engaging in general solicitation may raise certain investor protection
issues. We also understand that other commenters believe that
additional measures regarding private fund advertising are not
necessary because the antifraud provisions of the federal securities
laws continue to apply. We will monitor and study the development of
private fund advertising and undertake a review to determine whether
any further action is necessary.
    We remind investment advisers to private funds that they are
subject to Rule 206(4)-8 under the Advisers Act.\163\ Rule 206(4)-8
provides that it shall constitute a fraudulent, deceptive or
manipulative act, practice or course of business within the meaning of
Section 206(4) of the Advisers Act for any investment adviser to a
pooled investment vehicle \164\ to ``(1) [m]ake any untrue statement of
a material fact or to omit to state a material fact necessary to make
the statements made, in light of the circumstances under which they
were made, not misleading, to any investor or prospective investor in
the pooled investment vehicle; or (2) otherwise engage in any act,
practice or course of business that is fraudulent, deceptive, or
manipulative with respect to any investor or prospective investor in
the pooled investment vehicle.'' \165\
---------------------------------------------------------------------------

    \163\ 17 CFR 275.206(4)-8.
    \164\ Rule 206(4)-8 defines a pooled investment vehicle to mean
any investment company as defined in Section 3(a) of the Investment
Company Act [15 U.S.C. 80a-3(a)] or any company that would be an
investment company under Section 3(a) of that Act but for the
exclusion provided from that definition by either Section 3(c)(1) or
Section 3(c)(7) of that Act [15 U.S.C. 80a-3(c)(1) or (7)].
    \165\ Id.
---------------------------------------------------------------------------

    As was stated by the Commission when it adopted Rule 206-4(8),
``[t]he rule clarifies that an adviser's duty to refrain from
fraudulent conduct under the federal securities laws extends to the
relationship with ultimate investors and that the Commission may bring
enforcement actions under the Advisers Act against investment advisers
who defraud investors or prospective investors in those pooled
investment vehicles.'' \166\ We further stated that we ``intend to
employ all of the broad authority that Congress provided us in section
206(4) and direct it at adviser conduct affecting an investor or
potential investor in a pooled investment vehicle.'' \167\ Recently,
for example, we have brought enforcement actions against private fund
advisers and others for material misrepresentations to investors and
prospective investors regarding fund performance, strategy, and
investments, among other things.\168\
---------------------------------------------------------------------------

    \166\ Prohibition of Fraud by Advisers to Certain Pooled
Investment Vehicles, Release No. IA-2628 (Aug. 3, 2007) [72 FR 44756
(Aug. 9, 2007)].
    \167\ Id.
    \168\ See, e.g., In the Matter of Oppenheimer Asset Management
Inc. and Oppenheimer Alternative Investment Management, LLC, Release
No. IA-3566 (Mar. 11, 2013); In the Matter of Sentinel Investment
Management Corp., Release No. IA-3530 (Dec. 27, 2012); In the Matter
of Weizhan Tang, Release No. IA-3482 (Oct. 5, 2012); In the Matter
of Calhoun Asset Management, LLC, et al., Release No. IA-3428 (July
9, 2012); In the Matter of Belal K. Faruki, Release No. IA-3405 (May
17, 2012); In the Matter of GMB Capital Management LLC, et al.,
Release No. IA-3399 (Apr. 20, 2012).
---------------------------------------------------------------------------

    We believe that investment advisers that have implemented
appropriate policies and procedures regarding, among other things, the
nature and content of private fund sales literature, including general
solicitation materials, are less likely to use materials that
materially mislead investors or otherwise violate the federal
securities laws. Accordingly, we believe that investment advisers to
private funds should carefully review any such policies and procedures
that have been implemented to determine whether they are reasonably
designed to prevent the use of fraudulent or materially misleading
private fund advertising and make appropriate amendments to those
policies and procedures, particularly if the private funds intend to
engage in general solicitation activity.\169\
---------------------------------------------------------------------------

    \169\ We remind investment advisers that are registered or
required to be registered under Section 203 of the Advisers Act that
they must adopt and implement written policies and procedures
reasonably designed to prevent violations of the Advisers Act which
include, but are not limited to, violations of Section 206 of the
Advisers Act and the rules thereunder. They must also review, no
less frequently than annually, the adequacy of the written policies
and procedures and the effectiveness of the policies and procedures'
implementation. See CFR 275.206(4)-7.
---------------------------------------------------------------------------

F. Technical and Conforming Amendments

    We proposed a number of technical and conforming amendments to
Rules 502 and 506 of Regulation D. Under the proposal, we would amend
various provisions in Rule 502(b) to clarify that the references to
sales to non-accredited investors under Rule 506, and the corresponding
informational requirements, would be applicable to offerings under Rule
506(b) and not to offerings under Rule 506(c). We proposed to amend
Rule 502(c) to clarify that Rule 502(c)'s prohibition against general
solicitation would not apply to offerings under Rule 506(c). In
addition, as Section 201(c) of the JOBS Act renumbered Section 4 of the
Securities Act, we proposed to amend Regulation D and Rule 144A to
update the references to Section 4. Finally, the proposal would update
references to Section 2 of the Securities Act in these rules as some of
the references have not been updated to reflect the current numbering
scheme in Section 2. We received no comments regarding these technical
and conforming amendments and are adopting these rule amendments as
proposed.

III. Final Amendment to Rule 144A

    Section 201(a)(2) of the JOBS Act directs the Commission to revise
Rule 144A(d)(1) under the Securities Act to provide that securities
sold pursuant to Rule 144A may be offered to persons other than QIBs,
including by means of general solicitation, provided that securities
are sold only to persons that the seller and any person acting on
behalf of the seller reasonably believe is a QIB. To implement the
mandated rule change, we proposed amending Rule 144A(d)(1) to eliminate
the references to ``offer'' and ``offeree.'' All of the commenters that
expressed a view on the proposed amendment to Rule 144A(d)(1) stated
that they supported the Commission's proposal.\170\ We are adopting the
amendment as proposed. As amended, Rule 144A(d)(1) will require only
that the securities be sold to a QIB or to a purchaser that the seller
and any person acting on behalf of the seller reasonably believe is a
QIB.\171\ Under this amendment, resales of securities pursuant to Rule
144A can be conducted using general solicitation, so long as the
purchasers are limited in this manner.\172\
---------------------------------------------------------------------------

    \170\ See letters from IAA; SIFMA and FSR (Oct. 5, 2012); J.
Johnson; OTC Markets Group Inc.
    \171\ Rule 144A(d)(1).
    \172\ The general solicitation that is permitted in Rule 144A
resales from the initial purchaser to the QIBs will not affect the
availability of the Section 4(a)(2) exemption or Regulation S for
the initial sale of securities by the issuer to the initial
purchaser.
---------------------------------------------------------------------------

    As a result of the Section 201(a)(2) mandate and the resulting Rule
144A revisions, we are also making technical and conforming revisions
to the exceptions in Regulation M relating to transactions in Rule 144A
securities, specifically Regulation M Rules 101(b)(10), 102(b)(7) and
104(j)(2). When adopted in 1996, the exceptions delineated in Rules
101(b)(10)(i), 102(b)(7)(i) and 104(j)(2)(i) were generally intended to
permit transactions in securities eligible for resale under Rule 144A
during a distribution of securities, provided that offers and sales of
such securities were made solely to QIBs or persons reasonably believed
to be QIBs in certain transactions exempt from registration.\173\
---------------------------------------------------------------------------

    \173\ See Anti-Manipulation Rules Concerning Securities
Offerings, Release No. 34-38067 (Dec. 20, 1996) [62 FR 520 (Jan. 3,
1997)] at 530 (``As adopted, the exception permits transactions in
Rule 144A Securities during a distribution of such securities,
provided that sales of such securities within the United States are
made solely to: Qualified institution buyers (`QIBs'), or persons
reasonably believed to be QIBs, in transactions exempt from
registration under the Securities Act . . . The exception covers
both the Rule 144A security being distributed and any reference
security.'').
---------------------------------------------------------------------------

    As explained above, Section 201(a)(2) of the JOBS Act directs the
Commission to revise Rule 144A to permit offers of securities to
persons other than QIBs. As noted above, Rule 144A is being amended to
eliminate references to ``offer'' and ``offeree,'' so that the amended
rule will require only that securities be sold to a QIB or to a
purchaser that the seller and any person acting on behalf of the seller
reasonably believes is a QIB.
    In order to conform the language in Regulation M to Rule 144A, as
amended, we are conforming the Regulation M exceptions by similarly
eliminating the references to ``offered'' and ``offerees.'' We believe
that these conforming modifications do not result in any substantive
change to the Regulation M exceptions and are consistent with the
purpose of the exceptions.
    As a transition matter, for an ongoing Rule 144A offering that
commenced before the effective date of the amendment to Rule
144A(d)(1), offering participants will be entitled to conduct the
portion of the offering following the effective date of the amendment
to Rule 144A(d)(1) using general solicitation, without affecting the
availability of Rule 144A for the portion of the offering that occurred
prior to the effective date of the amended rule.

IV. Integration With Offshore Offerings

    In the Proposing Release, we noted that the mandate in Section
201(a) that the Commission amend Rule 506 and Rule 144A to permit the
use of general solicitation in transactions under those rules has
raised questions from some commenters \174\ regarding the impact of the
use of general solicitation on the availability of the Regulation S
safe harbors for concurrent unregistered offerings inside and outside
the United States.\175\ The safe harbors are important when U.S. and
non-U.S. companies engage in global offerings of securities in which
the U.S. portion of the offering is conducted in accordance with Rule
144A or Rule 506 and the offshore portion is conducted in reliance on
Regulation S.
---------------------------------------------------------------------------

    \174\ See, e.g., letters from ABA Fed. Reg. Comm. (Apr. 30,
2012); L. Neumann (June 12, 2012); NYCBA (May 4, 2012);
SecuritiesLawUSA, PC (June 26, 2012); SIFMA (Apr. 27, 2012).
    \175\ Regulation S provides a safe harbor for offers and sales
of securities outside the United States and includes an issuer and a
resale safe harbor. Two general conditions apply to both safe
harbors: (1) The securities must be sold in an offshore transaction
and (2) there can be no ``directed selling efforts'' in the United
States. Rule 902(c)(1) [17 CFR 230.902(c)(1)] broadly defines
``directed selling efforts'' as: Any activity undertaken for the
purpose of, or that could reasonably be expected to have the effect
of, conditioning the market in the United States for any of the
securities offered in reliance on Regulation S. Such activity
includes placing an advertisement in a publication ``with a general
circulation in the United States'' that refers to the offering of
securities being made in reliance upon Regulation S.
---------------------------------------------------------------------------

    We expressed our view on this issue in the Proposing Release, which
we are reaffirming in this release.\176\ Concurrent offshore offerings
that are conducted in compliance with Regulation S will not be
integrated with domestic unregistered offerings that are conducted in
compliance with Rule 506 or Rule 144A, as amended. As explained in the
Proposing Release, we believe that our view is consistent with the
historical treatment of concurrent Regulation S and Rule 144A/Rule 506
offerings.\177\
---------------------------------------------------------------------------

    \176\ All of the commenters who expressed a view on our
interpretation supported it and encouraged us to reiterate it in
this release. See letters from ABA Fed. Reg. Comm; Forum for U.S.
Securities Lawyers in London; IAA; IPA; NYCBA.
    \177\ See Offshore Offers and Sales, Release No. 33-6863 (Apr.
24, 1990) [55 FR 18306 (May 2, 1990)] (stating that ``[o]ffshore
transactions made in compliance with Regulation S will not be
integrated with registered domestic offerings or domestic offerings
that satisfy the requirements for an exemption from registration
under the Securities Act.''). In addressing the offshore transaction
component of the Regulation S safe harbor, the Commission also
stated, ``Offers made in the United States in connection with
contemporaneous registered offerings or offerings exempt from
registration will not preclude reliance on the safe harbors.'' Id.
at n. 36. Likewise, in addressing directed selling efforts, the
Commission stated, ``Offering activities in contemporaneous
registered offerings or offerings exempt from registration will not
preclude reliance on the safe harbors.'' Id. at n. 47. See also Rule
500(g) of Regulation D [17 CFR 230.500(g)] (formerly Preliminary
Note No. 7 to Regulation D) (``Regulation S may be relied upon for
such offers and sales even if coincident offers and sales are made
in accordance with Regulation D inside the United States.'').
---------------------------------------------------------------------------

V. Paperwork Reduction Act

A. Background

    The amendment to Form D contains a ``collection of information''
requirement within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\178\ We published a notice requesting comment on the
collection of information requirement in the Proposing Release for the
rule and form amendments. We submitted that requirement to the Office
of Management and Budget (``OMB'') for review and approval in
accordance with the PRA and its implementing regulations.\179\ The
title of this requirement is: ``Form D'' (OMB Control No. 3235-
0076).\180\
---------------------------------------------------------------------------

    \178\ 44 U.S.C. 3501 et seq.
    \179\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \180\ Form D was adopted under the authority of Sections
2(a)(15), 3(b), 4(a)(2), 19(a) and 19(c)(3) of the Securities Act
[15 U.S.C. 77b(a)(15), 77c(b), 77d(a)(2), 77s(a) and 77s(c)(3)].
---------------------------------------------------------------------------

    We adopted Regulation D and Form D as part of the establishment of
a series

of exemptions for offerings and sales of securities under the
Securities Act. The Form D filing is required to be made by issuers as
a notice of sales without registration under the Securities Act based
on a claim of exemption under Regulation D or Section 4(a)(5) of the
Securities Act. The Form D filing is required to include basic
information about the issuer, certain related persons, and the
offering. This information is needed for implementing the exemptions
and analyzing their use. The information collection requirements
related to the filing of Form D with the Commission are mandatory to
the extent that an issuer elects to make an offering of securities in
reliance on the relevant exemption. Responses are not confidential. The
hours and costs associated with preparing and filing forms and
retaining records constitute reporting and cost burdens imposed by the
collection of information requirements. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information requirement unless it displays a currently valid OMB
control number.
    As discussed above, we proposed to amend Form D to add a check box
to indicate an offering relying on the Rule 506(c) exemption. In the
Proposing Release, we requested comment on our PRA burden hour and cost
estimates and the analysis used to derive such estimates. One commenter
responded to our request for comment on the PRA analysis and stated
that it believed that the cost estimates in the PRA and economic
analysis are too low.\181\
---------------------------------------------------------------------------

    \181\ See letter from NSBA (stating that ``the compliance cost
estimates should include the time required by the issuer and their
advisors to familiarize themselves with the rule and to comply with
the additional verification requirements and the time and costs of
investors to comply (for example, with a third-party verification
requirement)''). For PRA purposes, we consider only the burden of
responding to the collection of information in Form D; we do not
consider any of the other costs, direct or indirect, of conducting a
Rule 506(c) offering.
---------------------------------------------------------------------------

B. Revisions to PRA Reporting and Cost Burden Estimates

    Consistent with the PRA analysis in the Proposing Release, we
believe that the addition of a check box on Form D to indicate that an
issuer is relying on the Rule 506(c) exemption for its offering will
have a negligible effect on the paperwork burden of the form. Form D
already contains a check box for each basis of exemption claimed under
Regulation D; this change simply conforms the form to the new rule
amendment. Accordingly, we estimate that under the amendment to Form D,
the burden for responding to the collection of information in Form D
will be substantially the same as before the amendment to Form D. We
believe, however, that the amendment to Rule 506 could increase the
number of Form D filings that are made with the Commission because we
expect issuers may conduct more Rule 506 offerings.
    The table below shows the current total annual compliance burden,
in hours and in costs, of the collection of information pursuant to
Form D. For purposes of the PRA, we estimate that, over a three-year
period, the average burden estimate will be four hours per Form D
filing. Our burden estimate represents the average burden for all
issuers. This burden is reflected as a one hour burden of preparation
on the issuer and a cost of $1,200 per filing. In deriving these
estimates, we assume that 25% of the burden of preparation is carried
by the issuer internally and that 75% of the burden of preparation is
carried by outside professionals retained by the issuer at an average
cost of $400 per hour. The portion of the burden carried by outside
professionals is reflected as a cost, while the portion of the burden
carried by the issuer internally is reflected in hours.

                                       Table 1--Estimated Paperwork Burden Under Form D, Pre-Amendment to Rule 506
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                External
                                                       Number of      Burden hours/     Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                          (A)\182\              (B)                (C)=(A)*(B)    (D)              (E)     (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D............................................          18,187                4           72,748           18,187           54,561      $21,824,400
--------------------------------------------------------------------------------------------------------------------------------------------------------

    According to our Division of Economic and Risk Analysis (``DERA''),
in 2012, 16,067 companies made 18,187 new Form D filings. The annual
number of new Form D filings rose from 13,764 in 2009 to 18,187 in
2012, an average increase of approximately 1,474 Form D filings per
year, or approximately 10%. Assuming that the macroeconomic factors
underlying this increase persist and the number of Form D filings
continues to increase by 1,474 filings per year for each of the next
three years, the average number of Form D filings in each of the next
three years, absent the elimination of the prohibition against general
solicitation, would be approximately 21,135.
---------------------------------------------------------------------------

    \182\ We had previously estimated the number of responses to be
25,000, as reflected in OMB's Inventory of Currently Approved
Information Collections (available at: http://www.reginfo.gov/public/do/PRAMain;jsessionid=D37174B5F6F9148DB767D63DF6983A65), but
we are revising this estimate to reflect the number of new Form D
filings made in 2012.
---------------------------------------------------------------------------

    We anticipate that new paragraph (c) of Rule 506 could result in an
even greater annual increase in the number of Form D filings than the
10% annual increase estimated above. As a reference point for the
potential increase, we use the impact of another past rule change on
the market for Regulation D offerings. In 1997, the Commission amended
Rule 144(d) under the Securities Act \183\ to reduce the holding period
for restricted securities from two years to one year,\184\ thereby
increasing the attractiveness of Regulation D offerings to investors
and to issuers. There were 10,341 Form D filings in 1996. This was
followed by a 20% increase in the number of Form D filings in each of
the subsequent three calendar years, reaching 17,830 by 1999. Although
it is not possible to predict with any degree of accuracy the increase
in the number of Rule 506 offerings following the elimination of the
prohibition against general solicitation for a new category of Rule 506
offerings, we assume for purposes of this analysis that there could be
a similarly significant increase.
---------------------------------------------------------------------------

    \183\ 17 CFR 230.144(d).
    \184\ See Revision of Holding Period Requirements in Rules 144
and 145, Release No. 33-7390 (Feb. 20, 1997) [62 FR 9242 (Feb. 28,
1997)].
---------------------------------------------------------------------------

    For purposes of the PRA and based on our analysis above, we
estimate that the amendment to Rule 506 will result in a 20% increase
in Form D filings relying on the Rule 506 exemption, or approximately
3,637 filings.\185\ We also assume that the number of Form D filings
will increase by approximately 3,637 in each year following the
adoption of the rule.
---------------------------------------------------------------------------

    \185\ This number is based on the 18,187 new Form D filings that
were made in 2012.

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

    Based on this increase, we estimate that the annual compliance
burden of the collection of information requirements for the first year
in which issuers will make Form D filings after the adoption of Rule
506(c) will be an aggregate of 21,824 hours of issuer personnel time
and $26,188,800 for the services of outside professionals per year.

                                      Table 2--Estimated Paperwork Burden Under Form D, Post-Amendment to Rule 506
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                External
                                                       Number of      Burden hours/     Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                         (A) \186\              (B)                (C)=(A)*(B)    (D)              (E)     (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D............................................          21,824                4           87,296           21,824           65,472      $26,188,800
--------------------------------------------------------------------------------------------------------------------------------------------------------

VI. Economic Analysis

A. Background

    We are adopting amendments to Rule 506 and Rule 144A to implement
the requirements of Section 201(a) of the JOBS Act.\187\ Section
201(a)(1) directs the Commission to revise Rule 506 to provide that the
prohibition against general solicitation contained in Rule 502(c) shall
not apply to offers and sales of securities made pursuant to Rule 506,
as amended, provided that all purchasers of the securities are
accredited investors. Section 201(a)(1) also provides that ``such rules
shall require the issuer to take reasonable steps to verify that
purchasers of the securities are accredited investors, using such
methods as determined by the Commission.'' Section 201(a)(2) of the
JOBS Act directs the Commission to revise Rule 144A(d)(1) to provide
that securities sold pursuant to Rule 144A may be offered to persons
other than QIBs, including by means of general solicitation, provided
that securities are sold only to persons that the seller and any person
acting on behalf of the seller reasonably believe are QIBs.
---------------------------------------------------------------------------

    \186\ The information in this column is based on the 18,187 new
Form D filings that were made in 2012, plus the additional 3,637
filings we estimate would be filed in the first year after the
effectiveness of Rule 506(c).
    \187\ As explained above, the Commission in this release is
adopting only those rule and form amendments that are specifically
mandated by Section 201(a). Correspondingly, we analyze the economic
impacts--including the benefits and costs--only of those rules and
form amendments considered within the scope of this release.
---------------------------------------------------------------------------

    We are mindful of the costs imposed by and the benefits obtained
from our rules. The discussion below addresses the economic effects of
the amendments to Rule 506, Rule 144A and Form D, including the likely
benefits and costs of the amendments as well as the effect of the
amendments on efficiency, competition and capital formation.\188\ Some
of the costs and benefits stem from the statutory mandate of Section
201(a), whereas others are affected by the discretion we have exercised
in implementing this mandate. These two types of costs and benefits may
not be entirely separable to the extent that our discretion is
exercised to realize the benefits that we believe were intended by
Section 201(a).
---------------------------------------------------------------------------

    \188\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)]
requires the Commission, when engaging in rulemaking that requires
it to consider whether an action is necessary or appropriate in the
public interest, to consider, in addition to the protection of
investors, whether the action would promote efficiency, competition,
and capital formation.
---------------------------------------------------------------------------

B. Economic Baseline

    The baseline analysis that follows is in large part based on
information collected from Form D filings submitted by issuers relying
on Regulation D to raise capital. As we describe in more detail below,
we believe that we do not have a complete view of the Rule 506 market,
particularly with respect to the amount of capital raised. Currently,
issuers are required to file a Form D within 15 days of the first sale
of securities, and are required to report additional sales through
amended filings only under certain conditions. In addition, issuers may
not report all required information, either due to error or because
they do not wish to make the information public. Commenters have
suggested and we also have evidence that some issuers do not file a
Form D for their offerings in compliance with Rule 503.\189\
Consequently, the analysis that follows is necessarily subject to these
limitations in the current Form D reporting process.
---------------------------------------------------------------------------

    \189\ Many commenters asserted that non-compliance with Form D
filing obligations is widespread. See, e.g., letters from Investor
Advisory Committee (stating that ``[i]t is generally acknowledged
that a significant number of issuers do not currently file Form D. .
.''); AARP (stating that ``[s]imply adding a checkbox to a form that
too often goes unfiled and then only after the fact is inadequate to
the task at hand.''); AFL-CIO and AFR (stating that ``many issuers
today flout the Form D filing requirement for such offerings,
further limiting the Commission's ability to provide effective
oversight''). See also Securities and Exchange Commission, Office of
Inspector General, Regulation D Exemption Process (Mar. 31, 2009)
(``OIG Report''), available at: http://www.sec-oig.gov/Reports/AuditsInspections/2009/459.pdf (stating that while the Commission
staff ``strongly encourage companies to comply with Rule 503, they
are aware of instances in which issuers have failed to comply with
Rule 503. . .''). Based on its analysis of the filings required by
FINRA Rules 5122 and 5123 during the period of December 3, 2012 to
February 5, 2013, DERA estimates that as many as 9% of the offerings
represented in the FINRA filings for Regulation D or other private
offerings that used a registered broker did not have a corresponding
Form D.
---------------------------------------------------------------------------

1. Size of the Exempt Offering Market
    Exempt offerings play a significant role in capital formation in
the United States. Offerings conducted in reliance on Rule 506 account
for 99% of the capital reported as being raised under Regulation D from
2009 to 2012, and represent approximately 94% of the number of
Regulation D offerings.\190\ The significance of Rule 506 offerings is
underscored by the comparison to registered offerings. In 2012, the
estimated amount of capital reported as being raised in Rule 506
offerings (including both equity and debt) was $898 billion, compared
to $1.2 trillion raised in registered offerings.\191\ Of this $898
billion, operating companies (issuers that are not pooled investment
funds) reported raising $173 billion, while pooled investment funds
reported raising $725 billion.\192\ The amount reported as being raised
by pooled investment funds is comparable to the amount of capital
raised by registered investment funds. In 2012, registered investment
funds (which include money market mutual funds, long-term mutual funds,
exchange-traded funds, closed-end funds and unit investment trusts)
raised approximately $727 billion.\193\
---------------------------------------------------------------------------

    \190\ See Ivanov/Bauguess Study.
    \191\ See id.
    \192\ See id.
    \193\ In calculating the amount of capital raised by registered
investment funds, we use the net amounts (plus reinvested dividends
and reinvested capital gains), which reflect redemptions, and not
gross amounts, by open-ended registered investment funds because
they face frequent redemptions and do not have redemption
restrictions and lock-up periods common among private funds. In
addition, we use the new issuances of registered closed-end funds
and the new deposits of registered unit investment trusts. See 2013
Investment Company Institute Factbook, available at: http://www.icifactbook.org.

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

    In 2011, the estimated amount of capital (including both equity and
debt) reported as being raised in Rule 506 offerings was $849 billion
compared to $985 billion raised in registered offerings.\194\ Of the
$849 billion, operating companies reported raising $71 billion, while
pooled investment funds reported raising $778 billion.\195\ More
generally, when including offerings pursuant to other exemptions--Rule
144A, Regulation S and Section 4(a)(2)--significantly more capital
appears to be raised through exempt offerings than registered offerings
(Figure 1).\196\
---------------------------------------------------------------------------

    \194\ See Ivanov/Bauguess Study.
    \195\ See id.
    \196\ See id.
    \197\ The 2012 non-ABS Rule 144A offerings data is based on an
extrapolation of currently available data through May 2012 from
Sagient Research System's Placement Tracker database. For more
detail, see the Ivanov/Bauguess Study.
[GRAPHIC] [TIFF OMITTED] TR24JY13.014

    At present, issuers are required to file a Form D not later than 15
days after the first sale of securities in a Regulation D offering and
an amendment to the Form D only under certain circumstances. Since
issuers are not required to submit a Form D filing when an offering is
completed, and submit amendments only under certain circumstances, we
have no definitive information on the final amounts raised. Figure 2,
below, illustrates that at the time of the Form D filing, only 39% of
offerings by non-pooled investment fund issuers were completed relative
to the total amount sought. Separately, 70% of pooled investment funds
state their total offering amount to be ``Indefinite'' in their Form D
filings. As a result, the Form D filings of these pooled investment
funds likely do not accurately reflect the total amount of securities
offered or sold.

[GRAPHIC] [TIFF OMITTED] TR24JY13.015

2. Affected Market Participants
    The amendments to Rule 506 we are adopting today will affect a
number of different market participants. Issuers of securities in Rule
506 offerings include both reporting and non-reporting operating
companies and pooled investment funds. Investment advisers organize and
sponsor pooled investment funds that conduct Rule 506 offerings.
Intermediaries that facilitate Rule 506 offerings include registered
broker-dealers, finders and placement agents. Investors in Rule 506
offerings include accredited investors (both natural persons and legal
entities) and non-accredited investors who meet certain
``sophistication'' requirements. Each of these market participants is
discussed in further detail below.
a. Issuers
    Based on the information submitted in 112,467 new and amended Form
D filings between 2009 and 2012, there were 67,706 new Regulation D
offerings by 49,740 unique issuers during this four-year period.\198\
The size of the average Regulation D offering during this period was
approximately $30 million, whereas the size of the median offering was
approximately $1.5 million.\199\ The difference between the average and
median offering sizes indicates that the Regulation D market is
comprised of many small offerings, which is consistent with the view
that many smaller businesses are relying on Regulation D to raise
capital, and a smaller number of much larger offerings.
---------------------------------------------------------------------------

    \198\ See Ivanov/Bauguess Study.
    \199\ See id. A study of unregistered equity offerings by
publicly-traded companies over the period 1980-1996 found that the
mean offering amount was $12.7 million, whereas the median offering
amount was $4.5 million. See Michael Hertzel, Michael Lemmon, James
Linck and Lynn Rees, Long-Run Performance Following Private
Placements of Equity, 57 Journal of Finance 2595 (2002).
---------------------------------------------------------------------------

    Some information about issuer size is available from Item 5 in Form
D, which requires issuers in Regulation D offerings to report their
size in terms of revenue ranges or, in the case of certain pooled
investment funds, net asset value ranges. All issuers can currently
choose not to disclose this size information, however, and a
significant majority of issuers that are not pooled investment funds
declined to disclose their revenue ranges in the Forms D that they
filed between 2009 and 2012. For those that did, most reported a
revenue range of less than $1 million (Figure 3).\200\ During the 2009-
2011 period, approximately 10% of all public companies raised capital
in Regulation D offerings; in 2012, approximately 6% of such companies
did so.\201\ These public companies tended to be smaller and less
profitable than their industry peers, which illustrates the
significance of the private capital markets to smaller companies,
whether public or private.\202\
---------------------------------------------------------------------------

    \200\ See Ivanov/Bauguess Study.
    \201\ Id. (explaining the methodology of using listings in the
Standard & Poor's Compustat database and the University of Chicago's
Center for Research in Securities Prices database to determine which
companies were public companies).
    \202\ Id.

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

[GRAPHIC] [TIFF OMITTED] TR24JY13.016

    During this period, pooled investment funds conducted approximately
24% of the total number of Regulation D offerings and raised
approximately 81% of the total amount of capital raised in Regulation D
offerings.\203\ More than 75% of pooled investment funds declined to
disclose their net asset value range.
---------------------------------------------------------------------------

    \203\ Id.
    \204\ Id.
    [GRAPHIC] [TIFF OMITTED] TR24JY13.017

    Between 2009 and 2012, approximately 66% of Regulation D offerings
were of equity securities, and almost two-thirds of these were by
issuers other than pooled investment funds.204 Non-U.S.
issuers accounted for

approximately 19% of the amount of capital raised in Regulation D
offerings, indicating that the U.S. market is a significant source of
capital for these issuers.\205\
---------------------------------------------------------------------------

    \205\ Id.
---------------------------------------------------------------------------

    Unlike in Regulation D offerings, issuers conducting Rule 144A
offerings are not required to disclose information about their
offerings to the Commission, which limits our ability to measure the
size of the Rule 144A market. Based on transaction information
collected by third-party data providers,\206\ we can broadly
characterize the Rule 144A market as being divided between ABS and non-
ABS offerings. These sources indicate that, over the four-year period
from 2009 to 2012, there were 3,510 non-ABS Rule 144A offerings by
1,965 unique issuers. During this period, the average non-ABS offering
size was approximately $526 million, while the median non-ABS offering
size was $350 million. These offering sizes are significantly larger
than the average and median amounts of Regulation D offerings, as
discussed above, indicating that the Rule 144A market, as compared to
the Regulation D market, is characterized by much larger issues (which
we presume correlate to larger issuers, as well) and, based on the
number of Rule 144A offerings, far fewer issuers. Another significant
difference from Regulation D offerings is the type of security offered.
During this period, over 99% of the non-ABS offerings in the Rule 144A
market were debt offerings,\207\ compared to 13% of Regulation D
offerings.\208\
---------------------------------------------------------------------------

    \206\ These statistics are based on a review of data from
Securities Data Corporation's New Issues database (Thomson
Financial) and Sagient Research System's Placement Tracker database.
    \207\ This statistic is based on a review of data from
Securities Data Corporation's New Issues database (Thomson
Financial) and Sagient Research System's Placement Tracker database.
    \208\ See Ivanov/Bauguess Study.
---------------------------------------------------------------------------

b. Investors
    We have relatively little information on the types and number of
investors in Rule 506 offerings. Form D currently requires issuers in
Rule 506 offerings to provide information about the total number of
investors who have already invested in the offering and the number of
persons who do not qualify as accredited investors.\209\ In 2012,
approximately 153,000 investors participated in offerings by operating
companies, while approximately 81,000 investors invested in offerings
by pooled investment funds.\210\ Because some investors participate in
multiple offerings, these numbers likely overestimate the actual number
of unique investors in these reported offerings. In offerings under
Rule 506(b), both accredited investors and up to 35 non-accredited
investors who meet certain sophistication requirements are eligible to
purchase securities. In offerings under new Rule 506(c), only
accredited investors will be eligible to purchase securities.
---------------------------------------------------------------------------

    \209\ See Item 14 of Form D. Form D does not require any other
information on the types of investors, such as whether they are
natural persons or legal entities.
    \210\ These numbers are based on initial Form D filings
submitted in 2012.
---------------------------------------------------------------------------

    Information collected from Form D filings indicates that most Rule
506 offerings do not involve broad investor participation. More than
two-thirds of these offerings have ten or fewer investors, while less
than 5% of these offerings have more than 30 investors. Although Rule
506 currently allows for the participation of non-accredited investors
who meet certain sophistication requirements, such non-accredited
investors reportedly purchased securities in only 11% of the Rule 506
offerings conducted between 2009 and 2012.\211\ Only 8% of the
offerings by pooled investment funds included non-accredited investors,
compared to 12% of the offerings by other issuers.\212\
---------------------------------------------------------------------------

    \211\ See Ivanov/Bauguess Study.
    \212\ Id.

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

[GRAPHIC] [TIFF OMITTED] TR24JY13.018

    As stated above, between 2009 and 2012, the size of the median
Regulation D offering, based on the information in Form D filings, was
approximately $1.5 million. The presence of so many relatively small
offerings suggests that a sizable number of current investors in Rule
506 offerings are natural persons or legal entities in which all equity
owners are natural persons. This is because smaller offerings may not
provide sufficient scale for institutional investors to earn a sizable
return. Institutional investors typically have a larger investible
capital base and more formal screening procedures compared to investors
who are natural persons, and the associated costs of identifying
potential investments and monitoring their investment portfolio lead
them to make larger investments than natural persons.\213\ As for
whether natural persons investing in these offerings are accredited
investors or non-accredited investors, almost 90% of the Regulation D
offerings conducted between 2009 and 2012 did not involve any non-
accredited investors.\214\
---------------------------------------------------------------------------

    \213\ See, e.g., George Fenn, Nellie Liang and Stephen Prowes,
The Economics of Private Equity Markets (1998); Steven Kaplan and
Per Str[ouml]mberg, Leveraged Buyouts and Private Equity, 23 Journal
of Economic Perspectives 121 (2009).
    \214\ See Ivanov/Bauguess Study.
---------------------------------------------------------------------------

    While we do not know what percentage of investors in Rule 506
offerings are natural persons, the vast majority of Regulation D
offerings are conducted without the use of an intermediary,\215\
suggesting that many of the investors in Regulation D offerings likely
have a pre-existing relationship with the issuer or its management
because these offerings would not have been conducted using general
solicitation. This category of investors is likely to be much smaller
than the total number of eligible investors for Rule 506(c) offerings,
which is potentially very large. We estimate that at least 8.7 million
U.S. households, or 7.4% of all U.S. households, qualified as
accredited investors in 2010, based on the net worth standard in the
definition of ``accredited investor'' (Figure 6).\216\
---------------------------------------------------------------------------

    \215\ An analysis of all Form D filings submitted between 2009
to 2012 shows that approximately 11% of all new offerings reported
sales commissions of greater than zero because the issuers used
intermediaries. See Ivanov/Bauguess Study. We assume that the lack
of a commission indicates the absence of an intermediary.
    \216\ This estimate is based on net worth and household data
from the Federal Reserve Board's Triennial Survey of Consumer
Finances 2010. Our calculations are based on all 32,410 observations
in the 2010 survey.

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

[GRAPHIC] [TIFF OMITTED] TR24JY13.019

    Our analysis, however, leads us to believe that only a small
percentage of these households are likely to participate in securities
offerings, especially exempt offerings. First, as mentioned above, data
from Form D filings in 2012 suggests that fewer than 234,000 investors
(of which an unknown subset are natural persons) participated in
Regulation D offerings, which is small compared to the 8.7 million
households that qualify as accredited investors. Second, evidence
suggests that only a small fraction of the total accredited investor
population has significant levels of direct stockholdings. Based on an
analysis of retail stock holding data for 33 million brokerage accounts
in 2010, only 3.7 million accounts had at least $100,000 of direct
investments in equity securities issued by public companies listed on
domestic national securities exchanges, while only 664,000 accounts had
at least $500,000 of direct investments in such equity securities
(Figure 7).\217\ Assuming that investments in publicly-traded equity
securities are a gateway to investments in securities issued in exempt
offerings, and accredited investors with investment experience in
publicly-traded equity securities are more likely to participate in an
exempt offering than accredited investors who do not, the set of
accredited investors likely to be interested in investing in Rule
506(c) offerings could be significantly smaller than the total
accredited investor population.
---------------------------------------------------------------------------

    \217\ This analysis by DERA is based on the stock holdings of
retail investors from more than 100 brokerage firms covering more
than 33 million accounts during the period June 2010-May 2011.

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

[GRAPHIC] [TIFF OMITTED] TR24JY13.020

    Investors in Rule 144A offerings are QIBs, which comprise a broad
range of U.S. entities, including mutual funds, pension funds, banks,
savings and loan associations, investment companies, insurance
companies and entities whose equity owners are all QIBs.\218\ As there
is no obligation for issuers in Rule 144A offerings to publicly
disclose the characteristics of their investors, the information
available on the number and types of QIBs in the Rule 144A market is
not broadly known, and is generally available only to those financial
intermediaries who act as initial purchasers in the offerings.
---------------------------------------------------------------------------

    \218\ Non-U.S. investors generally do not participate in Rule
144A offerings; rather, they participate in Regulation S offerings.
Issuers will frequently conduct side-by-side Rule 144A and
Regulation S offerings.
---------------------------------------------------------------------------

c. Investment Advisers
    As of December 2012, there were 10,870 Commission-registered
investment advisers that filed Form ADV with the Commission,
representing approximately $50 trillion total assets under
management.\219\ The average investment adviser registered with the
Commission has assets under management of approximately $4.6 billion;
the median size of assets under management for these registered
investment advisers is $258 million.
---------------------------------------------------------------------------

    \219\ For the same time period, 2,303 exempt reporting advisers
filed a Form ADV with the Commission. Certain investment advisers
that are ineligible to register with the Commission may also be
exempt from registration with any state.
---------------------------------------------------------------------------

    Approximately one-fourth of registered investment advisers (2,842)
currently advise (or advised) private funds that filed Form D between
2002 and 2012, while another 1,250 registered investment advisers
currently advise (or advised) private funds that did not file Form D
during the same period. The registered investment advisers advising
private funds that submitted Form D filings during this period had
average assets under management of $8.7 billion, while the ones
advising private funds that did not submit Form D filings had average
assets under management of $8.6 billion. Registered investment advisers
that did not advise private funds (6,623) are considerably smaller,
with average assets under management of $2.1 billion.
d. Broker-Dealers
    As of December 2012, there were 4,450 broker-dealers registered
with the Commission who file on Form X-17A-5, with average total assets
of approximately $1.1 billion per broker-dealer. The aggregate total
assets of these registered broker-dealers are approximately $4.9
trillion. Of these registered broker-dealers, 410 are dually registered
as investment advisers. The dually registered broker-dealers are larger
(average total assets of $6.4 billion) than those that are not dually
registered. Among the dually registered broker-dealers, we identified
24 that currently have or have had private funds that submitted Form D
filings between 2002 and 2012.
3. Current Practices
    The extent of the economic impact of the amendments to Rule 506
will depend on the current practices of issuers and market participants
in Rule 506 offerings. As issuers in the Regulation D market are not
required to disclose in Form D how they formed a reasonable belief that
the purchasers in their Rule 506 offerings are accredited investors or
sophisticated investors and are not currently required to take
reasonable steps to verify the accredited investor status of these
purchasers, the Commission does not have any data on current
verification practices used in such offerings, if any. Commenters,
however, provided examples of current practices of how issuers collect
information from a potential purchaser to form a reasonable belief that
he or she is an accredited investor. One commenter suggested that a
large number of issuers rely on lists of accredited investors created
and maintained by a reliable third party, such as registered broker-
dealers,\220\ which would be consistent with the

Commission's view that an issuer would not contravene Rule 502(c)'s
prohibition against general solicitation if the issuer or its agent has
a pre-existing substantive relationship with the offerees.\221\ Other
commenters asserted that many issuers rely on the services of placement
agents to obtain information about accredited investor status and to
complete a Rule 506 transaction.\222\ One commenter stated that the
most common practice was a combination of an investor suitability
questionnaire and investor self-certification.\223\ These commenters,
however, did not provide data to allow for an estimate of the frequency
of usage and the costs associated with these practices.
---------------------------------------------------------------------------

    \220\ See letter from J. McLaughlin.
    \221\ See Release No. 33-7856.
    \222\ See letters from SIFMA and FSR (Oct. 5, 2012); IAA.
    \223\ See letters from NSBA; MFA (May 4, 2012) (noting that, in
the hedge fund industry, a potential hedge fund investor must
complete ``a subscription document provided by the fund's manager
that provides a detailed description of, among other things, the
qualification standards that a purchaser must meet under the federal
securities laws'').
---------------------------------------------------------------------------

C. Analysis of the Amendment to Rule 506

    Congress has mandated that we eliminate the prohibition against
general solicitation for a subset of Rule 506 offerings.\224\ Below, we
analyze the benefits and costs associated with the amendments to Rule
506 in light of the baseline discussed above. Because existing Rule 506
has always been subject to the prohibition against general
solicitation, there are significant data and informational limitations
on our ability to quantify the economic impact of eliminating that
prohibition in certain Rule 506 offerings. As discussed above, we do
not believe that the Form D filings available on the Commission's
Electronic Data Gathering, Analysis and Retrieval (``EDGAR'') system
present a complete view of the Rule 506 market, as there are some Rule
506 offerings for which a Form D is not filed and the information
presented in the Forms D that are filed is not necessarily
comprehensive.\225\ In addition, as discussed below, we believe that
there are sufficient differences between Rule 504, as amended to permit
general solicitation from 1992 to 1999, and Rule 506(c) such that it
would not be useful to look to the Rule 504 market during that period
to make meaningful predictions as to the type or magnitude of the
effects of eliminating the prohibition against general solicitation for
Rule 506(c) offerings. For example, the amount of capital that could be
raised under Rule 504, as amended during this period, was capped at $1
million over a 12-month period; the securities in a Rule 504 offering
could be sold to an unlimited number of non-accredited investors; and
the securities sold in Rule 504 offerings were not restricted
securities for purposes of resale. We provide below a qualitative
analysis of the potential costs and benefits of eliminating the
prohibition against general solicitation in certain Rule 506 offerings,
supplementing that analysis with quantification, where possible, based
on existing data.
---------------------------------------------------------------------------

    \224\ The legislative history of a bill that was introduced (but
not adopted) at or around the time of the JOBS Act may be
instructive with respect to how Congress viewed the effect of
eliminating the prohibition against general solicitation in private
offerings. In its report on a bill that would have amended Section
4(a)(2) of the Securities Act to permit the use of general
solicitation, the House Committee on Financial Services stated that
``regulations such as the prohibition of general solicitation and
advertising in Regulation D Rule 506 offerings inhibit capital
formation.'' Access to Capital for Job Creators Act, H.R. Rep. 112-
263, at 2 (2011). Accordingly, ``[t]he legislation would allow
companies greater access to accredited investors and to new sources
of capital to grow and create jobs, without putting less
sophisticated investors at risk.'' Id.
    \225\ Because filing a Form D is not a condition for relying on
Regulation D, commenters have noted that many issuers do not file a
Form D when raising capital under Rule 506. Issuers are currently
required to file an initial Form D within 15 days of the first sale
of securities, but are required to report additional sales through
amended filings only under certain conditions, which means that in
many cases, the total amount of capital raised in a Regulation D
offering is not reported on Form D. Finally, issuers do not report
all required information, either due to error or because they do not
wish to make the information public. For example, issuers have the
option in Form D to decline to disclose their revenues or net asset
values.
---------------------------------------------------------------------------

1. Benefits to Issuers
    The elimination of the prohibition against general solicitation for
a subset of Rule 506 offerings will enable issuers to solicit potential
investors directly, through both physical (such as mailings, newspaper
advertisements and billboards) and electronic (such as the Internet,
social media, email and television) means. As a result, we anticipate
that issuers will be able to reach a much greater number of potential
investors than is currently the case, thereby increasing their access
to sources of capital. We note that many commenters, including those
representing small businesses, biotechnology companies and angel
investors, stated that the elimination of the prohibition against
general solicitation will facilitate capital formation by allowing
businesses, particularly early-stage companies, to solicit investments
from a larger pool of investors.\226\ This could increase overall
capital formation if issuers that previously did not raise capital from
individual investors because it was too costly to solicit them through
intermediaries now choose to solicit investors directly using general
solicitation in accordance with Rule 506(c). Alternatively, if issuers
use new Rule 506(c) in lieu of other methods of raising capital, such
as registered offerings or unregistered non-Rule 506(c) offerings, then
Rule 506(c) would replace one source of capital for another, thereby
potentially improving the efficiency of capital flow through lower
issuance costs, but not necessarily increasing the gross amount raised.
---------------------------------------------------------------------------

    \226\ See, e.g., letters from BIO; NSBA.
---------------------------------------------------------------------------

    We believe that it is reasonable to conclude that allowing issuers
to have wider access to accredited investors by eliminating the
prohibition against general solicitation for a category of Rule 506
offerings will significantly improve their access to capital and
potentially enhance capital formation and lower the issuance cost.
Although the lack of available data on the economic impact of
eliminating the prohibition against general solicitation in Rule 506
offerings precludes us from quantifying the magnitude of this effect,
the Commission has some evidence of the effect of the availability of
general solicitation on issuers' ability to raise capital based on
information about the number of Rule 504 offerings from 1992 to 2001,
which covers the period during which the prohibition against general
solicitation was lifted for Rule 504,\227\ and subsequently reinstated
in 1999.\228\ In particular, and as shown in the chart below, the
number of Rule 504 offerings increased at an average annual rate of
10.6% from 1992 through 1999.\229\ In 2000, following the reinstatement
of the ban, the number of Rule 504 offerings declined by almost 44%.
This decline is coincident with the general market decline in 2000,
including the collapse of the Internet bubble, which may have been the
cause or at least a significant contributing factor to the rate of
decline. During 2000, however, there was not a concurrent decline in
either the number of Rule 505 offerings or the number of Rule 506
offerings. To the contrary, the number of Rule 506 offerings increased
by about 54% in 2000, while the number of Rule 505 offerings remained
largely unchanged (Figure 8). Declines in the numbers of Rule 505 and
Rule 506 offerings followed in 2001, when presumably both types of
offerings were

negatively affected by the general market decline, although Rule 504
offerings experienced a sharper decline (-35%) compared to Rule 506
offerings (-30%). While it is not possible to disentangle the broader
market effects in 2000 from the reinstatement of the prohibition
against general solicitation on the number of Rule 504 offerings, the
steady increase in the number of Rule 504 offerings during the seven-
year period following the elimination, in 1992, of the prohibition
against general solicitation and the subsequent sharp decline in the
number of Rule 504 offerings is consistent with the view that issuers'
ability to generally solicit may enhance their ability to raise
capital.
---------------------------------------------------------------------------

    \227\ See Small Business Initiatives, Release No. 33-6949 (July
30, 1992) [57 FR 36442 (Aug. 13, 1992)].
    \228\ See Release No. 33-7644.
    \229\ This is based on an analysis of Form REGDEX filings on
EDGAR.
[GRAPHIC] [TIFF OMITTED] TR24JY13.021

    The development of the venture capital (VC) industry in the United
States may also be a relevant example to illustrate the potential for
enhanced capital formation that may result from allowing issuers to
have access to a wider range of investors. Under the Employment
Retirement Income Security Act of 1974, pension fund managers are
subject to a ``prudent man'' standard of care in making
investments.\230\ Prior to 1979, there was uncertainty under the U.S.
Department of Labor's then-existing interpretations of this standard as
to whether pension funds could invest in venture capital and start-up
companies. In 1979, the Department clarified its interpretation of this
standard by indicating that portfolio diversification is a factor in
determining whether an investment is prudent, which indicated that
pension funds would not be precluded from making investments in VC
funds.\231\ Following this regulatory change, the VC industry
experienced substantial growth: VC commitments increased from $218
million in 1978 (of which pension funds supplied approximately 15%) to
$3 billion in 1988 (of which pension funds supplied approximately
46%).\232\
---------------------------------------------------------------------------

    \230\ 29 U.S.C. 1104(a).
    \231\ See 29 CFR 2550.404a-1(b)(1)(i).
    \232\ See Paul A. Gompers and Josh Lerner, The Venture Capital
Cycle (2006); Paul Gompers, The Rise and Fall of Venture Capital, 23
Business and Economic History 1 (1994).
---------------------------------------------------------------------------

    We also anticipate that allowing issuers to solicit potential
investors directly will lower the direct costs of Rule 506 offerings.
Although none of the commenters provided data on direct cost savings,
and although Form D filings do not present a complete view of the
market, we do have estimates of the direct offering costs paid by
issuers that use an intermediary to locate investors in Rule 506
offerings. An analysis of all Form D filings submitted between 2009 to
2012 shows that approximately 11% of all new Regulation D offerings
reported sales commissions of greater than zero because the issuers
used intermediaries.\233\ The average commission paid to these
intermediaries was 5.9% of the offering size, with the median
commission being approximately 5%. Accordingly, for a $5 million
offering, which was the median size of a Regulation D offering with a
commission during this period, an issuer could potentially save up to
$250,000 if it solicits investors directly rather than through an
intermediary, minus the cost of its own solicitation efforts and the
cost associated with verifying accredited investor status.\234\ This
potential benefit would likely be larger on a percentage basis for
smaller offerings. During this four-year period, of the issuers that
paid a commission in connection with a Regulation D offering, issuers
raising up to $1 million in capital paid on average a 6.5% commission,
whereas issuers raising over $50 million in capital paid on average a
1.9% commission.\235\
---------------------------------------------------------------------------

    \233\ See Ivanov/Bauguess Study.
    \234\ We recognize that intermediaries can provide benefits to
issuers in addition to locating investors. For example, an
intermediary may be able to help an issuer obtain better pricing and
terms or provide access to investors that can provide strategic or
other advice to the issuer. An intermediary could also provide
accreditation services. Unfortunately, we do not have data to
quantify these benefits.
    \235\ See Ivanov/Bauguess Study.
---------------------------------------------------------------------------

    Even for issuers that do not currently use an intermediary,
allowing issuers to generally solicit would likely lower the search
costs associated with finding accredited investors who would be
interested in a particular offering, thus enhancing economic
efficiency.\236\ If lower search costs expand the pool of interested
investors for offerings, there could be greater competition among

investors, thereby lowering the costs of capital for issuers.\237\
---------------------------------------------------------------------------

    \236\ See, for example, Erik Sirri and Peter Tufano, Costly
Search and Mutual Fund Flows, 53 Journal of Finance 1589 (1998), for
a similar argument with respect to investors in mutual funds.
    \237\ For example, a study on offerings involving venture
capitalists finds that increased competition among them results in
higher valuations for issuers. See Paul Gompers and Josh Lerner,
Money Chasing Deals? The Impact of Fund Inflows on Private Equity
Valuations, 55 Journal of Financial Economics 281 (2000).
---------------------------------------------------------------------------

    The elimination of the prohibition against general solicitation
would also reduce the uncertainty for issuers as to whether a Rule 506
offering can be completed in certain situations, and would eliminate
the costs of complying with the prohibition.\238\ Under existing Rule
506, an inadvertent release of information about an offering to
entities or persons with whom the issuer does not have a pre-existing
substantive relationship has been viewed by some as raising questions
about the issuer's ability to rely on the exemption for the entire
offering.\239\ In addition, some private funds have been reluctant to
respond to press inquiries or to correct inaccurate reports due to
concerns about these discussions being misconstrued as a general
solicitation.\240\ Under Rule 506(c), any such uncertainty as to the
availability of the exemption due to the public disclosure of
information will be reduced. Nevertheless, there is no data available
to quantify or estimate these effects.
---------------------------------------------------------------------------

    \238\ See letter from MFA (May 4, 2012).
    \239\ See, e.g., letter from S. Lorne and J. McLaughlin (Aug. 5,
2008) on Release No. 33-8828 (stating that ``[o]n occasion, the
prohibition forces issuers to delay or even cancel offerings because
of communications--sometimes inadvertent--that could be viewed in
hindsight as a solicitation. The need to police communications by
transaction participants, and to analyze and remedy inadvertent
communications, also adds significantly to the cost of effecting
private placements.'').
    \240\ See, e.g., letters from D.E. Shaw & Co. (Apr. 3, 2006) on
Exposure Draft of Final Report of Advisory Committee on Smaller
Public Companies, Release No. 33-8666 (Feb. 28, 2006); MFA (May 4,
2012).
---------------------------------------------------------------------------

2. Benefits to Investors
    The elimination of the prohibition against general solicitation in
Rule 506(c) offerings will likely increase the amount and types of
information about issuers and offerings that are communicated to
investors, which could also lead to more efficient pricing for the
offered securities. In addition, accredited investors who previously
have found it difficult to find investment opportunities in Rule 506
offerings may be able to find and potentially invest in a larger and
more diverse pool of potential investment opportunities, which would
result in a more efficient allocation of investments by accredited
investors.\241\ Thus, Rule 506(c) could increase capital formation and
at the same time improve its allocative efficiency.\242\ One commenter
argued that we do not provide data to support the statements that
accredited investors need new opportunities or cannot find new
opportunities under the current rules prohibiting the use of general
solicitation in Rule 506 offerings.\243\ While we do not have data to
test the validity of these statements since general solicitation has
heretofore been prohibited in Rule 506 offerings, economic theory
suggests that expanding investors' opportunities for investment
generally results in more efficient allocation of capital. For example,
one seminal study suggests that if some investors have incomplete
information and are not aware of all firms in the economy, risk sharing
is incomplete and inefficient.\244\ Information that makes investors
aware of the existence of these firms and enlarges the investor base
leads to improved risk sharing and lower cost of capital.
---------------------------------------------------------------------------

    \241\ This benefit may not be applicable with respect to every
issuer (e.g., certain private funds that offer their shares
continuously at net asset value).
    \242\ Allocative efficiency is a condition that is reached when
resources are allocated in a way that allows the maximum possible
net benefit from their use. In this context, it means the right
number of dollars from the right types of investors going to the
most suitable investments on efficient terms.
    \243\ See letter from Consumer Federation.
    \244\ See Robert Merton, A Simple Model of Capital Market
Equilibrium With Incomplete Information, 42 Journal of Finance 483
(1987).
---------------------------------------------------------------------------

    With respect to private funds in particular, in the Proposing
Release, we noted that eliminating the prohibition against general
solicitation would allow accredited investors to gather information
about private funds at relatively lower costs and to allocate their
capital more efficiently.\245\ Increased information about private fund
strategies, management fees and performance information would likely
lead to greater competition among private funds for investor capital.
---------------------------------------------------------------------------

    \245\ See, e.g., letter from MFA (May 4, 2012); and Managed
Funds Association, Petition for Rulemaking on Rule 502 of Regulation
D under the Securities Act of 1933, File No. 4-643 (Jan. 9, 2012)
(``MFA Petition'').
---------------------------------------------------------------------------

    Some commenters noted that greater transparency about private
funds' activities would benefit investors in these funds, and
communications about these activities would be subject to the antifraud
provisions of the federal securities laws and FINRA regulations on the
preparation of marketing materials.\246\ Other commenters believed that
private funds engaging in general solicitation should be subject to
form, content and/or other restrictions, such as performance and
advertising standards that are analogous to the standards that are
applicable to mutual funds in order to engage in general
solicitation.\247\ One of the commenters suggested that the Commission
develop a rule tailored to the ways private funds calculate and present
performance, rather than extending mutual fund performance rules to
private funds.\248\ With respect to private funds sold through broker-
dealers subject to FINRA's rules of conduct, some commenters believed
that we should direct FINRA to require the filing and review of private
fund advertisements.\249\
---------------------------------------------------------------------------

    \246\ See letters from IAA; BlackRock; MFA (Sept. 28, 2012).
    \247\ See, e.g., letters from AFL-CIO and AFR; Sen. Levin;
Consumer Federation; Fund Democracy; Investor Advisory Committee;
ICI; IDC; Rep. Waters; NASAA; P. Turney; and Sens. Reed, Levin,
Durbin, Harkin, Lautenberg, Franken and Akaka.
    \248\ See letter from ICI.
    \249\ Letters from AFL-CIO and AFR; ICI.
---------------------------------------------------------------------------

    While the lack of data does not allow us to quantify the costs and
benefits of eliminating the prohibition against general solicitation
under Rule 506(c) for private funds, we believe that the potential for
an increase in fraudulent or deceptive issuer behavior due to the
elimination of the prohibition may be limited to some extent by the
competitive nature of the private funds industry as well as by the fact
that there are often repeat interactions between private funds and
their investors.\250\
---------------------------------------------------------------------------

    \250\ See, e.g., William Fung and David Hsieh, Hedge Fund
Benchmarks: Information Content and Biases, 58 Financial Analysts
Journal 22 (2002); Rajarishi Nahata, Venture Capital Reputation and
Investment Performance, 90 Journal of Financial Economics 127
(2008); Douglas Cumming and Uwe Walz, Private Equity Returns and
Disclosure Around the World, 41 Journal of International Business
Studies 727 (2010).
---------------------------------------------------------------------------

3. Costs
    Eliminating the prohibition against general solicitation could
result in heightened fraudulent activity in Rule 506(c) offerings
because it will be easier for promoters of fraudulent schemes to reach
potential investors through general solicitation. An increase in fraud
would not only harm those investors who are defrauded, it would
undermine investor participation in Rule 506(c) offerings and could
negatively affect capital-raising by legitimate issuers--for example,
by reducing investor participation in Rule 506(c) offerings--thereby
inhibiting capital formation and reducing efficiency. One commenter was
concerned that investors may confuse private funds with registered
investment companies.\251\ In such cases, fraud that occurs with
private funds may cause

investors to associate the wrongdoing with registered investment
companies, and therefore refrain from investing in registered
investment companies. In addition, some issuers with publicly-traded
securities may use general solicitation for a purported Rule 506(c)
offering to generate investor interest in the secondary trading
markets, especially in the over-the-counter markets, which could be
used by insiders to resell securities at inflated prices. This would
impose costs to investors in these secondary markets, as well as
investors in Rule 506(c) offerings, and could erode investor
participation in Rule 506(c) offerings, thus potentially raising the
cost of capital for issuers in this market. As discussed above, we
cannot quantify these potential costs because the existence of the
prohibition against general solicitation in Rule 506 offerings until
now means that data on the economic impact of eliminating the
prohibition is not available.
---------------------------------------------------------------------------

    \251\ See letters from ICI; ICI re: MFA Petition (Feb. 7, 2012).
---------------------------------------------------------------------------

    Several commenters echoed concerns regarding the potential of fraud
related to private funds in the Rule 506(c) market.\252\ Empirical
evidence on the extent of fraud involving private funds is not readily
available. While a few economic studies suggest that certain hedge
funds engage in various types of misreporting, such as misrepresenting
past performance,\253\ delaying disclosure of returns \254\ and
inflating returns at the end of the fiscal year in order to earn higher
fees,\255\ these studies do not provide information about the extent or
magnitude of any such misreporting activities. In a 2003 report, the
Commission staff noted that there was no evidence that hedge funds were
disproportionately involved in fraudulent activity and that the charges
brought by the Commission in 38 enforcement actions against hedge fund
advisers and hedge funds between 1999 and 2003 were similar to the
charges against other types of investment advisers.\256\ Evidence on
the extent of fraud involving other types of pooled investment funds
also is sparse. A more recent study has identified 245 lawsuits (both
federal and state) involving 200 venture capitalists as defendants
between 1975 and 2007, and has shown that VC funds that are older and
have a larger presence in terms of size and network are less likely to
be sued.\257\
---------------------------------------------------------------------------

    \252\ See letters from Consumer Federation; Fund Democracy; IDC.
    \253\ See Andrew Patton, Tarun Ramadorai, and Michael
Streatfield, Change You Can Believe In? Hedge Fund Data Revisions
(Duke University, Working Paper, 2013). But see letter from MFA
(June 20, 2013) (questioning the reliability of the underlying data
used in the study).
    \254\ See George Aragon and Vikram Nanda, Strategic Delays and
Clustering in Hedge Fund Reported Returns (Arizona State University,
Working Paper, 2013).
    \255\ See Vikas Agarwal, Naveen Daniel, and Naranyan Naik, Do
Hedge Funds Manage Their Reported Returns?, 24 Review of Financial
Studies 3282 (2011).
    \256\ See Staff Report on Hedge Funds.
    \257\ See Vladimir Atanasov, Vladimir Ivanov, and Kate Litvak,
Does Reputation Limit Opportunistic Behavior in the VC Industry?
Evidence From Litigation Against VCs, 67 Journal of Finance 2215
(2012).
---------------------------------------------------------------------------

    A number of commenters \258\ noted the Commission's experience with
the elimination of the prohibition against general solicitation for
Rule 504 offerings in 1992,\259\ and its subsequent reinstatement in
1999 as a result of heightened fraudulent activity.\260\ We do not
believe that our experience with offerings conducted pursuant to Rule
504, as amended in 1992, is particularly instructive with respect to
the potential incidence of fraud resulting from our implementation of
Section 201(a) of the JOBS Act, for a number of reasons. In 1992, when
we amended Rule 504 to eliminate the prohibition against general
solicitation, we also provided that the securities issued in these Rule
504 offerings would not be ``restricted securities'' for purposes of
resale pursuant to Rule 144 under the Securities Act.\261\ As a result,
a non-reporting company could sell up to $1 million of immediately
freely-tradable securities in a 12-month period and be subject only to
the antifraud and civil liability provisions of the federal securities
laws.
---------------------------------------------------------------------------

    \258\ See letters from Consumer Federation; Fund Democracy; Sen.
Levin.
    \259\ See Release No. 33-6949.
    \260\ See Release No. 33-7644.
    \261\ 17 CFR 230.144.
---------------------------------------------------------------------------

    By 1998, we concluded that securities issued in these Rule 504
offerings facilitated a number of fraudulent secondary transactions in
the over-the-counter markets, and that these securities were issued by
``microcap'' companies, characterized by thin capitalization, low share
prices and little or no analyst coverage.\262\ At that time, we stated
that, while ``we believe that the scope of abuse is small in relation
to the actual usage of the exemption, we also believe that a regulatory
response may be necessary.'' \263\ As the freely-tradable nature of the
securities facilitated the fraudulent secondary transactions, we
proposed to ``implement the same resale restrictions on securities
issued in a Rule 504 transaction as apply to transactions under the
other Regulation D exemptions,'' in addition to reinstating the
prohibition against general solicitation. Although we recognized that
resale restrictions would have ``some impact upon small businesses
trying to raise `seed capital' in bona fide transactions,'' we believed
that such restrictions were necessary so that ``unscrupulous stock
promoters will be less likely to use Rule 504 as the source of the
freely tradable securities they need to facilitate their fraudulent
activities in the secondary markets.'' \264\
---------------------------------------------------------------------------

    \262\ Revision of Rule 504 of Regulation D, the ``Seed Capital''
Exemption, Release No. 33-7541 (May 21, 1998) [63 FR 29168 (May 28,
1998)].
    \263\ Id. at 29169.
    \264\ Id.
---------------------------------------------------------------------------

    In contrast, issuers using Rule 506(c) can sell only to accredited
investors, and the securities issued in these offerings are deemed to
be ``restricted securities'' for purposes of resale under Rule 144. As
a result, schemes involving price manipulation to defraud unknowing
investors in the immediate resale of securities purchased directly from
issuers (colloquially referred to as ``pump and dump'' schemes) \265\
are not the types of fraud we believe are likely to occur in Rule
506(c) offerings, given the holding period requirement in Rule 144(d)
and other structural impediments, such as restricted transfer legends
on stock certificates.
---------------------------------------------------------------------------

    \265\ See, e.g., Testimony of Arthur Levitt, Chairman, U.S.
Securities and Exchange Commission, before the Permanent
Subcommittee on Investigations, Senate Committee on Governmental
Affairs, Sept. 22, 1997; SEC v. Huttoe, Litigation Release No. 15237
(Jan. 31, 1997), 63 SEC Docket 2383 (Mar. 4, 1997); SEC v. Spencer,
Litigation Release No. 14856 (Mar. 29, 1996), 61 SEC Docket 1960
(Apr. 30, 1996), and Litigation Release No. 15042 (Sept. 12, 1996),
62 SEC Docket 2409 (Oct. 8, 1996).
---------------------------------------------------------------------------

    The risks to investors of fraudulent offerings conducted under Rule
506(c) may be mitigated to some extent by the requirement that issuers
sell only to accredited investors (and take reasonable steps to verify
such status), who, by virtue of meeting the requirements of the
definition, may be better able to assess their ability to take
financial risks and bear the risk of loss than investors who are not
accredited investors. Issuers will still be subject to the antifraud
provisions under the federal securities laws, and the public nature of
these solicitations may also facilitate detection of fraudulent
activity in that the fraudulent nature of some offerings may be
inferred from particular statements contained in solicitation
materials, for example, representations of guaranteed high rates of
return.
    Several commenters asserted that satisfying the definition of
accredited investor does not equate to financial sophistication and
that it is questionable whether accredited investors will be better
able to identify the financial risks

of the offerings and detect fraudulent offerings as compared to non-
accredited investors.\266\ They also noted that the income test and the
net worth test have been significantly eroded by inflation. These
commenters also stated that not all general solicitation activities are
widely known or accessible, and that fraudulent offerings sold through
telemarketing calls and email solicitations, for example, will be
difficult if not impossible to detect until after significant damage
has occurred.
---------------------------------------------------------------------------

    \266\ See, e.g., letters from Consumer Federation; Fund
Democracy.
---------------------------------------------------------------------------

4. Indirect Effects on Other Markets
    Although Rule 506(c) will directly affect the private offering
market, it could also have an indirect effect on other markets. The
lower search costs associated with finding Rule 506(c) offerings may
cause some investors that currently invest in public equity and debt
markets or other non-registered offering markets to reallocate capital
to offerings made under Rule 506(c). If a significant number of
investors make a greater proportion of their investments in Rule 506(c)
offerings, such investor behavior may reduce the supply of capital and
prices in the public equity and debt markets and in other non-
registered offering markets. For example, issuers currently using the
exemptions in Regulation A under the Securities Act \267\ and in Rules
504(b)(1)(i) through (iii) of Regulation D \268\ to solicit investors
could prefer to rely on the exemption under Rule 506(c) because they
would be able to raise unlimited amounts of capital under Rule 506(c)
and state blue sky securities registration requirements do not apply to
Rule 506(c) offerings.\269\ Although it is difficult to estimate how
many of these issuers will choose to rely on Rule 506(c) in lieu of
other available exemptions from registration, we believe that it is
likely that Rule 506(c) will have a larger impact on issuers using Rule
504 rather than Regulation A because very few issuers have been using
the Regulation A exemption in recent years.\270\ In addition, to the
extent that accredited investors have invested in registered investment
companies instead of private funds because of information asymmetry
between private funds and registered investment companies, it is
possible that registered investment companies' assets may decrease if
these investors now transfer their assets to private funds. Because we
cannot predict how issuers will use the various exemptions from
registration after the elimination of the prohibition against general
solicitation in Rule 506(c) offerings, we cannot quantify these
potential effects.
---------------------------------------------------------------------------

    \267\ 17 CFR 230.251 through 17 CFR 230.263.
    \268\ 17 CFR 230.504(b)(1)(i)-(iii).
    \269\ 17 CFR 230.251 through 17 CFR 230.263.
    \270\ The Ivanov/Bauguess Study reported that 1,852 issuers
relied on the Rule 504 exemption to raise capital between 2009 to
2012, and 20 issuers relied on Regulation A. The number of issuers
using Regulation A to raise capital may increase once the Commission
adopts rules implementing Title IV of the JOBS Act, which directs
the Commission to adopt an exemption based on Regulation A to permit
offerings of up to $50 million.
---------------------------------------------------------------------------

5. Retention of Rule 506(b)
    We believe that retaining existing Rule 506(b) will have benefits
for both issuers and investors. It will allow issuers that do not wish
to generally solicit in their private offerings to avoid the added
expense of complying with the rules applicable to Rule 506(c)
offerings. It will also allow issuers to continue selling privately to
up to 35 non-accredited investors who meet existing Rule 506's
sophistication requirements. The continued availability of Rule 506(b)
may also be beneficial to investors with whom the issuer has a pre-
existing substantive relationship and who do not wish to bear
additional verification costs that may be associated with participation
in Rule 506(c) offerings. All but one commenter supported the
Commission's decision to retain Rule 506(b).\271\
---------------------------------------------------------------------------

    \271\ See, e.g., letters from ABA Fed. Reg. Comm.; ACA (Sept.
27, 2012); CFIRA; IPA; Montgomery & Hansen; NSBA; NYCBA; S&C SIFMA
and FSR (Oct. 5, 2012). Only one commenter opposed retaining it.
Letter from J. McLaughlin (stating that ``[t]here is no basis in the
statute for the Commission to continue to apply the prohibition to a
set of offerings exempt under Rule 506, especially since the effect
of maintaining a parallel rule may have the effect of discouraging
some issuers from using general solicitation . . . .'').
---------------------------------------------------------------------------

D. Verifying Accredited Investor Status in Rule 506(c) Offerings

    As there is no information available to us on the costs currently
incurred by issuers to form a reasonable belief that a purchaser in a
Rule 506 offering is an accredited investor, we are unable to quantify
the estimated costs and benefits of the verification requirement in
Rule 506(c). Comments from the public on this issue also did not
provide any estimates.
    The requirement in Rule 506(c) for issuers to take reasonable steps
to verify that purchasers are accredited investors will likely make it
more difficult for issuers to sell securities to non-accredited
investors. This, in turn, may reduce the likelihood that fraudulent
offerings would be completed because those who are eligible to purchase
are more likely to be able to protect their interests than investors
who are not accredited investors. Issuers would also benefit from
measures that improve the integrity and reputation of the Rule 506(c)
market because the measures would facilitate investor participation,
which could result in issuers having greater access to capital.
    The verification requirement in Rule 506(c) would impose costs as
well. Because the requirement is to take ``reasonable'' steps to
verify, and not every conceivable step to verify, it is possible that
some investors in Rule 506(c) will not be accredited investors, even if
the issuer takes reasonable steps to verify their status as accredited
investors. If so, then these investors will participate in offerings
for which they are not qualified and that may not be appropriate for
them, thereby resulting in a potentially inefficient allocation of
capital for these investors. These investors could also face an
additional cost in the form of heightened risk of significant losses on
their investments, which they may not be able to manage or diversify in
a way that accredited investors could.
    In addition, some potential investors likely would have to provide
more information to issuers than they currently provide, while issuers
may have to apply a stricter and more costly process to determine
accredited investor status than what they currently use. While
commenters provided us with examples of the methods currently used by
issuers in the Rule 506 market to collect information about purchasers,
they did not provide any data on the costs of these methods. While it
is reasonable to expect that the costs associated with the verification
requirement could be offset somewhat by its benefits, it is also
reasonable to expect that some accredited investors who would
participate in existing Rule 506(b) offerings would decline to
participate in Rule 506(c) offerings in light of the verification
requirement.
    To the extent that issuers require investors to provide personally
identifiable information (e.g., Social Security numbers, tax
information, bank or brokerage account information) in order to verify
their accredited investor status, these investors may be reluctant to
do so in the context of making an investment in an issuer, particularly
an issuer with which they may have no prior relationship.\272\ In
addition to concerns about maintaining personal privacy, investors may
be concerned that their personally identifiable information could be
stolen or accessed by third parties or used by

unscrupulous issuers in various ways (e.g., identity theft), which
could impose costs to investors that go well beyond the costs typically
associated with investing. As a consequence, some potential investors
may elect not to participate in Rule 506(c) offerings, thus impeding
capital formation to some extent.
---------------------------------------------------------------------------

    \272\ See letter from SecondMarket Holdings, Inc. (May 25,
2012).
---------------------------------------------------------------------------

    Our decision not to specify the verification methods that an issuer
must use in taking reasonable steps to verify accredited investor
status would provide issuers with the flexibility to use methods that
are appropriate in light of the facts and circumstances of each
offering and each purchaser. Such flexibility could mitigate the cost
to issuers of complying with Rule 506(c) because it would allow them to
select the most cost-effective verification method for each offering.
We anticipate, however, that issuers or their verification service
providers will document the particular verification methods used in the
event of any question being raised about the availability of the
exemption. Although we do not specify the nature or extent of any such
documentation, we acknowledge that it will create some cost.
    On the other hand, the greater flexibility of the principles-based
``reasonableness'' verification method could result in less rigorous
verification, thus allowing some unscrupulous issuers to more easily
sell securities to purchasers who are not accredited investors and
perpetrate fraudulent schemes, or it could create or promote legal
uncertainty about the availability of Rule 506(c), which may cause some
issuers to interpret ``reasonable steps to verify'' in a manner that is
more burdensome than if specific verification methods were prescribed,
thus incurring higher cost. We believe that the non-exclusive list of
specific methods of verification we are including in Rule 506(c), as
adopted, should help to mitigate the impact of these costs.
    Some commenters suggested that using a flexible verification
standard is optimal for issuers because it closely resembles current
market practices which they believe have worked well in this
market.\273\ Such flexibility will allow issuers to adopt different
approaches based on the types of accredited investors, types of
offerings and changing market practices. In contrast, other commenters
questioned the benefits of the flexibility provided by the principles-
based verification method and criticized the Commission for not
quantifying the costs and benefits of currently used verification
methods.\274\ They argued that the application of the reasonableness
standard in the principles-based method will lead to lax verification
practices by issuers, which would lessen investor protection by
allowing sales of securities to non-accredited investors.
---------------------------------------------------------------------------

    \273\ See letters from SIFMA and FSR (Oct. 5, 2012); and IAA.
    \274\ See letters from Consumer Federation; Fund Democracy.
---------------------------------------------------------------------------

    Our decision to provide a non-exclusive list of specified methods
that issuers can use to verify a purchaser's accredited investor status
will provide legal certainty in those circumstances in which there is a
question as to whether or not the steps taken are reasonable in light
of the facts and circumstances. Using a specified method would reduce
issuers' verification costs to the extent that they would otherwise
incur costs to analyze whether or not the steps they had taken or
proposed to take satisfied the reasonableness standard in Rule 506(c).
It could also reduce investors' costs, since the methods for verifying
income and net worth rely mostly on documents prepared by third parties
at no cost to the investors. On the other hand, some investors may be
reluctant to provide the personal financial information required by the
income and net worth methods; and with respect to the third-party
method, it may be relatively costly to pay for the verification
services of a lawyer or accountant as they may be concerned about
professional liability. The grandfather method--which permits self-
certification by existing investors who purchased securities as
accredited investors in an issuer's Rule 506(b) offering before the
effective date of Rule 506(c)--could result in investors that do not
meet the definition of ``accredited investor'' participating in Rule
506(c) offerings because issuers conducting Rule 506(b) offerings are
not required to take reasonable steps to verify the accredited investor
status of their purchasers.
    In addition, our non-exclusive list of specified verification
methods could be mistakenly viewed by market participants as the
required verification methods, in which compliance with at least one of
the enumerated methods could be viewed, in the practical application of
the verification requirement, as necessary in all circumstances to
demonstrate that the verification requirement has been satisfied,
thereby eliminating the flexibility that Rule 506(c) is intended to
provide.\275\ If issuers choose not to use verification methods
different from those on the non-exclusive list, then some potential
investors may limit their participation in the Rule 506(c) market,
which may impede capital formation to some extent. Finally, even if a
specified method has been used, thereby satisfying the verification
requirement, there may be circumstances in which issuers may
unreasonably overlook or disregard other information indicating that a
purchaser is not, in fact, an accredited investor. This could lead to
sales being made to persons who are not accredited investors. Because,
as stated above, the Commission does not have data on current
verification practices, we cannot quantify the effect of the new
verification requirement in Rule 506(c).
---------------------------------------------------------------------------

    \275\ The use of any of the specified methods is optional. We
expect that many issuers will conduct Rule 506(c) offerings in
reliance on the principles-based method of verification, in light of
its flexibility and efficiency.
---------------------------------------------------------------------------

E. Analysis of the Amendment to Rule 144A

    We expect the potential benefits of the amendments to Rule 144A to
be lower (i.e., less available) for issuers in Rule 144A offerings as
compared to issuers in Rule 506(c) offerings because QIBs, which are
the only permitted investors in Rule 144A offerings, are generally
fewer in number, known by market participants, and better networked
than accredited investors. Thus, as we noted in the Proposing Release,
we believe that eliminating the prohibition against general
solicitation for Rule 144A offerings is unlikely to dramatically
increase issuers' access to QIBs in such offerings or to lower the cost
of capital in Rule 144A offerings.
    We expect that there would be fewer potential occurrences of
general solicitation-induced fraud in Rule 144A offerings, as compared
to Rule 506(c) transactions, because Rule 144A offerings involve an
intermediary that, as the initial purchaser of the securities,
typically performs a due diligence investigation and assists the issuer
in preparing the offering materials, thereby adding a layer of
protection against fraud. Also, Rule 144A investors are generally large
institutions, which are thought to be better able to identify
fraudulent activities than smaller institutions and retail investors in
general.
    We also anticipate that eliminating the prohibition against general
solicitation would significantly affect private trading systems by
permitting information vendors to provide more information about Rule
144A securities. Indeed, because offers will be able to be made to the
public, the information on private trading systems for Rule 144A

securities could be made available to all investors, even though sales
would be limited to QIBs.\276\ In addition, currently there is no
public dissemination through Trade Reporting and Compliance Engine
(``TRACE'') of transactions in Rule 144A securities.\277\ Now that Rule
144A is being amended to permit offers to be made to persons other than
QIBs, transaction information with respect to Rule 144A securities can
be publicly disseminated. Such improvements in the information
available to potential investors could enhance efficiency in the Rule
144A market.
---------------------------------------------------------------------------

    \276\ Under the PORTAL Trading System developed by the Nasdaq
Stock Market for trading Rule 144A securities, access is restricted
to QIBs. Other privately developed Rule 144A trading systems, such
as Portal Alliance, have similar restrictions.
    \277\ See FINRA Rule 6750. There is mandatory reporting of over-
the-counter trades in fixed income securities. On April 19, 2013,
the FINRA Board of Governors announced that it has authorized FINRA
to file with the Commission ``proposed amendments to FINRA Rules
6750 and 7730 to provide for the dissemination of transactions in
TRACE-eligible securities effected pursuant to Securities Act Rule
144A (Rule 144A transactions).'' See Letter from Richard G. Ketchum,
Chairman and CEO, FINRA (Apr. 19, 2013), available at: http://www.finra.org/Industry/Regulation/Guidance/CommunicationstoFirms/P244913.
---------------------------------------------------------------------------

F. Additional Information Collection and Disclosures

    We are amending Form D to add a new check box in Item 6 of Form D
that will require an issuer to indicate whether it is relying on Rule
506(c) in conducting its offering. With this information, the
Commission will be able to more effectively analyze the use of Rule
506(c). The marginal cost to issuers of providing this information is
likely to be low because Form D already requires issuers to identify
the exemption on which they are relying. Commenters generally supported
the proposal to have a new check box in Item 6 of Form D as a way to
identify Rule 506(c) offerings.\278\ One commenter, however, questioned
the usefulness of the information provided by the new check box.\279\
---------------------------------------------------------------------------

    \278\ See letters from MFA (Sept. 28, 2012); SIFMA and FSR (Oct.
5, 2012); IAA.
    \279\ See letter from Consumer Federation.
---------------------------------------------------------------------------

    Much of what we know about the size and characteristics of the
private offering market comes from Form D filings. The information
collected to date and described in this release illustrates and
underscores the importance of the private offering market to the U.S.
economy. The continued collection of this information following the
elimination of the prohibition against general solicitation in Rule
506(c) and Rule 144A offerings will be an important tool in assessing
the ongoing economic impact of the new rule amendments.

VII. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been
prepared in accordance with Section 603 of the Regulatory Flexibility
Act.\280\ It relates to the amendments to Rules 500, 501, 502 and 506
of Regulation D, Form D and Rule 144A that we are adopting in this
release. An Initial Regulatory Flexibility Analysis (``IRFA'') was
prepared in accordance with the Regulatory Flexibility Act and included
in the Proposing Release.
---------------------------------------------------------------------------

    \280\ See 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Action

    The primary reason for, and objective of, the amendments to Rule
502 and Rule 506 is to implement the statutory requirements of Section
201(a)(1) of the JOBS Act, which directs the Commission to revise Rule
506 to provide that the prohibition against general solicitation in
Rule 502(c) shall not apply to offers and sales of securities made
pursuant to Rule 506, provided that all purchasers of the securities
are accredited investors. Consistent with the language in Section
201(a), the amendment to Rule 506 requires issuers to take reasonable
steps to verify that purchasers in any Rule 506 offering using general
solicitation are accredited investors. The primary reason for, and
objective of, the amendment to Form D is to assist our efforts to
analyze the use of general solicitation in Rule 506(c) offerings and
the size of this offering market.
    The primary reason for, and objective of, the final amendment to
Rule 144A is to implement the statutory requirements of Section
201(a)(2) of the JOBS Act, which directs the Commission to revise Rule
144A(d)(1) to provide that securities sold pursuant to Rule 144A may be
offered to persons other than QIBs, including by means of general
solicitation, provided that securities are sold only to persons that
the seller and any person acting on behalf of the seller reasonably
believe are QIBs.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on any aspect of the
IRFA, including the number of small entities that would be subject to
the proposed rule and form amendments and the nature of the effects of
the proposed amendments on small entities. We received one comment
addressing the IRFA.\281\ This commenter stated that the Commission
failed in its IRFA to consider the alternative of eliminating Form D or
significantly reducing the scope of information required to be
disclosed on Form D. As Form D provides meaningful information about
the Regulation D market, and our need for information about this market
will only increase once Rule 506(c) is in effect, we are not
considering eliminating Form D or significantly reducing the scope of
information required to be disclosed on Form D.
---------------------------------------------------------------------------

    \281\ See letter from K. Bishop.
---------------------------------------------------------------------------

C. Small Entities Subject to the Final Rule and Form Amendments

    For purposes of the Regulatory Flexibility Act, under our rules, an
issuer, other than an investment company, is a ``small business'' or
``small organization'' if it has total assets of $5 million or less as
of the end of its most recent fiscal year and is engaged or proposing
to engage in an offering of securities which does not exceed $5
million.\282\ For purposes of the Regulatory Flexibility Act, an
investment company is a small entity if it, together with other
investment companies in the same group of related investment companies,
has net assets of $50 million or less as of the end of its most recent
fiscal year.\283\
---------------------------------------------------------------------------

    \282\ 17 CFR 230.157.
    \283\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

    Rule 506(c) will affect small issuers (including both operating
businesses and investment funds that raise capital under Rule 506)
relying on this exemption from Securities Act registration. All issuers
that sell securities in reliance on Regulation D are required to file a
Form D with the Commission reporting the transaction. For the year
ended December 31, 2012, 16,067 issuers made 18,187 new Form D filings,
of which 15,208 issuers relied on the Rule 506 exemption. Based on the
information reported by issuers on Form D, there were 3,958 small
issuers \284\ relying on the Rule 506 exemption in 2012. This number
likely underestimates the actual number of small issuers relying on the
Rule 506 exemption, however, because over 60% of issuers that are not
pooled investment funds and over 80% of issuers that are pooled
investment funds declined to report their amount of revenues in 2012.
---------------------------------------------------------------------------

    \284\ Of this number, 3,627 of these issuers are not investment
companies, and 331 are investment companies. We also note that
issuers that are not investment companies disclose only revenues on
Form D, and not total assets. Hence, we use the amount of revenues
as a measure of issuer size.
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    The final amendment to Rule 144A will affect small entities that
engage in

Rule 144A offerings.\285\ Unlike issuers that use Regulation D, issuers
conducting Rule 144A offerings are not required to file any form with
the Commission. This lack of data significantly limits our ability to
assess the number and the size of issuers that conduct Rule 144A
offerings. Still, we are able to obtain some data on non-ABS Rule 144A
offerings during the 2009 to 2012 period from two commercial
databases.\286\ Based on these data, we identified 3,510 offerings
involving 1,965 issuers from 2009 to 2012. We were able to obtain 2011
financial information for 598 of these issuers,\287\ of which only 11
issuers reported total assets of less than $50 million.
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    \285\ While it may be theoretically possible for a small entity
to meet one part of the definition of ``qualified institutional
buyer'' (e.g., an ``entity, all of the equity owners of which are
qualified institutional buyers, acting for its own account or the
accounts of other qualified institutional buyers''), we do not have
any information to suggest that there are such small entities.
Accordingly, the regulatory flexibility analysis in regard to Rule
144A is focused on small issuers that engage in Rule 144A offerings.
    \286\ These databases are Thomson Financial's SDC Platinum
Service and Sagient Research System's Placement Tracker database.
    \287\ Financial data for fiscal year 2011 was obtained from
Compustat, a product of Standard and Poor's.
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D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The final amendment to Rule 506 will impose certain reporting and
compliance requirements on issuers that engage in general solicitation
in Rule 506 offerings. As discussed above, issuers taking advantage of
Rule 506(c) to engage in general solicitation in Rule 506 offerings
will be required to take reasonable steps to verify that the purchasers
of the securities are accredited investors. The steps required will
vary with the circumstances, but we anticipate that some potential
investors may have to provide more information to issuers than they
currently provide, while issuers may have to apply a stricter and more
costly process to verify accredited investor status than what they
currently use. We expect that the costs of compliance will vary
depending on the size and nature of the offering, the nature and extent
of the verification methods used, and the number and nature of
purchasers in the offering. Rule 506(c) does not impose any
recordkeeping requirements; however, we anticipate that issuers or
their verification service providers will document the steps taken to
verify that purchasers are accredited investors in Rule 506 offerings
involving general solicitation because the issuer has the burden of
demonstrating that its offering is entitled to an exemption from the
registration requirements of Section 5 of the Securities Act. To
promote legal certainty, we are including in Rule 506(c) a non-
exclusive list of verification methods that in and of themselves will
be deemed to satisfy the verification requirement.
    The final amendment to Form D will also impose an information
requirement with respect to Rule 506 offerings that use general
solicitation. Each issuer submitting a Form D for a Rule 506 offering
will be required to check a box on the form to indicate whether the
issuer is relying on the Rule 506(c) exemption. We do not believe that
this revision to Form D will increase in any material way the time or
information required to complete the Form D that must be filed with the
Commission in connection with a Rule 506 offering.
    The final amendment to Rule 144A contains no reporting,
recordkeeping or compliance requirements for issuers that engage in
Rule 144A offerings.

E. Duplicative, Overlapping or Conflicting Federal Rules

    The Commission believes that there are no rules that duplicate,
overlap or conflict with the final amendments to Rule 144A, Form D, and
Rules 500, 501, 502 and 506 of Regulation D.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objectives of our
amendments, while minimizing any significant adverse impact on small
entities. In regard to the final amendment to Rule 144A and the final
amendment to Rule 506 to remove the prohibition against general
solicitation in Rule 506 offerings where all purchasers are accredited
investors and issuers have taken reasonable steps to verify purchasers'
accredited investor status, there are no significant alternatives to
these amendments that would accomplish the stated objectives of Section
201(a) of the JOBS Act. Eliminating the prohibition against general
solicitation for a subset of Rule 506 offerings is intended to assist
small entities--and other entities--seeking to raise capital. Small
entities are not required to use Rule 506(c) to raise capital and would
do so presumably only if it would be useful to them.
    In connection with the final amendment to Form D and the final
amendment to Rule 506 that requires issuers to take reasonable steps to
verify that purchasers of securities are accredited investors, the
Commission considered the following alternatives: (1) Establishing
different compliance or reporting standards that take into account the
resources available to small entities; (2) clarifying, consolidating or
simplifying compliance requirements under the rule; (3) using design
rather than performance standards; and (4) exempting small entities
from coverage of all or part of the amendment to Rule 506.
    With respect to using design rather than performance standards, we
note that the ``reasonable steps to verify'' requirement in Rule 506(c)
is a performance standard. We believe that the flexibility of a
performance standard accommodates different types of offerings and
purchasers without imposing overly burdensome methods that may be ill-
suited or unnecessary to a particular offering or purchaser, given the
facts and circumstances. The Commission is not adopting different
compliance or reporting requirements or timetables for small entities
under Rule 506(c). The particular steps necessary to meet the
requirement to take reasonable steps to verify that purchasers are
accredited investors will vary according to the circumstances.
Different compliance requirements for small entities may create the
risk that the requirements may be too prescriptive or, alternatively,
insufficient to verify a purchaser's accredited investor status.
Special requirements for small entities may also lead to investor
confusion or reduced investor participation in Rule 506 offerings if
they create the impression that small entities have a different
standard of verification than other issuers of securities. As the
verification requirement is intended to protect investors by limiting
participation in unregistered offerings to those who are most able to
bear the risk, we are of the view that a flexible standard applicable
to all issuers better accomplishes the goal of investor protection that
this requirement is intended to serve. At the same time, the non-
exclusive list of verification methods that we are including in the
final rule will provide additional legal certainty to all issuers,
including small entities. The Commission is not adopting a different
reporting requirement for small entities because the additional
information that will be required in Form D is minimal and should not
be unduly burdensome or costly for small entities.
    We similarly believe that it does not appear consistent with the
objective of the final amendments or the considerations described above
regarding investor confusion and investor participation to further
clarify, consolidate or simplify the amendments for small entities.
With respect to

exempting small entities from coverage of these final amendments, we
believe such an approach would be contrary to the requirements of, and
the legislative intent behind, Section 201(a) of the JOBS Act, as
evidenced by the plain language of the statute.

VIII. Statutory Authority and Text of Final Rule and Form Amendments

    The final amendments contained in this release are being adopted
under the authority set forth in Sections 4(a)(1), 4(a)(2), 7, 17(a),
19 and 28 of the Securities Act, as amended, Sections 2, 3, 9(a), 10,
11A(c), 12, 13, 14, 15(c), 15(g), 17(a), 23(a) and 30 of the Exchange
Act, as amended, Sections 23, 30 and 38 of the Investment Company Act,
as amended, and Section 201(a) of the JOBS Act.\288\
---------------------------------------------------------------------------

    \288\ Although 15 U.S.C. 77d note is not an authority for the
amendments in this release, it is being included in the instruction
below for the general authority citation for Part 230 to ensure that
the Code of Federal Regulations is correctly updated for purposes of
the bad actor disqualification rule for Rule 506 offerings also
published today. See Bad Actor Release.
---------------------------------------------------------------------------

List of Subjects in 17 CFR Parts 230, 239 and 242

    Reporting and recordkeeping requirements, Securities.
    For the reasons set out above, the Commission is amending Title 17,
chapter II of the Code of Federal Regulations, as follows:

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

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

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77d note, 77f,
77g, 77h, 77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n,
78o, 78o-7 note, 78t, 78w, 78ll (d), 78mm, 80a-8, 80a-24, 80a-28,
80a-29, 80a-30, and 80a-37, and Pub. L. 112-106, sec. 201(a), 126
Stat. 313 (2012), unless otherwise noted.
* * * * *

Sec.  230.144A  [Amended]

0
2. Amend Sec.  230.144A by:
0
a. In Preliminary Note 7, removing the reference to ``section 4(2)''
and adding in its place ``section 4(a)(2)'';
0
b. In paragraph (a)(1)(i)(A), removing the reference to ``section
2(13)'' and adding in its place ``section 2(a)(13)'';
0
c. In paragraph (b), removing the reference to ``sections 2(11) and
4(1)'' and adding in its place ``sections 2(a)(11) and 4(a)(1)'';
0
d. In paragraph (c), removing the references to ``section 4(3)(C)'',
``section 2(11)'' and ``section 4(3)(A)'' and adding in their place
``section 4(a)(3)(C)'', ``section 2(a)(11)'' and ``section
4(a)(3)(A),'' respectively;
0
e. In paragraph (d)(1), first sentence, removing the phrase ``offered
or''; and
0
f. In paragraph (d)(1), first sentence, removing the phrase ``an
offeree or'' and adding in its place ``a''.

Sec.  230.500(c)  [Amended]

0
3. Amend Sec.  230.500(c) by:
0
a. Removing the reference to ``section 4(2)'' and adding in its place
``section 4(a)(2)''; and
0
b. In the second sentence, adding ``(b)'' after ``rule 506'' and after
``(Sec.  230.506''.

Sec.  230.501  [Amended]

0
4. Amend Sec.  230.501 by:
0
a. In paragraph (a)(1), removing the reference to ``section 2(13)'' and
adding in its place ``section 2(a)(13)''; and
0
b. In paragraph (g), removing the reference to ``section 2(4)'' and
adding in its place ``section 2(a)(4)''.

Sec.  230.502  [Amended]

0
5. Amend Sec.  230.502 by:
0
a. In paragraphs (b)(1), (b)(2)(iv), (b)(2)(v) and (b)(2)(vii),
removing the reference to ``Sec.  230.506'' and adding in its place
``Sec.  230.506(b)'';
0
b. In paragraph (c), first sentence, adding the phrase ``or Sec.
230.506(c)'' after the phrase ``Except as provided in Sec.
230.504(b)(1)'';
0
c. In paragraph (d), removing the reference to ``section 4(2)'' and
adding in its place ``section 4(a)(2)''; and
0
d. In paragraph (d), removing the reference to ``section 2(11)'' and
adding in its place ``section 2(a)(11).''

0
6. Amend Sec.  230.506 by:
0
a. In paragraph (a), adding the phrase ``or (c)'' after the phrase
``satisfy the conditions in paragraph (b)'';
0
b. In paragraph (a), removing the phrase ``section 4(2)'' and adding in
its place ``section 4(a)(2)'';
0
c. In the heading of paragraph (b), adding the phrase ``in offerings
subject to limitation on manner of offering'' after the phrase
``Conditions to be met'';
0
d. In the note following paragraph (b)(2)(i), removing the phrase
``this section'' and adding in its place ``paragraph (b) of this
section''; and
0
e. Adding paragraph (c) to read as follows:

Sec.  230.506  Exemption for limited offers and sales without regard to
dollar amount of offering.

* * * * *
    (c) Conditions to be met in offerings not subject to limitation on
manner of offering--(1) General conditions. To qualify for exemption
under this section, sales must satisfy all the terms and conditions of
Sec. Sec.  230.501 and 230.502(a) and (d).
    (2) Specific conditions--(i) Nature of purchasers. All purchasers
of securities sold in any offering under paragraph (c) of this section
are accredited investors.
    (ii) Verification of accredited investor status. The issuer shall
take reasonable steps to verify that purchasers of securities sold in
any offering under paragraph (c) of this section are accredited
investors. The issuer shall be deemed to take reasonable steps to
verify if the issuer uses, at its option, one of the following non-
exclusive and non-mandatory methods of verifying that a natural person
who purchases securities in such offering is an accredited investor;
provided, however, that the issuer does not have knowledge that such
person is not an accredited investor:
    (A) In regard to whether the purchaser is an accredited investor on
the basis of income, reviewing any Internal Revenue Service form that
reports the purchaser's income for the two most recent years
(including, but not limited to, Form W-2, Form 1099, Schedule K-1 to
Form 1065, and Form 1040) and obtaining a written representation from
the purchaser that he or she has a reasonable expectation of reaching
the income level necessary to qualify as an accredited investor during
the current year;
    (B) In regard to whether the purchaser is an accredited investor on
the basis of net worth, reviewing one or more of the following types of
documentation dated within the prior three months and obtaining a
written representation from the purchaser that all liabilities
necessary to make a determination of net worth have been disclosed:
    (1) With respect to assets: Bank statements, brokerage statements
and other statements of securities holdings, certificates of deposit,
tax assessments, and appraisal reports issued by independent third
parties; and
    (2) With respect to liabilities: A consumer report from at least
one of the nationwide consumer reporting agencies; or
    (C) Obtaining a written confirmation from one of the following
persons or entities that such person or entity has taken reasonable
steps to verify that the purchaser is an accredited investor within the
prior three months and has determined that such purchaser is an
accredited investor:
    (1) A registered broker-dealer;
    (2) An investment adviser registered with the Securities and
Exchange Commission;
    (3) A licensed attorney who is in good standing under the laws of
the

jurisdictions in which he or she is admitted to practice law; or
    (4) A certified public accountant who is duly registered and in
good standing under the laws of the place of his or her residence or
principal office.
    (D) In regard to any person who purchased securities in an issuer's
Rule 506(b) offering as an accredited investor prior to September 23,
2013 and continues to hold such securities, for the same issuer's Rule
506(c) offering, obtaining a certification by such person at the time
of sale that he or she qualifies as an accredited investor.
    Instructions to paragraph (c)(2)(ii)(A) through (D) of this
section:
    1. The issuer is not required to use any of these methods in
verifying the accredited investor status of natural persons who are
purchasers. These methods are examples of the types of non-exclusive
and non-mandatory methods that satisfy the verification requirement in
Sec.  230.506(c)(2)(ii).
    2. In the case of a person who qualifies as an accredited investor