[Federal Register Volume 85, Number 10 (Wednesday, January 15, 2020)]
[Proposed Rules]
[Pages 2574-2613]
[FR Doc No: 2019-28304]

Vol. 85

Wednesday,

No. 10

January 15, 2020

Part IV

 Securities and Exchange Commission

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

17 CFR Parts 230 and 240

Amending the ``Accredited Investor'' Definition; Proposed Rule

Federal Register / Vol. 85 , No. 10 / Wednesday, January 15, 2020 /
Proposed Rules

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

SECURITIES AND EXCHANGE COMMISSION

17 CFR PARTS 230 and 240

[Release Nos. 33-10734; 34-87784; File No. S7-25-19]
RIN 3235-AM19

Amending the ``Accredited Investor'' Definition

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

SUMMARY: We are proposing amendments to the definition of ``accredited
investor'' in our rules to add new categories of qualifying natural
persons and entities and to make certain other modifications to the
existing definition. The proposed amendments are intended to update and
improve the definition in order to identify more effectively
institutional and individual investors that have the knowledge and
expertise to participate in our private capital markets and therefore
do not need the additional protections of registration under the
Securities Act of 1933. We are also proposing amendments to the
qualified institutional buyer definition in Rule 144A under the
Securities Act that would expand the list of entities that are eligible
to qualify as qualified institutional buyers.

DATES: Comments should be received on or before 60 days after
publication in the Federal Register.

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); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-25-19 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-25-19. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method of submission. The Commission will post all comments on the
Commission's website (http://www.sec.gov/rules/proposed.shtml).
Comments also are available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549-1090 on official business days between the hours of 10:00 a.m.
and 3:00 p.m. Persons submitting comments are cautioned that we do not
redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly.
    We or the staff may add studies, memoranda, or other substantive
items to the comment file during this rulemaking. A notification of the
inclusion in the comment file of any such materials will be made
available on our website. To ensure direct electronic receipt of such
notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Charles Kwon, Senior Counsel, Office
of Rulemaking, or Charlie Guidry, Special Counsel, Office of Small
Business Policy, at<PHONE_NUMBER>, Division of Corporation Finance;
Jennifer Songer, Branch Chief, or Lawrence Pace, Senior Counsel, at
(202) 551-6999, Investment Adviser Regulation Office, Division of
Investment Management; U.S. Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549.

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

    \1\ 15 U.S.C. 77a et seq.
    \2\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

Table of Contents

I. Introduction
II. Proposed Amendments to the Accredited Investor Definition
    A. Background
    B. Adding Categories of Natural Persons Who Qualify as
Accredited Investors
    1. Professional Certifications and Designations and Other
Credentials
    2. Knowledgeable Employees of Private Funds
    3. Proposed Note to Rule 501(a)(5)
    C. Adding Categories of Entities That Qualify as Accredited
Investors
    1. Registered Investment Advisers
    2. Rural Business Investment Companies
    3. Limited Liability Companies
    4. Other Entities Meeting an Investments-Owned Test
    5. Proposed Note to Rule 501(a)(8)
    6. Certain Family Offices and Family Clients
    D. Permit Spousal Equivalents To Pool Finances for the Purposes
of Qualifying as Accredited Investors
    E. Proposed Amendment to Rule 215
    F. Proposed Amendment to Rule 163B
    G. Proposed Amendment to Exchange Act Rule 15g-1
III. Additional Requests for Comment on the Accredited Investor
Definition
IV. Proposed Amendment to the Qualified Institutional Buyer
Definition
V. Implications for Other Contexts
VI. General Request for Comment
VII. Economic Analysis
    A. Introduction
    B. Broad Economic Effects
    C. Baseline and Affected Parties
    D. Anticipated Economic Effects
    1. Potential Benefits to Issuers
    2. Potential Benefits to Investors
    3. Potential Costs to Issuers
    4. Potential Costs to Investors
    5. Variation in Economic Effects
    6. Competition, Efficiency, and Capital Formation
    7. Alternatives
VIII. Paperwork Reduction Act
IX. Small Business Regulatory Enforcement Fairness Act
X. Initial Regulatory Flexibility Analysis
    A. Reasons for, and Objectives of, the Proposed Action
    B. Legal Basis
    C. Small Entities Subject to the Proposed Rule
    D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. Request for Comment
XI. Statutory Authority and Text of Proposed Rule Amendments

I. Introduction

    On June 18, 2019, the Commission issued a concept release that
solicited public comment on possible ways to simplify, harmonize, and
improve the exempt offering framework under the Securities Act of 1933
to promote capital formation and expand investment opportunities while
maintaining appropriate investor protections.\3\ In the Concept
Release, the Commission requested comments on possible approaches to
amending the definition of ``accredited investor'' in Rule 501(a) of
Regulation D. This definition is a central component of several
exemptions from registration such as Rules 506(b) and 506(c) of
Regulation D, and plays an important role in other federal and state
securities law contexts. Qualifying as an accredited investor is
significant because accredited investors may, under Commission rules,
participate in investment opportunities that are

generally not available to non-accredited investors, such as
investments in private companies and offerings by certain hedge funds,
private equity funds, and venture capital funds.
---------------------------------------------------------------------------

    \3\ Concept Release on Harmonization of Securities Offering
Exemptions, Release No. 33-10649 (June 18, 2019) [84 FR 30460 (June
26, 2019)] (``Concept Release'').
---------------------------------------------------------------------------

    In view of the significance of the accredited investor definition
in the exempt offering framework, we are proposing to amend the
accredited investor definition as an initial step in a broader effort
to consider ways to harmonize and improve this framework. We believe
that this proposal to update the accredited investor definition would
provide a foundation for our ongoing efforts to assess whether our
exempt offering framework, as a whole, is consistent, accessible, and
effective for both issuers and investors. In addition to these proposed
rule amendments, we are continuing to evaluate the comments received on
the Concept Release in connection with possible future rulemaking
proposals relating to the exemptions from registration under the
Securities Act.
    The Concept Release was preceded by a staff report \4\ on the
accredited investor definition issued in December 2015. The 2015 Staff
Report examined the background and history of the definition and
considered comments and recommendations from the public, the
Commission's Investor Advisory Committee,\5\ the Commission's Advisory
Committee on Small and Emerging Companies,\6\ and the 2014 SEC
Government-Business Forum on Small Business Capital Formation.\7\ The
2015 Staff Report also presented staff recommendations on amending the
definition and analyzed the impact of potential approaches to amending
the definition on the pool of accredited investors. The Commission
staff prepared the report pursuant to Section 413(b)(2)(A) of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank
Act''),\8\ which directs the Commission to review the accredited
investor definition as the term relates to natural persons at least
once every four years to determine whether the definition ``should be
adjusted or modified for the protection of investors, in the public
interest, and in light of the economy.'' \9\ The Commission received
over 50 comment letters on the 2015 Staff Report and subsequently
received recommendations on possible revisions to the accredited
investor definition from the Advisory Committee on Small and Emerging
Companies \10\ and the annual SEC Government-Business Forum on Small
Business Capital Formation.\11\
---------------------------------------------------------------------------

    \4\ See Report on the Review of the Definition of ``Accredited
Investor'' (Dec. 18, 2015) (``2015 Staff Report''), available at
https://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf.
    \5\ See Recommendation of the Investor as Purchaser Subcommittee
and the Investor Education Subcommittee of the Investor Advisory
Committee: Accredited Investor Definition (Oct. 9, 2014), (the
``2014 Investor Advisory Committee Recommendation''), available at
http://www.sec.gov/spotlight/investor-advisory-committee-2012/accredited-investor-definition-recommendation.pdf.
    \6\ See Advisory Committee on Small and Emerging Companies:
Recommendations Regarding the Accredited Investor Definition (March
9, 2015) (the ``2015 ACSEC Recommendations''), available at http://www.sec.gov/info/smallbus/acsec/acsecaccredited-investor-definition-recommendation-030415.pdf.
    \7\ See Final Report of the 2014 SEC Government-Business Forum
on Small Business Capital Formation (May 2015), available at http://www.sec.gov/info/smallbus/gbfor33.pdf.
    \8\ Public Law 111-203, 124 Stat. 1376 (2010).
    \9\ Section 413(b)(2)(A) states that this Commission review must
be conducted not earlier than four years after the enactment of the
Dodd-Frank Act and not less frequently than once every four years
afterward.
    \10\ See Advisory Committee on Small and Emerging Companies:
Recommendations Regarding the Accredited Investor Definition (July
20, 2016) (the ``2016 ACSEC Recommendations''), available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendations-accredited-investor.pdf.
    \11\ Each of the Final Reports of the 2016, 2017, and 2018 SEC
Government-Business Forums on Small Business Capital Formation
included a recommendation that the Commission maintain the monetary
thresholds for accredited investors and expand the categories of
qualification for accredited investor status based on various types
of sophistication such as education, experience, and training. See
Final Report of the 2016 SEC Government-Business Forum on Small
Business Capital Formation (March 2017) (the ``2016 Small Business
Forum Report''), available at https://www.sec.gov/info/smallbus/gbfor35.pdf; Final Report of the 2017 SEC Government-Business Forum
on Small Business Capital Formation (March 2018) (the ``2017 Small
Business Forum Report''), available at https://www.sec.gov/files/gbfor36.pdf; and Final Report of the 2018 SEC Government-Business
Forum on Small Business Capital Formation (June 2019) (the ``2018
Small Business Forum Report''), available at https://www.sec.gov/info/smallbus/gbfor37.pdf.
    The Final Report of the 2019 SEC Government-Business Forum on
Small Business Capital Formation included a recommendation that the
Commission should revise the accredited investor definition as
follows: (1) For natural persons, in addition to the income and net
worth thresholds in the definition, add a sophistication test as an
additional way to qualify; (2) provide tribal governments parity
with state governments; and (3) revise the dollar amounts to scale
for geography, lowering the thresholds in states/regions with a
lower cost of living. See Final Report of the 2019 SEC Government-
Business Forum on Small Business Capital Formation (December 2019)
(the ``2019 Small Business Forum Report''), available at https://www.sec.gov/files/small-business-forum-report-2019.pdf.
---------------------------------------------------------------------------

    Many of the comments submitted in response to the Concept Release
\12\ urged the Commission to expand the accredited investor
definition.\13\ Other commenters opposed changing the definition or
stated that the Commission should narrow the definition,\14\ while a
few commenters recommended that the Commission eliminate the definition
altogether.\15\ Commenters expressed a range of views on whether the
Commission should amend the financial thresholds currently in the
accredited investor definition,\16\ and a number of commenters urged
the Commission to maintain objective standards in the

definition.\17\ Some commenters suggested that the Commission harmonize
the accredited investor definition with the definitions of ``qualified
purchaser'' under the Investment Company Act of 1940 (the ``Investment
Company Act''), ``qualified client'' under the Investment Advisers Act
of 1940 (the ``Advisers Act''), and/or ``qualified institutional
buyer'' as defined in Rule 144A under the Securities Act.\18\
---------------------------------------------------------------------------

    \12\ Unless otherwise indicated, comments cited in this release
are to comment letters received in response to the Concept Release,
which are available at https://www.sec.gov/comments/s7-08-19/s70819.htm.
    \13\ See, e.g., letters from Federal Regulation of Securities
Committee, Business Law Section of the American Bar Association
dated October 16, 2019 (``ABA FR of Sec. Comm. Letter''); Island
Mountain Development Group dated September 24, 2019 (``IMDG
Letter''); Association for Corporate Growth dated September 24, 2019
(``ACG Letter''); Investments and Wealth Institute dated September
12, 2019 (``IWI Letter''); Securities Regulation Committee, Business
Law Section of the New York State Bar Association dated October 18,
2019 (``Sec. Reg. Comm. of NY St. B.A. Letter''); Small Business
Investor Alliance dated September 25, 2019 (``2019 SBIA Letter'');
BlackRock, Inc. dated September 24, 2019 (``BlackRock Letter'');
Artivest Holdings, Inc. dated October 8, 2019 (``Artivest Letter'');
EquityZen Inc. dated September 30, 2019 (``EquityZen Letter'');
Alfonso Ceja dated October 15, 2019 (``A. Ceja Letter''); CoinList
dated September 26, 2019 (``CoinList Letter''); H. Konings et al.
dated September 24, 2019 (``H. Konings et al. Letter''); Institute
for Portfolio Alternatives dated September 24, 2019 (``IPA
Letter''); Jeff Thomas dated September 24, 2019 (``J. Thomas
Letter''); McCarter & English LLP dated September 24, 2019
(``McCarter & English Letter''); Center for Capital Markets
Competitiveness of the U.S. Chamber of Commerce dated September 24,
2019 (``CCMC Letter''); CFA Institute dated September 24, 2019
(``CFA Institute Letter''); Marketplace Lending Association dated
September 23, 2019 (``MLA Letter''); Funding Circle dated September
23, 2019 (``Funding Circle Letter''); Bridgeport Financial
Technology dated September 20, 2019 (``Bridgeport Letter''); Jor Law
dated July 6, 2019; Kyle Sonlin dated June 26, 2019 (``K. Sonlin
Letter''); John Tapp dated June 19, 2019 (``J. Tapp Letter'');
Private Investor Coalition dated September 24, 2019 (``2019 PIC
Letter''); California Municipal Treasurers Association dated
September 20, 2019 (``CMTA Letter''); Native American Finance
Officers Association dated September 12, 2019 (``NAFOA Letter'');
Investment Adviser Association dated October 18, 2019 (``IAA
Letter''); Managed Funds Association and Alternative Investment
Management Association dated September 24, 2019 (``MFA and AIMA
Letter''); Crowdfunding Professionals Association, Legislative &
Regulatory Affairs Division, dated October 15, 2019 (``CfPA
Letter''); Joseph L. Schocken dated September 24, 2019 (``J.
Schocken Letter''); Alternative & Direct Investment Securities
Association dated September 24, 2019 (``ADISA Letter''); Jeff
LaBerge dated September 6, 2019 (``J. LaBerge Letter''); and
Association of Online Investment Platforms dated July 5, 2019
(``AOIP Letter'').
    \14\ See, e.g., letters from Consumer Federation of America
dated October 1, 2019 (``Consumer Federation Letter'') and Forum for
U.S. Securities Lawyers in London dated September 24, 2019.
    \15\ See, e.g., letters from Nathan Eames dated September 1,
2019 and Andrew Deville dated June 19, 2019.
    \16\ See infra Section III.
    \17\ See, e.g., ABA Fed. of Sec. Reg. Comm. Letter; letter from
Securities Industry and Financial Markets Association dated
September 24, 2019 (``SIFMA Letter''); BlackRock Letter; and MFA and
AIMA Letter.
    \18\ See, e.g., ABA FR of Sec. Comm. Letter; IAA Letter; Sec.
Reg. Comm. of NY St. B.A. Letter; SIFMA Letter; BlackRock Letter;
and letter from Shartsis Friese LLP dated September 24, 2019
(``Shartsis Friese Letter'').
---------------------------------------------------------------------------

    Commenters on the Concept Release offered a number of suggestions
for expanding the accredited investor definition to provide natural
persons and entities with additional means of qualifying for accredited
investor status. Some commenters suggested that the Commission amend
the definition to deem natural persons with additional measures of
financial sophistication, other than annual income or net worth,
eligible for accredited investor status, such as professional
certifications,\19\ prior experience in investing in securities,\20\
status as a ``knowledgeable employee'' as defined in 17 CFR 270.3c-5
under the Investment Company Act (``Rule 3c-5''),\21\ or an accredited
investor examination.\22\ Several commenters urged the Commission to
amend the accredited investor definition to include natural persons or
entities that are advised by a financial professional, such as a
registered investment adviser that acts as a fiduciary in making the
investment,\23\ while other commenters opposed this view.\24\
Commenters also recommended that the Commission expand the accredited
investor definition to include family offices and clients of family
offices, as defined in 17 CFR 275.202(a)(11)(G)-1 under the Advisers
Act (``Rule 202(a)(11)(G)-1''),\25\ registered investment advisers,\26\
entities with investments over a certain threshold (e.g., $5
million),\27\ Indian tribes,\28\ and certain state and local
governments.\29\
---------------------------------------------------------------------------

    \19\ See infra Section II.B.1.
    \20\ See, e.g., CCMC Letter; letter from Institutional Capital
Network dated September 24, 2019 (``iCapital Network Letter''); CFA
Institute Letter; and letter from Charlie Uchill dated August 9,
2019 (``C. Uchill Letter'').
    \21\ See infra Section II.B.2.
    \22\ See, e.g., ACG Letter; J. Thomas Letter; CCMC Letter; MLA
Letter; Funding Circle Letter; letter from Hedge Fund Association
dated September 23, 2019 (``HFA Letter''); and letter from Wefunder
dated September 13, 2019 (``Wefunder Letter'').
    \23\ See, e.g., IAA Letter; Artivest Letter; letter from
MarketPlus Capital Company dated October 8, 2019; EquityZen Letter;
2019 SBIA Letter; IPA Letter; BlackRock Letter; iCapital Network
Letter; letter from Davis Polk & Wardwell LLP dated September 24,
2019 (``Davis Polk Letter''); letter from Iownit Capital and
Markets, Inc. dated September 24, 2019 (``Iownit Letter''); and
Wefunder Letter.
    \24\ See, e.g., letters from Public Investors Advocate Bar
Association dated September 24, 2019 (``PIABA Letter''); Investment
Company Institute dated September 24, 2019 (``ICI Letter''); and
Angel Capital Association dated September 23, 2019 (``ACA Letter'').
    \25\ See infra Section II.C.6.
    \26\ See infra Section II.C.1.
    \27\ See infra Section II.C.4.
    \28\ See, e.g., letter from Rosebud Economic Development
Corporation dated September 24, 2019 (``REDCO Letter''); IMDG
Letter; letter from Gavin Clarkson dated September 22, 2019 (``G.
Clarkson Letter''); and NAFOA Letter.
    \29\ See, e.g., CMTA Letter.
---------------------------------------------------------------------------

    After considering these comments and recommendations, we are
proposing to amend the accredited investor definition in Rule 501(a) of
Regulation D by modifying a number of the definition's existing
categories and by adding new categories to the definition.\30\
Specifically, we are proposing to:
---------------------------------------------------------------------------

    \30\ We are also proposing conforming amendments to the
accredited investor definition in Rule 215 under the Securities Act.
The Rule 215 and Rule 501(a) definitions of accredited investor
historically have been substantially consistent but not identical.
See discussion in Section II.E.
---------------------------------------------------------------------------

     Add new categories to the definition that would permit
natural persons to qualify as accredited investors based on certain
professional certifications or designations or credentials from an
accredited educational institution or, with respect to investments in a
private fund, based on the person's status as a ``knowledgeable
employee'' of the fund; \31\
---------------------------------------------------------------------------

    \31\ A private fund is an issuer that would be an investment
company, as defined in Section 3 of the Investment Company Act, but
for Sections 3(c)(1) or 3(c)(7) of that Act. See Section 202(a)(29)
of the Advisers Act.
---------------------------------------------------------------------------

     Add certain entity types to the current list of entities
that may qualify as accredited investors, as well as add a new category
for any entity owning ``investments,'' as defined in 17 CFR 270.2a51-
1(b) under the Investment Company Act (``Rule 2a51-1(b)''), in excess
of $5 million and that was not formed for the specific purpose of
investing in the securities offered;
     Add ``family offices'' with at least $5 million in assets
under management and their ``family clients,'' as each term is defined
under the Advisers Act;
     Add the term ``spousal equivalent'' to the accredited
investor definition, so that spousal equivalents may pool their
finances for the purpose of qualifying as accredited investors; and
     Codify certain staff interpretive positions that relate to
the accredited investor definition.\32\
---------------------------------------------------------------------------

    \32\ See infra Sections II.B.3, II.C.3, and II.C.5.
---------------------------------------------------------------------------

    In addition, we are proposing to amend the definition of
``qualified institutional buyer'' in Rule 144A(a)(1) \33\ to include
additional entity types that meet the $100 million threshold to avoid
inconsistencies between the types of entities that are eligible for
accredited investor status and those that are eligible for qualified
institutional buyer status under Rule 144A.
---------------------------------------------------------------------------

    \33\ 17 CFR 230.144A(a)(1).
---------------------------------------------------------------------------

    The amendments we propose today are the product of many years of
efforts by the Commission and its staff to consider and analyze
possible approaches to revising the accredited investor definition. A
number of the proposed amendments are consistent with those recommended
by the Commission staff in the 2015 Staff Report, while some of the
proposed amendments are substantially similar to those the Commission
proposed in 2007.\34\ Many of the proposed amendments have been
recommended in the past, in one form or another, by the Advisory
Committee on Small and Emerging Companies, the Investor Advisory
Committee, and a wide array of public commenters.
---------------------------------------------------------------------------

    \34\ Revisions of Limited Offering Exemptions in Regulation D,
Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116 (Aug. 10, 2007)]
(``2007 Proposing Release'').
---------------------------------------------------------------------------

    Unregistered offerings conducted under Regulation D, particularly
those under Rule 506(b), play a significant role in capital formation
in the United States. In 2018, the estimated amount of capital
(including both equity and debt) reported as being raised in Rule 506
offerings was $1.7 trillion,\35\ compared to $1.4 trillion raised in
registered offerings.\36\ Of the $1.7 trillion, $1.5

trillion was raised by pooled investment funds, and $228 billion was
raised by non-fund issuers. As noted in the 2015 Staff Report, and as
discussed further in Section VII below, accredited investors are
critical to providing capital for the Regulation D market. There may be
investment opportunities, particularly with respect to early stage and
high growth firms, in the Regulation D market that are not available to
investors in registered securities offerings.\37\ At the same time,
investors in the Regulation D market can be subject to investment risks
not associated with registered offerings because, for example, issuers
in this market generally are not required to provide information
comparable to that included in a registration statement.
---------------------------------------------------------------------------

    \35\ See Concept Release at 30466.
    \36\ See Concept Release at 30465. Unless otherwise indicated,
information in this release on Regulation D offerings is based on
analysis by staff in the Commission's Division of Economic and Risk
Analysis (``DERA'') of data collected from Form D filings on the
Commission's Electronic Data Gathering, Analysis, and Retrieval
system (``EDGAR'') from January 2009 through December 2018. DERA
staff determined the amount raised based on the amounts reported as
``Total amount sold'' in all Form D filings (new filings and
amendments) on EDGAR. Subsequent amendments to a new filing were
treated as incremental fundraising and recorded in the calendar year
in which the amendment was filed. It is likely that the reported
data on Regulation D offerings underestimates the actual amount
raised through these offerings for two reasons. First, 17 CFR
230.503 (``Rule 503'') of Regulation D requires issuers to file a
Form D no later than 15 days after the first sale of securities, but
a failure to file the notice does not invalidate the exemption.
Accordingly, despite the filing requirement, it is possible that
some issuers do not file Forms D for offerings relying on Regulation
D. Second, underreporting could also occur because a Form D may be
filed prior to completion of the offering, and our rules do not
require issuers to amend a Form D to report the total amount sold on
completion of the offering or to reflect additional amounts offered
if the aggregate offering amount does not exceed the original
offering size by more than 10%.
    \37\ For example, according to Ritter (2019), the median age of
a firm that went public in 1999 was 5 years, while in 2018 the
median age was 10 years, see https://site.warrington.ufl.edu/ritter/files/2019/03/IPOs2018Age.pdf.
---------------------------------------------------------------------------

    Accordingly, in proposing changes to the definition, and in
particular changes in the types of natural persons that would qualify
as an ``accredited investor'' under these amendments, we have
considered investor protection concerns, including concerns about an
investor's ability to participate in and supply capital to the
Regulation D market. As discussed below, the accredited investor
definition is a central component of Regulation D. We are mindful that
an overly broad definition could potentially undermine important
investor protections and reduce public confidence in this vital market.
At the same time, an unnecessarily narrow definition could limit
investor access to investment opportunities where there may be adequate
investor protection given factors such as that investor's financial
sophistication, net worth, knowledge and experience in financial
matters, or amount of assets under management.\38\ The amendments to
the accredited investor definition we propose in this release reflect a
balancing of these considerations and, along with the Commission's
periodic reviews of the definition pursuant to the Dodd-Frank Act,\39\
are part of an ongoing effort to update and enhance this definition.
---------------------------------------------------------------------------

    \38\ See 15 U.S.C. 77b(a)(15)(i) and (ii) (establishing several
categories of accredited investors and authorizing the Commission to
adopt additional categories based on ``such factors as financial
sophistication, net worth, knowledge, and experience in financial
matters, or amount of assets under management'').
    \39\ See supra note 9.
---------------------------------------------------------------------------

    We welcome feedback and encourage interested parties to submit
comments on any or all aspects of the proposed amendments. When
commenting, it would be most helpful if you include the reasoning
behind your position or recommendation.

II. Proposed Amendments to the Accredited Investor Definition

A. Background

    The current exemptions from Securities Act registration include a
variety of requirements, investor protections, and other conditions,
including, in many cases, restrictions on the types of investors that
are permitted to participate in the offering. SEC v. Ralston
Purina,\40\ the leading case interpreting the Section 4(a)(2)
exemption, addressed the characteristics of the investors involved in
an offering exempt from registration.\41\ That decision set forth the
position that the availability of the Section 4(a)(2) exemption should
turn on whether the particular class of persons affected needs the
protection of the Securities Act. The Commission has over the years
adopted rules to provide greater certainty about exempt offerings that
are consistent with the basic criteria set forth in Ralston Purina. For
example, Rule 146--a predecessor to Regulation D adopted in 1974--
permitted offers and sales only to persons the issuer reasonably
believed had the requisite knowledge and experience in financial
matters to evaluate the risks and merits of the prospective investment
or who could bear the economic risks of the investment.\42\ Later, Rule
242 introduced the accredited investor concept into the federal
securities laws, providing a limited offering exemption up to $2
million with various conditions and defining an ``accredited person''
as a person purchasing $100,000 or more of the issuer's securities, a
director or executive officer of the issuer, or a specified type of
entity.\43\
---------------------------------------------------------------------------

    \40\ 346 U.S. 119, 125 (1953).
    \41\ Section 4(a)(2) [15 U.S.C. 77(d)(a)(2)] exempts
transactions by an issuer ``not involving any public offering'' from
the Securities Act's registration requirements.
    \42\ See Transactions By an Issuer Deemed Not To Involve Any
Public Offering, Release No. 33-5487 (Apr. 23, 1974) [39 FR 15261
(May 2, 1974)]. If all the conditions of Rule 146 were met, the
offer and sale of securities were deemed to not involve any public
offering within the meaning of Section 4(a)(2). The Commission
rescinded Rule 146 in 1982 in connection with the adoption of
Regulation D.
    \43\ See Exemption of Limited Offers and Sales by Qualified
Issuers, Release No. 33-6180 (Jan. 17, 1980) [45 FR 6362 (Jan. 28,
1980)] (``Rule 242 Adopting Release''). The Commission rescinded
Rule 242 in 1982 in connection with the adoption of Regulation D.
---------------------------------------------------------------------------

    Congress subsequently enacted the Small Business Investment
Incentive Act of 1980,\44\ which exempted from Securities Act
registration non-public offers and sales of securities up to $5 million
made solely to accredited investors \45\ and added the accredited
investor definition to Section 2(a)(15) of the Securities Act. Section
2(a)(15)(i) defines accredited investor to mean certain enumerated
entities, and Section 2(a)(15)(ii) authorizes the Commission to adopt
additional categories based on ``such factors as financial
sophistication, net worth, knowledge, and experience in financial
matters, or amount of assets under management.'' The Commission has
used this authority to expand the types of persons that qualify as
accredited investors, as described below.
---------------------------------------------------------------------------

    \44\ Public Law 96-477, 94 Stat. 2275 (1980).
    \45\ Securities Act Section 4(a)(5) [15 U.S.C. 77(d)(a)(5)].
---------------------------------------------------------------------------

    Historically, the Commission has stated that the accredited
investor definition is ``intended to encompass those persons whose
financial sophistication and ability to sustain the risk of loss of
investment or fend for themselves render the protections of the
Securities Act's registration process unnecessary.'' \46\ The
characteristics of an investor encompassed within this standard can be
demonstrated in a variety of ways. These include the ability to assess
an investment opportunity--which includes the ability to analyze the
risks and rewards, the capacity to allocate investments in such a way
as to mitigate or avoid risks of unsustainable loss, or the ability to
gain access to information about an issuer or about an investment
opportunity--or the ability to bear the risk of a loss.\47\
---------------------------------------------------------------------------

    \46\ Regulation D Revisions; Exemption for Certain Employee
Benefit Plans, Release No. 33-6683 (Jan. 16, 1987) [52 FR 3015 (Jan.
30, 1987)]. See also SEC v. Ralston Purina Co., 346 U.S. 119, 125
(1953) (taking the position that the availability of the Section
4(a)(2) exemption ``should turn on whether the particular class of
persons affected needs the protection of the Act. An offering to
those who are shown to be able to fend for themselves is a
transaction `not involving any public offering.' '').
    \47\ The accredited investor standard is similar to, but
distinct from, other regulatory standards in Commission rules that
are used to identify persons who are not in need of certain investor
protection features of the federal securities laws. For example,
Section 3(c)(7) of the Investment Company Act excepts from the
definition of investment company any issuer, the outstanding
securities of which are owned exclusively by persons who, at the
time of acquisition of such securities, are qualified purchasers,
and which is not making and does not at that time propose to make a
public offering of securities. Congress defined qualified purchasers
as: (i) Natural persons who own not less than $5 million in
investments; (ii) family-owned companies that own not less than $5
million in investments; (iii) certain trusts; and (iv) persons,
acting for their own accounts or the accounts of other qualified
purchasers, who in the aggregate own and invest on a discretionary
basis, not less than $25 million in investments (e.g., institutional
investors). These other regulatory standards each serve a different
regulatory purpose. Accordingly, an accredited investor will not
necessarily meet these other standards and these other regulatory
standards are not designed to capture the same investor
characteristics as the accredited investor standard. See also 2015
Staff Report, supra note 4, at section III.

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

    Regulation D, adopted in 1982,\48\ is a series of rules that sets
forth exemptions and a safe harbor from the registration requirements
of the Securities Act.\49\ Rule 506(b) of Regulation D is a non-
exclusive safe harbor under Section 4(a)(2) of the Securities Act
pursuant to which an issuer may offer and sell an unlimited amount of
securities, provided that offers are made without the use of general
solicitation or general advertising and sales are made only to
accredited investors and up to 35 non-accredited investors who meet an
investment sophistication standard.\50\ Rule 506(c) of Regulation D
provides an exemption without any limitation on offering amount
pursuant to which offers may be made through general solicitation or
general advertising, so long as the purchasers in the offering are
limited to accredited investors and the issuer takes reasonable steps
to verify their accredited investor status.\51\ The accredited investor
definition, which is found in Rule 501(a), is a cornerstone of
Regulation D. It also plays an important role in other federal and
state securities law contexts.\52\
---------------------------------------------------------------------------

    \48\ Revision of Certain Exemptions From Registration for
Transactions Involving Limited Offers and Sales, Release No. 33-6389
(Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)] (``Regulation D 1982
Adopting Release'').
    \49\ Rules 500 through 503 of Regulation D contain the notes,
definitions, terms, and conditions that apply generally throughout
Regulation D. The exemptions and safe harbor of Regulation D are set
forth in Rule 504, Rule 506(b), and Rule 506(c). Rule 507 of
Regulation D is a provision that disqualifies issuers under certain
circumstances from relying on Regulation D for failure to file a
notice of sales on Form D. Rule 508 of Regulation D provides that
certain insignificant deviations from a term, condition, or
requirement of Regulation D will not necessarily result in the loss
of a Regulation D exemption.
    \50\ See 17 CFR 230.506(b)(2)(ii) (``Each purchaser who is not
an accredited investor either alone or with his purchaser
representative(s) has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and
risks of the prospective investment, or the issuer reasonably
believes immediately prior to making any sale that such purchaser
comes within this description.'').
    \51\ 17 CFR 230.506(c). The Commission adopted Rule 506(c) in
2013 to implement Section 201(a) of the Jumpstart Our Business
Startups Act (``JOBS Act''). Public Law No. 112-106, 126 Stat. 306
(2012). See Eliminating the Prohibition Against General Solicitation
and General Advertising in Rule 506 and Rule 144A Offerings, Release
No. 33-9415 (Jul. 10, 2013) [78 FR 44771 (Jul. 24, 2013)].
    \52\ See Section V for a discussion of certain implications of
the accredited investor definition under federal and state
securities laws.
---------------------------------------------------------------------------

    The current accredited investor definition provides that natural
persons and entities that come within, or that the issuer reasonably
believes comes within, any of eight enumerated categories at the time
of the sale of the securities is an accredited investor. Natural
persons may qualify as accredited investors based on the following
criteria:
     Individuals who have a net worth exceeding $1 million
(excluding the value of the individual's primary residence), either
alone or with their spouses; \53\
---------------------------------------------------------------------------

    \53\ Rule 501(a)(5).
---------------------------------------------------------------------------

     Individuals who had an 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, and
have a reasonable expectation of reaching the same income level in the
current year; \54\ and
---------------------------------------------------------------------------

    \54\ Rule 501(a)(6).
---------------------------------------------------------------------------

     Directors, executive officers, and general partners of the
issuer or of a general partner of the issuer.\55\
---------------------------------------------------------------------------

    \55\ Rule 501(a)(4).

Some entities may qualify as accredited investors based on their status
alone. These entities include:
     Banks, savings and loan associations, brokers or dealers
registered pursuant to Section 15 of the Exchange Act, insurance
companies, small business investment companies, investment companies
registered under the Investment Company Act, or business development
companies as defined in Section 2(a)(48) of that Act; \56\
---------------------------------------------------------------------------

    \56\ Rule 501(a)(1).
---------------------------------------------------------------------------

     Private business development companies as defined in
Section 202(a)(22) of the Advisers Act; \57\ and
---------------------------------------------------------------------------

    \57\ Rule 501(a)(2).

     Entities in which all of the equity owners are accredited
investors.\58\
---------------------------------------------------------------------------

    \58\ Rule 501(a)(8).

Other entities may qualify as accredited investors based on a
combination of their status and the amount of their total assets. These
---------------------------------------------------------------------------
entities include:

     Tax exempt charitable organizations, corporations,
Massachusetts or similar business trusts, or partnerships, not formed
for the specific purpose of acquiring the securities offered, with
total assets in excess of $5 million; \59\
---------------------------------------------------------------------------

    \59\ Rule 501(a)(3).
---------------------------------------------------------------------------

     Plans established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such plan
has total assets in excess of $5 million; \60\
---------------------------------------------------------------------------

    \60\ Rule 501(a)(1).
---------------------------------------------------------------------------

     Employee benefit plans (within the meaning of the Employee
Retirement Income Security Act) if a bank, savings and loan
association, insurance company, or registered investment adviser makes
the investment decisions, or if the plan has total assets in excess of
$5 million; \61\ and
---------------------------------------------------------------------------

    \61\ Rule 501(a)(1).
---------------------------------------------------------------------------

     Trusts with total assets in excess of $5 million, not
formed for the specific purpose of acquiring the securities offered,
the purchases of which are directed by a person who meets the legal
standard of having sufficient knowledge and experience in financial and
business matters to be capable of evaluating the merits and risks of
the prospective investment.\62\
---------------------------------------------------------------------------

    \62\ Rule 501(a)(7).
---------------------------------------------------------------------------

    The Commission has amended the accredited investor definition on
three occasions since the adoption of Regulation D in 1982.\63\ First,
in 1988, the Commission expanded the definition to include additional
types of entities,\64\ added a joint income test for natural persons,
and eliminated a standard under which a person could qualify as an
accredited investor based on the purchase of $150,000 of the securities
being offered when the purchase price did not exceed 20% of the
person's net worth.\65\ Second, in 1989, the Commission amended the
definition to include plans established and maintained by state
governments and their political subdivisions, as well as their agencies
and instrumentalities, for the benefit of their employees if the plans
have total assets in excess of $5

million.\66\ Third, in 2011, to implement the requirements of Section
413(a) of the Dodd-Frank Act, the Commission amended the $1 million net
worth standard for natural persons to exclude the value of the
investor's primary residence.\67\
---------------------------------------------------------------------------

    \63\ In addition, in 2007, the Commission proposed but did not
adopt a number of changes to the accredited investor definition,
which would have, among other things, added an alternative
``investments-owned'' standard, established a mechanism to adjust
the dollar-amount thresholds to reflect inflation, and added several
categories of permitted entities to the list of accredited
investors. See 2007 Proposing Release. In 2013, the Commission
requested comment on the accredited investor definition in
connection with proposed amendments to Regulation D and Form D.
Amendments to Regulation D, Form D and Rule 156, Release No. 33-9416
(July 10, 2013) [78 FR 44806 (July 24, 2013)].
    \64\ The types of institutional investors added were savings and
loan associations and other institutions specified in Section
3(a)(5)(A) of the Securities Act (including credit unions), broker-
dealers, certain trusts, partnerships, and corporations.
    \65\ Regulation D Revisions, Release No. 33-6758 (Mar. 3, 1988)
[53 FR 7866 (Mar. 10, 1988)] (``Regulation D 1988 Adopting
Release'').
    \66\ Regulation D, Release No. 33-6825 (Mar. 15, 1989) [54 FR
11369 (Mar. 20, 1989)] (``Regulation D 1989 Adopting Release'').
    \67\ Net Worth Standard for Accredited Investors, Release No.
33-9287 (Dec. 21, 2011) [76 FR .81793 (Dec. 29, 2011)] (``Regulation
D 2011 Adopting Release'').
---------------------------------------------------------------------------

    Although the current accredited investor definition uses wealth--in
the form of a certain level of income, net worth, or assets--as a proxy
for financial sophistication, we do not believe wealth should be the
sole means of establishing financial sophistication for purposes of the
accredited investor definition. Accordingly, the proposed amendments
would create new categories of individuals and entities that would
qualify as accredited investors irrespective of their wealth, on the
basis that such investors have the requisite ability to assess an
investment opportunity. We discuss these and other proposed amendments
to the accredited investor definition in detail below.

B. Adding Categories of Natural Persons Who Qualify as Accredited
Investors

    We are proposing to add two new categories in the accredited
investor definition for natural persons (1) who hold certain
professional certifications or designations or other credentials, or
(2) who are ``knowledgeable employees'' of a private fund and are
investing in the private fund. With the exception of directors,
executive officers, and general partners of the issuer, the current
accredited investor definition uses only the financial measures of
income and net worth as proxies for a natural person's financial
sophistication. The proposed new categories would apply additional
markers of financial sophistication for natural persons based on
professional knowledge and experience.
1. Professional Certifications and Designations and Other Credentials
    We propose to add a category for natural persons to qualify as
accredited investors based on certain professional certifications and
designations or other credentials that demonstrate an individual's
background and understanding in the areas of securities and
investing.\68\ We believe that this approach would provide appropriate
alternative means of assessing an investor's need for the protections
of registration under the Securities Act. We recognize that investors
holding such certifications, designations and credentials may not meet
the current financial thresholds in the accredited investor definition,
and therefore the impact of investment losses on such investors could
be significant. Nevertheless, we believe that the concept of financial
sophistication encompasses not only an ability to analyze the risks and
rewards of an investment but also the capacity to allocate investments
in a way to mitigate or avoid risks of unsustainable loss. Adding this
new category of individual accredited investors may potentially expand
the pool of investors eligible to participate in, and provide capital
to, the Regulation D market. As discussed below, we also believe that
this standard in some cases could reduce compliance burdens for issuers
by providing an alternative basis for qualification that issuers may be
able to assess more easily than the current net worth or annual income
standards.
---------------------------------------------------------------------------

    \68\ This proposal is limited to natural persons seeking to
qualify as accredited investors on their own behalf, and any
discussion in the release of professional certifications,
designations, and other credentials has no applicability in the
context of that individual making investment recommendations to
others as a financial professional.
---------------------------------------------------------------------------

    The 2015 Staff Report included a staff recommendation that the
Commission permit individuals with certain professional credentials to
qualify as accredited investors. Commenters who expressed a view about
this recommendation generally supported the recommendation.\69\ Several
commenters stated that qualifying credentials should include one or
more of the following: Passing the Series 7, Series 65, Series 66, or
Series 82 examinations, being a certified public accountant (CPA),
certified financial analyst (CFA), certified management accountant
(CMA), investment adviser representative or registered representative
(RR); having a Masters of Business Administration degree (MBA) from an
accredited educational institution or having a certified investment
management analyst (CIMA) certification; or having been in the
securities industry as a broker, lawyer, or accountant.\70\ Other
commenters expressed more general views about the sophistication
necessary to qualify as an accredited investor.\71\
---------------------------------------------------------------------------

    \69\ See, e.g., letter from Consumer Federation of America and
Americans for Financial Reform dated April 27, 2016 (``CFA/AFR
Letter''); letter from Dar'shun Kendrick, Kendrick Law Practice
dated May 1, 2016 (``D. Kendrick Letter''); letter from National
Small Business Association dated March 29, 2016 (``NSBA Letter'');
letter from North American Securities Administrators Association
(``NASAA'') dated May 25, 2016 (``2016 NASAA Letter''); letter from
Kyle Beagle dated January 13, 2016 (``K. Beagle Letter''); letter
from Ava Badiee dated May 10, 2016; letter from Chase R. Morello
dated January 13, 2016; letter from Keith J. Johnson dated Mar. 6,
2016; letter from Cornell Securities Law Clinic dated April 30, 2016
(``Cornell Law Clinic Letter''); letter from Investment Management
Consultants Association dated March 29, 2016 (``IMCA Letter'');
letter from Anonymous Investment Banker dated April 13, 2016; letter
from Leonard A. Grover, dated June 13, 2016 (``2016 L. Grover
Letter''); letter from The TAN2000 International Regulatory
Corporation dated December 10, 2016 (``TAN2000 Letter''); letter
from Jeff Carlsen dated January 17, 2017 (``J. Carlsen Letter'');
letter from Managed Funds Association dated June 16, 2016 (``MFA-1
Letter''); letter from Managed Funds Association dated May 18, 2017
(``MFA-2 Letter''); letter from Mark R. Maisonneuve dated April 26,
2017 (``M. Maisonneuve Letter''); and letter from Crowdfund
Intermediary Regulatory Advocates dated January 14, 2016 (``CFIRA
Letter''). Some of these commenters supported the recommendation
with additional limitations and conditions such as a minimum amount
of professional experience or investment limits. See, e.g., Beagle
Letter; D. Kendrick Letter; Cornell Law Clinic Letter; 2016 NASAA
Letter; and TAN2000 Letter.
    \70\ See, e.g., CFA/AFR Letter (``. . . the Series 7, Series 65,
and Series 82 examinations likely `provide demonstrable evidence of
relevant investor sophistication because of the subject matter their
examinations cover' ''); 2016 NASAA Letter (recommending qualifying
credentials to include passing the Series 7, Series 65, or Series
66, provided that there is also a requisite minimum amount of
professional experience); MFA-1 Letter and MFA-2 Letter
(recommending qualifying credentials would include being a CPA or
CFA or having a MBA from an accredited educational institution); M.
Maisonneuve Letter (recommending qualifying credentials would
include being a CFA); IMCA Letter (recommending qualifying
credentials would include having a CIMA certification); CFIRA Letter
(recommending qualifying credentials would include being a CPA, CFA,
CMA, registered investment adviser, RR or securities attorney); and
D. Kendrick Letter (recommending qualifying credentials would
include having been in the securities industry as a broker, lawyer,
or accountant).
    \71\ See, e.g., NSBA Letter (``. . . if someone is sophisticated
enough to advise others on investing in these types of offerings,
for example, they should themselves be qualified to invest in
them''); Cornell Law Clinic Letter (credentials required should be
substantially high to cause financial sophistication to make up for
the loss in ability to sustain financial losses); 2016 L. Grover
Letter (experts in industries historically passed over by angel
investors should be allowed to qualify as accredited investors); and
J. Carlsen Letter (individuals with business-related college
degrees).

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

    Several recent advisory committee recommendations similarly have
supported expanding the criteria for natural persons to qualify as
accredited investors. In 2014, the Investor Advisory Committee
recommended that the Commission revise the accredited investor
definition to enable individuals to qualify as accredited investors
based on their ``financial sophistication.'' \72\ In 2015, the Advisory
Committee on Small and Emerging Companies recommended including in the
accredited investor definition those investors who meet a
``sophistication test,'' regardless of income or net worth.\73\ In
2016, the Advisory Committee on Small and Emerging Companies
recommended, among other things, that the Commission expand the pool of
accredited investors to include individuals who have passed
examinations that test their knowledge and understanding in the areas
of securities and investing, including the Series 7, Series 65, Series
82, and CFA Examinations and equivalent examinations.\74\ In October
2017, the U.S. Department of the Treasury issued a report that includes
recommendations on amending the accredited investor definition with the
objective of expanding the eligible pool of sophisticated investors to
financial professionals, such as registered representatives and
investment adviser representatives, who generally are considered
qualified to recommend Regulation D investments to others.\75\ In
addition, the 2016, 2017, and 2018 Small Business Forum Reports
included a recommendation that the Commission expand the categories of
qualification for accredited investor status based on various types of
sophistication, such as education, experience, or training, including,
among other things, persons holding FINRA licenses or CPA or CFA
designations. The 2019 Small Business Forum Report included a
recommendation that the Commission revise the accredited investor
definition for natural persons to add a sophistication test as a way to
qualify in addition to the income and net worth thresholds in the
definition.\76\
---------------------------------------------------------------------------

    \72\ 2014 Investor Advisory Committee Recommendation.
    \73\ 2015 ACSEC Recommendations.
    \74\ 2016 ACSEC Recommendations.
    \75\ A Financial System That Creates Economic Opportunities
Capital Markets, U.S. Dept. of the Treasury (Oct. 2017) (``2017
Treasury Report''), available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINALpdf, at p. 44. Some registered representatives may hold
limited licenses that preclude them from recommending Regulation D
investments to others.
    \76\ See the 2019 Small Business Forum Report at 8.
---------------------------------------------------------------------------

    The Concept Release requested comment on the use of additional
sophistication measures other than income or net worth to permit
natural persons to qualify as accredited investors. Table 1 below
provides an overview of the feedback provided by Concept Release
commenters on this topic.
---------------------------------------------------------------------------

    \77\ See K. Sonlin Letter; AOIP Letter; letter from Jor Law
Dated July 10, 2019 (``J. Law Letter''); letter from Leonard A.
Grover dated July 10, 2019 (``2019 L. Grover Letter''); letter from
Broadmark Capital LLC dated July 29, 2019 (``Broadmark Capital
Letter''); C. Uchill Letter; letter from Steven Marshall dated
August 18, 2019 (``S. Marshall Letter''); J. LaBerge Letter; IWI
Letter; Wefunder Letter; HFA Letter; ACA Letter; Funding Circle
Letter; letter from Joe Wallin et al. dated September 23, 2019 (``J.
Wallin Letter''); letter from G. Philip Rutledge dated September 24,
2019 (``P. Rutledge Letter''); letter from SeedInvest dated
September 24, 2019 (``SeedInvest Letter''); letter from Republic
dated September 24, 2019 (``Republic Letter''); CFA Institute
Letter; EquityZen Letter; Iownit Letter; letter from David R. Burton
dated September 24, 2019 (``D. Burton Letter''); CoinList Letter;
2019 SBIA Letter; letter from AngelList Advisors, LLC dated
September 25, 2019 (``AngelList Letter''); letter from William F.
Galvin, Secretary of the Commonwealth of Massachusetts dated
September 24, 2019 (``MA Secretary Letter''); Davis Polk Letter;
letter from Crystal World Holdings and New Sports Economy Institute
dated September 24, 2019 (``CWH and NSEI Letter''); H. Konings et
al. Letter; letter from Crowdfund Capital Advisors dated September
24, 2019 (``CCA Letter''); SIFMA Letter; CCMC Letter; ACG Letter;
IPA Letter; ADISA Letter; letter from Carta dated September 24, 2019
(``Carta Letter''); McCarter & English Letter; letter from Jade
Barker dated September 24, 2019 (``J. Barker Letter''); J. Schocken
Letter; Artivest Letter; J. Tapp Letter; letter from Cody Snyder
dated September 11, 2019 (``C. Snyder Letter''); Bridgeport Letter;
MLA Letter; J. Thomas Letter; letter from Kirk McGregor and Samarth
Sandeep dated September 24, 2019 (``McGregor and Sandeep Letter'');
CfPA Letter; A. Ceja Letter; ABA FR of Sec. Comm. Letter; Sec. Reg.
Comm. of N.Y.St. B.A. Letter; letter from Leyline Corporation dated
October 18, 2019 (``Leyline Letter''); letter from Joey Jones dated
October 29, 2019 (``J. Jones Letter''); letter from CrowdCheck dated
October 30, 2019 (``CrowdCheck Letter''); and Recommendation of the
SEC Small Business Capital Formation Advisory Committee regarding
the accredited investor definition (Dec. 11, 2019), (the ``2019
Advisory Committee Recommendation''), available at https://www.sec.gov/spotlight/sbcfac/recommendation-accredited-investor.pdf..
    \78\ See 2019 L. Grover Letter; C. Uchill Letter; Wefunder
Letter; ACA Letter; P. Rutledge Letter; SeedInvest Letter; Republic
Letter; EquityZen Letter; D. Burton Letter; CoinList Letter; Davis
Polk Letter; H. Konings et al. Letter; ACG Letter; IPA Letter; ADISA
Letter; McCarter & English Letter; Artivest Letter; CfPA Letter;
Sec. Reg. Comm. of N.Y.St. B.A. Letter; Leyline Letter; J. Jones
Letter; and CrowdCheck Letter.
    \79\ See J. Law Letter; SeedInvest Letter; Republic Letter;
EquityZen Letter; D. Burton Letter; CoinList Letter; Davis Polk
Letter; CWH and NSEI Letter; SIFMA Letter; ACG Letter; IPA Letter;
Artivest Letter; CfPA Letter; and CrowdCheck Letter.
    \80\ See D. Burton Letter and CoinList Letter.
    \81\ See J. Tapp Letter; J. Law Letter; 2019 L. Grover Letter;
C. Uchill Letter; C. Snyder Letter; IWI Letter; Bridgeport Letter;
HFA Letter; ACA Letter; Funding Circle Letter; MLA Letter; J. Wallin
Letter; P. Rutledge Letter; SeedInvest Letter; Republic Letter; D.
Burton Letter; 2019 SBIA Letter; CWH and NSEI Letter; CCMC Letter;
ACG Letter; J. Thomas Letter; Carta Letter; McGregor and Sandeep
Letter; CfPA Letter; ABA FR of Sec. Comm. Letter; J. Jones Letter;
CrowdCheck Letter; and the 2019 Advisory Committee Recommendation.
    \82\ See Consumer Federation Letter.
    \83\ See K. Sonlin Letter; Broadmark Capital Letter; C. Uchill
Letter; S. Marshall Letter; J. LaBerge Letter; Wefunder Letter; HFA
Letter; ACA Letter; SeedInvest Letter; Republic Letter; EquityZen
Letter; D. Burton Letter; CoinList Letter; CWH and NSEI Letter; H.
Konings et al. Letter; CCA Letter; SIFMA Letter; CCMC Letter; IPA
Letter; ADISA Letter; McCarter & English Letter; J. Barker Letter;
Artivest Letter; CfPA Letter; A. Ceja Letter; ABA FR of Sec. Comm.
Letter; and the 2019 Advisory Committee Recommendation.
    \84\ See, e.g., Consumer Federation Letter and PIABA Letter.

 Table 1--Responses to Requests for Comment on Additional Sophistication
               Tests in the Accredited Investor Definition
------------------------------------------------------------------------
                        Responses from commenters
-------------------------------------------------------------------------
--Many commenters supported adding a sophistication-based category to
 the accredited investor definition.\77\ Of those commenters:
    --Several commenters supported a sophistication category based on
     passing certain FINRA-administered examinations.\78\
    --Several commenters supported a sophistication category based on
     obtaining a Chartered Financial Analyst certification.\79\
    --Two commenters supported a sophistication category based on
     obtaining a Certified Financial Planner certification.\80\
    --Several commenters supported the use of an accredited investor
     examination.\81\
    --One commenter believed insufficient demand existed for an
     accredited investor examination.\82\
    --Several commenters supported the use of educational experience
     more generally.\83\
    --A few other commenters expressed concern about adding
     sophistication-based categories to the definition.\84\
------------------------------------------------------------------------

    Having considered this feedback, we believe that certain
professional certifications and designations or other credentials can
indicate an appropriate level of financial sophistication that renders
these investors less in need of the protections of registration under
the Securities Act. Indeed, relying solely upon financial thresholds
may unduly restrict access to investment opportunities for individuals
whose knowledge and experience render them capable of evaluating the
merits and risks of a prospective investment--and therefore fending for
themselves--in a private offering, irrespective of their personal
wealth. Accordingly, and consistent with suggestions from a broad range
of commenters, we are proposing to amend the rule to include natural
persons holding one or more professional certifications or designations
or other credentials issued by an accredited educational institution
that the Commission designates from time to time as meeting specified
criteria. In addition, where applicable, an investor would need to
maintain these certifications, designations, or credentials in good
standing in order to qualify for accredited investor status.
    The Commission's designation of certifications, designations, or
credentials would be based upon its consideration of all the facts
pertaining to a particular certification, designation, or credential.
The proposed amendment would provide the following non-exclusive list
of attributes that the Commission would consider in determining which
professional certifications and designations or other credentials
qualify for accredited investor status:
     The certification, designation, or credential arises out
of an examination or series of examinations administered by a self-
regulatory organization or other industry body or is issued by an
accredited educational institution;
     The examination or series of examinations is designed to
reliably and validly demonstrate an individual's comprehension and
sophistication in the areas of securities and investing;
     Persons obtaining such certification, designation, or
credential can reasonably be expected to have sufficient knowledge and
experience in financial and business matters to evaluate the merits and
risks of a prospective investment; and
     An indication that an individual holds the certification
or designation is made publicly available by the relevant self-
regulatory organization or other industry body.
    Professional certifications and designations or other credentials
meeting these proposed criteria would be designated as qualifying for
accredited investor status by means of a Commission order. We
anticipate that the Commission generally would provide public notice
and an opportunity for public comment before issuance of such an order.
To assist members of the public, the professional certifications and
designations or other credentials recognized by the Commission as
satisfying the above criteria would be posted on the Commission's
website.
    We recognize that professional certifications and designations or
credentials may evolve with changes in the market and industry
practices. The proposed approach would provide the Commission with
flexibility to reevaluate previously designated certifications,
designations, or credentials if they change over time, and also to
designate other certifications, designations, or credentials if new
certifications, designations or credentials develop that meet the
specified criteria.
    We preliminarily expect that the following certifications or
designations would be included in an initial Commission order
accompanying the final rule, if adopted:
     Licensed General Securities Representative (Series 7). The
Series 7 license qualifies a candidate ``for the solicitation,
purchase, and/or sale of all securities products, including corporate
securities, municipal securities, municipal fund securities, options,
direct participation programs, investment company products, and
variable contracts.'' \85\ FINRA developed and administers the Series 7
examination. An individual must be associated with a FINRA member firm
or other applicable self-regulatory organization member firm to be
eligible to take the exam and be granted a license.\86\
---------------------------------------------------------------------------

    \85\ https://www.finra.org/registration-exams-ce/qualification-exams/series7.
    \86\ FINRA Rule 1210.03. Candidates must also pass the
Securities Industry Essentials (SIE) examination to obtain the
General Securities Representative designation.
---------------------------------------------------------------------------

     Licensed Investment Adviser Representative (Series 65).
The Series 65 Uniform Investment Adviser Law Examination is designed to
qualify candidates as investment adviser representatives and covers
topics necessary for adviser representatives to understand to provide
investment advice to retail advisory clients.\87\ NASAA developed the
Series 65 examination, and FINRA administers it. An individual does not
need to be sponsored by a member firm to take the exam, and successful
completion of the exam does not convey the right to transact business
prior to being granted a license or registration by a state.\88\
---------------------------------------------------------------------------

    \87\ https://www.nasaa.org/exams/study-guides/series-65-study-guide/.
    \88\ https://www.nasaa.org/exams/exam-faqs/.
---------------------------------------------------------------------------

     Licensed Private Securities Offerings Representative
(Series 82). The Series 82 license qualifies individuals seeking to
effect the sales of private securities offerings.\89\ The examination
focuses on private transactions and is more limited in scope than the
Series 7 examination. FINRA developed and administers the Series 82
examination. An individual must be associated with and sponsored by a
FINRA member firm or other applicable self-regulatory organization
member firm to be eligible to take the exam.\90\
---------------------------------------------------------------------------

    \89\ https://www.finra.org/registration-exams-ce/qualification-exams/series82. Candidates must also pass the SIE examination to
obtain the Private Securities Offerings Representative designation.
    \90\ FINRA Rule 1210.03.
---------------------------------------------------------------------------

    The proposed amendments would enable persons holding designated
certifications, designations, or credentials to qualify as accredited
investors even when they do not meet the income or net worth standards
in the accredited investor definition. We preliminarily believe that
individuals who have passed the necessary examinations and received
their certifications or designations described above have demonstrated
a level of sophistication in the areas of securities and investing such
that they may not need the protections of registration under the
Securities Act. In this regard, we note that these certifications and
designations are required in order to represent or advise others in
connection with securities market transactions. One commenter stated
that, if an individual is ``sophisticated enough to advise others on
investing in these types of offerings . . . they should themselves be
qualified to invest in them.'' \91\
---------------------------------------------------------------------------

    \91\ See NSBA Letter.
---------------------------------------------------------------------------

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

       Table 2--Estimated Number of Individuals Holding Specified
                     Certifications and Designations
------------------------------------------------------------------------
                                                            Number of
               Certification/designation                   individuals
------------------------------------------------------------------------
Registered Securities Representative..................      \92\ 691,041
State Registered Investment Adviser Representative....       \93\ 17,543
------------------------------------------------------------------------

As Table 2 illustrates, if we were to adopt the amendments to the
accredited investor definition as proposed and designate professional
certifications and designations as qualifying credentials, it may
result in a significant increase in the number of individuals that
qualify as accredited investors. However, we note that we cannot
estimate how many individuals that hold the relevant certifications and
designations may already qualify as accredited investors under the
current financial thresholds, and therefore we are unable to state with
certainty how many individuals would be newly eligible under the
proposals. Moreover, for purposes of updating the accredited investor
definition, we believe it is less relevant to focus on the number of
individuals that would qualify and more relevant to consider whether
the proposed criteria adequately capture the attributes of financial
sophistication that is a touchstone of the definition.
---------------------------------------------------------------------------

    \92\ As of December 2018. Of this number, 334,860 individuals
were registered only as broker-dealers, 294,684 were dually
registered as broker-dealers and investment advisers, and 61,497
were registered only as investment advisers.
    Because FINRA-registered representatives can be required to hold
multiple professional certifications, this aggregation likely
overstates the actual number of individuals that hold a Series 7 or
Series 82, and we have no method of estimating the extent of
overlap.
    \93\ As of December 2018.
---------------------------------------------------------------------------

    We acknowledge that there may be individuals that hold other
professional or academic credentials that can demonstrate similar
comprehension and sophistication; however, we believe that it is
appropriate at this time to tailor this category of credentials and
designations to certain ones that directly relate to securities and
investing. For example, while commenters have suggested criteria such
as college degrees and advanced degrees generally for the accredited
investor definition, we are concerned that such a broad approach might
not provide a consistent measure of financial sophistication for a
variety of reasons, including the range of degrees, the different types
of institutions that grant degrees, and the various career paths that
degree holders can take.
    As proposed, where applicable, an individual would be required to
maintain an active certification, designation, or credential \94\ to
qualify as an accredited investor on this basis but would not be
required to practice in fields related to the certification,
designation, or credential, except to the extent that continued
affiliation with a firm is required to maintain the certification,
designation, or credential.\95\ We believe that passing the requisite
examinations and maintaining an active certification, designation, or
license would be sufficient to demonstrate the individual's financial
sophistication to invest in Regulation D offerings, even when the
individual is not practicing in an area related to the certification or
designation. Conversely, an inactive certification, designation, or
license, particularly when the certification or designation has been
inactive for an extended period of time, could lessen the validity of
the certification or designation as a measure of financial
sophistication.
---------------------------------------------------------------------------

    \94\ To maintain their certifications and designations in good
standing, General Securities Representatives and Private Securities
Offerings Representatives are subject to continuing education
requirements under FINRA rules.
    \95\ For example, an individual's registration as a general
securities representative will lapse two years after the date that
his or her employment with a FINRA member has been terminated. See
FINRA Rule 1210.08.
---------------------------------------------------------------------------

    In addition, because issuers must take reasonable steps to verify
whether an investor in a Rule 506(c) offering is an accredited
investor,\96\ readily available information on whether an individual
actively holds a particular certification or designation would be
useful. For example, issuers and other market participants may obtain
registration and licensing information about registered representatives
and investment adviser representatives through FINRA's BrokerCheck \97\
or the Commission's Investment Adviser Public Disclosure database.\98\
For this reason, we are proposing to include, as one of the criteria to
be considered by the Commission in recognizing qualifying professional
credentials, the public availability of information listing the
individuals who hold the relevant certifications or designations.
---------------------------------------------------------------------------

    \96\ See supra note 51.
    \97\ https://brokercheck.finra.org/.
    \98\ https://www.adviserinfo.sec.gov/IAPD/Default.aspx.
---------------------------------------------------------------------------

Request for Comment
    1. Are professional certifications and designations or other
credentials an appropriate standard for determining whether a natural
person is an accredited investor? Do the types of certifications and
designations that the Commission is considering indicate that an
investor has the requisite level of financial sophistication and
abilities to render the protections of the Securities Act unnecessary?
    2. Are the professional certifications and designations we
preliminarily expect to designate as qualifying credentials in an
initial Commission order accompanying the final rule appropriate to
recognize for this purpose? Should we include a credential from an
accredited educational institution, such as an MBA, in such initial
order?
    3. Should we consider other certifications, designations, or
credentials as a means for individuals to qualify as accredited
investors? If so, which ones should we consider? For example, there are
several FINRA Representative-level and Principal-level exams, as well
as FINRA-administered NASAA exams, Municipal Securities Rulemaking Body
exams, and National Futures Association exams, that cover a broad range
of subjects relating to the markets, the securities industry and its
regulatory structure.\99\ Should we consider any other FINRA-developed
examinations or FINRA-administered examinations not discussed in this
release? Should we consider designating any professional certifications
or designations or credentials issued outside of the United States?
Should we consider other certifications and designations administered
by private organizations, such as the CFA Institute and the Certified
Financial Planner Board of Standards? Does the fact that these private
organizations are not subject to Commission oversight or regulation
raise concerns with respect to the inclusion of certifications or
designations such as the CFA Charter or the CFP Certification as a
means of accredited investor qualification?
---------------------------------------------------------------------------

    \99\ See https://www.finra.org/registration-exams-ce/qualification-exams.
---------------------------------------------------------------------------

    4. A FINRA introductory-level examination, the ``Securities
Industry

Essentials'' (SIE) examination, is a co-requisite to the Series 7 and
Series 82 examinations and assesses a candidate's knowledge of basic
securities industry information.\100\ The SIE examination is open to
any individual aged 18 or over, and association with a firm is not
required. Passing the SIE examination alone does not qualify an
individual for registration with a FINRA member firm or to engage in
securities business. We have not included the SIE examination among
those we expect initially to designate as qualifying credentials
because the SIE examination is relatively new and evaluates
introductory-level comprehension of the securities industry. Should we
consider the SIE examination as a means for individuals to qualify as
accredited investors? Should we consider the SIE examination, in
addition to the completion of an investing-related course at an
accredited college or university, as a means for individuals to qualify
as accredited investors?
---------------------------------------------------------------------------

    \100\ https://www.finra.org/registration-exams-ce/qualification-exams/securities-industry-essentials-exam.
---------------------------------------------------------------------------

    5. FINRA's Series 86 and 87 examinations assess the ability of an
entry-level registered representative to perform their job as a
research analyst.\101\ As with the Series 7 and Series 82 examinations,
an individual must be associated with and sponsored by a FINRA member
firm or other applicable self-regulatory organization member firm to be
eligible to take the Series 86 and 87 examinations. The SIE examination
is also co-requisite to the Series 86 and 87 examinations. Should we
consider the Series 86 and 87 examinations as a means for individuals
to qualify as accredited investors?
---------------------------------------------------------------------------

    \101\ https://www.finra.org/registration-exams-ce/qualification-exams/series86-87.
---------------------------------------------------------------------------

    6. The Series 66 NASAA Uniform Combined State Law Examination
(Series 66) is designed to qualify candidates as investment adviser
representatives and as broker-dealer representatives.\102\ NASAA
developed the Series 66 examination, and FINRA administers it. An
individual does not need to be sponsored by a member firm to take the
exam,\103\ and successful completion of the exam does not convey the
right to transact business prior to being granted a license or
registration by a state. Should we consider the Series 66 examination
and registration as an investment adviser representative as a means for
individuals to qualify as accredited investors?
---------------------------------------------------------------------------

    \102\ https://www.finra.org/registration-exams-ce/qualification-exams/series66.
    \103\ Though the Series 66 examination has no pre-requisites, in
order to register as an investment adviser representative based on
passing the Series 66 examination, an individual must also have
passed the FINRA Series 7 examination.
---------------------------------------------------------------------------

    7. Several types of certifications and designations, including the
Series 7, Series 82, Series 86, and 87 licenses, require that an
individual be sponsored by a FINRA member firm to take the exam. Other
certifications and designations, including the Series 65, Series 66,
and the SIE, do not have such a requirement. With respect to
certifications and designations for which an individual does not need
to be sponsored by a member firm, should we consider imposing a waiting
period following an individual's attainment of the credential or
designation before the individual can invest in an offering as an
accredited investor? If so, would a 30-day waiting period, or some
other period of time be appropriate?
    8. Should we, as proposed, designate certain certifications,
designations, or credentials as qualifying credentials by order, or
should we instead include specific certifications, designations, or
credentials in the rule itself? The proposed provision specifies
various attributes that the Commission would consider in making this
determination. Is the proposed list of attributes appropriate or are
there other criteria that we should consider in determining whether
certain professional certifications or designations or other
credentials should be recognized as qualifying for accredited investor
status? One proposed attribute that may be considered is that an
indication that an individual holds the certification or designation is
made publicly available by the relevant self-regulatory organization or
other industry body. Would such a publicly available indication be
necessary if the individual can demonstrate to the issuer that he or
she has actually obtained the certification, or designation?
    9. Should the individuals who obtain the designated professional
credentials be required to maintain these certifications or
designations in good standing in order to qualify as accredited
investors, as proposed? Should they also be required to practice in the
fields related to the certifications or designations, or to have
practiced for a minimum number of years? Certain of the professional
certifications or designations we are considering require an individual
to be associated with a FINRA member firm or other applicable self-
regulatory organization member firm, or require a certain amount of
work experience in order to qualify for the certification or
designation, while others do not. Is it appropriate to recognize
professional certifications or designations that require employment at
certain firms, state registration or licensure, or a minimum amount of
work experience, as proposed? If work experience is a requirement for a
certification but not a prerequisite to taking the relevant exam,
should successful completion of the exam be sufficient to qualify for
accredited investor status, instead of requiring certification?
    10. Under the proposed approach, individuals with certain
certifications, designations, or credentials would qualify as
accredited investors regardless of their net worth or income. While
having such a certification, designation, or credential may be a
measure of financial sophistication, which should encompass the
investor's capacity to allocate their investments in a way to mitigate
or avoid risks of unsustainable loss, the impact of an investment loss
on an investor that does not meet the current net worth or income
thresholds may be significant. Should we consider additional
conditions, such as investment limits, for individuals with these
certifications, designations, or credentials who do not meet the income
test or net worth test, in order to qualify as accredited investors? If
so, what types of investment limits or other conditions should we
consider?
    11. Should we consider educational backgrounds more generally, such
as advanced degrees in certain areas such as law, accounting, business,
or finance, as a means for qualifying as an accredited investor? If so,
which degrees would be appropriate? Should the individual also be
required to demonstrate professional experience in such areas?
    12. Should we consider professional experience in areas such as
finance and investing, apart from professional certifications and
designations, as another means for qualifying for accredited investor
status? If so, what factors should we consider in evaluating whether an
individual has the capability of evaluating the merits and risks of a
prospective investment based on his or her professional experience? For
example, should the focus be on specific types and levels of job
experience? Should we consider only professional experience related to
the securities industry? If so, would it be appropriate to include only
those actively involved in the buying and selling of securities, or
should we consider other professionals whose work experience may
demonstrate an understanding of the investment process? How should the
Commission determine the appropriate level of experience needed in
order to

qualify as an accredited investor under such a test?
    13. Should we consider developing an accredited investor
examination as another means for determining investor sophistication?
What are the advantages and disadvantages of such an approach? What
should be considered in developing and designing such an examination?
    14. Should we consider permitting individuals to self-certify that
they have the requisite financial sophistication to be an accredited
investor as another means for determining investor sophistication?
2. Knowledgeable Employees of Private Funds
    We propose to add a category to the accredited investor definition
that would enable ``knowledgeable employees'' of a private fund to
qualify as accredited investors for investments in the fund.\104\
Private funds, such as hedge funds, venture capital funds, and private
equity funds, are issuers that would be an investment company, as
defined in Section 3 of the Investment Company Act, but for the
exclusion from the definition of ``investment company'' in Section
3(c)(1) or Section 3(c)(7) of the Investment Company Act.\105\ Private
funds generally rely on Section 4(a)(2) and Rule 506 to offer and sell
their interests without registration under the Securities Act.
---------------------------------------------------------------------------

    \104\ Rule 3c-5(a)(4) under the Investment Company Act defines a
``knowledgeable employee'' with respect to a private fund as: (i) An
executive officer, director, trustee, general partner, advisory
board member, or person serving in a similar capacity, of the
private fund or an affiliated management person (as defined in Rule
3c-5(a)(1)) of the private fund; and (ii) an employee of the private
fund or an affiliated management person of the private fund (other
than an employee performing solely clerical, secretarial or
administrative functions with regard to such company or its
investments) who, in connection with his or her regular functions or
duties, participates in the investment activities of such private
fund, other private funds, or investment companies the investment
activities of which are managed by such affiliated management person
of the private fund, provided that such employee has been performing
such functions and duties for or on behalf of the private fund or
the affiliated management person of the private fund, or
substantially similar functions or duties for or on behalf of
another company for at least 12 months.
    \105\ 15 U.S.C. 80a-3(c)(1) and (c)(7).
---------------------------------------------------------------------------

    Section 3(c)(1) of the Investment Company Act excludes from the
definition of ``investment company'' any issuer whose outstanding
securities (other than short-term paper) are beneficially owned by not
more than 100 persons, and which is not making and does not presently
propose to make a public offering of its securities. As discussed
above, Section 3(c)(7) of the Investment Company Act excludes from the
definition of ``investment company'' any issuer whose outstanding
securities are owned exclusively by persons who, at the time of
acquisition of such securities, are ``qualified purchasers,'' and which
is not making and does not at that time propose to make a public
offering of its securities.\106\
---------------------------------------------------------------------------

    \106\ Issuers that rely on Section 3(c)(1) or 3(c)(7) of the
Investment Company Act are a subset of pooled investment funds. The
definition of ``qualified purchaser'' in Section 2(a)(51) of the
Investment Company Act includes any natural person (including any
person who holds a joint, community property, or other similar
shared ownership interest in an issuer that is excepted under
Section 3(c)(7) of the Investment Company Act with that person's
qualified purchaser spouse) who owns not less than $5 million in
investments (as defined by the Commission).
---------------------------------------------------------------------------

    Pursuant to Rule 3c-5, ``knowledgeable employees'' of a private
fund may acquire securities issued by the fund without being counted
for purposes of Section 3(c)(1)'s 100-investor limit and may invest in
a Section 3(c)(7) fund even though they do not meet the definition of
``qualified purchaser.'' \107\ This provision permits individuals who
participate in a fund's management to invest in the fund as a benefit
of employment.\108\ However, even though a knowledgeable employee is
permitted to invest in a Section 3(c)(7) fund (along with other natural
persons that have a high degree of financial sophistication),\109\ a
knowledgeable employee may not meet the financial thresholds in the
accredited investor definition. Therefore, a knowledgeable employee who
does not meet the accredited investor definition may be excluded from
participating in an offering of the private fund under Rule 506 if the
offering is limited to accredited investors.
---------------------------------------------------------------------------

    \107\ Rule 3c-5(b).
    \108\ 2015 Staff Report.
    \109\ Such an employee would be considered a qualified client
under Rule 205-3(d)(1)(iii) under the Advisers Act (allowing such
funds to offer performance fees).
---------------------------------------------------------------------------

    The 2015 Staff Report included a recommendation that the Commission
revise the accredited investor definition to permit knowledgeable
employees of sponsors of private funds to qualify as accredited
investors for investments in the funds sponsored by their employers,
using the definition of the term ``knowledgeable employee'' in Rule 3c-
5(a)(4). In response to the 2015 Staff Report, several commenters
expressed support for the recommendation,\110\ while one commenter
opposed this recommendation.\111\ In July 2016, the Advisory Committee
on Small and Emerging Companies, though not specifically referencing
knowledgeable employees, recommended that the Commission explore more
generally different ways to permit participation by potential investors
with specific industry or issuer knowledge or expertise who would
otherwise not qualify for accredited investor status.\112\ The 2016,
2017, and 2018 Small Business Forum Reports included a recommendation
that the Commission expand the categories of qualification to include,
among other things, status as managerial or key employees affiliated
with the issuer. In addition, a number of commenters on the Concept
Release supported permitting a private fund's knowledgeable employees
to invest in the private fund.\113\
---------------------------------------------------------------------------

    \110\ See, e.g., CFA/AFR Letter (``. . . such individuals
`likely have significant investing experience and sufficient access
to the information necessary to make informed decisions about
investments in their employer's funds' ''); NSBA Letter; Cornell Law
Clinic Letter (``Knowledgeable employees of private funds are likely
some of the highest levels of financial sophistication among
potential investors.''); MFA-1 Letter; and MFA-2 Letter (``. . .
such knowledgeable employees have meaningful investing experience
and sufficient access to information necessary to make informed
investment decisions about the private fund's offerings. In
addition, investments by knowledgeable employees are beneficial for
private fund investors in that they further align investor interests
of adviser employees and fund investors.'').
    \111\ See 2016 NASAA Letter (``Such an approach could raise
suitability issues, may be difficult to verify, and ultimately has a
negligible impact in improving capital formation efforts.'').
    \112\ See 2016 ACSEC Recommendations.
    \113\ See ACA Letter; Funding Circle Letter; MLA Letter; J.
Wallin Letter; P. Rutledge Letter; MFA and AIMA Letter; EquityZen
Letter; 2019 SBIA Letter; BlackRock Letter; ACG Letter; letter from
Dechert LLP dated September 24, 2019; Artivest Letter; and Sec. Reg.
Comm. of N.Y.St. B.A. Letter.
---------------------------------------------------------------------------

    We are not able to estimate the number of individuals that would
qualify as accredited investors under this proposed amendment to the
definition. Using data on private fund statistics compiled by the
Commission's Division of Investment Management, we estimate that there
were 32,202 private funds as of fourth quarter 2018.\114\ However, we
lack data on the number of knowledgeable employees per fund. We also
cannot estimate how many individuals that meet the definition of
``knowledgeable employee'' may already qualify as accredited investors
under the current financial thresholds.
---------------------------------------------------------------------------

    \114\ See https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2018-q4.pdf.
---------------------------------------------------------------------------

    The proposed new category of accredited investor would be the same
in scope as the definition of ``knowledgeable employee'' in Rule 3c-
5(a)(4).\115\ It would include, among other persons, trustees and
advisory board members, or persons serving in a

similar capacity, of a Section 3(c)(1) or 3(c)(7) fund or an affiliated
person of the fund that oversees the fund's investments, as well as
employees of the private fund or the affiliated person of the fund
(other than employees performing solely clerical, secretarial, or
administrative functions) who, in connection with the employees'
regular functions or duties, have participated in the investment
activities of such private fund for at least 12 months.\116\ This new
category would be similar to the existing category for directors,
executive officers, or general partners of the issuer (or directors,
executive officers, or general partners of a general partner of the
issuer).\117\ We believe that such employees, through their knowledge
and active participation of the investment activities of the private
fund, are likely to be financially sophisticated and capable of fending
for themselves in evaluating investments in such private funds.\118\
These employees, by virtue of their position with the fund, are
presumed to have meaningful investing experience and sufficient access
to the information necessary to make informed investment decisions
about the fund's offerings. Allowing these employees to invest in the
funds for which they work also may help to align their interests with
those of other investors in the fund.
---------------------------------------------------------------------------

    \115\ See proposed Rule 501(a)(11).
    \116\ The scope of the term ``knowledgeable employee'' in Rule
3c-5(a)(4) also includes executive officers, directors, and general
partners, or persons servings in a similar capacity, of a Section
3(c)(1) or 3(c)(7) fund or an affiliated person of the fund that
oversees the fund's investments. For these persons, the proposed new
category for ``knowledgeable employees'' in the definition of
``accredited investor'' would overlap with the existing category in
Rule 501(a)(4), which encompasses directors, executive officers, and
general partners of the issuer, as well as directors, executive
officers, and general partners of a general partner of the issuer. A
person is determined to be a knowledgeable employee at the time of
investment. See Rule 3c-5(b)(1).
    \117\ Rule 501(a)(4).
    \118\ As is the case under Rule 3c-5(a)(4), the scope of
``knowledgeable employees'' under this proposed amendment would not
include employees who simply obtain information but do not
participate in the investment activities of the fund.
---------------------------------------------------------------------------

    The inclusion of knowledgeable employees in the definition of
``accredited investor'' would also allow these employees to invest in
the private fund without the fund itself losing accredited investor
status when the funds have assets of $5 million or less. Under Rule
501(a)(8), private funds with assets of $5 million or less may qualify
as accredited investors if all of the fund's equity owners are
accredited investors.\119\ Unless they qualify as accredited investors,
these small private funds could otherwise be excluded from
participating in some offerings under Rule 506 that are limited to
accredited investors. Amending the accredited investor definition in
this manner would allow knowledgeable employees to invest in these
small private funds as accredited investors, while permitting the funds
to remain eligible to qualify as accredited investors under Rule
501(a)(8).
---------------------------------------------------------------------------

    \119\ A private fund may qualify as an accredited investor if it
holds total assets in excess of $5 million and is a corporation,
Massachusetts or similar business trust, or partnership, not formed
for the specific purpose of acquiring the securities offered. A
private fund may also be able to qualify as an accredited investor
if it is a trust with total assets in excess of $5 million that was
not formed for the specific purpose of acquiring the securities
offered, and the purchase is directed by a sophisticated person.
---------------------------------------------------------------------------

Request for Comment
    15. Should knowledgeable employees of private funds be added to the
definition of accredited investor as proposed?
    16. Would adding ``knowledgeable employees'' as a category in the
accredited investor definition raise concerns that small private funds
could qualify as accredited investors under Rule 501(a)(8) when all or
most of its equity owners consist of knowledgeable employees? Do small
private funds raise different concerns than pooled investment funds
such as registered investment companies, business development
companies, and small business investment companies that qualify as
accredited investors without satisfying any quantitative criteria such
as a total assets or investments threshold?
    17. Under the proposed definition of ``accredited investor,''
should a knowledgeable employee's accredited investor status be
attributed to his or her spouse and/or dependents when making joint
investments in private funds? Is the answer to this question the same
for a family corporation or similar estate planning vehicle for which
the knowledgeable employee is responsible for investment decisions and
the source of the funds invested?
    18. Should the Commission consider including certain types of
employees of a non-fund issuer in the accredited investor definition
for purposes of a securities offering by that issuer? If so, what are
the job types or categories of employees that should be considered to
have the appropriate level of financial sophistication and access to
the information necessary to make informed investment decisions about
the issuer's offerings? For example, would it be appropriate to
consider including officers of an issuer, or employees that serve a
particular function such as employees who oversee the issuer's
financial reporting or business operations? Similarly, should the
Commission consider including other individuals with a familial or
similar relationship to an issuer in the definition for purposes of
such an issuer's securities offering? If so, how should we determine
the appropriate individuals and types of relationships that would be
covered by such a provision?
3. Proposed Note to Rule 501(a)(5)
    We are proposing to add a note to Rule 501 to clarify that the
calculation of ``joint net worth'' for purposes of Rule 501(a)(5) can
be the aggregate net worth of an investor and his or her spouse (or
spousal equivalent if ``spousal equivalent'' is included in Rule
501(a)(5), as proposed), and that the securities being purchased by an
investor relying on the joint net worth test of Rule 501(a)(5) need not
be purchased jointly.\120\
---------------------------------------------------------------------------

    \120\ This proposed note is consistent with an existing staff
interpretation. See question number 255.11 of Securities Act Rules
Compliance and Disclosure Interpretations, available at https://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm.
---------------------------------------------------------------------------

    It does not appear to be necessary, in the accredited investor
context, to limit how an investor takes title to securities or how
spouses own assets. Owning assets separately may be preferable for
estate planning purposes, while owning assets jointly offers a
different set of advantages.\121\ Moreover, nothing in previous
Regulation D releases indicates that the Commission intended the term
``joint'' in Rule 501(a)(5) to require (1) joint ownership of assets
when calculating the net worth of the spouses, or (2) that an investor
relying on the joint net worth test acquire the security jointly
instead of separately. Furthermore, allowing spouses to own assets in
various forms for the purposes of the net worth test is consistent with
how the Commission treats spousal ownership of assets in other
contexts.\122\
---------------------------------------------------------------------------

    \121\ See Andrea Coombes, Separate Assets, Joint Problems Wall
St. J., (Nov. 10, 2013), available at https://www.wsj.com/articles/separate-assets-joint-problems-1383947655 (noting that separate
ownership may provide certain estate planning advantages and joint
ownership may provide certain creditor protections and
administrative conveniences).
    \122\ See Investment Company Act Rule 2a51-1, which permits
separate ownership, joint ownership, and community property
ownership.
---------------------------------------------------------------------------

Request for Comment
    19. Should we add a note to clarify the calculation of ``joint net
worth'' for purposes of Rule 501(a)(5), as proposed?

C. Adding Categories of Entities That Qualify as Accredited Investors

    The accredited investor definition includes enumerated categories
of entities in paragraphs (1) through (3), (7), and (8) of Rule
501(a).\123\ Any entity not covered specifically by one of the
enumerated categories is not an accredited investor under the rule.
This has resulted in some degree of uncertainty for legal entities of a
type similar to, but not precisely the same as, those entities
specifically enumerated in Rule 501(a). In addition, federal and state
law developments since the adoption of Regulation D have expanded the
types of business entities that exist, and relatively recent concepts,
such as limited liability companies, suggest that developments in this
area are ongoing. Moreover, there are some entities--such as registered
investment advisers--that are not currently enumerated in Rule 501(a)
but that may exhibit attributes of financial sophistication and an
ability to fend for themselves or sustain losses that are similar to
those of enumerated entities. In light of these considerations, we
believe that an expansion of the types of entities that qualify as
accredited investors may reduce uncertainty and legal costs and promote
more efficient private capital formation.
---------------------------------------------------------------------------

    \123\ See Section II.A above for a summary of the categories of
entities covered by the current rule.
---------------------------------------------------------------------------

1. Registered Investment Advisers
    We propose to include in Rule 501(a)(1) investment advisers
registered under Section 203 of the Advisers Act \124\ and investment
advisers registered under the laws of the various states. Though these
entities have not previously been included as accredited investors, we
believe it is appropriate to propose including them at this time.
---------------------------------------------------------------------------

    \124\ See Section 203 of the Investment Advisers Act of 1940 (15
U.S.C. 80b-3).
---------------------------------------------------------------------------

    As discussed above, the definition of ``accredited person'' in
former Rule 242 is the antecedent to the current accredited investor
definition. Adopted in 1980, Rule 242 was an exemption from
registration for sales to an unlimited number of ``accredited persons''
and to 35 other purchasers.\125\ Included as accredited persons were
certain institutional investors: Banks, insurance companies, certain
employee benefit plans, investment companies, and small business
investment companies (``SBICs''). Regarding which institutions were to
be included in this list, the Commission noted that ``[t]he definition
of accredited person is similar to provisions found in state securities
laws, in the ALI Federal Securities Code, and in proposed
legislation,'' \126\ none of which included registered investment
advisers. In adopting Regulation D, the Commission used Rule 242's list
of institutional investors, adding only business development
companies.\127\
---------------------------------------------------------------------------

    \125\ See Rule 242 Adopting Release at 6363.
    \126\ See Exemption of Limited Offers and Sales by Corporate
Issuers, Release No. 33-6121 (September 11, 1979) [44 FR 54258 at
54259 (Sept. 18, 1979)].
    \127\ See Regulation D 1982 Adopting Release.
---------------------------------------------------------------------------

    When the Commission amended the definition of accredited investor
in 1988 to include savings and loan associations, credit unions, and
registered broker-dealers, the Commission stated that there did not
appear to be a compelling reason to distinguish these newly included
institutions from those that were already treated as accredited
investors, noting that most states already treated these new entities
as institutional investors.\128\
---------------------------------------------------------------------------

    \128\ See Regulation D 1988 Adopting Release at 7866, noting
that ``[m]ost of the states in their institutional investor
exemptions already exempt securities offerings to these categories
of investors.'' See also footnote 11 of the Regulation D 1988
Adopting Release, describing Section 402(b)(8) of the Uniform
Securities Act which ``exempts any offer or sale to a bank, savings
institution, trust company, insurance company, investment company as
defined in the Investment Company Act of 1940, pension or profit
sharing trust, or other financial institution or institutional
buyer, or to a broker-dealer, whether the purchaser is acting for
itself or in some fiduciary capacity.''
---------------------------------------------------------------------------

    The Uniform Securities Act \129\ was amended in 2002, and the
definition of institutional investor therein was expanded to include,
among others, SEC-registered investment advisers acting for their own
accounts.\130\ Twenty states have adopted a version of the 2002 Uniform
Securities Act.\131\ As registered investment advisers are now
generally considered to be institutional investors under state law,
following the rationale the Commission applied in 1988, we see no
compelling reason to distinguish SEC- and state-registered investment
advisers from those institutional investors already treated as
accredited investors.
---------------------------------------------------------------------------

    \129\ The Uniform Securities Act was developed by the National
Conference of Commissioners on Uniform State Laws as a model
securities regulation statute that the states could choose to use as
a basis for their own statutes. See https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=9b2b8f23-651c-c727-e234-3af8b5ab1b6e&forceDialog=0.
    \130\ See Section 102(11) of the Uniform Securities Act (2002).
See also Section 202(13) of the Uniform Securities Act (2002)
(exempting a sale or offer to sell to an institutional investor from
certain registration and filing requirements).
    \131\ See https://www.uniformlaws.org/committees/community-home?CommunityKey=8c3c2581-0fea-4e91-8a50-27eee58da1cf.
---------------------------------------------------------------------------

    We estimate that there are currently approximately 13,400 SEC-
registered investment advisers and approximately 17,500 state-
registered investment advisers that would be covered by the proposed
rule change. We are not able to estimate how many of those SEC- or
state-registered investment advisers may meet the $5 million assets
test under Rule 501(a)(3) and therefore currently qualify as accredited
investors. Because registered investment advisers, like the other
entity types listed in Rule 501(a)(1), appear to have the requisite
financial sophistication needed to conduct meaningful investment
analysis, we believe it is appropriate to extend accredited investor
status to all SEC- and state-registered investment advisers.
Request for Comment
    20. Should SEC- and state-registered investment advisers be added
to the list of entities specified in Rule 501(a)(1) and qualify as
accredited investors, as proposed? Alternatively, should only SEC-
registered investment advisers qualify as accredited investors? If so,
why? Should we allow exempt reporting advisers to qualify as accredited
investors? \132\ If so, should exempt reporting advisers be subject to
additional conditions?
---------------------------------------------------------------------------

    \132\ An exempt reporting adviser is an investment adviser that
qualifies for the exemption from registration under Section 203(l)
of the Advisers Act because it is an adviser solely to one or more
venture capital funds, or under Rule 203(m)-1 of the Advisers Act
because it is an adviser solely to private funds and has assets
under management in the United States of less than $150 million. See
Exemptions for Advisers to Venture Capital Funds, Private Fund
Advisers With Less Than $150 Million in Assets Under Management, and
Foreign Private Advisers, Investment Advisers Act Release No. 3222
(June 22, 2011) [76 FR 39646 (July 6, 2011)].
---------------------------------------------------------------------------

2. Rural Business Investment Companies
    A rural business investment company (``RBIC'') is defined in
Section 384A of the Consolidated Farm and Rural Development Act \133\
as a company that is approved by the Secretary of Agriculture and that
has entered into a participation agreement with the Secretary.\134\
RBICs are intended to promote economic development and the creation of
wealth and job opportunities in rural areas and among individuals

living in such areas.\135\ Their purpose is similar to the purpose of
SBICs, which are intended to increase access to capital for growth
stage businesses.\136\ Because SBICs and RBICs share the common purpose
of promoting capital formation in their respective sectors, advisers to
SBICs and RBICs are treated similarly under the Advisers Act in that
they have the opportunity to take advantage of expanded exemptions from
investment adviser registration.\137\ Because of their common purpose,
we also believe they should be treated similarly under the Securities
Act. SBICs are already accredited investors under Rule 501(a)(1). We
therefore propose to include RBICs as accredited investors under Rule
501(a)(1).
---------------------------------------------------------------------------

    \133\ 7 U.S.C. 2009cc.
    \134\ See Public Law 115-417 (2019). To be eligible to
participate as an RBIC, the company must be a newly formed for-
profit entity or a newly formed for-profit subsidiary of such an
entity, have a management team with experience in community
development financing or relevant venture capital financing, and
invest in enterprises that will create wealth and job opportunities
in rural areas, with an emphasis on smaller enterprises. See 7
U.S.C. 2009cc-3(a).
    \135\ http://www.rd.usda.gov/programs-services/rural-business-investment-program.
    \136\ https://www.sba.gov/partners/sbics.
    \137\ Advisers to solely RBICs and advisers to solely SBICs are
exempt from investment adviser registration. Advisers Act Sections
203(b)(8) and 203(b)(7), respectively. The venture capital fund
adviser exemption deems RBICs and SBICs to be venture capital funds
for purposes of the exemption. 15 U.S.C. 80b-3(l). The private fund
adviser exemption excludes the assets of RBICs and SBICs from
counting towards the $150 million threshold. 15 U.S.C. 80b-3(m).
---------------------------------------------------------------------------

Request for Comment
    21. Should RBICs be added to the list of entities specified in Rule
501(a)(1) and qualify as accredited investors, as proposed? Is there
any reason to treat RBICs differently than SBICs in this regard?
3. Limited Liability Companies
    Rule 501(a)(3) sets forth the following types of entities that
qualify for accredited investor status if they have total assets in
excess of $5 million and were not formed for the specific purpose of
acquiring the securities being offered: Organizations described in
section 501(c)(3) of the Internal Revenue Code, corporations,
Massachusetts or similar business trusts, and partnerships.\138\ This
list does not include limited liability companies, which have become a
widely adopted corporate form since the Commission last updated the
accredited investor rules in 1989 to include additional entities.\139\
---------------------------------------------------------------------------

    \138\ See Rule 501(a)(3).
    \139\ See Regulation D 1989 Adopting Release.
---------------------------------------------------------------------------

    In 1977, the state of Wyoming was the first state to enact a
statute authorizing the creation of a limited liability company.\140\
However, more widespread adoption of the limited liability company as a
corporate form did not occur until more than a decade later.\141\
Indeed, it took until 1996 for all fifty states to enact limited
liability company statutes.\142\ The slow adoption of the limited
liability company as a corporate form may help explain why limited
liability companies were not included in the Regulation D 1982 Adopting
Release, the Regulation D 1988 Adopting Release, or the Regulation D
1989 Adopting Release, which together expanded Rule 501(a)(3) to
include the enumerated list as it exists today.
---------------------------------------------------------------------------

    \140\ See Susan Pace Hamill, ``The Story of LLCs: Combining the
Best Features of a Flawed Business Tax Structure'' in Business Tax
Stories: An In-Depth Look at Ten Leading Developments in Corporate
and Partnership Taxation (Foundation Press, 2005), available at
https://www.law.ua.edu/misc/bio/hamill/Chapter%2010--Business%20Tax%20Stories%20(Foundation).pdf.
    \141\ Id. at 297 (noting that the State of Florida enacted a
limited liability company statute in 1982, but that the next state
to adopt a similar statute did not do so until 1990).
    \142\ Id.
---------------------------------------------------------------------------

    Given the widespread adoption of the limited liability company as a
corporate form, we propose to include limited liability companies in
Rule 501(a)(3). The proposed amendment would codify a longstanding
staff position that limited liability companies that satisfy the other
requirements of the definition are eligible to qualify as accredited
investors under Rule 501(a)(3).\143\ One commenter responding to the
Concept Release supported the inclusion of limited liability companies
as accredited investors under Rule 501(a)(3).\144\
---------------------------------------------------------------------------

    \143\ See Division of Corporation Finance interpretive letter to
Wolf, Block, Schorr and Solis-Cohen (Dec. 11, 1996); and question
number 255.05 of Securities Act Rules Compliance and Disclosure
Interpretations, available at https://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm.
    \144\ See MFA and AIMA Letter.
---------------------------------------------------------------------------

    Due to a lack of publicly available information about limited
liability companies, we are unable to estimate the number of limited
liability companies that would qualify as accredited investors under
the proposed rule. We believe that limited liability companies that
meet the requirements of Rule 501(a)(3), including the assets test,
should be considered to have the requisite financial sophistication to
qualify as accredited investors. Moreover, we are not aware of abuses
or concerns associated with the current treatment of limited liability
companies that satisfy the other requirements of the definition as
accredited investors that would warrant their exclusion from the
definition.
    We are aware that some individuals may prefer to make investments
through an entity instead of on an individual basis, and we understand
that frequently such individuals will opt to use the limited liability
company form of organization. In such cases, the limited liability
company may not qualify under Rule 501(a)(3) if it was formed for the
specific purpose of acquiring the securities being offered, regardless
of the amount of assets held by the LLC. However, because Rule
501(a)(8) accredits any entity in which all of the equity owners are
accredited investors, a limited liability company formed for this
purpose may still qualify as an accredited investor under such
rule.\145\
---------------------------------------------------------------------------

    \145\ As discussed below in Section II.C.5, we are proposing to
add a note to Rule 501(a)(8) that would clarify the application of
Rule 501(a)(8) when the equity owner is itself an entity rather than
a natural person.
---------------------------------------------------------------------------

    We note that Rule 501(a)(4) includes as an accredited investor any
director, executive officer, or general partner of the issuer of the
securities being offered or sold. The term ``executive officer'' is
defined in Rule 501(f) as ``the president, any vice president in charge
of a principal business unit, division or function, as well as any
other officer who performs a policy making function, or any other
person who performs similar policy making functions for the issuer.''
We are of the view that a manager of a limited liability company
performs a policy making function for the issuer equivalent to that of
an executive officer of a corporation under Rule 501(f), and therefore
we do not believe it is necessary to amend Rule 501(a)(4) or Rule
501(f) to specifically include managers of limited liability companies.
We believe that such managers, through their knowledge and management
of the issuer, are likely to be sophisticated financially and capable
of fending for themselves in evaluating investments in the limited
liability company's securities.
Request for Comment
    22. Should limited liability companies be added to the list of
entities specified in Rule 501(a)(3), as proposed?
    23. If limited liability companies are listed in Rule 501(a)(3),
should we further amend our rules to specifically include managers of
limited liability companies as executive officers under Rule 501(f)?
Instead of all managers, should we limit this provision to managing
members, which would preclude third-party managers from being
considered executive officers under Rule 501(f)? Alternatively, should
we include managers of limited liability companies in Rule 501(a)(4)'s
list of insiders who may qualify as accredited investors?

4. Other Entities Meeting an Investments-Owned Test
    In addition to limited liability companies, other types of
entities, such as Indian tribes, labor unions, governmental bodies and
funds, and entities organized under the laws of a foreign country, are
not specifically listed in the accredited investor definition.
    In the 2015 Staff Report, the Commission staff recommended that the
Commission ``consider modifying the definition to permit any entity
with investments in excess of $5 million, and not formed for the
specific purpose of investing in the securities offered, to qualify as
an accredited investor.'' \146\ The staff noted that a definition of
investments ``based on the definition of investments in Rule 2a51-1(b)
would promote consistency across securities laws and provide a
predictable framework.'' \147\ Responses were mixed, with several
commenters supporting the recommendation \148\ and other commenters
opposing it.\149\
---------------------------------------------------------------------------

    \146\ See 2015 Staff Report at 92.
    \147\ Id.
    \148\ See, e.g., letter from the Small Business Investor
Alliance dated March 7, 2016 (``2016 SBIA Letter''); NSBA Letter;
and 2016 NASAA Letter (``An investments test is a better gauge of
financial sophistication than simply analyzing net worth or
income'').
    \149\ See, e.g., K. Beagle Letter; Cornell Law Clinic Letter;
and Reardon Letter.
---------------------------------------------------------------------------

    The Concept Release requested comment on whether the Commission
should revise the definition to expand the types of entities that may
qualify as accredited investors, and if so, what types of entities
should be included. Several commenters supported expanding the
definition to include specific additional entity types, including
Indian tribes \150\ and certain state and local governmental
entities.\151\
---------------------------------------------------------------------------

    \150\ See CrowdCheck Letter; NAFOA Letter; G. Clarkson Letter;
J. Wallin Letter; REDCO Letter; and IMDG Letter. The NAFOA Letter,
which the G. Clarkson Letter, J. Wallin Letter, REDCO Letter, and