule 135c, 17 CFR 230.135c, the proposed exemption
is substantially patterned after the Model Accredited Investor
Exemption and differs from Rule 135c in that the advertisement is
permitted and anticipated to be part of the offering process,
whereas Rule 135c is limited to an announcement that is not to be
used to condition the market or as part of the solicitation for the
offering.
    \60\ These statements are similar to statements required by the
Model Accredited Investor Exemption, except that the proposed
announcement is not required to contain a statement that the
securities have not been registered with or approved by a state
securities agency.
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     The name and address of the issuer;
     A brief description of the business of the issuer in 25 or
fewer words; \61\
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    \61\ The Model Accredited Investor Exemption limits an issuer's
description of the business to 25 or fewer words. We have retained
the 25-word limitation in the proposal, but solicit comment below on
whether such a limitation is appropriate. We already have one
federal exemption from Securities Act registration that permits
offerings involving select investors and a limited amount of general
solicitation. Our Rule 1001, 17 CFR 230.1001, exempts offerings
conducted under Section 25102(n) of the California Corporations
Code's ``Qualified Purchaser Exemption.'' Adopted in September 1994,
the California provision permits offerings to specified classes of
qualified purchasers that are similar to federal classes of
accredited investors without state registration. The QPE allows for
a general announcement of an offering, including a brief description
of the issuer's business, without a word limit. California's QPE
served as a prototype for the Model Accredited Investor Exemption.
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     The name, type, number, price, and aggregate amount of
securities being offered and a brief description of the securities;
     A description of what large accredited investor means;
     Any suitability standards and minimum investment
requirements for prospective purchasers in the offering; and
     The name, postal or e-mail address, and telephone number
of a person to contact for additional information.\62\
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    \62\ The additional information permitted in the announcement is
patterned after the Model Accredited Investor Exemption, but also
permits a description of the meaning of the term ``large accredited
investor'' and a discussion of suitability standards and minimum
investment requirements. We propose to permit these latter
statements to avoid confusion about the meaning of the term ``large
accredited investor'' and to facilitate management of offerings
under the exemption.
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    Publication of such an announcement would not contravene the
prohibition on general solicitation and advertising otherwise
applicable to the offer and sale of securities in a Rule 507
transaction. The publication could only be ``in written form'' \63\ but
could occur in any written medium, such as in a newspaper or on the
Internet. We have proposed to limit the publication to written form in
an effort to limit aggressive selling efforts made through the
announcement. As part of this limitation, radio or television broadcast
spots or ``infomercials'' would be prohibited.\64\
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    \63\ Proposed Rule 507 uses the term ``in written form'' to
limit the term and differentiate the concept from ``written
communication'' as defined in Rule 405. 17 CFR 230.405. The term
``written communication'' is defined in Rule 405 to include a radio
or television broadcast. Publication of an announcement under Rule
507 would be substantially more limited.
    \64\ Limiting the use of certain types of advertisements under
Rule 507 would be consistent with our position in Rule 433, 17 CFR
230.433, relating to free writing prospectuses in the context of
public offerings by non-reporting and unseasoned issuers.
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    Rule 507 also provides that an issuer or a person acting on an
issuer's behalf may provide information in addition to the limited
announcement only if the issuer reasonably believes that the
prospective purchaser is a large accredited investor.\65\ Additional
information may be provided orally or in writing, such as in the form
of sales material or an offering circular. Information also may be
delivered to prospective purchasers through an electronic database that
is restricted to large accredited investors.\66\
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    \65\ For a related discussion of what measures an issuer could
take to satisfy its obligation under Rule 501(a) to form a
reasonable belief that a prospective purchaser satisfies the
definition of accredited investor, see n. 99 and accompanying text.
    \66\ For a discussion of on-line private offerings under
Regulation D, see Release No. 33-7856 (Apr. 28, 2000) [65 FR 25843].
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Request for Comment
     We propose to limit the information included in a Rule 507
announcement and require that the information be in written form.
Should we require or permit any other information to be included in the
limited announcement proposed in Rule 507 offerings? If so, what
additional information would be appropriate? Should any of the optional
information be required? Should we eliminate or expand the 25-word
limit on the description of the issuer's business? If we did not impose
a limit on the business description, would

issuers be more or less likely to use inappropriately promotional and
non-objective language to describe their businesses in the limited
announcement? Should the rule require that any description of the
issuer's business be fair and impartial?
     Should we eliminate the requirement that the Rule 507
announcement be in written form? If so, what limitations, if any,
should we have on the form of the announcement? Should we define the
phrase ``in written form''? Should we limit permitted written
announcements to publications, as opposed to, for example, flyers
handed out on street corners? Should we allow radio or television
broadcast announcements? Should we follow the Model Accredited Investor
Exemption and allow the announcement to be made by any means? Should we
require issuers to retain copies of any advertisements or to submit
copies of the script of any radio or television broadcast to the
Commission staff? Should they be filed with the Commission, and if so,
should the filing be confidential?
     Proposed Rule 507 would require issuers to include in any
permitted public announcement a prominent statement that sales will be
made only to large accredited investors, that no money is being
solicited or will be accepted by way of the announcement, and that the
securities have not been registered with or approved by the Commission
and are being offered and sold pursuant to an exemption. Are these
appropriate requirements for the announcement? Should we require
additional statements? Do we need to require that the statement be
prominent? If so, should we also specify format or font sizes? How
would such a requirement operate for electronic communications? Does
the requirement that the announcement prominently state that ``no money
or other consideration is being solicited or will be accepted through
the announcement'' make it clear that an investor should not respond to
the announcement by sending a check to the issuer? Can you suggest
alternative wording?
     Should we allow issuers, at their option, to include in a
Rule 507 announcement a coupon, returnable to the issuer, indicating
interest in the offering, containing the name, address and telephone
number of the prospective purchaser, and stating clearly and separately
that the indication of interest is not binding and that no money should
be sent? \67\
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    \67\ This provision could be modeled after subparagraph (c) of
Rule 254 of Regulation A, 17 CFR 254(c). Proposed Rule 135d,
although never adopted, had a similar provision in subparagraph (b).
See Release No. 33-7188 (June 27, 1995) [60 FR 35648].
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     The Model Accredited Investor Exemption does not permit
telephone solicitation unless, before placing a telephone call, the
issuer reasonably believes the prospective purchaser to be solicited is
an accredited investor.\68\ Should we include a similar limitation in
Rule 507 with respect to large accredited investors?
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    \68\ Paragraph (G) of the Model Accredited Investor Exemption
provides that no telephone solicitation is permitted unless the
issuer reasonably believes that the person solicited is an
accredited investor before making the telephone solicitation.
Proposed Rule 507(b)(2)(iii) provides that any information beyond
the announcement may be provided ``only if the issuer reasonably
believes that the prospective purchaser is a large accredited
investor,'' but does not address telephone solicitation explicitly.
---------------------------------------------------------------------------

     The rule provides that an issuer or any person acting on
an issuer's behalf may provide additional information if the issuer
reasonably believes the prospective purchaser is a large accredited
investor. Does the proposal adequately acknowledge that the reasonable
belief of an agent of the issuer may be attributable to the issuer and
thereby permit the issuer to satisfy the standard? What requirements,
if any, should apply to the delivery of information to prospective
purchasers through an electronic database that is restricted to large
accredited investors? \69\ Should we provide additional guidance and if
so, should the guidance be in the rule?
---------------------------------------------------------------------------

    \69\ See n. 66.
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     Should the rule provide any guidance as to how an issuer
may arrive at a reasonable belief that a prospective purchaser is a
large accredited investor? Should it be permitted to form the belief
entirely on the basis of responses to a questionnaire?
     Rule 508 provides that insignificant deviations from the
requirements of Regulation D do not result in the loss of the
exemption.\70\ Rule 508(a)(2) provides, however, that failures with
regard to limitations on the manner of offering are deemed to be
significant. What should be the implications for failure to comply with
the restrictions on permitted advertising in Rule 507 transactions?
Should the issuer no longer be able to rely on the Rule 507 exemption?
Are the provisions of Rule 508 sufficient to deal with situations that
might arise?
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    \70\ We propose to amend Rule 508 to add a reference to proposed
Rule 507.
---------------------------------------------------------------------------

     Should we adopt broader amendments to Rule 508 to address
related issues that might arise under the Rule 507 exemption, as well
as under other exemptions in Regulation D? For example, should we
delete the current Rule 508 carve-out of manner of sale limitations in
the list of insignificant deviations? This carve-out has been read to
provide that an issuer's failure to comply with a ban on general
solicitation applicable to a Regulation D offering never can constitute
an insignificant deviation. As a result, legal practitioners have
expressed concern that an insignificant deviation relating to general
solicitation could result in total loss of the Rule 508 defense. If the
carve-out were deleted, Rule 508 would treat insignificant failures to
comply with an applicable ban on general solicitation like most other
deviations from the requirements of Regulation D. One effect of such a
rule amendment would be to clearly permit issuers to raise the Rule 508
defense with respect to complaining parties who were not generally
solicited in an offering structured to avoid general solicitation,
while continuing to preclude the issuer from raising the defense with
respect to a party who was generally solicited, depending upon whether
it is able to satisfy the other conditions to availability of the
defense.
3. No Sales to Persons Who Do Not Qualify as Large Accredited Investors
    We propose that issuers relying on Rule 507 to exempt a transaction
from Securities Act registration be permitted to sell securities only
to investors who qualify as large accredited investors. This is a
departure from the approach taken in Rule 506, where issuers are
permitted to sell securities to up to 35 non-accredited investors, in
addition to an unlimited number of accredited investors. Because
limited advertising allows issuers to provide information about their
offering to anyone, we believe it is appropriate to establish stricter
limitations on sales to limit investors to those who do not need all of
the protections of Securities Act registration.
    A Rule 507 offering could only be conducted simultaneously or
``side-by-side'' with another Regulation D offering if the two
offerings were considered as separate and distinct offerings under the
five-factor integration test set forth in Rule 502(a) of Regulation
D.\71\ Since Rule 506 prohibits the use of general solicitation and
advertising and Rule 507 is limited exclusively to sales to large
accredited investors, neither of these two exemptions would be
available if two offerings were

considered as integrated where one offering used limited public
advertising and the other offering was sold to persons who were not
large accredited investors.\72\
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    \71\ 17 CFR 230.502(a). We are proposing a note to clarify that
Rule 144A does not preclude an issuer or a person acting on the
issuer's behalf from publishing a general announcement of an
offering pursuant to Rule 507. See II.E.2 below.
    \72\ We do not propose to provide an integration safe harbor for
Rule 507 offerings as was done, for example, in Section 3(c)(7)(E)
of the Investment Company Act, 15 U.S.C. 80a-3(c)(7)(E), and under
17 CFR 230.144A(e) and 17 CFR 230.701(f).
---------------------------------------------------------------------------

Request for Comment
     Should we permit investors who do not qualify as large
accredited investors to invest in Rule 507 offerings? If so, how should
we limit the number of non-qualifying investors? Would permitting
investors who do not qualify as large accredited investors to invest in
Rule 507 offerings increase the potential for fraud in those offerings?
     To limit sales to large accredited investors, would it be
appropriate to limit publication of the announcement to password-
protected Web sites that are accessible only by large accredited
investors? Should we provide other limitations to ensure that the
exemption is not abused?
4. Authority for Exemption
    We are proposing Rule 507 as an exemption from the registration
provisions of Section 5 of the Securities Act under our general
exemptive authority in Section 28 of that Act. Under Section 28, we may
exempt any transaction from any provision of the Securities Act ``to
the extent that such exemption is necessary or appropriate in the
public interest, and is consistent with the protection of investors.''
\73\
---------------------------------------------------------------------------

    \73\ 15 U.S.C. 77z-3.
---------------------------------------------------------------------------

    We believe proposed Rule 507 meets the standard set forth in
Section 28 because it safeguards investor interests by limiting both
the advertising permitted and the types of investors that may invest in
an exempt offering. The proposal would impose strict controls on
advertising and would be limited to offerings that are sold only to
investors who meet high financial qualification standards designed to
identify investors who have less need for the protections offered by
Securities Act registration, as they can ``fend for themselves'' with
regard to the transaction.\74\
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    \74\ The conclusion that investors do not need all the
protections that registration under the Securities Act would offer
them and that they can fend for themselves is the determination that
must be made under SEC v. Ralston Purina, 346 U.S. 119, 125 (1953),
to establish that transactions are exempt under Section 4(2) of the
Securities Act as transactions ``not involving any public
offering.'' We believe the Ralston Purina standard is informative in
analyzing whether Rule 507, as proposed, would satisfy the Section
28 standard. As a practical matter, we believe that the use of high
financial thresholds to qualify as a large accredited investor and
the imposition of a ban on most general solicitation and advertising
would tend to support a determination that Rule 507 is appropriate
in the public interest and consistent with the protection of
investors.
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    Proposing Rule 507 under Section 28, rather than Section 4(2),\75\
has certain consequences. Among these consequences is that pooled
investment vehicles that rely on the exclusion from the definition of
``investment company'' provided by Section 3(c)(1) or Section 3(c)(7)
of the Investment Company Act would not be able to take advantage of
the limited advertising proposed to be permitted under Rule 507. This
results because those vehicles are required to sell their securities in
transactions not involving a public offering.\76\ Such vehicles
typically rely on Section 4(2) to meet this requirement, frequently
through Rule 506, which expressly forbids general solicitation and
general advertising.\77\ Accordingly, they would be precluded from
selling their securities in reliance on Rule 507.
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    \75\ Because some advertising would be permitted in Rule 507
transactions, we have chosen not to propose the exemption under
Section 4(2) of the Securities Act, which the Commission in the past
has viewed as incompatible with a non-public offering under Section
4(2). See n. 37.
    \76\ Section 3(c)(1) of the Investment Company Act excludes from
the definition of investment company an issuer the securities (other
than short-term paper) of which are beneficially owned by not more
than 100 persons and that is not making or proposing to make a
public offering of its securities. Section 3(c)(7) of the Investment
Company Act excludes from the definition of investment company an
issuer the outstanding securities of which are owned exclusively by
persons who, at the time of acquisition of such securities, are
``qualified purchasers,'' as defined in the Investment Company Act,
and that is not making or proposing to make a public offering of its
securities. The term ``qualified purchaser'' is defined for purposes
of the Investment Company Act in Section 2(a)(51) of the Investment
Company Act, 15 U.S.C. 80a-2(a)(51). This definition applies in the
context of the Investment Company Act; the term has a different
meaning under the Securities Act, as provided in the proposed
amendment to Rule 146(c).
    \77\ Compliance with Rule 506 provides a safe harbor that a
transaction does not involve ``any public offering'' within the
meaning of Section 4(2) of the Securities Act. See 17 CFR
230.506(a).
---------------------------------------------------------------------------

Request for Comment
     Are there other implications we should consider as a
result of our proposed use of our exemptive authority under Section 28,
rather than proposing Rule 507 under Section 4(2)?
5. Covered Security Status
    Securities sold under Rule 506 are ``covered securities'' under
Section 18(b)(4)(D) of the Securities Act.\78\ To enhance the utility
of proposed Rule 507, we propose that a large accredited investor that
participates in a Rule 507 offering be defined in Rule 146 as a
``qualified purchaser'' under Section 18(b)(3) of the Securities Act.
As such, securities sold in a Rule 507-exempt offering would be
``covered securities,'' resulting in preemption from state securities
regulation as provided under Section 18 of the Securities Act.\79\ By
providing ``covered security'' status to the securities, the securities
would be primarily regulated on the federal level, with the goal of
enhancing efficiency and reducing duplicative regulation without
compromising investor protection. Because the dollar-amount thresholds
for investors in Rule 507 transactions would be significantly higher
than the dollar-amount thresholds in Rule 506 offerings, we believe the
policy rationales for making securities in Rule 506 transactions
``covered securities'' also support making securities in Rule 507
transactions ``covered securities.'' \80\
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    \78\ The National Securities Markets Improvement Act of 1996,
Pub. L. 104-290, 110 Stat. 3416 (Oct. 11, 1996) (``NSMIA''),
preempts the state registration and review of transactions involving
``covered securities.'' It amended Section 18 of the Securities Act
to establish classes of covered securities, including securities
offered or sold to ``qualified purchasers,'' as defined by
Commission rule.
    \79\ In 2001, we proposed to define the term ``qualified
purchaser'' in the Securities Act to equate that term with our
definition of the term ``accredited investor'' in Rule 501(a). See
Release No. 33-8041 (Dec. 19, 2001) [66 FR 66839]. That proposal is
no longer under consideration by the Commission.
    \80\ These policy rationales are contained in the legislative
history of NSMIA, especially H.R. Rep. No. 104-622, at 159-165
(1996).
---------------------------------------------------------------------------

Request for Comment
     We propose to amend Rule 146 to define the term ``large
accredited investor'' as a ``qualified purchaser'' for purposes of
Section 18 of the Securities Act. Is defining a ``large accredited
investor'' as a ``qualified purchaser'' under the Securities Act
appropriate? Should the definition of ``qualified purchaser'' be
narrower or broader?
     Proposed Rule 146(c) includes a provision that indicates
clearly that states may continue to impose substantially similar notice
filing requirements as those imposed by the Commission on transactions
with qualified purchasers. Is this provision necessary? Should we
define ``substantially similar'' more precisely? If so, please provide
specific language. Would the proposed language preclude states from
requiring that certain supplemental items be attached to notice
filings?

B. Proposed Revisions Related to Definition of ``Accredited Investor''

    We propose revisions to the definition of the term ``accredited
investor'' in

Rule 501(a) of Regulation D, which sets forth the standards to qualify
as an accredited investor. The current definition provides that a
person who comes within, or who the issuer reasonably believes comes
within, one of eight enumerated categories at the time of sale is an
accredited investor. Currently, the Rule 501(a) categories include:
     Institutional investors; \81\
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    \81\ This category includes banks, savings and loan
associations, registered brokers and dealers, insurance companies,
registered investment companies, business development companies, and
small business investment companies. The category also includes
certain employee benefit plans within the meaning of the Employee
Retirement Income Security Act (codified primarily at 29 U.S.C. ch.
18), with total assets in excess of $5 million. See Rule 501(a)(1).
---------------------------------------------------------------------------

     Private business development companies;
     Corporations, partnerships and tax exempt organizations
with total assets in excess of $5 million;
     Directors, executive officers and general partners of the
issuer;
     Individuals with a net worth exceeding $1 million, either
alone or with their spouses;
     Individuals with income in excess of $200,000 in each of
the two most recent years or joint income with the individual's spouse
in excess of $300,000 in each of those years;
     Trusts with total assets in excess of $5 million; and
     Entities in which all of the equity owners are accredited
investors.
    The revisions we propose to the Rule 501(a) ``accredited investor''
qualification standards would affect Rules 504 through 506 and, to the
extent that the standards to qualify as a ``large accredited investor''
are based on the standards to qualify as an ``accredited investor,''
Rule 507.\82\ We believe our proposed revisions of the qualification
standards for accredited investors will result in those standards,
together with the substantive provisions of the exemptions in
Regulation D, better determining who meets the requirements for
reliance on the exemptions. Our proposed revisions would:
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    \82\ The revisions may affect offerings made by pooled
investment vehicles under Sections 3(c)(1) and 3(c)(7) of the
Investment Company Act, as those offerings must qualify as non-
public offerings under Section 4(2) of the Securities Act and many
such offerings are structured to take advantage of the Rule 506 safe
harbor for the Section 4(2) exemption. We recently proposed
revisions to our accredited investor qualification standards for
individuals investing in certain pooled investment vehicles. See
II.B.5 below.
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     Add an alternative ``investments-owned'' standard to Rule
501(a);
     Define the term ``joint investments'';
     Establish a mechanism to adjust the dollar-amount
thresholds in the definitions in the future to reflect inflation; and
     Add several categories of permitted entities to the list
of accredited and large accredited investors.
    In addition, in the Private Pooled Investment Vehicle Release, we
proposed to revise Regulation D to establish a new category of
accredited investor, ``accredited natural person,'' that individuals
would need to satisfy in order to invest in certain private pooled
investment vehicles relying on Rule 506.\83\ We are continuing to
consider the comments received on that proposal. We also are taking the
opportunity to solicit further comment on the questions we asked in
December 2006 when we issued that proposal, especially in light of the
new proposals in this release, and to solicit comment on additional
questions on the proposal, as discussed below.
---------------------------------------------------------------------------

    \83\ Proposed Rules 216 and 509 under the Securities Act.
---------------------------------------------------------------------------

1. Adding Alternative Investments-Owned Standards to Accredited
Investor Standards
    Rule 501(a) currently provides generally that certain legal
entities must have total assets in excess of $5 million to qualify as
accredited investors, that individuals and spouses may qualify if they
have a net worth above $1 million, that individuals also may qualify if
they have annual income above $200,000, and that spouses also may
qualify if they have annual income above $300,000. We propose to add
alternative standards for these entities and for individuals and
spouses in Rule 501(a) that reflect investments owned by the
prospective investor as an additional and alternative method of
establishing accredited investor status.\84\ We believe an investments-
owned standard will add another, potentially more accurate method to
assess an investor's need for the protections of registration under the
Securities Act. We also believe an investments-owned standard may
reduce and simplify compliance burdens for companies by providing an
alternative standard that may be assessed more easily than the current
assets or net worth or annual income standards.
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    \84\ As explained above with respect to large accredited
investors, an investments-owned standard would be an alternative to
the income standards for establishing large accredited investor
status for individuals and spouses and the sole method for
establishing large accredited investor status for entities that must
satisfy a dollar-amount threshold.
---------------------------------------------------------------------------

a. Proposed Definition of ``Investments''
    We propose a definition of ``investments'' for purposes of
qualifying for accredited investor and large accredited investor status
that is substantively the same as the definition we proposed in
December 2006 in the Private Pooled Investment Vehicle Release.\85\
However, in order to establish a uniform definition that applies
throughout Regulation D, the newly proposed definition contains slight
differences. The Private Pooled Investment Vehicle Release proposed
separate definitions for the terms ``prospective accredited natural
person,'' ``related person,'' ``investment purposes,'' ``valuation,''
and ``deductions.'' \86\ Our current proposal replaces the term
``prospective accredited natural person'' with the term ``purchaser.''
In addition, the concepts underlying the terms ``related person,''
``investment purposes,'' ``valuation,'' and ``deductions'' are
discussed in the notes to the definition of ``investments'' in our
current proposal rather than as separate definitions, as was done in
the Private Pooled Investment Vehicle Release.\87\ We believe including
these concepts as notes to the definition of ``investments'' in
proposed Rule 501(h) will provide greater clarity and ease use of the
definition.
---------------------------------------------------------------------------

    \85\ The standard proposed in December 2006 would require
investors to satisfy a two-part test--they would be required to be
an accredited investor, as defined in Rule 501(a)(5) or (6) for
transactions offered under Rule 506 or Rule 215(e) or (f) for
transactions under Section 4(6) of the Securities Act (15 U.S.C.
77d(6)), and to own at least $2.5 million in ``investments,'' as
that term would be defined in Rule 509 as proposed in the Private
Pooled Investment Vehicle Release.
    \86\ Unlike in the Private Pooled Investment Vehicle Release, we
have not here proposed a definition of ``certain retirement plans
and trusts'' for use in our proposed definition of ``investments.''
We assume that investments held in retirement plans and trusts would
be included in our proposed definition of investments.
    \87\ In order to simplify the definition of ``investments,'' we
included the concepts of ``related person'' and ``deduction'' in the
notes as they relate to ``investment purposes'' and ``valuation,''
respectively. See proposed notes 1 through 3 to paragraph (h) of
Rule 501.
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b. Amount of Investments Required
    For legal entities required to satisfy a $5 million assets test,
the proposed amendment would add an alternative investments standard of
$5 million. For individuals and spouses, the proposed amendment would
provide a new alternative standard of $750,000 in investments that
could be used instead of the current net worth standard of $1 million
or annual income standards of $200,000 (or $300,000 with one's

spouse).\88\ We proposed an investments-owned standard as part of our
December 2006 proposal for a new category of accredited investor, the
``accredited natural person,'' which was developed to address
eligibility for individuals to invest in private pooled investment
vehicles that rely on the exclusion from the definition of the term
``investment company'' provided by Section 3(c)(1) of the Investment
Company Act.\89\
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    \88\ We are proposing the $750,000 investments-owned standard
because the dollar-amount threshold is the same as the dollar-amount
threshold initially proposed in Regulation D for the assets test,
which, as initially proposed, excluded certain assets, including
personal residences. The assets threshold was increased to $1
million and adopted for the sake of simplicity and reflected a
$250,000 increase in large part to account for the value of the
primary residence. See Release No. 33-6389, at 11255.
    \89\ See n. 76.
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    Unlike the December 2006 proposed definition, the proposed
alternative standards would not result in a reduction in the number of
investors eligible for accredited investor status; rather, the standard
is intended to ease issuers' threshold determinations and provide a
possibly more logical basis for them.\90\ In determining whether an
investor meets the threshold under the investments-owned standard, the
value of personal residences and places of business would not be
included. Although we recognize that we have historically included (and
may continue to include) personal residences and places of business as
assets in calculating total assets for legal entities and net worth for
individuals, we believe, consistent with our December 2006 proposed
definition, that an accurate method of assessing an investor's need for
the protections of registration under the Securities Act when based on
an investments test is to exclude these real estate assets from the
definition of investments, since they are not held for investment
purposes.\91\ Accordingly, real estate would not be considered to be
held for ``investment purposes'' if the real estate is used by the
person or certain related persons for personal purposes (e.g., as a
personal residence).\92\ The term ``personal purposes'' is derived from
the Internal Revenue Code provision that addresses circumstances under
which a taxpayer is allowed deductions with respect to certain
``dwelling units.'' \93\ The proposed definition refers to the Internal
Revenue Code because it would allow determinations of whether
residential real estate is an investment based on the same provisions
that would apply in determining whether certain expenses related to the
property are deductible for purposes of completing tax returns.
Similarly, property that has been used as a place of business or in
connection with the conduct of a trade or business also would not be
considered to be held for investment purposes.\94\
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    \90\ As proposed, there would be no changes to the current
standards for accredited investors in Regulation D that would
decrease the existing pool of potential investors. We do not believe
these amendments would substantially change the number of investors
now eligible for accredited investor status. Based on the 2004
Federal Reserve survey cited in n. 50, our Office of Economic
Analysis estimates that adding an alternative $750,000 investments
standard to the current accredited investor standard for natural
persons (net worth in excess of $1 million or individual income in
excess of $200,000 (or $300,000 with the person's spouse)) would
result in 8.69 percent of households qualifying for accredited
investor status in 2003, as opposed to 8.47 percent of households
qualifying for accredited investor status without the proposed
alternative.
    \91\ This approach follows the proposed approach in the Private
Pooled Investment Vehicle Release. Commenters generally preferred
including the primary residence in the valuation of investments. We
continue to consider those comments, but are again proposing to
exclude the primary residence when determining the value of
investments, as the value of an individual's primary residence may
have little relevance with regard to the individual's need for the
protections of Securities Act registration.
    \92\ See proposed Note 1 to Rule 501(h).
    \93\ The proposed rule would treat residential real estate as an
investment if it is not treated as a dwelling unit used as a
residence in determining whether deductions for depreciation and
other items are allowable under the IRC. Section 280A of the IRC
provides, among other things, that a taxpayer uses a dwelling unit
during the taxable year as a residence if he or she uses such unit
for personal purposes for a number of days that exceeds the greater
of 14 days or 10 percent of the number of days during which the unit
is rented at a fair rental. 26 U.S.C. 280A.
    \94\ See proposed Note 1 to Rule 501(h).
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Request for Comment \95\
     Are the dollar-amount thresholds for the proposed
investments-owned standard appropriate? Are other levels more
appropriate than the $5 million in investments for legal entities and
$750,000 in investments for individuals and spouses? Should these
levels be higher or lower? For example, would $4 million in investments
for legal entities and $500,000 in investments for individuals and
spouses be more appropriate levels? Why?
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    \95\ We intend to consider comments we receive in response to
this request for comment along with the comments on the Private
Pooled Investment Vehicle Release.
---------------------------------------------------------------------------

     Is there a better way to define ``investments'' to meet
the goals of the standard in Regulation D? Is our proposed definition
of investments too complicated? Should we specifically include
additional types of investment asset classes in the definition of
investments? Should we exclude or limit any of the investment asset
classes we have proposed for inclusion?
     We are proposing a definition of ``investments'' in
proposed paragraph (h) of Rule 501 that is substantially similar to the
definition in proposed Securities Act Rule 509(b)(3) \96\ and existing
Investment Company Act Rule 2a51-1(b).\97\ Should we adopt a less
technical, more principles-based definition of ``investments''? Would a
more principles-based definition be more appropriate for the many
smaller companies and small businesses with limited resources that
commonly use Regulation D, sometimes operating without sophisticated
legal counsel? If a more principles-based definition would be more
appropriate, should the rule define ``investments'' as meaning cash and
cash equivalents, securities, real estate, commodities, and commodity
interests held for investment purposes, provide that the value of
investments be calculated ``net of investment indebtedness,'' and
provide that investment purposes would not include use of real estate
by a prospective purchaser as a primary or secondary residence or
primary place of business?
---------------------------------------------------------------------------

    \96\ See the Private Pooled Investment Vehicle Release.
    \97\ 17 CFR 270.2a51-1(b).
---------------------------------------------------------------------------

     Should we specifically exclude from the definition of
investments real estate used as a primary residence or primary place of
business? Should we exclude secondary residences? Is it appropriate to
include secondary residences that are not held for investment purposes?
Would it be appropriate to specify in the rule that residential real
estate that currently qualifies for the home mortgage interest
deduction under the Internal Revenue Code is the type of residential
real estate that would be excluded for purposes of determining
investments owned? Commenters are asked to discuss why they believe
that real estate of the kind excluded should or should not be counted
as an investment under the rules and why.
     Our proposed definition of ``investments'' excludes
securities that constitute a ``control interest'' in an issuer.
Limiting the definition in this manner is designed to exclude, among
other things, controlling ownership interests in family-owned and other
closely-held businesses.\98\ Such holdings may not demonstrate the lack
of need for protection of the Securities Act registration provisions.
Proposed

Rule 501(h) and proposed Rule 509(b)(3) and the underlying existing
rule upon which these two proposals are based, Rule 2a51-1(b)(1), all
contain the same exceptions from the control interest exclusion--
interests in ``investment vehicles,'' ``public companies'' and ``large
private companies''--all of which are defined in Rule 2a51-1. Should
these three exceptions be omitted from the definition of investments or
referred to in Rule 501(h) in a shorter, more principles-based
definition so as to be easier to comprehend?
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    \98\ For a more in-depth discussion of the concept of
investments as used in proposed Rule 501(h), proposed Rule 509(b)(3)
and Rule 2a51-1(b)(1), see the adopting release for Rule 2a51-1,
Release No. IC-22597 (Apr. 3, 1997) [62 FR 17511].
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     Note 3 to proposed Rule 501(h) indicates that the value of
investments is the fair market value on the most recent practicable
date or their cost and that the determination is made net of any
outstanding indebtedness incurred to acquire or for the purpose of
acquiring the investments. Would it be appropriate to provide that the
test be the higher or lower of fair market value or cost, or solely
fair market value? Should we simply use the concept of net of
investment indebtedness or is it more helpful to have a more detailed
explanation of the deductions?
     Does an investments-owned standard serve as a better proxy
than a net worth or total assets standard for determining whether an
investor is among those investors who do not need the protections of
Securities Act registration? Would an investments-owned standard be a
more appropriate determinant of accredited investor status than the
current net worth standard?
     Our experience indicates that some issuers may not have
taken appropriate measures to satisfy their obligation under Rule
501(a) to form a reasonable belief that a prospective purchaser
satisfied the definition of accredited investor. What additional
measures could and should we take to improve issuers' understanding and
practices in this area? Should we create a safe harbor in Regulation D
that sets forth the type of investigation required for an issuer to
reach a reasonable belief? Would it be appropriate to set forth in the
safe harbor that an issuer must conduct a reasonable investigation in
order to come to a reasonable belief? Are there other modifications to
the existing requirements under Regulation D that would improve
issuers' practices in forming a reasonable belief that prospective
purchasers satisfy the definition of accredited investor? Should we
provide specific details as to what kind of investigation an issuer can
rely upon to form a reasonable belief, as we did in Rule 144A(d)(1)?
\99\ What other criteria or methods could be used by issuers to form a
reasonable belief that an investor is accredited? Or would any of the
foregoing render the rule less usable for capital formation?
---------------------------------------------------------------------------

    \99\ 17 CFR 230.144A(d)(1). In determining whether a prospective
purchaser is a qualified institutional buyer, Rule 144A(d) provides
that a seller and any person acting on its behalf are entitled to
rely upon the following non-exclusive methods of establishing the
prospective purchaser's ownership and discretionary investment of
securities: (i) The prospective purchaser's most recent publicly
available financial statements; (ii) the most recent publicly
available information appearing in documents filed by the
prospective purchaser with the Commission or another U.S. federal,
state, or local government agency or self-regulatory organization,
or with a foreign governmental agency or self-regulatory
organization; (iii) the most recent publicly available information
appearing in a recognized securities manual; or (iv) a certification
by the chief financial officer, a person fulfilling an equivalent
function, or other executive officer of the purchaser, specifying
the amount of securities owned and invested on a discretionary basis
by the purchaser as of a specific date on or since the close of the
purchaser's most recent fiscal year.
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2. Proposed Definition of ``Joint Investments''
    Our rules currently allow issuers to count all of the assets that
an individual owns jointly with a spouse or that are part of a shared
community interest in the calculation of whether the individual is an
accredited investor under Rule 501(a)(5) because the individual has a
``joint net worth'' with the spouse of more than $1 million. In the
Private Pooled Investment Vehicle Release, we proposed to take a
different approach to determining eligibility for accredited investor
status by reason of assets owned by a spouse or as part of a shared
community interest in calculating ``joint investments.'' \100\ We
propose to take that same approach in calculating ``joint investments''
to apply throughout Regulation D. We propose a simplified definition of
the term ``joint investments'' to apply throughout Regulation D that
retains the substantive meaning of the definition proposed in the
Private Pooled Investment Vehicle Release.
---------------------------------------------------------------------------

    \100\ Private Pooled Investment Vehicle Release at 407.
---------------------------------------------------------------------------

    The definition of ``joint investments'' that we propose provides
that investments of an individual seeking to make an investment in a
Regulation D-exempt offering without obtaining the signature and
binding commitment of his or her spouse may include only 50 percent of:
     Any investments held jointly with the individual's spouse;
and
     Any investments in which the individual shares a community
property or similar shared ownership interest with the individual's
spouse.
    Where spouses both sign and are bound by the investment
documentation, the full amount of their investments (whether made
jointly or separately) may be included for purposes of determining
whether the investors are either accredited or large accredited
investors.\101\
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    \101\ We received substantial comment on this issue in response
to the Private Pooled Investment Vehicle Release, urging that we
permit a spouse's assets to be included in any calculation for
determining an investor's accreditation. See, e.g., comment letters
in Commission Rulemaking File No. S7-25-06 from American Bar
Association (Mar. 12, 2007) (the ``ABA Private Pooled Investment
Vehicle Letter''), available at http://www.sec.gov/comments/s7-25-06/s72506-584.pdf
, and New York State Bar Association (Mar. 14,

2007), available at http://www.sec.gov/comments/s7-25-06/s72506-597.pdf.
 We continue to consider this issue.

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

    To avoid confusion and clarify language in other parts of Rule 501
in connection with the ``joint investments'' proposal, we propose to
change the words used to describe the threshold for spouses to qualify
for accredited investor status on the basis of net worth under Rule
501(a)(5) from ``joint net worth'' to ``aggregate net worth'' and to
change the words used to describe the income threshold for spouses to
qualify as accredited investors under Rule 501(a)(6) from ``joint
income'' to ``aggregate income.'' We also would use the ``aggregate
income'' terminology in the definition of large accredited investor. We
believe these changes are advisable to avoid confusion between the
interpretation of the word ``joint'' in the context of the term ``joint
investments'' and in the context of the terms ``joint net worth'' and
``joint income.'' Our previous releases and staff interpretations in
this area have used the terms ``joint net worth'' and ``joint income''
to mean aggregate net worth and aggregate income, and we do not intend
for these changes to alter the meaning of the rules.\102\
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    \102\ For a discussion of ``joint net worth,'' see Release No.
33-6389, at n. 14 (Mar. 8, 1982) [47 FR 11251]. For a discussion of
``joint income,'' see Release No. 33-6683 (Jan. 16, 1987) [52 FR
3015] and Release No. 33-6758 (Mar. 3, 1988) [53 FR 7866].
---------------------------------------------------------------------------

Request for Comment
     Does the proposed joint investments approach properly
address the application of the accredited investor standard to marital
assets? Should we base the determination as to whether marital assets
may be considered in determining the accredited investor status of
individual spouses on something other than whether both spouses sign
and are bound by the investment documentation?
     Under Rule 501(a)(5) as we propose to amend it, an issuer
could count 100

percent of the assets held jointly with an individual's spouse or as
part of a shared community interest in determining, on the basis of net
worth, the eligibility for accredited investor status of an individual
investing without his or her spouse but only 50 percent of those same
assets (if they are investments) in determining eligibility on the
basis of investments owned. Is this approach workable? Should we treat
assets of a spouse the same regardless of whether an individual
investor is qualifying on the basis of net worth or investments owned?
For instance, should we permit an issuer to include only 50 percent of
an individual investor's marital assets in calculating both net worth
and investments owned? Or should we permit the issuer to include 100
percent or some other part of the marital assets?
     We believe that the definition of joint investments
proposed today does not reflect any material change in substance from
the definition of joint investments proposed in the Private Pooled
Investment Vehicle Release. Would adopting both definitions, with their
immaterial differences, create confusion, and why? Would it create less
confusion and be more appropriate to modify the definition of joint
investments in proposed Rule 216 and proposed Rule 509 to mirror the
definition we propose today?
3. Future Inflation Adjustments
    Our staff recently indicated that ``inflation, along with the
sustained growth in wealth and income of the 1990s, has boosted a
substantial number of investors past the `accredited investor
standard.' '' \103\ By not adjusting these dollar-amount thresholds
upward for inflation, we have effectively lowered the thresholds in
terms of real purchasing power.\104\ We recognize, however, that
raising the accredited investor standards of Regulation D too high may
result in some issuers returning to pre-1982 practices of effecting
private placements under the statutory exemption in Section 4(2) and
forgoing the Regulation D safe harbor. This result may not be desirable
for issuers or for the health of our private capital markets because
issuers would be required to incur the expenses and complications of
multi-state securities law compliance and the uncertainty of case law
interpretations of the Section 4(2) exemption, as was the case before
the adoption of Regulation D.\105\ In addition, regulators and
investors would no longer be provided with Form D filings, which help
in monitoring private placement activity.\106\ Accordingly, we are
reluctant at this time to immediately adjust upward for inflation the
current income requirements and investment thresholds in Rule 501(a).
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    \103\ See Implication of the Growth of Hedge Funds, Staff Report
to the U.S. Securities and Exchange Commission (Sept. 2003)
available at http://www.sec.gov/news/studies/hedgefunds0903.pdf.

    \104\ See n. 53 and the discussion in II.A.1.
    \105\ For transactions that are exempt under Rule 506, the
federal preemption of most state securities regulation under Section
18(b)(4)(D) of the Securities Act would apply.
    \106\ The current version of Form D was developed by the
Commission and NASAA as a uniform form to be filed with both the
Commission and the States. See Release No. 33-6663 (Oct. 2, 1986)
[51 FR 36385]. Form D continues to be accepted and used by many
states to monitor private placement activity.
---------------------------------------------------------------------------

    Instead, at this time we propose to adjust for inflation all
dollar-amount thresholds set forth in Rule 501 of Regulation D on a
going forward basis, starting on July 1, 2012, and every five years
thereafter, to reflect any changes in the value of the Personal
Consumption Expenditures Chain-Type Price Index (or any successor index
thereto), as published by the Department of Commerce, from December 31,
2006.\107\ We propose to round the adjusted dollar amounts to the
nearest multiple of $10,000. By adjusting the thresholds for inflation
in the future, we intend to retain the income, assets, and investments
requirements in real terms so that the accredited investor standards
will not erode over time.\108\
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    \107\ This index was selected based on discussions with the
Federal Reserve Bank and wide use of the index as an indicator of
inflation in the U.S. economy. Adjusting thresholds every five years
ensures that the thresholds stay current while limiting the
disruption caused by changing the threshold.
    \108\ This is the same method we have proposed to apply to the
accredited natural person standards we proposed for private pooled
investment vehicles. See the Private Pooled Investment Vehicle
Release, at 406.
---------------------------------------------------------------------------

Request for Comment
     We have noted the effects of inflation on the total
assets, net worth, and income thresholds currently used in the
accredited investor qualification standards. Should we make a one-time
adjustment now to the thresholds to increase them to take into account
the effects of inflation?
     Is our proposal to adjust the dollar-amount thresholds in
Regulation D every five years in the future and the methodology that we
have proposed for this purpose appropriate? Should the time period
between adjustments be longer or shorter than five years? Should the
adjusted dollar amounts be rounded to the nearest multiple of $10,000,
as proposed, or to a different nearest multiple, such as $50,000 or
$100,000? What would the impact of this inflation adjustment be on the
ability of companies to raise capital, particularly small businesses?
     Is there more appropriate data to use that would support
different conclusions as to our proposal to adjust Regulation D dollar-
amount thresholds for inflation? Is there a more appropriate way to
interpret the data that we have provided?
     Is another index more appropriate for our purposes than
the Personal Consumption Expenditures Chain-Type Price Index (or any
successor index thereto), as published by the Department of Commerce?
4. Adding Categories of Entities to List of Accredited and Large
Accredited Investors
    The definition of accredited investor in Rule 501(a)(3) currently
includes a list of legal entities that may qualify as accredited
investors, assuming they satisfy other conditions. The list includes
organizations described in Section 501(c)(3) of the Internal Revenue
Code,\109\ corporations, Massachusetts or similar business trusts, and
partnerships. It does not include limited liability companies, Indian
tribes, labor unions, governmental bodies, and similar legal entities,
leading to some degree of uncertainty as to whether these types of
entities may qualify as accredited investors.
---------------------------------------------------------------------------

    \109\ 26 U.S.C. 501(c)(3).
---------------------------------------------------------------------------

    Accordingly, we propose to amend the Rule 501(a)(3) list of legal
entities so that it includes any corporation (including any non-profit
corporation), Massachusetts or similar business trust, partnership,
limited liability company, Indian tribe, labor union, governmental body
or other legal entity with substantially similar legal attributes. We
also would add a definition of the term ``governmental body'' to Rule
501(a), similar to the definition of that term that appears commonly in
transactional financing documents.\110\ Our staff is regularly asked
questions about which entities may qualify as accredited investors, and
has provided guidance that limited liability companies and certain
governmental units may so qualify.\111\ We hope these changes will

reduce uncertainty and legal costs and promote more efficient private
capital formation.
---------------------------------------------------------------------------

    \110\ See, e.g., Section of Business Law, American Bar
Association, Model Stock Purchase Agreement with Commentary, at 15-
16 (1995). Our proposed definition of ``governmental body'' would
apply only to the definition of ``accredited investor'' in Rule 215
and Rule 501(a), which apply only in the context of exempt offerings
under Section 4(6) and Regulation D.
    \111\ In this regard, see Division of Corporation Finance no-
action letter to Wolf, Block, Schorr and Solis-Cohen (Dec. 11, 1996)
(limited liability companies), and Release No. 33-6455 (Mar. 4,
1983) [48 FR 10045] at Q & A 19, citing Division of Corporation
Finance no-action letter to Voluntary Hospitals of America, Inc.
(Dec. 30, 1982) (governmental unit that falls within the substantive
description of 26 U.S.C. 501(c)(3)).
---------------------------------------------------------------------------

Requests for Comment
     Should we add or delete types of legal entities from the
list in paragraph (a)(3) of Rule 501? For example, should we
specifically include ``joint venture'' or ``college or university
endowment'' in the list, or is it clear that they would be covered by
the proposed language of the rule? \112\ Should we delete the list
entirely and simply say that any legal entity that can sue or be sued
in the United States, assuming it meets the other standards for
becoming an accredited investor, can qualify as an accredited investor?
---------------------------------------------------------------------------

    \112\ As originally proposed, the definition of ``accredited
investor'' in Regulation D specifically included college or
university endowment funds. See Release No. 33-6339 (Aug. 7, 1981)
[46 FR 41791]. Upon adoption, college or university endowment funds
were intended to be included within the category ``organization[s]
described in Section 501(c)(3) of the Internal Revenue Code.'' See
Release No. 33-6389 (Mar. 8, 1982) [47 FR 11251]. Since we now
propose to replace the phrase ``organization described in Section
501(c)(3) of the Internal Revenue Code'' with a reference to non-
profit corporations, we seek to assure that college and university
endowment funds will still be considered accredited investors if
they satisfy the applicable financial standard.
---------------------------------------------------------------------------

     Should we define the terms ``Indian tribe'' and ``labor
union'' and, if so, how? For example, should we define ``Indian tribe''
in terms of a tribe, band, nation, pueblo, village, or community that
the Secretary of the Interior acknowledges to exist as an Indian tribe
under the Federally Recognized Indian Tribe List Act of 1994? \113\
Should we include state-recognized Indian tribes? Should we make any
special provision for labor union pension funds?
---------------------------------------------------------------------------

    \113\ 25 U.S.C. 479a.
---------------------------------------------------------------------------

     When we first proposed Rule 144A, we noted that the type
of ``qualified institutional buyers'' contemplated under that rule
would generally include ``very large institutions, long involved in the
resale market for restricted securities, as to which there has been
little concern with respect to Section 5 implications.'' \114\ As a
result, we looked to the list of institutional accredited investors
contained in Rule 501(a)(3) to develop the Rule 144A(a)(1)(i)(H) list
of qualified institutional buyers. Because we are now proposing to
amend Rule 501(a)(3) by expanding the list of institutional accredited
investors, we are seeking comment on whether the Rule 144A(a)(1)(i)(H)
list of qualified institutional buyers should be expanded in a similar
manner. Is it appropriate to consider all institutions that would come
under Rule 501(a)(3) and that meet the $100 million investment size
threshold under Rule 144A as having sufficient experience with the
resale market for restricted securities? Should any or all of the
categories of institutional accredited investors contained in Rule
501(a)(3) be included in the Rule 144A(a)(1)(H) list of qualified
institutional buyers? Are there any categories of institutions included
in proposed Rule 501(a)(3) that should not be included in the
definition of qualified institutional buyer under Rule 144A?
---------------------------------------------------------------------------

    \114\ See Release No. 33-6806 (Oct. 25, 1988) [53 FR 33147].
---------------------------------------------------------------------------

     Rule 144A contains few procedural restrictions relating to
the transferability of restricted securities sold under Rule 144A. Do
we need to make any modifications in light of the possibility that, if
we were to expand the definition of qualified institutional buyer under
Rule 144A, these restrictions would lead to a greater likelihood of
restricted securities flowing into the public market?
5. Proposed Definition of Accredited Natural Person
    In the Private Pooled Investment Vehicle Release, we expressed our
concerns about the increased number of individual investors who may
today be eligible as accredited investors to make investments in pooled
investment vehicles relying on Section 3(c)(1) of the Investment
Company Act. We noted that the existing $1 million net worth and
$200,000 ($300,000 with one's spouse) income tests provide some
investor protection for individuals seeking to invest in pooled
investment vehicles relying on Section 3(c)(1) of the Investment
Company Act, but expressed our concern that some further level of
protection may be necessary to safeguard investors seeking to make an
investment in such vehicles in light of their unique risks, including
risks with respect to undisclosed conflicts of interest, complex fee
structures, and the higher risk that may accompany such vehicles'
anticipated returns. Accordingly, we proposed for comment a standard
that would require individual investors to satisfy a two-part test to
qualify as accredited investors for purposes of investing in certain
private pooled investment vehicles--they would be required to satisfy
the current standard to qualify as accredited investors, as defined in
(i) Rule 501(a)(5) or (6) for transactions under Rule 506 or (ii) Rule
215(e) or (f) for transactions under Section 4(6) of the Securities
Act, and also to own at least $2.5 million in ``investments,'' as that
term would be defined in proposed Rule 509 or proposed Rule 216, as
applicable.
    We recognize that if we adopt the alternative investments-owned
standard for individuals in the definition of accredited investor in
proposed Rule 215(e) and Rule 501(a)(5) ($750,000) and the investments-
owned standard for the definition of accredited natural person in
proposed Rule 216 and Rule 509 ($2.5 million), an individual who meets
the investment test as an accredited natural person would also meet the
investments test as an accredited investor. We believe that the
different amounts applicable under the definitions are targeted to
address concerns about the nature of different types of offerings. As
noted, the alternative investments-owned standards proposed under the
definition of accredited investor are designed to add another method to
assess an investor's need for the protections of registration under the
Securities Act. The additional and higher investments-owned standard
proposed in the definition of accredited natural person is intended to
provide a more objective and clearer standard to use in ascertaining
whether an individual is likely to have sufficient knowledge and
experience in financial and business matters to enable that investor to
evaluate the merits and risks of a prospective investment in certain
private pooled investment vehicles, or to be able to hire someone with
such knowledge and experience who may help the individual to make such
an evaluation.
    We received numerous comments disagreeing with the proposed
definition of accredited natural person. Most of those submitting
comments argued that the proposal limits investor access to private
pooled investment vehicles and questioned the dollar amount of the
investments standard. In light of those comments, we are soliciting
additional comments on the following points.
Requests for Comment
     We request comment on whether we should revise the
proposed definition of accredited natural person to include alternative
income and investment standards similar to those used in the definition
of ``large accredited investor'' in proposed Rule 507 (income of
$400,000 (or $600,000 with one's spouse) or investments of $2.5
million). Would such a revision address some of the concerns noted by
those who submitted comments on the

Private Pooled Investment Vehicle Release? Would a higher (e.g.,
$500,000 (or $700,000 with one's spouse)) or lower (e.g., $300,000 (or
$400,000 with one's spouse)) income standard be more appropriate, and
why? Would a higher (e.g. $3 million) or lower (e.g. $2 million)
investments standard be more appropriate, and why? In responding to
this request for comment, please also comment on any concerns you might
have if any final definition that we may adopt includes an inflation
adjustment provision. For example, some comment letters on the December
2006 proposal raised a concern that the proposed inflation adjustment
could result in the proposed standard for accredited natural persons
ultimately being higher than the existing $5 million investments-owned
requirement for private investment pools that rely on Section 3(c)(7)
of the Investment Company Act.\115\ How would you propose to address
this concern? Should we set a dollar limit above which the dollar
amount of investments included in proposed Rule 216 and proposed Rule
509 may not rise (for example, should we cap the investments amount at
$4.9 million), and why?
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    \115\ See, e.g., comment letters in Commission Rulemaking File
No. S7-25-06 from Schulte, Roth & Zabel LLP (Mar. 9, 2007),
available at http://www.sec.gov/comments/s7-25-06/s72506-549.pdf,

and ABA Private Pooled Investment Vehicle Letter, n. 101 above.
    An individual that invests in 3(c)(7) pools must be a qualified
person, defined in Section 2(a)(51)(A)(1) of the Investment Company
Act as an individual who owns not less than $5 million in
investments. Rule 2a51-1(b) under the Investment Company Act defines
investments, and is the basis for the definition we proposed in
December 2006 and today.
---------------------------------------------------------------------------

     We believe that the changes we propose to make in the
definition of ``investments'' proposed today do not reflect any
material change from the definition of ``investments'' proposed in the
Private Pooled Investment Vehicle Release. Would adopting both
definitions, with their immaterial differences, create confusion, and
why? Would it create less confusion and be more appropriate to modify
the definition of ``investments'' in proposed Rule 216 and proposed
Rule 509 to mirror the definition we propose today?
     Would a more principles-based definition of the term
``investments,'' like the one we have suggested as an alternative to
the definition we are proposing for Rule 501(h), also be appropriate in
the context of proposed Rule 509 and Rule 216? Is there any reason to
have a definition of ``investments'' in Rule 501(h) that is different
from the definition used in proposed Rule 509 and Rule 216, and why?
     Earlier in this release, we request specific comment on
the treatment of real estate as an investment, the treatment of
securities that constitute a ``control interest'' in an issuer as an
investment, and how investments are proposed to be valued under the
definition of ``investments'' proposed in this release. We solicit
comment with respect to those points in connection with the definition
of the term ``investments'' as proposed for use with the term
``accredited natural person.'' Is there any reason to have a definition
of the term ``investments'' under proposed Rules 216 and 509 that is
different from the one proposed in this release? Please explain why or
why not.
     As we have explained, we modeled the definition of
``investments'' in proposed Rule 216 and proposed Rule 509 on the
definition included in Rule 2a51-1(b) under the Investment Company Act.
Would a more principles-based definition of the term ``investments,''
like the one we have suggested as an alternative to the definition we
are proposing for Rule 501(h), also be appropriate in the context of
Rule 2a51-1, and why? Should we adopt coordinated definitions of
``investments'' for purposes of proposed Rule 501(h), proposed Rule
216, proposed Rule 509 and Rule 2a51-1, or should there be different
definitions applicable to these rules, and why?

C. Proposed Revisions to General Conditions of Regulation D

    Rule 502 of Regulation D sets forth conditions that are applicable
to offers and sales made under Regulation D. We propose to make changes
to those conditions, including shortening the amount of time issuers
are required to wait to make offers and sales in order to rely on the
integration safe harbor provided in Rule 502(a) and adding
disqualification provisions for certain issuers seeking to rely on the
exemptions in Regulation D. We also are providing guidance regarding
the integration of concurrent public and private offerings.
    Our Advisory Committee on Smaller Public Companies advised that the
six-month safe harbor period from integration provided in Rule 502(a)
``represents an unnecessary restriction on companies that may very well
be subject to changing financial circumstances, and weighs too heavily
in favor of investor protection, at the expense of capital formation.''
\116\ The Committee supported ``clearer guidance concerning the
circumstances under which two or more apparently separate offerings
will or will not be integrated.'' \117\ The Advisory Committee
acknowledged the difficulty, however, of modifying the five-factor test
contained in Rule 502(a) and concluded that the issue could be more
readily addressed through a shortening of the six-month period. Based
on their analysis of the issue, the Advisory Committee recommended that
we shorten the integration safe harbor from six months to 30 days.\118\
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    \116\ Advisory Committee Final Report at 96.
    \117\ Id. at 95.
    \118\ Id. at 94.
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    In making recommendations with respect to the integration doctrine,
the Advisory Committee recommended, in addition to decreasing the time
period of the integration safe harbor in Regulation D, that the
Commission clarify the interpretation of or amend Securities Act Rule
152 \119\ in order to permit companies to conduct a valid private
placement immediately before the filing of a registration statement
without concern that the two offerings would be integrated.\120\ The
Advisory Committee also noted in making this recommendation that, in
addition to the concerns that companies may not be able to raise
capital privately in the time shortly before the filing of a
registration statement, there also are continuing integration
considerations when conducting concurrent private placements while a
registration statement is pending with the Commission.\121\ This
recommendation and commentary demonstrate that questions continue to
arise in the capital raising process concerning the ability of issuers
to conduct a private placement before a Securities Act registration
statement is filed with the Commission, or in the period between the
filing and effectiveness of the registration statement.
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    \119\ 17 CFR 230.152. Rule 152 specifies that ``[t]he phrase
`transactions by an issuer not involving any public offering' in
Section 4(2) shall be deemed to apply to transactions not involving
any public offering at the time of said transaction although
subsequently thereto the issuer decides to make a public offering
and/or files a registration statement.''
    \120\ Advisory Committee Final Report at 100-101.
    \121\ Advisory Committee Final Report at n. 207.
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    We understand that capital raising around the time of a public
offering, in particular an initial public offering, often is critical
if companies are to have sufficient funds to continue to operate while
the public offering process is ongoing. For this reason, we are
providing guidance so that companies and their counsel may have a
better

framework for evaluating their particular circumstances.\122\
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    \122\ This guidance does not affect the risk that the Commission
or a court could find a violation of Section 5 where a company
begins an offering as a private placement and seeks to complete that
offering pursuant to a registration statement, or where a company
commences a registered offering and seeks to complete that offering
through a private placement, except in those circumstances specified
in Securities Act Rule 155. See Integration of Abandoned Offerings,
Release No. 33-7943 (Jan. 26, 2001) [66 FR 8887].
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    Consistent with Securities Act Rule 152, the staff of the Division
of Corporation Finance, in its review of Securities Act registration
statements, will not take the view that a completed private placement
that was exempt from registration under Securities Act Section 4(2)
should be integrated with a public offering of securities that is
registered on a subsequently filed registration statement.\123\
Consistent with the staff's approach to this issue, we are of the view
that, pursuant to Securities Act Rule 152, a company's contemplation of
filing a Securities Act registration statement for a public offering at
the same time that it is conducting a Section 4(2)-exempt private
placement would not cause the Section 4(2) exemption to be unavailable
for that private placement.\124\
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    \123\ See, e.g., Division of Corporation Finance no-action
letter to Verticom, Inc. (Feb. 12, 1986).
    \124\ In these circumstances, companies should be careful to
avoid any pre-filing communications regarding the contemplated
public offering that could render the Section 4(2) exemption
unavailable for what would be an otherwise exempt private placement.
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    We recognize that a company's financing needs do not end with the
filing of a registration statement. As a general matter, however, the
filing of a registration statement has been viewed as a general
solicitation of investors.\125\ Today, upon the filing of a
registration statement, information about a company and its prospects
is available immediately through our EDGAR filing system. The staff of
the Division of Corporation Finance has issued interpretive letters to
the effect that, notwithstanding the availability of the information in
the registration statement, companies may continue to conduct
concurrent private placements without those offerings necessarily being
integrated with the ongoing public offering.\126\ Concerns remain,
however, with the ability to complete such concurrent private
placements in factual situations that were not considered previously by
the Division staff in interpretive letters. The Division staff has not
applied any per se approach in addressing these circumstances in its
review of filings, but rather has requested a discussion of the
relevant facts and in some cases an opinion of counsel when concerns
arose as to the potential integration of the concurrent private
offering and public offering and the availability of the Section 4(2)
exemption after the filing of the registration statement.\127\
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    \125\ See, e.g., Division of Corporation Finance no-action
letter to Michael Bradfield, General Counsel, Board of Governors of
the Federal Reserve System (Mar. 16, 1984).
    \126\ See, e.g., Division of Corporation Finance no-action
letters to Black Box Incorporated (June 26, 1990) and Squadron
Ellenoff, Pleasant & Lehrer (Feb. 28, 1992). The guidance in this
release does not affect the ability of issuers to continue to rely
on the views expressed by the Division staff in these letters.
    \127\ The guidance that follows applies in the context of
private placements conducted under existing exemptions from
registration. If we adopt proposed Rule 507 of Regulation D, we may
provide additional interpretive guidance on any potential
integration issues unique to that exemption. In this regard, we note
that, as proposed, offers and sales exempt under Rule 507 would be
subject to a ban on general solicitation except as permitted under
the rule and would be considered ``limited,'' rather than
``private,'' offerings.
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    Our view is that, while there are many situations in which the
filing of a registration statement could serve as a general
solicitation or general advertising for a concurrent private offering,
the filing of a registration statement does not, per se, eliminate a
company's ability to conduct a concurrent private offering, whether it
is commenced before or after the filing of the registration statement.
Further, it is our view that the determination as to whether the filing
of the registration statement should be considered to be a general
solicitation or general advertising that would affect the availability
of the Section 4(2) exemption for such a concurrent unregistered
offering should be based on a consideration of whether the investors in
the private placement were solicited by the registration statement or
through some other means that would otherwise not foreclose the
availability of the Section 4(2) exemption. This analysis should not
focus exclusively on the nature of the investors, such as whether they
are ``qualified institutional buyers'' as defined in Securities Act
Rule 144A or institutional accredited investors, or the number of such
investors participating in the offering; instead, companies and their
counsel should analyze whether the offering is exempt under Section
4(2) on its own, including whether securities were offered and sold to
the private placement investors through the means of a general
solicitation in the form of the registration statement. For example, if
a company files a registration statement and then seeks to offer and
sell securities without registration to an investor that became
interested in the purportedly private offering by means of the
registration statement, then the Section 4(2) exemption would not be
available for that offering. On the other hand, if the prospective
private placement investor became interested in the concurrent private
placement through some means other than the registration statement that
did not involve a general solicitation and otherwise was consistent
with Section 4(2), such as through a substantive, pre-existing
relationship with the company or direct contact by the company or its
agents outside of the public offering effort, then the prior filing of
the registration statement generally would not impact the potential
availability of the Section 4(2) exemption for that private placement
and the private placement could be conducted while the registration
statement for the public offering was on file with the Commission.
Similarly, if the company is able to solicit interest in a concurrent
private placement by contacting prospective investors who (1) Were not
identified or contacted through the marketing of the public offering
and (2) did not independently contact the issuer as a result of the
general solicitation by means of the registration statement, then the
private placement could be conducted in accordance with Section 4(2)
while the registration statement for a separate public offering was
pending. While these are only examples, we believe they demonstrate the
framework for analyzing these issues that companies and their counsel
should apply and that the staff will consider when reviewing
registration statements.
1. Proposed Revisions to Regulation D Integration Safe Harbor
    The integration doctrine seeks to prevent an issuer from improperly
avoiding registration by artificially dividing a single offering into
multiple offerings such that Securities Act exemptions would apply to
the multiple offerings that would not be available for the combined
offering. The integration concept was first articulated in 1933 \128\
and was further developed in two interpretive releases issued in the
1960s.\129\ The interpretive releases clarified that determining
whether a particular securities offering should be integrated with
another offering requires an analysis of the specific facts and
circumstances of the offerings. In our guidance, we identified five
factors to

consider in making the determination of whether the offerings should be
integrated.\130\ In 1982, we included the five factors and established
an integration safe harbor in Rule 502(a). We stated that the five
factors relevant to the question of integration are:

    \128\ Release No. 33-97 (Dec. 28, 1933).
    \129\ Release No. 33-4434 (Dec. 6, 1961) [26 FR 11896] and
Release No. 33-4552 (Nov. 6, 1962) [27 FR 11316].
    \130\ Release No. 33-4552 (Nov. 6, 1962) [27 FR 11316].

    ``Whether (1) The different offerings are part of a single plan of
financing, (2) the offerings involve issuance of the same class of
security, (3) the offerings are made at or about the same time, (4) the
same type of consideration is to be received, and (5) the offerings are
made for the same general purpose.''\131\
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    \131\ Id.

Under the safe harbor, offers and sales more than six months before a
Regulation D offering or more than six months after the completion of a
Regulation D offering will not be considered part of the same offering.
This provides issuers with a bright-line test upon which they can rely
to avoid integration of multiple offerings.
    In making its recommendation that the integration safe harbor be
shortened, the Advisory Committee noted that smaller companies'
financing needs often are unpredictable, making the six-month waiting
period for use of the safe harbor problematic for issuers in need of
capital. Other commenters have made similar recommendations to decrease
the waiting period in the safe harbor.\132\ While we recognize the
burdens that the integration doctrine places on capital formation,
improper reliance on exemptions from registration harms investors by
depriving them of the benefits of full and fair disclosure and the
civil remedies that flow from registration. Any changes that we make to
the integration doctrine must continue to provide that issuers are
aware of their obligation to analyze the exemptions upon which they
rely and whether any offers and sales are, in reality, part of a single
plan of financing.
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    \132\ See ABA Private Offering Letter, n. 24 above, at 33. The
ABA letter also suggested expanding the factors to consider when
making the determination of whether an offering should be
integrated.
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    The current six-month time frame of the safe harbor in Rule 502(a)
provides a substantial time period that has worked well to clearly
differentiate two similar offerings and provide time for the market to
assimilate the effects of the prior offering. The Advisory Committee
has expressed concern, however, that such a long delay could inhibit
companies, particularly smaller companies, from meeting their capital
needs.\133\ We recognize that increased volatility in the capital
markets and advances in information technology have changed the
landscape of private offerings. We remain concerned, however, that an
inappropriately short time frame could allow issuers to undertake
serial Rule 506-exempt offerings each month to up to 35 non-accredited
investors in reliance on the safe harbor, resulting in unregistered
sales to hundreds of non-accredited investors in a year. Such sales
could result in large numbers of non-accredited investors failing to
receive the protections of Securities Act registration. Our proposal
seeks to strike an appropriate balance between the number of non-
accredited investors allowed in an offering relying on the integration
safe harbor and the non-public nature of that offering. It would be an