[Federal Register Volume 78, Number 142 (Wednesday, July 24, 2013)]
[Rules and Regulations]
[Pages 44771-44805]
[FR Doc No: 2013-16883]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 239 and 242

[Release No. 33-9415; No. 34-69959; No. IA-3624; File No. S7-07-12]
RIN 3235-AL34

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

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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SUMMARY: We are adopting amendments to Rule 506 of Regulation D and
Rule 144A under the Securities Act of 1933 to implement Section 201(a)
of the Jumpstart Our Business Startups Act. The amendment to Rule 506
permits an issuer to engage in general solicitation or general
advertising in offering and selling securities pursuant to Rule 506,
provided that all purchasers of the securities are accredited investors
and the issuer takes reasonable steps to verify that such purchasers
are accredited investors. The amendment to Rule 506 also includes a
non-exclusive list of methods that issuers may use to satisfy the
verification requirement for purchasers who are natural persons. The
amendment to Rule 144A provides that securities may be offered pursuant
to Rule 144A to persons other than qualified institutional buyers,
provided that the securities are sold only to persons that the seller
and any person acting on behalf of the seller reasonably believe are
qualified institutional buyers. We are also revising Form D to require
issuers to indicate whether they are relying on the provision that
permits general solicitation or general advertising in a Rule 506
offering.
    Also today, in a separate release, to implement Section 926 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, we are
adopting amendments to Rule 506 to disqualify issuers and other market
participants from relying on Rule 506 if ``felons and other `bad
actors' '' are participating in the Rule 506 offering. We are also
today, in a separate release, publishing for comment a number of
proposed amendments to Regulation D, Form D and Rule 156 under the
Securities Act that are intended to enhance the Commission's ability to
evaluate the development of market practices in Rule 506 offerings and
address certain comments made in connection with implementing Section
201(a)(1) of the Jumpstart Our Business Startups Act.

DATES: The final rule and form amendments are effective on September
23, 2013.

FOR FURTHER INFORMATION CONTACT: Charles Kwon, Special Counsel, or Ted
Yu, Senior Special Counsel, Office of Chief Counsel, Division of
Corporation Finance, at<PHONE_NUMBER>, or, with respect to private
funds, Holly Hunter-Ceci, Senior Counsel, Chief Counsel's Office, or
Alpa Patel, Senior Counsel, Investment Adviser Regulation Office,
Division of Investment Management, at<PHONE_NUMBER> or<PHONE_NUMBER>,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rule 144A,\1\
Form D,\2\ and Rules 500,\3\ 501,\4\ 502 \5\ and 506 \6\ of Regulation
D \7\ under the Securities Act of 1933,\8\ and to Rules 101,\9\ 102
\10\ and 104 \11\ of Regulation M \12\ under the Securities Exchange
Act of 1934.\13\
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    \1\ 17 CFR 230.144A.
    \2\ 17 CFR 239.500.
    \3\ 17 CFR 230.500.
    \4\ 17 CFR 230.501.
    \5\ 17 CFR 230.502.
    \6\ 17 CFR 230.506.
    \7\ 17 CFR 230.500 through 230.508.
    \8\ 15 U.S.C. 77a et seq.
    \9\ 17 CFR 242.101.
    \10\ 17 CFR 242.102.
    \11\ 17 CFR 242.104.
    \12\ 17 CFR 242.100 through 242.105.
    \13\ 15 U.S.C. 78a et seq.
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Table of Contents

I. Introduction
II. Final Amendments to Rule 506 and Form D
    A. Eliminating the Prohibition Against General Solicitation
    1. Proposed Rule Amendment
    2. Comments on the Proposed Rule Amendment
    3. Final Rule Amendment
    B. Reasonable Steps To Verify Accredited Investor Status
    1. Proposed Rule Amendment
    2. Comments on the Proposed Rule Amendment
    3. Final Rule Amendment
    a. Principles-Based Method of Verification
    b. Non-Exclusive Methods of Verifying Accredited Investor Status
    C. Reasonable Belief That All Purchasers Are Accredited
Investors
    D. Form D Check Box for Rule 506(c) Offerings
    1. Proposed Form Amendment
    2. Comments on the Proposed Form Amendment
    3. Final Form Amendment
    E. Specific Issues for Private Funds
    F. Technical and Conforming Amendments
III. Final Amendment to Rule 144A
IV. Integration With Offshore Offerings
V. Paperwork Reduction Act
    A. Background
    B. Revisions to PRA Reporting and Cost Burden Estimates
VI. Economic Analysis
    A. Background
    B. Economic Baseline
    1. Size of the Exempt Offering Market
    2. Affected Market Participants
    a. Issuers
    b. Investors
    c. Investment Advisers
    d. Broker-Dealers
    3. Current Practices
    C. Analysis of the Amendment to Rule 506
    1. Benefits to Issuers
    2. Benefits to Investors
    3. Costs
    4. Indirect Effects on Other Markets
    5. Retention of Rule 506(b)
    D. Verifying Accredited Investor Status in Rule 506(c) Offerings
    E. Analysis of the Amendment to Rule 144A
    F. Additional Information Collection and Disclosures
VII. Final Regulatory Flexibility Analysis
    A. Reasons for, and Objectives of, the Action
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Final Rule and Form Amendments
    D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
    E. Duplicative, Overlapping or Conflicting Federal Rules
    F. Significant Alternatives
VIII. Statutory Authority and Text of Final Rule and Form Amendments

I. Introduction

    On August 29, 2012, we proposed rule and form amendments \14\ to
implement Section 201(a) of the Jumpstart Our Business Startups Act
(the ``JOBS Act'').\15\ Section 201(a)(1) of the JOBS Act directs the
Commission, not later than 90 days after the date of enactment, to
amend Rule 506 of Regulation D \16\ under the Securities Act of 1933
(the ``Securities Act'') to permit general solicitation or general
advertising in offerings made under Rule 506, provided that all
purchasers of the securities are accredited investors.\17\ Section
201(a)(1) also states that ``[s]uch rules shall require the issuer to
take reasonable steps to verify that purchasers of the securities are
accredited investors, using such methods as determined by the
Commission.'' Section 201(a)(2) of the JOBS Act directs the Commission,
not later than 90 days after the date of enactment, to revise Rule
144A(d)(1) under the Securities Act \18\ to permit offers of securities
pursuant to Rule 144A to persons other than qualified institutional
buyers (``QIBs''),\19\ including by means of general solicitation or
general advertising, provided that the securities are sold only to
persons that the seller and any person acting on behalf of the seller
reasonably believe are QIBs.
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    \14\ See Eliminating the Prohibition Against General
Solicitation and General Advertising in Rule 506 and Rule 144A
Offerings, Release No. 33-9354 (Aug. 29, 2012) [77 FR 54464 (Sept.
5, 2012)] (the ``Proposing Release'').
    \15\ Public Law 112-106, sec. 201(a), 126 Stat. 306, 313 (Apr.
5, 2012).
    \16\ The Commission adopted Regulation D in 1982 as a result of
the Commission's evaluation of the impact of its rules on the
ability of small businesses to raise capital. See Revision of
Certain Exemptions From Registration for Transactions Involving
Limited Offers and Sales, Release No. 33-6389 (Mar. 8, 1982) [47 FR
11251 (Mar. 16, 1982)]. Over the years, the Commission has revised
various provisions of Regulation D in order to address, among other
things, specific concerns relating to facilitating capital-raising
as well as abuses that have arisen under Regulation D. See, e.g.,
Additional Small Business Initiatives, Release No. 33-6996 (Apr. 28,
1993) [58 FR 26509 (May 4, 1993)] and Revision of Rule 504 of
Regulation D, the ``Seed Capital'' Exemption, Release No. 33-7644
(Feb. 25, 1999) [64 FR 11090 (Mar. 8, 1999)].
    \17\ The definition of the term ``accredited investor'' that is
applicable to Rule 506 is set forth in Rule 501(a) of Regulation D
[17 CFR 230.501(a)] and includes any person who comes within one of
the definition's enumerated categories of persons, or whom the
issuer ``reasonably believes'' comes within any of the enumerated
categories, at the time of the sale of the securities to that
person. For natural persons, Rule 502(a) defines an accredited
investor as a person: (1) Whose individual net worth, or joint net
worth with that person's spouse, exceeds $1 million, excluding the
value of the person's primary residence (the ``net worth test''); or
(2) who had an individual income in excess of $200,000 in each of
the two most recent years, or joint income with that person's spouse
in excess of $300,000 in each of those years, and has a reasonable
expectation of reaching the same income level in the current year
(the ``income test'').
    Although the Dodd-Frank Act did not change the amount of the $1
million net worth test, it did change how that amount is
calculated--by excluding the value of a person's primary residence.
This change took effect upon the enactment of the Dodd-Frank Act. In
December 2011, we amended Rule 501 to incorporate this change into
the definition of accredited investor. See Net Worth Standard for
Accredited Investors, Release No. 33-9287 (Dec. 21, 2011) [76 FR
81793 (Dec. 29, 2011)].
    \18\ 17 CFR 230.144A(d)(1).
    \19\ The term ``qualified institutional buyer'' is defined in
Rule 144A(a)(1) [17 CFR 230.144A(a)(1)] and includes specified
institutions that, in the aggregate, own and invest on a
discretionary basis at least $100 million in securities of issuers
that are not affiliated with such institutions. Banks and other
specified financial institutions must also have a net worth of at
least $25 million. A registered broker-dealer qualifies as a QIB if
it, in the aggregate, owns and invests on a discretionary basis at
least $10 million in securities of issuers that are not affiliated
with the broker-dealer.
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    The Commission originally adopted Rule 506 as a non-exclusive safe
harbor under Section 4(a)(2) (formerly Section 4(2)) of the Securities
Act,\20\ which exempts transactions by an issuer ``not involving any
public offering'' from the registration requirements of Section 5 of
the Securities Act.\21\ Under existing Rule 506, an issuer may sell
securities,

without any limitation on the offering amount, to an unlimited number
of ``accredited investors,'' as defined in Rule 501(a) of Regulation D,
and to no more than 35 non-accredited investors who meet certain
``sophistication'' requirements.\22\ The availability of Rule 506 is
subject to a number of requirements \23\ and is currently conditioned
on the issuer, or any person acting on its behalf, not offering or
selling securities through any form of ``general solicitation or
general advertising.'' \24\ Although the terms ``general solicitation''
and ``general advertising'' are not defined in Regulation D, Rule
502(c) does provide examples of general solicitation and general
advertising, including advertisements published in newspapers and
magazines, communications broadcast over television and radio, and
seminars where attendees have been invited by general solicitation or
general advertising.\25\ By interpretation, the Commission has
confirmed that other uses of publicly available media, such as
unrestricted Web sites, also constitute general solicitation and
general advertising.\26\ In this release, we refer to both general
solicitation and general advertising as ``general solicitation.''
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    \20\ 15 U.S.C. 77d(a)(2).
    \21\ 15 U.S.C. 77e.
    \22\ Under Rule 506(b)(2)(ii) [17 CFR 230.506(b)(2)(ii)], each
purchaser in a Rule 506 offering who is not an accredited investor
must possess, or the issuer must reasonably believe immediately
before the sale of securities that such purchaser possesses, either
alone or with his or her purchaser representative, ``such knowledge
and experience in financial and business matters that he [or she] is
capable of evaluating the merits and risks of the prospective
investment.''
    \23\ Offerings under Rule 506 are subject to all the terms and
conditions of Rules 501 and 502. If securities are sold to any non-
accredited investors, specified information requirements apply. See
Rule 502(b) [17 CFR 230.502(b)].
    \24\ Rule 502(c) of Regulation D [17 CFR 230.502(c)].
    \25\ Id.
    \26\ See Use of Electronic Media for Delivery Purposes, Release
No. 33-7233 (Oct. 6, 1995) [60 FR 53458, 53463-64 (Oct. 13, 1995)];
Use of Electronic Media, Release No. 33-7856 (Apr. 28, 2000) [65 FR
25843, 25851-52 (May 4, 2000)].
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    Rule 144A is a non-exclusive safe harbor exemption from the
registration requirements of the Securities Act for resales of certain
``restricted securities'' \27\ to QIBs. Resales to QIBs in accordance
with the conditions of Rule 144A \28\ are exempt from registration
pursuant to Section 4(a)(1) (formerly Section 4(1)) of the Securities
Act,\29\ which exempts transactions by any person ``other than an
issuer, underwriter, or dealer.'' Although Rule 144A does not include
an express prohibition against general solicitation, offers of
securities under Rule 144A currently must be limited to QIBs, which has
the same practical effect. By its terms, Rule 144A is available solely
for resale transactions; however, since its adoption by the Commission
in 1990,\30\ market participants have used Rule 144A to facilitate
capital-raising by issuers.\31\ The term ``Rule 144A offering'' in this
release refers to a primary offering of securities by an issuer to one
or more financial intermediaries--commonly known as the ``initial
purchasers''--in a transaction that is exempt from registration
pursuant to Section 4(a)(2) or Regulation S under the Securities
Act,\32\ followed by the resale of those securities by the initial
purchasers to QIBs in reliance on Rule 144A.
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    \27\ ``Restricted securities'' are defined in Securities Act
Rule 144(a)(3) [17 CFR 230.144(a)(3)] to include, in part,
``[s]ecurities acquired directly or indirectly from the issuer, or
from an affiliate of the issuer, in a transaction or chain of
transactions not involving any public offering.''
    \28\ In order for a transaction to come within existing Rule
144A, a seller must have a reasonable basis for believing that the
offeree or purchaser is a QIB and must take reasonable steps to
ensure that the purchaser is aware that the seller may rely on Rule
144A. Further, only securities that were not, when issued, of the
same class as securities listed on a U.S. securities exchange or
quoted on a U.S. automated interdealer quotation system are eligible
for resale under Rule 144A. Also, the seller and a prospective
purchaser designated by the seller must have the right to obtain
from the issuer, upon request, certain information on the issuer,
unless the issuer falls within specified categories as to which this
condition does not apply.
    \29\ 15 U.S.C. 77d(a)(1).
    \30\ See Resale of Restricted Securities; Changes to Method of
Determining Holding Period of Restricted Securities Under Rules 144
and 145, Release No. 33-6862 (Apr. 23, 1990) [55 FR 17933 (Apr. 30,
1990)].
    \31\ While Rule 144A applies to resales of securities of both
U.S. and non-U.S. issuers, one of the objectives of Rule 144A was to
make primary offerings of non-U.S. issuers' securities available to
U.S. institutions in the U.S. market through intermediaries (rather
than compelling such investors to go to overseas markets) by making
the private offering market in the United States more attractive to
non-U.S. issuers. See Resale of Restricted Securities; Changes to
Method of Determining Holding Period of Restricted Securities Under
Rules 144 and 145, Release No. 33-6806 (Oct. 25, 1988) [53 FR 44016
(Nov. 1, 1988)].
    \32\ Regulation S under the Securities Act [17 CFR 230.901
through 230.905] was adopted in 1990 as a safe harbor from the
registration requirements of the Securities Act for any offer or
sale of securities made outside the United States. It provides that
any ``offer,'' ``offer to sell,'' ``sell,'' ``sale'' or ``offer to
buy'' that occurs outside the United States is not subject to the
registration requirements of Section 5. Regulation S does not affect
the scope or availability of the antifraud or other provisions of
the Securities Act to offers and sales made in reliance on
Regulation S.
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    Rule 506 offerings and Rule 144A offerings are widely used by U.S.
and non-U.S. issuers to raise capital. In 2012, the estimated amount of
capital (including both equity and debt) reported as being raised in
Rule 506 offerings and non-asset-backed securities (``non-ABS'') Rule
144A offerings by operating companies was $173 billion and $636
billion, respectively, and by pooled investment funds, such as venture
capital funds, private equity funds and hedge funds, was $725 billion
and $4 billion, respectively, compared to $1.2 trillion raised in
registered offerings.\33\ In 2011, the estimated amount of capital
(including both equity and debt) reported as being raised in Rule 506
offerings and non-ABS Rule 144A offerings by operating companies was
$71 billion and $438 billion, respectively, and by pooled investment
funds was $778 billion and $4 billion, respectively, compared to $985
billion raised in registered offerings.\34\ These data points
underscore the importance of the Rule 506 and Rule 144A exemptions for
issuers seeking access to the U.S. capital markets.
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    \33\ These statistics are based on a review of Form D electronic
filings with the Commission--specifically, the ``total amount sold''
as reported in the filings--and data regarding other types of
offerings (e.g., public debt offerings and Rule 144A offerings) from
Securities Data Corporation's New Issues database (Thomson
Financial). See Vladimir Ivanov and Scott Bauguess, Capital Raising
in the U.S.: An Analysis of Unregistered Offerings Using the
Regulation D Exemption, 2009-2012 (July 2013) (the ``Ivanov/Bauguess
Study''), available at: http://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf. For non-ABS Rule
144A offerings, since the databases we used to obtain the Rule 144A
data do not distinguish between operating companies and funds, we
classified issuers with SIC codes between 6200 and 6299 as funds,
and the rest as operating companies.
    The amount of capital raised through offerings under Regulation
D may be larger than what is reported in Form D filings because,
although the filing of a Form D is a requirement of Rule 503(a) of
Regulation D [17 CFR 230.503(a)], it is not a condition to the
availability of the exemptions under Regulation D. Further, once a
Form D is filed, the issuer is not required to file an amendment to
the filing to reflect a change that occurs after the offering
terminates or a change that occurs solely with respect to certain
information, such as the amount sold in the offering. For example,
if the amount sold does not result in an increase in the total
offering amount of more than 10% or the offering closes within a
year, the filing of an amendment to the initial Form D is not
required. Therefore, a Form D filed for a particular offering may
not reflect the total amount of securities sold in the offering in
reliance on the exemption.
    \34\ See id.
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    To implement Section 201(a) of the JOBS Act, we proposed amending
Rule 506 to add new paragraph (c), under which the prohibition against
general solicitation contained in Rule 502(c) would not apply, provided
that all purchasers of the securities are accredited investors and the
issuer takes reasonable steps to verify that such purchasers are
accredited investors. In addition, we proposed amending Form D, which
is a notice required to be filed with the Commission by each issuer

claiming a Regulation D exemption, to add a check box to indicate
whether an issuer is claiming an exemption under Rule 506(c). We also
proposed an amendment to Rule 144A to provide that securities sold
pursuant to Rule 144A may be offered to persons other than QIBs,
including by means of general solicitation, provided that the
securities are sold only to persons that the seller and any person
acting on behalf of the seller reasonably believe are QIBs.
    The comment period for the proposed rule and form amendments closed
on October 5, 2012. We received over 225 comment letters on the
Proposing Release, including from professional and trade associations,
investor organizations, law firms, investment companies and investment
advisers, members of Congress, the Commission's Investor Advisory
Committee,\35\ state securities regulators, issuers, individuals and
other interested parties. Most of the comment letters focused on the
proposed amendments to Rule 506. As discussed below, commenters were
sharply divided in their views on the proposed amendments to Rule 506,
whereas commenters generally supported the proposed amendments to Rule
144A and Form D.
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    \35\ The SEC Investor Advisory Committee (``Investor Advisory
Committee'') was established in April 2012 pursuant to Section 911
of the Dodd-Frank Wall Street Reform and Consumer Protection Act
[Pub. L. 111-203, sec. 911, 124 Stat. 1376, 1822 (July 21, 2010)]
(the ``Dodd-Frank Act'') to advise the Commission on regulatory
priorities, the regulation of securities products, trading
strategies, fee structures, the effectiveness of disclosure,
initiatives to protect investor interests and to promote investor
confidence and the integrity of the securities marketplace. The
Dodd-Frank Act authorizes the Investor Advisory Committee to submit
findings and recommendations for review and consideration by the
Commission.
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    We have reviewed and considered all of the comments that we
received on the proposed rule and form amendments and on Section 201(a)
of the JOBS Act.\36\ We are adopting new paragraph (c) to Rule 506 as
proposed, with one modification, and the amendments to Form D and to
Rule 144A as proposed. We are also adopting the technical and
conforming rule amendments as proposed. We discuss these amendments in
detail below.
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    \36\ To facilitate public input on JOBS Act rulemaking before
the issuance of rule proposals, the Commission invited members of
the public to make their views known on various JOBS Act initiatives
in advance of any rulemaking by submitting comment letters to the
Commission's Web site at http://www.sec.gov/spotlight/jobsactcomments.shtml. The comment letters relating to Section
201(a) of the JOBS Act submitted in response to this invitation are
located at http://www.sec.gov/comments/jobs-title-ii/jobs-title-ii.shtml. The comment letters submitted in response to the Proposing
Release are located at http://www.sec.gov/comments/s7-07-12/s70712.shtml. Many commenters submitted comment letters both before
and after the issuance of the Proposing Release. Dated comment
letters refer to those submitted before the issuance of the
Proposing Release or by commenters that submitted multiple letters.
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    We acknowledge the concerns of some commenters that the elimination
of the prohibition against general solicitation for a subset of Rule
506 offerings may affect the behavior of issuers and other market
participants in ways they believe could compromise investor
protection.\37\ Preserving the integrity of the Rule 506(c) market and
minimizing the incidence of fraud are critical objectives for the
Commission in implementing Section 201(a) of the JOBS Act. We are
adopting today the bad actor disqualification for Rule 506 offerings
mandated by the Dodd-Frank Act, which may address some of those
concerns.\38\ We are also issuing a proposing release to amend
Regulation D and Form D to enhance the Commission's ability to analyze
the Rule 506 market and to amend Rule 156 under the Securities Act to
provide guidance to private funds on the application of the antifraud
provisions of the federal securities laws to their sales
literature.\39\ Upon the effectiveness of Rule 506(c), the Commission
staff will monitor developments in the market for Rule 506(c) offerings
so as to be able to undertake a review of market practices in Rule
506(c) offerings, including the steps taken by issuers and other market
participants to verify that the purchasers of the offered securities
are accredited investors, as well as the impact of the amendments to
Rule 506 on capital formation.
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    \37\ See, e.g., letters from Investor Advisory Committee; North
American Securities Administrators Association, Inc. (``NASAA'');
Consumer Federation of America (``Consumer Federation'').
    \38\ Disqualification of Felons and Other ``Bad Actors'' from
Rule 506 Offerings, Release No. 33-9414 (July 10, 2013) (the ``Bad
Actor Release'').
    \39\ See Amendments to Regulation D, Form D and Rule 156,
Release No. 33-9416 (July 10, 2013).
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II. Final Amendments to Rule 506 and Form D

A. Eliminating the Prohibition Against General Solicitation

    Section 4(a)(2) of the Securities Act exempts transactions by an
issuer ``not involving any public offering.'' An issuer relying on
Section 4(a)(2) is restricted in its ability to make public
communications to attract investors for its offering because public
advertising is incompatible with a claim of exemption under Section
4(a)(2).\40\ As noted above, Rule 506 currently conditions the
availability of the safe harbor under Section 4(a)(2) on the issuer, or
any person acting on its behalf, not offering or selling securities
through any form of general solicitation.\41\ Section 201(a)(1) of the
JOBS Act directs the Commission to amend Rule 506 to provide that the
prohibition against general solicitation contained in Rule 502(c) shall
not apply to offers and sales of securities made pursuant to Rule 506,
as so amended, provided that all purchasers of the securities are
accredited investors and the issuer takes reasonable steps to verify
their status as accredited investors.
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    \40\ See Non-Public Offering Exemption, Release No. 33-4552
(Nov. 6, 1962) [27 FR 11316 (Nov. 16, 1962)].
    \41\ See Rule 502(c) and Rule 506(b)(1) of Regulation D [17 CFR
230.506(b)(1)]. The failure to comply with Rule 502(c) is deemed to
be significant to the offering as a whole, which means that an
issuer cannot rely on the ``insignificant deviation'' relief in Rule
508 of Regulation D for violations of Rule 502(c). See Rule
508(a)(2) [17 CFR 230.508(a)(2)].
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    This mandate affects only Rule 506, and not Section 4(a)(2)
offerings in general,\42\ which means that even after the effective
date of Rule 506(c), an issuer relying on Section 4(a)(2) outside of
the Rule 506(c) exemption will be restricted in its ability to make
public communications to solicit investors for its offering because
public advertising will continue to be incompatible with a claim of
exemption under Section 4(a)(2). We are amending Rule 500(c) of
Regulation D accordingly to make this clear.\43\ Congress' directive in
Section 201(a)(1) of the JOBS Act, and not Section 4(a)(2) of the
Securities Act or our interpretation of Section 4(a)(2), is the reason
that Rule 506, ``as revised pursuant to [Section 201(a)(1)], shall
continue to be treated as a regulation issued under section 4[(a)](2)
of the Securities Act of 1933'' (emphasis added).\44\ Similarly,
securities issued in Rule 506(c) offerings are deemed to be ``covered
securities'' for purposes of

Section 18(b)(4)(E) of the Securities Act,\45\ only by virtue of
Section 201(a)(1) of the JOBS Act.
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    \42\ In this regard, we also note that bills that would have
amended Section 4(a)(2) directly, rather than requiring the
Commission to amend Rule 506, to permit the use of general
solicitation were introduced and considered by Congress, but were
not enacted. See Access to Capital for Job Creators, H.R. 2940,
112th Cong., 1st Sess. (2011) (proposing to amend Section 4(a)(2) by
adding the phrase ``whether or not such transactions involve general
solicitation or general advertising''); Access to Capital for Job
Creators, S.1831, 112th Cong., 1st Sess. (2011) (same).
    \43\ As revised, Rule 500(c) reads as follows: ``Attempted
compliance with any rule in Regulation D does not act as an
exclusive election; the issuer can also claim the availability of
any other applicable exemption. For instance, an issuer's failure to
satisfy all the terms and conditions of rule 506(b) (Sec.
230.506(b)) shall not raise any presumption that the exemption
provided by section 4(a)(2) of the Act is not available.''
(additions italicized).
    \44\ Section 201(a)(1) of the JOBS Act.
    \45\ 15 U.S.C. 77r(b)(4)(E). This means that state blue sky
registration requirements do not apply to securities offered or sold
in Rule 506(c) offerings.
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1. Proposed Rule Amendment
    To implement the mandated rule change, we proposed new Rule 506(c),
which would permit the use of general solicitation to offer and sell
securities under Rule 506, provided that the following conditions are
satisfied:
     All terms and conditions of Rule 501 \46\ and Rules 502(a)
\47\ and 502(d) \48\ must be satisfied;
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    \46\ Rule 501 sets forth definitions for the terms used in
Regulation D, such as ``accredited investor.''
    \47\ Rule 502(a) addresses the question of integration by
providing a six-month safe harbor from integration for successive
Regulation D offerings and a five-factor framework to apply in cases
in which the six-month safe harbor is not available.
    \48\ Rule 502(d) provides that, for resale purposes, securities
acquired in a Regulation D offering, except as provided in Rule
504(b)(1), have the status of securities acquired in a transaction
under Section 4(a)(2) of the Securities Act. Rule 144(a)(3)(ii) [17
CFR 230.144(a)(3)(ii)] defines ``restricted securities'' as
securities ``acquired from the issuer that are subject to the resale
limitations of Sec.  230.502(d) under Regulation D. . . .''
Separately, Section 201(b) of the JOBS Act added Section 4(b) of the
Securities Act, which provides that ``[o]ffers and sales exempt
under [Rule 506 as amended pursuant to Section 201 of the JOBS Act]
shall not be deemed public offerings under the Federal securities
laws as a result of general advertising or general solicitation.''
Thus, securities acquired under new Rule 506(c) would also meet the
definition of ``restricted securities'' under Rule 144(a)(3)(i) [17
CFR 230.144(a)(3)(i)] (``[s]ecurities acquired directly or
indirectly from the issuer, or from an affiliate of the issuer, in a
transaction or chain of transactions not involving any public
offering'').
---------------------------------------------------------------------------

     all purchasers of securities must be accredited investors;
and
     the issuer must take reasonable steps to verify that the
purchasers of the securities are accredited investors.

Offerings under proposed Rule 506(c) would not be subject to the
requirement to comply with Rule 502(c), which contains the prohibition
against general solicitation. While we proposed Rule 506(c) to enable
issuers to use general solicitation in Rule 506 offerings, we also
preserved, in current Rule 506(b), the existing ability of issuers to
conduct Rule 506 offerings subject to the prohibition against general
solicitation.
2. Comments on the Proposed Rule Amendment
    Commenters were sharply divided in their views on the proposed
amendment to Rule 506. Commenters who supported the proposed amendment
to Rule 506 stated that Rule 506(c), if adopted, would assist issuers,
particularly early stage and smaller issuers, in raising capital by
allowing them to solicit investments from a larger pool of
investors.\49\ These commenters generally approved of the flexibility
afforded by the manner in which we proposed to implement Rule 506(c)'s
verification requirement,\50\ as further discussed below, and supported
retaining, in its current form, the ability of issuers under existing
Rule 506(b) to conduct Rule 506 offerings subject to the prohibition
against general solicitation.\51\ A number of commenters stated that
they supported the availability of Rule 506(c) for private funds
pursuant to the Commission's guidance in the Proposing Release.\52\
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    \49\ See, e.g., letters from Biotechnology Industry Organization
(``BIO''); National Small Business Association (``NSBA'').
    \50\ See letters from Linklaters LLP (``Linklaters'') (stating
that a ``straightforward, focused rule that provides issuers with
the flexibility to continue to adapt to market practice is the best
way to realize the spirit and intent of the Jumpstart Our Business
Startups Act''); BlackRock (stating that ``[o]verall, we believe
that the Proposed Rule is in accordance with the intent of Congress
and will facilitate the formation of capital''); Securities
Regulation Committee, Business Law Section of the New York State Bar
Association (``SRC of NYSBA'').
    \51\ See, e.g., letters from the Federal Regulation of
Securities Committee, Business Law Section of the American Bar
Association (``ABA Fed. Reg. Comm.''); Angel Capital Association
(``ACA'') (Sept. 27, 2012); The CrowdFund Intermediary Regulatory
Advocates (``CFIRA''); Investment Program Association (``IPA'');
Montgomery & Hansen, LLP (``Montgomery & Hansen''); NSBA; Committee
on Securities Regulation of the New York City Bar Association
(``NYCBA''); Sullivan & Cromwell LLP (``S&C''); Securities Industry
and Financial Markets Association (``SIFMA'') and The Financial
Services Roundtable (``FSR'') (Oct. 5, 2012).
    \52\ See, e.g., letters from BlackRock; Dukas Public Relations
(``Dukas''); Forum for U.S. Securities Lawyers in London; Hedge Fund
Association (``HFA''); Investment Adviser Association (``IAA'');
Managed Funds Association (``MFA'') (Sept. 28, 2012); NYCBA; SRC of
NYSBA. In the Proposing Release, we stated that private funds that
engage in general solicitation under proposed Rule 506(c) would not
be precluded from relying on the exclusions from the definition of
``investment company'' set forth in Section 3(c)(1) and Section
3(c)(7) of the Investment Company Act of 1940.
---------------------------------------------------------------------------

    Other commenters opposed the proposed amendment to Rule 506 in its
entirety or in part. Many of these commenters expressed concern that
the proposed amendment, if adopted, would increase the risk of
fraudulent and abusive Rule 506 offerings and asserted that additional
investor safeguards are necessary under Rule 506(c).\53\ A number of
these commenters urged the Commission to adopt rules concerning bad
actor disqualifications for Rule 506 offerings, as required by Section
926 of the Dodd-Frank Act.\54\ Other commenters recommended that the
Commission amend the definition of ``accredited investor'' by raising
the income and net worth thresholds for natural persons or by
implementing other measures of financial sophistication.\55\ Some
commenters stated that the Commission should condition the availability
of the Rule 506(c) exemption on the filing of Form D or require the
advance filing of Form D, or both.\56\ Other commenters argued that the
Commission should adopt specific standards or requirements that would
govern the content and/or manner of general solicitations in Rule
506(c) offerings, particularly with respect to advertising by private
funds.\57\ A number of commenters urged the Commission to require that
the materials used to generally solicit investors in Rule 506(c)
offerings be filed with or furnished to either the Commission or to
FINRA.\58\
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    \53\ See, e.g., letters from AARP; AFL-CIO and Americans for
Financial Reform (``AFR''); Sen. Levin; CFA Institute; Council of
Institutional Investors (``CII''); Consumer Federation; Fund
Democracy, Inc. (``Fund Democracy''); Office of the Secretary of the
Commonwealth of Massachusetts Securities Division (``Massachusetts
Securities Division''); NASAA.
    \54\ Public Law 111-203, sec. 926, 124 Stat. 1376, 1851 (July
21, 2010) (to be codified at 15 U.S.C. 77d note). See, e.g., letters
from AFL-CIO and AFR; Consumer Federation; Fund Democracy;
Commissioner of Securities, State of Hawaii (``Hawaii Commissioner
of Securities''); Investor Advisory Committee; Rep. Waters;
Commissioner of Securities, State of Missouri (``Missouri
Commissioner of Securities''); NASAA.
    \55\ See, e.g., letters from AARP; AFL-CIO and AFR;
BetterInvesting; CFA Institute; Consumer Federation; Investor
Advisory Committee; Investment Company Institute (``ICI''); Rep.
Waters; Massachusetts Securities Division (July 2, 2012).
    \56\ See, e.g., letters from AARP; AFL-CIO and AFR; Consumer
Federation; Hawaii Commissioner of Securities; Investor Advisory
Committee; Massachusetts Securities Division (July 2, 2012);
Missouri Commissioner of Securities; Commissioner of Securities and
Insurance, State of Montana (``Montana Commissioner of
Securities''); NASAA; Ohio Division of Securities.
    \57\ See, e.g., letters from Sen. Levin; Consumer Federation;
ICI; Independent Directors Council (``IDC''); Rep. Waters; Montana
Commissioner of Securities; NASAA.
    \58\ See, e.g., letters from AFL-CIO and AFR; Investor Advisory
Committee; ICI; Massachusetts Securities Division (July 2, 2012).
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    A number of commenters requested that the Commission provide
transitional guidance with respect to ongoing offerings under existing
Rule 506 that commenced before the effectiveness of Rule 506(c).\59\
For example, in some situations, the initial closings in these
offerings may have already occurred, and could have included non-
accredited investors pursuant to offering procedures that would not
have involved any form of general solicitation.\60\ Several commenters
suggested that the Commission clarify that an issuer would be entitled
to conduct the portion of the

offering following the effectiveness of Rule 506(c) in accordance with
the requirements of new Rule 506(c), without the portion of the
offering occurring after the rule's effectiveness affecting the portion
of the offering that was completed prior to the rule's
effectiveness.\61\
---------------------------------------------------------------------------

    \59\ See letters from ABA Fed. Reg. Comm.; Forum for U.S.
Securities Lawyers in London; S&C IPA.
    \60\ See letter from ABA Fed. Reg. Comm.
    \61\ See letters from ABA Fed. Reg. Comm.; S&C (stating that
``[w]e believe that such issuers should be allowed, upon
effectiveness of the final rule, to use the new Rule 506(c)
exemption and use general solicitation for the remaining portion of
their offerings, provided that they satisfy the requirements of Rule
506(c) going forward.'').
---------------------------------------------------------------------------

3. Final Rule Amendment
    After considering the comments, we are adopting Rule 506(c) as
proposed, with one modification. Under new Rule 506(c), issuers can
offer securities through means of general solicitation, provided that
they satisfy all of the conditions of the exemption.\62\ These
conditions are:
---------------------------------------------------------------------------

    \62\ We also note that broker-dealers participating in offerings
in conjunction with issuers relying on Rule 506(c) would continue to
be subject to FINRA rules regarding communications with the public,
which, among other things, (1) generally require all member
communications to be based on principles of fair dealing and good
faith, to be fair and balanced, and to provide a sound basis for
evaluating the facts in regard to any particular security or type of
security, industry or service; and (2) prohibit broker-dealers from
making false, exaggerated, unwarranted, promissory or misleading
statements or claims in any communications. See FINRA Rule 2210.
---------------------------------------------------------------------------

     all terms and conditions of Rule 501 and Rules 502(a) and
502(d) must be satisfied; \63\
---------------------------------------------------------------------------

    \63\ New Rule 506(c)(1).
---------------------------------------------------------------------------

     all purchasers of securities must be accredited investors;
\64\ and
---------------------------------------------------------------------------

    \64\ New Rule 506(c)(2)(i).
---------------------------------------------------------------------------

     the issuer must take reasonable steps to verify that the
purchasers of the securities are accredited investors.\65\
---------------------------------------------------------------------------

    \65\ New Rule 506(c)(2)(ii).

Issuers relying on Rule 506(c) for their offerings will not be subject
to the prohibition against general solicitation found in Rule
502(c).\66\ In addition and as further discussed below, in response to
comments from a wide range of commenters asking for greater certainty
with respect to satisfying the verification requirement, we are also
including in Rule 506(c) a non-exclusive list of methods that issuers
may use to verify the accredited investor status of natural persons.
---------------------------------------------------------------------------

    \66\ Offerings under Rule 506(c) will also not be subject to the
information requirements in Rule 502(b) for non-accredited
investors, because all purchasers in Rule 506(c) offerings are
required to be accredited investors.
---------------------------------------------------------------------------

    Issuers will continue to have the ability under Rule 506(b) to
conduct Rule 506 offerings subject to the prohibition against general
solicitation. As we noted in the Proposing Release, offerings under
existing Rule 506(b) represent an important source of capital for
issuers of all sizes, and we believe that the continued availability of
existing Rule 506(b) will be important for those issuers that either do
not wish to engage in general solicitation in their Rule 506 offerings
(and become subject to the requirement to take reasonable steps to
verify the accredited investor status of purchasers) or wish to sell
privately to non-accredited investors who meet Rule 506(b)'s
sophistication requirements. Retaining the safe harbor under existing
Rule 506(b) may also be beneficial to investors with whom an issuer has
a pre-existing substantive relationship.\67\ In this regard, we do not
believe that Section 201(a) requires the Commission to modify Rule 506
to impose any new requirements on offers and sales of securities that
do not involve general solicitation. Therefore, the amendment to Rule
506 we are adopting today does not amend or modify the requirements
relating to existing Rule 506(b).
---------------------------------------------------------------------------

    \67\ See Release No. 33-7856, at 25852 (noting that ``one method
of ensuring that general solicitation is not involved is to
establish the existence of a `pre-existing, substantive
relationship''' and that ``there may be facts and circumstances in
which a third party, other than a registered broker-dealer, could
established a `pre-existing, substantive relationship' sufficient to
avoid a `general solicitation' '').
---------------------------------------------------------------------------

    Finally, with respect to transition matters, for an ongoing
offering under Rule 506 that commenced before the effective date of
Rule 506(c), the issuer may choose to continue the offering after the
effective date in accordance with the requirements of either Rule
506(b) or Rule 506(c). If an issuer chooses to continue the offering in
accordance with the requirements of Rule 506(c), any general
solicitation that occurs after the effective date will not affect the
exempt status of offers and sales of securities that occurred prior to
the effective date in reliance on Rule 506(b).

B. Reasonable Steps To Verify Accredited Investor Status

    Section 201(a)(1) of the JOBS Act mandates that our amendment to
Rule 506 require issuers using general solicitation in Rule 506
offerings ``to take reasonable steps to verify that purchasers of the
securities are accredited investors, using such methods as determined
by the Commission.'' As noted in the Proposing Release, we believe that
the purpose of the verification mandate is to address concerns, and
reduce the risk, that the use of general solicitation in Rule 506
offerings could result in sales of securities to investors who are not,
in fact, accredited investors.\68\
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    \68\ See, e.g., Markup of H.R. 2940, Access to Capital for Job
Creators Act, Subcommittee on Capital Markets and Government
Sponsored Enterprises, House Financial Services Committee, 112th
Cong. (Oct. 5, 2011) (remarks of Rep. Waters, explaining that she is
introducing the amendment that requires issuers to take reasonable
steps to verify accredited investor status because ``we must take
steps to ensure that those folks are indeed sophisticated''); 157
Cong. Rec. H7291 (daily ed. Nov. 3, 2011) (remarks of Rep. Maloney
(same)); 157 Cong. Rec. H7294 (daily ed. Nov. 3, 2011) (remarks of
Rep. Lee (same)).
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1. Proposed Rule Amendment
    To implement the verification mandate of Section 201(a)(1), we
proposed to condition the Rule 506(c) exemption on the requirement that
issuers using general solicitation ``take reasonable steps to verify''
that the purchasers of the offered securities are accredited investors.
As proposed, whether the steps taken are ``reasonable'' would be an
objective determination by the issuer (or those acting on its behalf),
in the context of the particular facts and circumstances of each
purchaser and transaction. Under this principles-based approach,
issuers would consider a number of factors when determining the
reasonableness of the steps to verify that a purchaser is an accredited
investor, such as:
     The nature of the purchaser and the type of accredited
investor that the purchaser claims to be;
     the amount and type of information that the issuer has
about the purchaser; and
     the nature of the offering, such as the manner in which
the purchaser was solicited to participate in the offering, and the
terms of the offering, such as a minimum investment amount.

These factors would be interconnected, and the information gained by
looking at these factors would help an issuer assess the reasonable
likelihood that a potential purchaser is an accredited investor, which
would, in turn, affect the types of steps that would be reasonable to
take to verify a purchaser's accredited investor status.
    In the Proposing Release, we considered providing a list of
specified methods for satisfying the verification requirement, which
was suggested by some commenters on Section 201(a) prior to the
issuance of the Proposing Release.\69\ We expressed concern that, in

designating such a list--for example, by setting forth particular types
of information that issuers may rely upon as conclusive means of
verifying accredited investor status--there may be circumstances where
such information will not actually verify accredited investor status or
where issuers may unreasonably overlook or disregard other information
indicating that a purchaser is not, in fact, an accredited investor.
Also, we were concerned that requiring issuers to use specified methods
of verification would be impractical, burdensome and potentially
ineffective in light of the numerous ways in which a purchaser can
qualify as an accredited investor, as well as the potentially wide
range of verification issues that may arise, depending on the nature of
the purchaser and the facts and circumstances of a particular Rule
506(c) offering. Even if the list of specified methods was not
mandatory, but rather, constituted a non-exclusive list, we were
concerned that a non-exclusive list of specified methods could be
viewed by market participants as, in effect, required methods, in which
compliance with at least one of the enumerated methods could be viewed
as necessary in all circumstances to demonstrate that the verification
requirement has been satisfied, thereby eliminating the flexibility
that proposed Rule 506(c) was intended to provide.
---------------------------------------------------------------------------

    \69\ See letters from MFA (June 26, 2012) (suggesting that the
Commission publish a non-exclusive list of the types of third-party
evidence that an investor could provide to establish accredited
investor status, in conjunction with certifying that he or she is an
accredited investor); NASAA (July 3, 2012) (recommending that the
Commission set forth non-exclusive safe harbors to specify the types
of actions that would be deemed ``reasonable steps to verify'' for
three types of accredited investors: natural persons who purport to
satisfy the income test; natural persons who purport to satisfy the
net worth test; and entities who purport to meet one of the other
tests set forth in Rule 501(a)).
---------------------------------------------------------------------------

    We requested comment in the Proposing Release on our proposed
principles-based method and its effectiveness in limiting sales of
securities in Rule 506(c) offerings to only accredited investors. We
also requested comment on possible alternative approaches for
implementing the verification mandate of Section 201(a)(1), such as a
rule that specifies mandatory methods for verifying accredited investor
status or a non-exclusive list of verification methods that would
function as a safe harbor for compliance with the verification
requirement.
2. Comments on the Proposed Rule Amendment
    Commenters expressed a wide range of views on the proposed approach
to the verification requirement in Rule 506(c). Some commenters
commended the Commission for proposing a flexible, principles-based
standard for verification.\70\ For example, one commenter stated that
the Commission's proposed approach would provide issuers with the
flexibility to develop tailored, reliable and cost-effective procedures
for verification.\71\ A number of commenters stated that the discussion
in the Proposing Release of the factors that issuers may take into
account in verifying accredited investor status would assist issuers in
assessing the reasonableness of their verification processes.\72\ Other
commenters asserted that not requiring issuers to use certain specified
methods to verify a purchaser's accredited investor status would permit
advancements in verification methods over time.\73\ Some commenters
expressed support for the Commission's proposal that accredited
investor status may be verified through an attestation or certification
by a third party, provided that the issuer has a reasonable basis to
rely on such third-party verification.\74\
---------------------------------------------------------------------------

    \70\ See, e.g., letters from HFA; MFA (Sept. 28, 2012); BIO; ABA
Fed. Reg. Comm.; IAA; Linklaters; NYCBA; SRC of NYSBA; SIFMA and FSR
(Oct. 5, 2012); Artivest Holdings, Inc. (``Artivest'').
    \71\ See letter from SIFMA and FSR (Oct. 5, 2012).
    \72\ See, e.g., letters from SRC of NYSBA; S&C SIFMA and FSR
(Oct. 5, 2012); IAA.
    \73\ See letters from ACA (Sept. 27, 2012); CFIRA.
    \74\ See, e.g., letters from IAA; SIFMA and FSR (Oct. 5, 2012);
Tannenbaum Helpern Syracuse & Hirschtritt LLP (``Tannenbaum
Helpern''). A number of commenters noted that the availability of
third-party verification could address investors' privacy and
security concerns in providing information to an issuer. See, e.g.,
letters from L. Neumann; NSBA. One commenter urged the Commission
not to limit third-party verification providers to certain types of
entities. See letter from Tannenbaum Helpern. One commenter
suggested the possibility of requiring investors to self-certify as
to accredited investor status under penalty of perjury. See letter
from NSBA.
---------------------------------------------------------------------------

    Other commenters opposed the Commission's proposed approach, for
various reasons. A number of these commenters opposed the proposed
verification standard because, in their view, self-certification by
itself should be sufficient to satisfy the verification
requirement.\75\ Some commenters opposed the proposed verification
standard because it did not prescribe specific verification methods,
which they believed is required in order to satisfy the verification
mandate in Section 201(a).\76\ One commenter stated that the Commission
should deem the verification requirement to be satisfied if all
purchasers in a Rule 506(c) offering are in fact accredited
investors.\77\ Another commenter stated that verification of accredited
investor status should not be a condition of the Rule 506(c) exemption
when the purchaser is actually an accredited investor.\78\
---------------------------------------------------------------------------

    \75\ See, e.g., letters from C. Hague; G. Brooks; Golenbock
Eiseman Assor Bell & Peskoe LLP; P. Christenson; W. Johnson.
    \76\ See, e.g., letters from AFL-CIO and AFR; Sen. Levin;
Consumer Federation; Fund Democracy; Rep. Waters; Massachusetts
Securities Division; The Options Clearing Corporation (``OCC'');
Ohio Division of Securities.
    \77\ See letter from IPA.
    \78\ See letter from S. Keller.
---------------------------------------------------------------------------

    Commenters expressed differing views on whether the Commission
should include a non-exclusive list of methods in proposed Rule 506(c)
for satisfying the verification requirement. Many commenters,
encompassing a wide range of perspectives (e.g., state government
officials, law firms, investor organizations, professional and trade
associations, and individuals), urged the Commission to provide such a
non-exclusive list.\79\ A number of these commenters cited the lack of
legal certainty that the verification requirement has been satisfied in
any given situation as the reason why, in their view, the Commission
should include a non-exclusive list of verification methods in Rule
506(c).\80\ In contrast, other commenters stated that the Commission
should not include a non-exclusive list of verification methods in Rule
506(c), arguing that such a list could be viewed by market participants
as the required verification methods, which would thereby undermine the
flexibility of the Commission's proposed approach.\81\
---------------------------------------------------------------------------

    \79\ See, e.g., letters from ACA (Sept. 27, 2012 and Dec. 11,
2012); BIO; CFIRA; HFA; Hawaii Commissioner of Securities; IAA;
Investor Advisory Committee (stating that the ``facts and
circumstances'' based approach proposed by the Commission does not
do enough either to ensure only accredited investors purchase in the
offering or to provide issuers with the certainty they need to
develop appropriate procedures); J. McLaughlin; MFA (Sept. 28,
2012); Montana Commissioner of Securities; NASAA; Tufts Stephenson &
Kasper, LLP; Nevada Securities Division; OCC; Ohio Division of
Securities; Pepper Hamilton LLP (``Pepper Hamilton''); Plexus
Consulting Group, LLC (``Plexus Consulting Group''); Small Business
Investor Association (``SBIA''); South Carolina Securities
Commissioner; Virginia Division of Securities.
    \80\ See, e.g., letters from ACA (Sept. 27, 2012 and Dec. 11,
2012); HFA; Investor Advisory Committee; OCC.
    \81\ See, e.g., letters from ABA Fed. Reg. Comm.; Artivest;
BlackRock; S&C SIFMA and FSR (Oct. 5, 2012).
---------------------------------------------------------------------------

    If there were to be a non-exclusive list of verification methods,
commenters expressed a range of views on what should be included in
such a list, such as verification by certain third parties or through
tax returns and third-party documentary proof such as Forms W-2, Forms
1099, bank statements, brokerage account statements, tax assessment
valuations and appraisal reports.\82\ With

respect to the types of third parties that could provide verification
services, commenters named registered brokers-dealers,\83\ banks and
other financial institutions,\84\ registered investment advisers,\85\
certified financial planners,\86\ attorneys,\87\ and accountants.\88\
Other commenters suggested including in a non-exclusive list of
verification methods self-certification, plus a minimum investment
amount such as $25,000,\89\ $100,000,\90\ $250,000,\91\ $500,000 \92\
or $1,000,000.\93\
---------------------------------------------------------------------------

    \82\ See, e.g., letters from B. Methven; L. Neumann; NASAA.
    \83\ See, e.g., letters from Massachusetts Securities Division
(July 2, 2012); J. McLaughlin; NASAA; OCC; Pepper Hamilton; Plexus
Consulting Group; SBIA.
    \84\ See letter from Massachusetts Securities Division (July 2,
2012).
    \85\ See, e.g., letters from Plexus Consulting Group; SBIA.
    \86\ See, e.g., letters from Plexus Consulting Group; NSBA
(stating that ``if there must be some kind of enhanced verification,
we recommend that a certification by the investor's attorney, CPA,
certified financial advisor or other licensed professional should be
sufficient'').
    \87\ Id.
    \88\ Id.
    \89\ See letter from Montgomery & Hansen.
    \90\ See letters from B. Methven; SBIA (provided the issuer is a
small business investment company (``SBIC'') or a fund that has been
authorized to apply to be an SBIC by the U.S. Small Business
Administration).
    \91\ See letter from J. Joseph (stating that ``[s]ome may feel
that that number is $25,000, perhaps $100,000 but certainly at
$250,000 there should be no question that the investor is properly
qualified and accredited'').
    \92\ See letter from MFA (Sept. 28, 2012) (stating that ``[i]n
considering the appropriate minimum investment level, we have
previously recommended a minimum investment level of 50% of the
accredited investor net worth or total asset thresholds, currently
$500,000 for an individual, and $2,500,000 for an entity'').
    \93\ See letter from Pepper Hamilton.
---------------------------------------------------------------------------

    In contrast, one commenter argued that the ability to satisfy a
minimum investment amount would not necessarily mean a person is an
accredited investor, but rather, that the investor could be ``over-
concentrated in the investment.'' \94\ Another commenter stated that
the verification requirement should not be deemed satisfied simply
because an issuer possesses general information about the average
compensation in the investor's profession or workplace.\95\
---------------------------------------------------------------------------

    \94\ Letter from Massachusetts Securities Division (July 2,
2012).
    \95\ See letter from NASAA.
---------------------------------------------------------------------------

    Several commenters stated that there should be a ``grandfather''
provision from the verification mandate for an issuer's existing
investors who purchased securities in a Rule 506(b) offering prior to
the effective date of Rule 506(c),\96\ and one commenter proposed to
limit the scope of any grandfather provision to only existing
accredited investors.\97\ Two of these commenters reasoned that, as
issuers are prohibited from engaging in general solicitation activities
in Rule 506(b) offerings, their existing investors did not purchase
securities in offerings that used general solicitation, and any future
investments by these investors would be based on their pre-existing
relationship with the issuers, and not as a result of general
solicitation.\98\ Therefore, a grandfather provision would be
appropriate because the purpose of the verification mandate in Section
201(a) of the JOBS Act is to require the verification of the accredited
investor status of only prospective purchasers who come to the issuer
``as a result of'' the issuer's general solicitation activities.\99\
One commenter stated that, for existing investors, a ``reaffirmation
representation'' of accredited investor status received shortly before
or simultaneously with any subsequent investment should be sufficient
for Rule 506(c) purposes.\100\
---------------------------------------------------------------------------

    \96\ See letters from MFA (Sept. 28, 2012); IAA; Tannenbaum
Helpern.
    \97\ See letter from Pepper Hamilton.
    \98\ See letters from MFA (Sept. 28, 2012); Tannenbaum Helpern.
    \99\ See letter from Tannenbaum Helpern.
    \100\ See letter from Pepper Hamilton.
---------------------------------------------------------------------------

3. Final Rule Amendment
    After considering the comments and as directed by Section 201(a) of
the JOBS Act, we are adopting as a condition of new Rule 506(c) the
requirement that issuers take ``reasonable steps to verify'' that
purchasers of the offered securities are accredited investors. This
requirement is separate from and independent of the requirement that
sales be limited to accredited investors, and must be satisfied even if
all purchasers happen to be accredited investors.\101\ We are also
including in Rule 506(c) a non-exclusive list of methods that issuers
may use to satisfy the verification requirement. As discussed above, a
number of commenters urged the Commission to provide greater certainty
for issuers that the verification requirement has been satisfied by
providing a non-exclusive list of methods for verifying the accredited
investor status of purchasers in Rule 506(c) offerings. Upon further
consideration, we have concluded that a general requirement that
issuers take ``reasonable steps to verify'' that the purchasers are
accredited investors, combined with a non-exclusive list of
verification methods that are deemed to meet this requirement, would
maintain the flexibility of the verification standard while providing
additional clarity and certainty that this requirement has been
satisfied if one of the specified methods is used. We have specified
methods for verifying the accredited investor status of natural persons
because we believe that the potential for uncertainty and the risk of
participation by non-accredited investors is highest in offerings
involving natural persons as purchasers.
---------------------------------------------------------------------------

    \101\ This will avoid diminishing the incentive for issuers to
undertake the reasonable verification steps envisioned by the
statute.
---------------------------------------------------------------------------

a. Principles-Based Method of Verification
    Under Rule 506(c), issuers are required to take reasonable steps to
verify the accredited investor status of purchasers. Consistent with
the Proposing Release, whether the steps taken are ``reasonable'' will
be an objective determination by the issuer (or those acting on its
behalf), in the context of the particular facts and circumstances of
each purchaser and transaction. Among the factors that issuers should
consider under this facts and circumstances analysis are:
     the nature of the purchaser and the type of accredited
investor that the purchaser claims to be;
     the amount and type of information that the issuer has
about the purchaser; and
     the nature of the offering, such as the manner in which
the purchaser was solicited to participate in the offering, and the
terms of the offering, such as a minimum investment amount.
    As noted in the Proposing Release, these factors are interconnected
and are intended to help guide an issuer in assessing the reasonable
likelihood that a purchaser is an accredited investor--which would, in
turn, affect the types of steps that would be reasonable to take to
verify a purchaser's accredited investor status. After consideration of
the facts and circumstances of the purchaser and of the transaction,
the more likely it appears that a purchaser qualifies as an accredited
investor, the fewer steps the issuer would have to take to verify
accredited investor status, and vice versa. For example, if the terms
of the offering require a high minimum investment amount and a
purchaser is able to meet those terms, then the likelihood of that
purchaser satisfying the definition of accredited investor may be
sufficiently high such that, absent any facts that indicate that the
purchaser is not an accredited investor, it may be reasonable for the
issuer to take fewer steps to verify or, in certain cases, no
additional steps to verify accredited investor status other than to
confirm that the purchaser's cash

investment is not being financed by a third party.
    Regardless of the particular steps taken, 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,\102\ it will be important for issuers and their
verification service providers to retain adequate records regarding the
steps taken to verify that a purchaser was an accredited investor.
---------------------------------------------------------------------------

    \102\ SEC v. Ralston Purina, 346 U.S. 119, 126 (1953) (``Keeping
in mind the broadly remedial purposes of federal securities
legislation, imposition of the burden of proof on an issuer who
would plead the exemption seems to us fair and reasonable.'').
---------------------------------------------------------------------------

    Nature of the Purchaser. In determining the reasonableness of the
steps to verify accredited investor status, an issuer should consider
the nature of the purchaser of the offered securities. The definition
of ``accredited investor'' in Rule 501(a) includes natural persons and
entities that come within any of eight enumerated categories in the
rule, or that the issuer reasonably believes come within one of those
categories, at the time of the sale of securities to that natural
person or entity. Some purchasers may be accredited investors based on
their status, such as:
     a broker or dealer registered pursuant to Section 15 of
the Securities Exchange Act of 1934 (the ``Exchange Act''); \103\ or
---------------------------------------------------------------------------

    \103\ See 17 CFR 230.501(a)(1).
---------------------------------------------------------------------------

     an investment company registered under the Investment
Company Act of 1940 (the ``Investment Company Act'') or a business
development company as defined in Section 2(a)(48) of that Act.\104\
---------------------------------------------------------------------------

    \104\ See id.

Some purchasers may be accredited investors based on a combination of
their status and the amount of their total assets, such as:
     a plan established and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state or
its political subdivisions, for the benefit of its employees, if such
plan has total assets in excess of $5 million; \105\ or
---------------------------------------------------------------------------

    \105\ See id.
---------------------------------------------------------------------------

     an Internal Revenue Code (``IRC'') Section 501(c)(3)
organization, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5 million.\106\
---------------------------------------------------------------------------

    \106\ See 17 CFR 230.501(a)(3).

Natural persons may be accredited investors based on either their net
worth or their annual income, as follows:
     a natural person whose individual net worth, or joint net
worth with that person's spouse, exceeds $1 million, excluding the
value of the person's primary residence; \107\ or
---------------------------------------------------------------------------

    \107\ See 17 CFR 230.501(a)(5).
---------------------------------------------------------------------------

     a natural person who had an individual income in excess of
$200,000 in each of the two most recent years, or joint income with
that person's spouse in excess of $300,000 in each of those years, and
has a reasonable expectation of reaching the same income level in the
current year.\108\
---------------------------------------------------------------------------

    \108\ See 17 CFR 230.501(a)(6).
---------------------------------------------------------------------------

    As Rule 501(a) sets forth different categories of accredited
investors, an issuer should recognize that the steps that will be
reasonable to verify whether a purchaser is an accredited investor will
vary depending on the type of accredited investor that the purchaser
claims to be. For example, the steps that may be reasonable to verify
that an entity is an accredited investor by virtue of being a
registered broker-dealer--such as by going to FINRA's BrokerCheck Web
site \109\--will necessarily differ from the steps that may be
reasonable to verify whether a natural person is an accredited
investor.
---------------------------------------------------------------------------

    \109\ This Web site is available at: http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/.
---------------------------------------------------------------------------

    As we stated in the Proposing Release, the verification of natural
persons as accredited investors may pose greater practical difficulties
as compared to other categories of accredited investors, particularly
for natural persons claiming to be accredited investors based on the
net worth test. These practical difficulties likely will be exacerbated
by privacy concerns about the disclosure of personal financial
information. As between the net worth test and the income test for
natural persons, we recognize that commenters have suggested that it
might be more difficult for an issuer to obtain information about the
assets and liabilities that determine a person's net worth--
particularly the liabilities--than it would be to obtain information
about a person's annual income,\110\ although there could be privacy
concerns with respect to either test. The question of what type of
information would be sufficient to constitute reasonable steps to
verify accredited investor status under the particular facts and
circumstances will also depend on other factors, as described below.
---------------------------------------------------------------------------

    \110\ See letters from NASAA (stating that ``[v]erification of
net worth is more challenging because an individual could provide
proof of assets but not liabilities.''); P. Sigelman (Sept. 28,
2012).
---------------------------------------------------------------------------

    Information about the Purchaser. The amount and type of information
that an issuer has about a purchaser can also be a significant factor
in determining what additional steps would be reasonable to take to
verify the purchaser's accredited investor status. The more information
an issuer has indicating that a prospective purchaser is an accredited
investor, the fewer steps it may have to take, and vice versa.\111\
Examples of the types of information that issuers could review or rely
upon--any of which might, depending on the circumstances, in and of
themselves constitute reasonable steps to verify a purchaser's
accredited investor status--include, without limitation:
---------------------------------------------------------------------------

    \111\ If an issuer has actual knowledge that the purchaser is an
accredited investor, then the issuer will not have to take any steps
at all.
---------------------------------------------------------------------------

     publicly available information in filings with a federal,
state or local regulatory body--for example, without limitation:
    [cir] the purchaser is a named executive officer of an Exchange Act
registrant, and the registrant's proxy statement discloses the
purchaser's compensation; or
    [cir] the purchaser claims to be an IRC Section 501(c)(3)
organization with $5 million in assets, and the organization's Form 990
series return filed with the Internal Revenue Service discloses the
organization's total assets; \112\
---------------------------------------------------------------------------

    \112\ Such an organization is required to make the Form 990
series returns available for public inspection. See Internal Revenue
Service, Public Disclosure and Availability of Exempt Organizations
Returns and Applications: Documents Subject to Public Disclosure,
available at: http://www.irs.gov/Charities-&-Non-Profits/Public-Disclosure-and-Availability-of-Exempt-Organizations-Returns-and-Applications:-Documents-Subject-to-Public-Disclosure (last reviewed
or updated April 28, 2013).
---------------------------------------------------------------------------

     third-party information that provides reasonably reliable
evidence that a person falls within one of the enumerated categories in
the accredited investor definition--for example, without limitation:
    [cir] the purchaser is a natural person and provides copies of pay
stubs for the two most recent years and the current year; or
    [cir] specific information about the average compensation earned at
the purchaser's workplace by persons at the level of the purchaser's
seniority is publicly available; or
     verification of a person's status as an accredited
investor by a third party, provided that the issuer has a

reasonable basis to rely on such third-party verification.\113\
---------------------------------------------------------------------------

    \113\ For example, in the future, services may develop that
verify a person's accredited investor status for purposes of new
Rule 506(c) and permit issuers to check the accredited investor
status of possible investors, particularly for web-based Rule 506
offering portals that include offerings for multiple issuers. This
third-party service, as opposed to the issuer itself, could obtain
appropriate documentation or otherwise take reasonable steps to
verify accredited investor status. Several commenters, in fact, have
recommended that the Commission take action to facilitate the
ability of issuers to rely on third parties to perform the necessary
verification. See letters from NASAA (July 3, 2012) (recommending
that the Commission allow an issuer to obtain the necessary
verification through registered broker-dealers, provided that there
are independent liability provisions for failure to adequately
perform the verification); Massachusetts Securities Division (July
2, 2012) (urging the Commission to adopt as a safe harbor or best
practice the use of an independent party, such as a broker-dealer,
bank, or other financial institution, that would verify the
accredited investor status of purchasers). One commenter, however,
expressed concerns that some of the Web sites that currently offer
lists of accredited investors could be used to facilitate fraud,
noting that some offer lists based on ``ethnicity, gender, and
lifestyle--presumably to make [it] easier for scammers to relate to
marks--and ominously, `seniors.' '' Letter from I. Moscovitz and J.
Maxfield (June 27, 2012).
---------------------------------------------------------------------------

    Nature and Terms of the Offering. The nature of the offering--such
as the means through which the issuer publicly solicits purchasers--may
be relevant in determining the reasonableness of the steps taken to
verify accredited investor status. An issuer that solicits new
investors through a Web site accessible to the general public, through
a widely disseminated email or social media solicitation, or through
print media, such as a newspaper, will likely be obligated to take
greater measures to verify accredited investor status than an issuer
that solicits new investors from a database of pre-screened accredited
investors created and maintained by a reasonably reliable third party.
We believe that an issuer will be entitled to rely on a third party
that has verified a person's status as an accredited investor, provided
that the issuer has a reasonable basis to rely on such third-party
verification. We do not believe that an issuer will have taken
reasonable steps to verify accredited investor status if it, or those
acting on its behalf, required only that a person check a box in a
questionnaire or sign a form, absent other information about the
purchaser indicating accredited investor status.
    The terms of the offering will also affect whether the verification
methods used by the issuer are reasonable. We continue to believe that
there is merit to the view that a purchaser's ability to meet a high
minimum investment amount could be a relevant factor to the issuer's
evaluation of the types of steps that would be reasonable to take in
order to verify that purchaser's status as an accredited investor. By
way of example, the ability of a purchaser to satisfy a minimum
investment amount requirement that is sufficiently high such that only
accredited investors could reasonably be expected to meet it, with a
direct cash investment that is not financed by the issuer or by any
third party, could be taken into consideration in verifying accredited
investor status.
    Commenters suggested a number of alternative approaches to
implementing the verification mandate. Some commenters urged us to
adopt a requirement that prescribes specific methods of verification
that issuers must use, either because they believed such methods are
needed for issuers seeking clarity on how to comply with this condition
of Rule 506(c) \114\ or because they believed that such methods are
needed to maintain investor protection.\115\ We have decided not to
take such an approach. As we stated in the Proposing Release, we
believe that, at present, requiring issuers to use specified methods of
verification will be impractical and potentially ineffective in light
of the numerous ways in which a purchaser can qualify as an accredited
investor, as well as the potentially wide range of verification issues
that may arise, depending on the nature of the purchaser and the facts
and circumstances of a particular Rule 506(c) offering. We are also
concerned that a prescriptive rule that specifies required verification
methods could be overly burdensome in some cases, by requiring issuers
to follow the same steps, regardless of their particular circumstances,
and ineffective in others, by requiring steps that, in the particular
circumstances, would not actually verify accredited investor status.
---------------------------------------------------------------------------

    \114\ See, e.g., letter from Handler Thayer, LLP.
    \115\ See, e.g., letters from AARP; CII.
---------------------------------------------------------------------------

    We believe that the approach we are adopting appropriately
addresses the concerns underlying the verification mandate by
obligating issuers to take reasonable steps to verify that the
purchasers are accredited investors, but not requiring them to follow
uniform verification methods that may be ill-suited or unnecessary to a
particular offering or purchaser in light of the facts and
circumstances. We also expect that such an approach will give issuers
and market participants the flexibility to adopt different approaches
to verification depending on the circumstances, to adapt to changing
market practices, and to implement innovative approaches to meeting the
verification requirement, such as the development of reliable third-
party databases of accredited investors and verification services. In
addition, we anticipate that many practices currently used by issuers
in connection with existing Rule 506 offerings will satisfy the
verification requirement for offerings pursuant to Rule 506(c).
b. Non-Exclusive Methods of Verifying Accredited Investor Status
    In addition to adopting a principles-based method of verification,
we are including in Rule 506(c) four specific non-exclusive methods of
verifying accredited investor status for natural persons that, if used,
are deemed to satisfy the verification requirement in Rule 506(c);
provided, however, that none of these methods will be deemed to satisfy
the verification requirement if the issuer or its agent has knowledge
that the purchaser is not an accredited investor.\116\ While the
principles-based method of verification is intended to provide an
issuer with the flexibility to address the particular facts and
circumstances surrounding its offering, we appreciate the view of some
commenters that the final rule should include a non-exclusive list of
specific verification methods for natural persons that may be relied
upon by those issuers seeking greater certainty that they satisfy the
rule's verification requirement.\117\ Accordingly, we are adding a non-
exclusive list of specific verification methods to supplement our
principles-based framework for verifying accredited investor
status.\118\ Issuers are not required to use any of the methods
discussed below, and can apply the reasonableness standard directly to
the specific facts and circumstances presented by the offering and the
investors.\119\
---------------------------------------------------------------------------

    \116\ Because an issuer must have a reasonable belief that the
purchaser is an accredited investor, the issuer could not form such
reasonable belief if it has knowledge that the purchaser is not an
accredited investor. See Section II.C of this release for a
discussion of the reasonable belief standard in the definition of
accredited investor in Rule 501(a).
    \117\ See, e.g., letters from ACA (Sept. 27, 2012 and Dec. 11,
2012); Investor Advisory Committee; MFA (Sept. 28, 2012).
    \118\ Information and documentation collected for these
verification purposes may be subject to federal and/or state privacy
and data security requirements. See, e.g., Regulation S-P [17 CFR
248.1-248.30] (implementing notice requirements and restrictions on
a financial institution's ability to disclose nonpublic personal
information about customers); Privacy of Consumer Financial
Information (Regulation S-P), Release No. 34-42974 (June 22, 2000)
[65 FR 40334 (June 29, 2000)].
    \119\ 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.

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

    First, in verifying whether a natural person is an accredited
investor on the basis of income, an issuer is deemed to satisfy the
verification requirement in Rule 506(c) by reviewing copies of any
Internal Revenue Service (``IRS'') form that reports income, including,
but not limited to, a Form W-2 (``Wage and Tax Statement''), Form 1099
(report of various types of income), Schedule K-1 of Form 1065
(``Partner's Share of Income, Deductions, Credits, etc.''), and a copy
of a filed Form 1040 (``U.S. Individual Income Tax Return''),\120\ for
the two most recent years, along with obtaining a written
representation from such person that he or she has a reasonable
expectation of reaching the income level necessary to qualify as an
accredited investor during the current year. In the case of a person
who qualifies as an accredited investor based on joint income with that
person's spouse, an issuer would be deemed to satisfy the verification
requirement in Rule 506(c) by reviewing copies of these forms for the
two most recent years in regard to, and obtaining written
representations from, both the person and the spouse.
---------------------------------------------------------------------------

    \120\ A person could provide a redacted version of an Internal
Revenue Service form so as to disclose only information about annual
income and to avoid disclosure of personally identifiable
information, such as a Social Security number, or other information
that would not be relevant to the determination of a person's annual
income.
---------------------------------------------------------------------------

    Second, in verifying whether a natural person is an accredited
investor on the basis of net worth, an issuer is deemed to satisfy the
verification requirement in Rule 506(c) by reviewing one or more of the
following types of documentation, dated within the prior three
months,\121\ and by obtaining a written representation from such person
that all liabilities necessary to make a determination of net worth
have been disclosed. In the case of a person who qualifies as an
accredited investor based on joint net worth with that person's spouse,
an issuer would be deemed to satisfy the verification requirement in
Rule 506(c) by reviewing such documentation in regard to, and obtaining
representations from, both the person and the spouse. For assets: Bank
statements, brokerage statements and other statements of securities
holdings, certificates of deposit, tax assessments and appraisal
reports issued by independent third parties are deemed to be
satisfactory; and for liabilities: A consumer report (also known as a
credit report) from at least one of the nationwide consumer reporting
agencies is required.\122\ Commenters did not provide examples of any
other type of documentation that would, in our view, adequately
evidence liabilities.\123\ We recognize that it will be difficult for
an issuer to determine whether it has a complete picture of a natural
person's liabilities, and therefore, for purposes of this method,
consistent with the suggestions of some commenters, we are requiring a
consumer report and a written representation from such person that all
liabilities necessary to make a determination of net worth have been
disclosed.
---------------------------------------------------------------------------

    \121\ A person could provide redacted versions of these
documents so as to disclose only information about the amounts of
assets and liabilities and to avoid disclosure of personally
identifiable information, such as a Social Security number, or other
information that would not be relevant to the determination of a
person's net worth.
    \122\ We note that the Fair Credit Reporting Act (``FCRA'') [15
U.S.C. 1681 et seq.] requires each of the nationwide consumer
reporting agencies to provide a person with a free copy of his or
her consumer report, upon request, once every 12 months. In
addition, the FCRA permits third parties to access individual
consumer reports with the written permission of the individual.
    \123\ One commenter suggested that the Commission ``require the
issuer to obtain a list of liabilities from the investor, which
would include a sworn statement that all material liabilities are
disclosed.'' Letter from NASAA. Another commenter noted that
liabilities can be cross checked against UCC 1 filings, bankruptcy
information on Public Access to Court Electronic Records (PACER),
and credit reports. See letter from P. Sigelman (Sept. 28, 2012).
---------------------------------------------------------------------------

    Third, an issuer is deemed to satisfy the verification requirement
in Rule 506(c) by obtaining a written confirmation from a registered
broker-dealer, an SEC-registered investment adviser, a licensed
attorney, or a certified public accountant 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.\124\ While third-party
confirmation by one of these parties will be deemed to satisfy the
verification requirement in Rule 506(c), depending on the
circumstances, an issuer may be entitled to rely on the verification of
accredited investor status by a person or entity other than one of
these parties, provided that any such third party takes reasonable
steps to verify that purchasers are accredited investors and has
determined that such purchasers are accredited investors, and the
issuer has a reasonable basis to rely on such verification.
---------------------------------------------------------------------------

    \124\ For purposes of this method, a licensed attorney must be
in good standing under the laws of the jurisdictions in which the
attorney is admitted to practice law, and a certified public
accountant must be in good standing under the laws of the place of
the accountant's residence or principal office.
---------------------------------------------------------------------------

    Fourth, with respect to any natural person who invested in an
issuer's Rule 506(b) offering as an accredited investor prior to the
effective date of Rule 506(c) and remains an investor of the issuer,
for any Rule 506(c) offering conducted by the same issuer, the issuer
is deemed to satisfy the verification requirement in Rule 506(c) with
respect to any such person by obtaining a certification by such person
at the time of sale that he or she qualifies as an accredited investor.
    We are including the first three methods in our non-exclusive list
of methods that are deemed to satisfy the verification requirement in
Rule 506(c) because we believe that there will likely be few instances
in which they would not constitute reasonable steps to verify
accredited investor status. With respect to the verification method for
the income test, there are numerous penalties for falsely reporting
information in an Internal Revenue Service form, and these forms are
filed with the Internal Revenue Service for purposes independent of
investing in a Rule 506(c) offering. Similarly, we believe that the
various forms of documentation set forth in the verification method for
the net worth test ordinarily are generated for reasons other than to
invest in a Rule 506(c) offering (with the possible exception of
appraisal reports) and, in combination with a consumer report and a
written representation from the investor regarding his or her
liabilities, constitute sufficiently reliable evidence that such
person's net worth exceeds $1 million, excluding the value of the
person's primary residence. With respect to the third-party
verification method, we have included written confirmations from
certain third parties in our non-exclusive list of verification methods
because these third parties are subject to various regulatory and/or
licensing requirements. Registered broker-dealers \125\ and SEC-
registered investment advisers \126\ are regulated by

the Commission; and in the United States, attorneys and certified
public accountants are licensed at the state level and are subject to
rules of professional conduct \127\ as well as, to the extent they
appear or practice before the Commission in any way, to the
Commission's Rules of Practice.\128\
---------------------------------------------------------------------------

    \125\ Registered broker-dealers are subject to a comprehensive
system of oversight by the Commission as well as FINRA. In
particular, registered broker-dealers, among other things, must
maintain and preserve specified books and records, develop effective
supervisory policies and controls, and comply with FINRA rules
regarding registration and qualification requirements for their
associated persons as well as general and specific conduct rules. In
addition, registered broker-dealers are subject to examinations by
both FINRA and Commission staff.
    \126\ An investment adviser must register with the Commission
unless it is prohibited from registering under Section 203A of the
Investment Advisers Act of 1940 [15 U.S.C. 80b-3a] (the ``Advisers
Act'') or is exempt from registration under Advisers Act Section 203
[15 U.S.C. 80b-3]. Investment advisers that are prohibited from
registering with the Commission instead may be subject to regulation
by the states, but the antifraud provisions of the Advisers Act
continue to apply to them. See Advisers Act Sections 203A(b) and 206
[15 U.S.C. 80b-3(a), 15 U.S.C. 80b-6]. SEC-registered investment
advisers are subject to examinations by Commission staff.
    \127\ Attorneys are subject to state standards for professional
competence and ethical conduct, such as those based on the American
Bar Association (``ABA'') Model Rules of Professional Conduct, which
have been adopted by most states in the United States. For example,
Rule 4.1 of the ABA Model Rules of Professional Conduct prohibits an
attorney from knowingly making a false statement of material fact or
law to a third person or failing to disclose a material fact to a
third person when disclosure is necessary to avoid assisting a
criminal or fraudulent act by a client. Accountants are also subject
to state standards for professional competence and ethical conduct,
such as those based on the AICPA Code of Professional Conduct. See
AICPA Code of Professional Conduct ET 201.01, 202.01; see also,
e.g., The Uniform Accountancy Act (5th ed. 2007), available at:
http://www.aicpa.org/Advocacy/State/StateContactInfo/uaa/DownloadableDocuments/UAA_Fifth_Edition_January_2008.pdf.
    The Commission recognizes that there may be particular
considerations a certified public accountant would need to take into
account to comply with applicable professional standards for
attestation engagements to provide a report that constitutes a
confirmation in the context of this rule.
    \128\ See Rule 102(e) of the Rules of Practice [17 CFR
201.102(e)] (The Commission may censure a person or deny,
temporarily or permanently, the privilege of appearing and
practicing before it in any way to any person who is found by the
Commission after notice and opportunity for hearing in the matter:
(i) Not to possess the requisite qualifications to represent others;
or (ii) To be lacking in character or integrity or to have engaged
in unethical or improper professional conduct; or (iii) To have
willfully violated, or willfully aided and abetted the violation of
any provision of the Federal securities laws or the rules and
regulations thereunder.).
---------------------------------------------------------------------------

    We are including the fourth method in our non-exclusive list of
methods that are deemed to satisfy the verification requirement in Rule
506(c) because we acknowledge that existing accredited investors who
purchased securities in an issuer's Rule 506(b) offering prior to the
effective date of Rule 506(c) would presumably participate in any
subsequent offering by the same issuer conducted pursuant to Rule
506(c) based on their pre-existing relationships with the issuer.
Accordingly, for these existing investors who were accredited investors
in a Rule 506(b) offering prior to the effective date of Rule 506(c), a
self-certification at the time of sale that he or she is an accredited
investor will be deemed to satisfy the verification requirement in Rule
506(c). This provision does not extend to existing investors in an
issuer who were not accredited investors in a Rule 506(b) offering that
was conducted prior to the effective date of Rule 506(c).
    While we have not adopted the recommendations of commenters who
believe that even more prescriptive verification requirements are
needed, we do recognize the general concern regarding possible misuse
of the new Rule 506(c) exemption to sell securities to those who are
not qualified to participate in the offering. We will closely monitor
and study the development of verification practices by issuers,
securities intermediaries and others by undertaking a review of whether
such practices are, in fact, resulting in the exclusion of non-
accredited investors from participation in these offerings, and the
impact of compliance with this verification requirement on investor
protection and capital formation.

C. Reasonable Belief That All Purchasers Are Accredited Investors

    In the Proposing Release, we noted that a number of commenters had
raised concerns that the language of Section 201(a) of the JOBS Act
could be interpreted as precluding the use of the ``reasonable belief''
standard in the definition of ``accredited investor'' in Rule 501(a) in
determining whether a purchaser is an accredited investor, such that an
issuer's determination as to whether a purchaser is an accredited
investor is subject to an absolute, rather than a ``reasonable
belief,'' standard.\129\ In their view, issuers may be more reluctant
to use general solicitation in Rule 506 offerings if their
determinations as to whether a purchaser is an accredited investor are
subject to an absolute standard. Other commenters had interpreted the
difference in the statutory language used in Section 201(a)(1) and
Section 201(a)(2) \130\ as indicating Congress' intent that the
Commission ``raise the `reasonable belief' standard for Rule 506
offerings . . . .'' \131\
---------------------------------------------------------------------------

    \129\ See, e.g., letters from ABA Fed. Reg. Comm. (Apr. 30,
2012); BlackRock (May 3, 2012); NYCBA (May 4, 2012); W. Sjostrom,
Jr. (Apr. 14, 2012).
    \130\ Section 201(a)(2) of the JOBS Act, which calls for
amendments to Rule 144A, specifically refers to a ``reasonable
belief'' standard as to whether a purchaser is a QIB, whereas
Section 201(a)(1) does not mention a similar ``reasonable belief''
standard with respect to the amendments to Rule 506.
    \131\ Letter from Fund Democracy (May 24, 2012). See also letter
from Massachusetts Securities Division (July 2, 2012).
---------------------------------------------------------------------------

    Commenters on the Proposing Release were divided on the
Commission's interpretation that the reasonable belief standard in Rule
501(a) applies to offerings under Rule 506(c). Several commenters
supported this interpretation; \132\ and other commenters opposed this
interpretation.\133\
---------------------------------------------------------------------------

    \132\ See letters from ABA Fed. Reg. Comm. (stating that it
``strongly support[s] the continued inclusion of the reasonable
belief standard in the accredited investor definition, whether the
offering is conducted under Rule 506(b) without general
solicitation, or under Rule 506(c) with general solicitation'');
IAA; MFA (Sept. 28, 2012) (stating that ``[e]liminating the
`reasonable belief' standard in the definition of accredited
investor would preclude issuers from relying on Rule 506(c)'' and
that, if this were the case, ``[i]ssuers would not engage in general
solicitation and Section 201 would fail in its intended purposes to
modernize the securities laws''); NSBA; NYCBA; P. Rutledge.
    \133\ See letters from AFL-CIO and AFR (stating that ``the
legislative record reflects unmistakable congressional intent that
securities sold through general solicitation and advertising under
Rule 506 be sold only to accredited investors, not individuals
issuers reasonably believe to be accredited investors''); Sen. Levin
(stating that the ``Proposed Rule also creates, with no statutory
basis, an alternative to the `reasonable steps' requirement in the
statute by stating that issuers may engage in a general solicitation
or advertising so long as they `reasonably believe' that the
investors to be addressed will be accredited''); Consumer Federation
(stating that a reasonable belief standard ``is in direct conflict
with the statutory mandate that all investors in offerings sold
through general solicitation and advertising be accredited investors
and that the Commission specify methods issuers must follow to
ensure that this is the case''); Fund Democracy (arguing that
``Congress intentionally chose not to make such [a reasonable
belief] exception to the mandate that Rule 506 purchasers be
accredited investors'').
---------------------------------------------------------------------------

    We are reaffirming the view that we expressed on this issue in the
Proposing Release. In our view, the difference in the language between
Section 201(a)(1) and Section 201(a)(2) reflects only the differing
manner in which the reasonable belief standard was included in the
respective rules at the time they were adopted, and does not represent
a Congressional intent to eliminate the existing reasonable belief
standard in Rule 501(a) or for Rule 506 offerings.\134\ We note that
the definition of accredited investor remains unchanged with the
enactment of the JOBS Act and includes persons that come within any of
the listed categories of accredited investors, as well as persons that
the issuer reasonably believes come within any such category.
---------------------------------------------------------------------------

    \134\ Both Rule 506 and Rule 144A currently provide for a
reasonable belief standard regarding the eligibility of an investor
to participate in an offering under the respective rules, but they
reach that result in different ways. For Rule 506, the Commission
chose to include the reasonable belief standard within the Rule
501(a) definition of ``accredited investor''; for Rule 144A, the
Commission chose to include the standard as a condition, in
paragraph (d)(1), to the use of the exemption.
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    Further, as discussed in the Proposing Release, we continue to
recognize that a person could provide false information or
documentation to an issuer in order to purchase securities in an
offering made under new Rule 506(c). Thus, even if an issuer has taken
reasonable

steps to verify that a purchaser is an accredited investor, it is
possible that a person nevertheless could circumvent those
measures.\135\ If a person who does not meet the criteria for any
category of accredited investor purchases securities in a Rule 506(c)
offering, we believe that the issuer will not lose the ability to rely
on Rule 506(c) for that offering, so long as the issuer took reasonable
steps to verify that the purchaser was an accredited investor and had a
reasonable belief that such purchaser was an accredited investor at the
time of sale.\136\
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    \135\ We note that several federal courts have been
unsympathetic to attempts by investors who represented that they
were accredited investors at the time of the sale of securities to
subsequently disavow those representations in order to pursue a
cause of action under the federal securities laws. See, e.g., Wright
v. Nat'l Warranty Co., 953 F.2d 256 (6th Cir. 1991) (rejecting the
plaintiffs' argument that Rule 505 was unavailable because the
plaintiffs ``specifically warranted and represented in the
subscription agreement . . . that they were accredited investors'');
Goodwin Properties, LLC v. Acadia Group, Inc., No. 01-49-P-C, 2001
U.S. Dist. LEXIS 9975 (D. Me. 2001) (noting that the plaintiffs
``provided the defendants with reason to believe that they were
accredited investors as defined by 17 C.F.R. Sec.  230.501(a)'' and
stating that therefore ``[t]hey cannot now disavow those
representations in order to support their claims against the
defendants''); Faye L. Roth Revocable Trust v. UBS Painewebber Inc.,
323 F. Supp. 2d 1279 (S.D. Fla. 2004) (stating that the plaintiffs
``cannot disavow their representations that they were accredited
investors'' and concluding that there was no material dispute that
the offering complied with Regulation D).
    \136\ Our views regarding an issuer's ability to maintain the
exemption for a Rule 506(c) offering notwithstanding the fact that
not all purchasers meet the criteria for any category of accredited
investor are consistent with our views regarding the effect of
attempts by prospective investors to circumvent the requirement in
Regulation S that offers and sales be made only to non-U.S. persons.
See Statement of the Commission Regarding Use of Internet Web sites
to Offer Securities, Solicit Securities Transactions or Advertise
Investment Services Offshore, Release No. 33-7516 (Mar. 23, 1998)
[63 FR 14806 (Mar. 27, 1998)] (``In our view, if a U.S. person
purchases securities or investment services notwithstanding adequate
procedures reasonably designed to prevent the purchase, we would not
view the Internet offer after the fact as having been targeted at
the United States, absent indications that would put the issuer on
notice that the purchaser was a U.S. person.'').
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D. Form D Check Box for Rule 506(c) Offerings

    Form D is the notice of an offering of securities conducted without
registration under the Securities Act in reliance on Regulation D.\137\
Under Rule 503 of Regulation D, an issuer offering or selling
securities in reliance on Rule 504, 505 or 506 must file a notice of
sales on Form D with the Commission for each new offering of securities
no later than 15 calendar days after the first sale of securities in
the offering. Form D is currently organized around 16 numbered
``items'' or categories of information. The information required to be
provided in a Form D filing includes basic identifying information,
such as the name of the issuer of the securities and the issuer's year
and place of incorporation or organization; information about related
persons (executive officers, directors, and promoters); the exemption
or exemptions being claimed for the offering; and factual information
about the offering, such as the duration of the offering, the type of
securities offered and the total offering amount.
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    \137\ Form D also applies to offerings conducted using the
Section 4(a)(5) exemption. The Commission adopted Form D when it
adopted Regulation D in 1982. Release No. 33-6389 (adopting Form D
as a replacement for Forms 4(6), 146, 240 and 242).
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1. Proposed Form Amendment
    We proposed revising Form D to add a separate field or check box
for issuers to indicate whether they are claiming an exemption under
Rule 506(c). Item 6 of Form D currently requires the issuer to identify
the claimed exemption or exemptions for the offering from among Rule
504's paragraphs and subparagraphs, Rule 505, Rule 506 and former
Section 4(5), as applicable. Under the proposal, a new check box in
Item 6 of Form D would require issuers to indicate specifically whether
they are relying on the Rule 506(c) exemption. In addition, the current
check box for ``Rule 506'' would be renamed ``Rule 506(b),'' and the
current check box for ``Section 4(5)'' would be renamed ``Section
4(a)(5)'' to update the reference to former Section 4(5) of the
Securities Act.
    We explained in the Proposing Release that this revision would
provide additional information needed to assist our efforts to analyze
the use of general solicitation in Rule 506(c) offerings and the size
of this offering market. The information would also help us to look
into the practices that may develop to satisfy the verification
requirement, which would assist us in assessing the effectiveness of
various verification practices in identifying and excluding non-
accredited investors from participation in Rule 506(c) offerings.
2. Comments on the Proposed Form Amendment
    Most commenters who expressed a view on the proposed checkbox in
Form D supported the addition of this checkbox for issuers to indicate
whether they are relying on Rule 506(c) for their offerings.\138\ Only
one commenter opposed the proposed checkbox.\139\ A number of
commenters recommended that the Commission include additional
information requirements in Form D for Rule 506(c) offerings, beyond a
checkbox to indicate reliance on Rule 506(c).\140\ Some commenters
asked for confirmation that issuers may check both the Rule 506(b) box
and the Rule 506(c) box in a Form D under certain circumstances.\141\
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    \138\ See, e.g., letters from MFA (Sept. 28, 2012); BIO; S&C
Tannenbaum Helpern; ABA Fed. Reg. Comm.; IAA; SIFMA and FSR (Oct. 5,
2012); SRC of NYSBA.
    \139\ Letter from J. McLaughlin (stating that ``Section
201(a)(1) does not authorize the Commission to impose a separate
Form D filing requirement on issuers who choose to engage in general
solicitation'').
    \140\ See, e.g., letters from AARP; AFL-CIO and AFR; Consumer
Federation; Investor Advisory Committee; NASAA; Massachusetts
Securities Division (July 2, 2012); Fund Democracy.
    \141\ See letters from J. Gross; NYCBA; IAA.
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3. Final Form Amendment
    We are adopting the revision to Form D as proposed. Issuers
conducting Rule 506(c) offerings must indicate that they are relying on
the Rule 506(c) exemption by marking the new check box in Item 6 of
Form D. Further, as proposed, the current check box for ``Rule 506''
will be renamed ``Rule 506(b),'' and the current check box for
``Section 4(5)'' will be renamed ``Section 4(a)(5).''
    We are of the view that an issuer will not be permitted to check
both boxes at the same time for the same offering. We remind issuers
that once a general solicitation has been made to the purchasers in the
offering,\142\ an issuer is precluded from making a claim of reliance
on Rule 506(b), which remains subject to the prohibition against
general solicitation, for that same offering.
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    \142\ That is, the purchasers became interested in the offering
because of, or through, the general solicitation, and not through
some means other than the general solicitation, such as through a
substantive, pre-existing relationship with the company or direct
contact by the company or its agents outside of the general
solicitation. See Revisions of Limited Offering Exemptions in
Regulation D, Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116, 45129
(Aug. 10, 2007)].
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E. Specific Issues for Private Funds

    Private funds, such as hedge funds, venture capital funds and
private equity funds, typically rely on Section 4(a)(2) and Rule 506 to
offer and sell their interests without registration under the
Securities Act.\143\ In addition, private funds generally rely on one
of two exclusions from the definition of ``investment company'' under
the Investment Company Act--Section

3(c)(1) \144\ and Section 3(c)(7) \145\--which enables them to be
excluded from substantially all of the regulatory provisions of that
Act.\146\ Private funds are precluded from relying on either of these
two exclusions if they make a public offering of their securities.\147\
Section 3(c)(1) excludes from the definition of ``investment company''
any issuer whose outstanding securities (other than short-term paper)
are beneficially owned by not more than 100 beneficial owners,\148\ and
which is not making and does not presently propose to make a public
offering of its securities. Section 3(c)(7) excludes from the
definition of ``investment company'' any issuer whose outstanding
securities are owned exclusively by persons who, at the time of
acquisition of such securities, are ``qualified purchasers,'' \149\ and
which is not making and does not at that time propose to make a public
offering of its securities.
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    \143\ See, e.g., Implications of the Growth of Hedge Funds,
Staff Report to the Securities and Exchange Commission (Sept. 2003)
(``Staff Report on Hedge Funds''), available at: http://www.sec.gov/news/studies/hedgefunds0903.pdf.
    \144\ 15 U.S.C. 80a-3(c)(1).
    \145\ 15 U.S.C. 80a-3(c)(7).
    \146\ We also refer in this release to ``pooled investment
funds'' because that term is used in Form D. Issuers that rely on
Section 3(c)(1) or 3(c)(7) of the Investment Company Act are a
subset of pooled investment funds.
    \147\ See also Section 202(a)(29) of the Advisers Act [15 U.S.C.
80b-2(a)(29)] (defining a ``private fund'' as an issuer that would
be an investment company under the Investment Company Act, but for
Sections 3(c)(1) or 3(c)(7) of that Act). Many ABS issuers also rely
on the exclusions contained in Sections 3(c)(1) or 3(c)(7) of the
Investment Company Act. These ABS issuers frequently participate in
Rule 144A offerings.
    \148\ See also Rule 3c-5 under the Investment Company Act [17
CFR 270.3c-5] (providing that the section's limit of 100 beneficial
owners does not include ``knowledgeable employees,'' as defined in
the rule).
    \149\ See Section 2(a)(51) of the Investment Company Act [15
U.S.C. 80a-2(a)(51)] and the rules there under. See Also Rule 3c-5
under the Investment Company Act (excluding ``knowledgeable
employees'' from the determination of whether all of the outstanding
securities of the fund relying on Section 3(c)(7) are owned
exclusively by qualified purchasers).
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    Section 201(a)(1) of the JOBS Act directs the Commission to
eliminate the prohibition against general solicitation for a new
category of Rule 506 offerings, and makes no specific reference to
private funds. Section 201(b) of the JOBS Act also provides that
``[o]ffers and sales exempt under [Rule 506, as revised pursuant to
Section 201(a)] shall not be deemed public offerings under the Federal
securities laws as a result of general advertising or general
solicitation.'' We historically have regarded Rule 506 transactions as
non-public offerings for purposes of Sections 3(c)(1) and 3(c)(7).\150\
As we stated in the Proposing Release and reaffirm here, the effect of
Section 201(b) is to permit private funds to engage in general
solicitation in compliance with new Rule 506(c) without losing either
of the exclusions under the Investment Company Act.
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    \150\ See Release No. 33-6389 (noting that the ``Commission
regards rule 506 transactions as non-public offerings for purposes
of the definition of `investment company' in section 3(c)(1) of the
Investment Company Act''); Privately Offered Investment Companies,
Release No. IC-22597 (Apr. 3, 1997) [62 FR 17512 (Apr. 9, 1997)], at
n. 5 (noting that the ``Commission believes that section 3(c)(7)'s
public offering limitation should be interpreted in the same manner
as the limitation in section 3(c)(1)'').
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    A few commenters argued that Section 201(b) does not permit private
funds to engage in general solicitation under proposed Rule 506(c)
without losing their exclusions under the Investment Company Act.\151\
In our view, although Section 201(b) does not explicitly reference the
meaning of ``public offering'' under the Investment Company Act, it
clearly states that ``[o]ffers and sales exempt under [Rule 506, as
revised pursuant to Section 201(a)] shall not be deemed public
offerings under the Federal securities laws as a result of general
advertising or general solicitation'' (emphasis added). As the
Investment Company Act is a federal securities law, the effect of
Section 201(b) is to permit offers and sales of securities under Rule
506(c) by private funds relying on the exclusions from the definition
of ``investment company'' under Section 3(c)(1) or Section 3(c)(7) of
the Investment Company Act.
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    \151\ See letter from Fund Democracy (stating that ``Section
201(b) refers only to Rule 506; it makes no reference to the meaning
of `public offering' under the Investment Company Act exemptions'').
See also letter from AFL-CIO and AFR.
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    Some commenters expressed concerns about private funds engaging in
general solicitation under proposed Rule 506(c).\152\ Other commenters,
however, supported the removal of the prohibition against general
solicitation in Rule 506(c) offerings with respect to private
funds,\153\ with some commenters stating that the removal of the ban
would bring greater transparency to the private fund industry and allow
managers of private funds to communicate more effectively with the
public and prospective investors.\154\
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    \152\ See, e.g., letters from A. La Rosa; A. Pierwola; AFL-CIO
and AFR; C. Erickson; Consumer Federation; E. Guthrie; F. Urling;
Fund Democracy; J. Clark; K. Pesson; M. Gessford; M. Trail; M.
Zartler; R. Dunn; S. Johnston; W. Cunningham.
    \153\ See, e.g., letters from BlackRock; Dukas; Forum for U.S.
Securities Lawyers in London; HFA; IAA; MFA (Sept. 28, 2012); NYCBA;
SRC of NYSBA.
    \154\ See, e.g., letters from Dukas; HFA.
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    Some commenters who were concerned about private funds engaging in
general solicitation recommended that we impose additional conditions
on private funds that rely on Rule 506(c). In particular, a number of
commenters believed that private funds engaging in general solicitation
should be subject to some form of content and/or other restrictions,
and suggested potential methods.\155\ For example, some believed that,
in order to engage in general solicitation, private funds should be
held to performance and advertising standards that are analogous to
mutual fund standards.\156\ One of these commenters suggested that the
Commission develop rules tailored to the ways private funds calculate
and present investment performance, rather than extending mutual fund
performance rules to private funds.\157\ Some made other suggestions,
such as

requiring each private fund relying on Rule 506(c) to disclose that the
private fund is not registered with the Commission and should not be
confused with a registered fund, such as a mutual fund.\158\ 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.\159\
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    \155\ See, e.g., letters from ICI; AFL-CIO and AFR; C. Corn;
Sen. Levin (stating that ``Congress did not contemplate removing the
general solicitation ban--without retaining any limitations on forms
of solicitation--for private investment vehicles''); Consumer
Federation; D. Kronheim; D. Smith; Fund Democracy; G. Lavy; G.
Morin; Investor Advisory Committee; IDC; J. Sanders; Rep. Waters;
NASAA; P. Turney; Sens. Reed, Levin, Durbin, Harkin, Lautenberg,
Franken and Akaka.
    \156\ See, e.g., letters from C. Corn; Sen. Levin (noting that
``[a]lready, the Commission has determined that the manner and
substance of solicitation and advertising for investments in
registered investment companies deserves significant regulatory
oversight. Many of those same concerns apply to investments in
private investment vehicles. Accordingly, the Commission should
impose analogous protections for investments in private funds.'');
Consumer Federation (stating that ``[s]hort of an outright
prohibition on general solicitation and advertising by private
funds, the Commission should at the very least adopt clear standards
for the reporting of performance and fees by private funds, and
delay their eligibility from engaging in general solicitation and
advertising until such time as those standards are in place,''
including a requirement to include in private fund advertisements
``a clear, prominent warning that they are not mutual funds and
carry special risks.''); D. Kronheim; D. Smith; Fund Democracy
(noting that an alternative would be to ``apply mutual fund
advertising and valuation rules to hedge funds that engage in
[general solicitation and advertising] (and, in any case, require
standardized performance and fee reporting for all hedge funds), and
require explicit, large-font disclaimers that hedge funds are not
mutual funds and present special risks.''); G. Lavy; ICI
(recommending content restrictions on private fund advertising at
least as extensive as those currently applicable to mutual funds
(e.g., disclaimers regarding the performance figures or measures
displayed in any advertisement), with a prohibition on use of
performance advertising until the Commission can develop a new rule
regarding such advertising); IDC; NASAA (stating that ``because the
investment strategies of private funds are typically more opaque,
risky, and illiquid than those of mutual funds, private fund
advertisements should be subject to restrictions that are comparable
to the rules for mutual funds.''); P. Turney.
    \157\ See letter from ICI (arguing that the antifraud provisions
in Section 206(4) of the Advisers Act [15 U.S.C. 80b-6(4)] and Rule
206(4)-8 thereunder [17 CFR 275.206(4)-8] would not be enough to
protect investors because these advertisements will be presented
before accredited and non-accredited investors at the same time).
    \158\ See letters from ICI; IDC.
    \159\ See letters from AFL-CIO and AFR (stating that ``FINRA
already pre-reviews broker-dealer advertising; the same requirement
should apply to general solicitation and advertising in Rule 506
offerings in light of the significant potential for abuse.''); ICI
(noting that ``FINRA has developed an infrastructure to handle such
filings and an expertise to substantively review them, and
accordingly is best positioned to handle this task.'').
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    Finally, some commenters opposed the imposition of content and/or
other restrictions for private funds.\160\ They asserted that
purchasers of the securities of a private fund that relies on Rule
506(c), must be, at a minimum, accredited investors and thus have met
objective criteria demonstrating financial sophistication, which they
believed eliminates the risk that other types of investors could be
defrauded.\161\ A number of commenters pointed out that advertisements
of private funds are subject to the antifraud provisions of the federal
securities laws and suggested that liability under such provisions
provides sufficient investor protections.\162\
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    \160\ See, e.g., letters from Verrill Dana LLP (stating that
``[t]here is no suggestion in Section 201 that the Commission must
distinguish between `issuers that engage in operational businesses'
and `those that are merely investment vehicles'''); Artivest (noting
that for private funds managed by a registered commodity pool
operator, the National Futures Association Rule 2-29 contains
standards regarding marketing materials).
    \161\ In general, private funds that pay performance fees to
their managers are available only to ``qualified clients'' that have
at least $1 million in assets under management or that have a net
worth of $2 million (excluding the value of the client's primary
residence). See Rule 205-3 under the Advisers Act [17 CFR 275.205-
3]. See also letter from BlackRock.
    \162\ See, e.g., letters from BlackRock; HFA; MFA (Mar. 22,
2013).
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    We have carefully considered commenters' suggestions and concerns.
We are mindful of certain commenters' concerns that private funds