To assist both issuers and investors, the Commission proposed to
incorporate the definition of investments from Rule 2a51-1(b) under the
Investment Company Act, which includes, among other things: Securities;
real estate, commodity interests, physical commodities, and non-
security financial contracts held for investment purposes; and cash and
cash

equivalents.\160\ By using an existing definition, the Commission
indicated that it hoped to alleviate confusion and facilitate
compliance.
---------------------------------------------------------------------------

    \160\ See Rule 2a51-1(b), which was adopted by the Commission in
Privately Offered Investment Companies, Release No. IC-22597 (Apr.
3, 1997) [62 FR 17512 (April 9, 1997)].
---------------------------------------------------------------------------

i. Comments
    Many commenters supported adding a catch-all category for entities
to the definition.\161\ No commenter specifically objected, although
one commenter indicated that it opposed including governmental bodies
and Indian tribes in the catch-all category because entities funded by
taxpayers should not be given accredited investor status when
``[t]axpayers themselves would not likely qualify under existing
restrictions.'' \162\ A few commenters suggested that the Commission
clarify the types of entities to be included in the catch-all
category,\163\ with two commenters suggesting specific enumerated lists
that include Indian tribes and their various instrumentalities.\164\ To
maintain flexibility and to allow for new entity types to be included
within the accredited investor definition, another commenter suggested
that the Commission describe in the text of the release the types of
entities to be included instead of enumerating entity types in the
rule.\165\ One commenter suggested that the Commission use the term
``person,'' as defined in Section 2(a)(2) of the Securities Act instead
of ``entity,'' in order to clarify that governmental funds would be
included in this new category.\166\
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    \161\ See letter from California Municipal Treasurers
Association Legislative Committee dated Feb. 12, 2020 (``CMTA
Letter''); letter from Arnold Porter Kaye Scholer LLP dated Feb. 14,
2020 (``Arnold & Porter Letter''); letter from National Association
of State Treasurers et al. dated Feb. 27, 2020 (``NAST et al.
Letter''); A. Hemmingsen Letter; letter from Southern Ute Indian
Tribe dated Mar. 3, 2020 (``Southern Ute Letter''); NAFOA Letter;
ICI Letter; TIAA Letter (stating that the Commission should
``clarify in its final rule that the phrase ``governmental bodies''
should be construed broadly to include a comprehensive range of
state, territorial, and local governmental entities, as well as U.S.
government agencies and departments, sovereign governments
recognized by the United States and sovereign investment funds, and
funds, pools, and endowments established by U.S. federal, state, and
local governments for a specified purpose and subject to control by
a government officer, board, or similar body''); NASAA Letter;
letter from PFM Asset Management LLC dated Mar. 16, 2020 (``PFM
Letter''); MFA and AIMA Letter; Better Markets Letter; SIFMA Letter;
CCMC Letter; SBIA Letter; letter from California Association of
County Treasurers and Tax Collectors dated Feb. 14, 2020 (``CACTTC
Letter''); Artivest Letter; and ABA FR of Sec. Comm. Letter.
    \162\ See letter from Vulcan Consultants, LLC dated Feb. 17,
2020 (``Vulcan Letter'') (stating that ``adding to the risk profile
in hopes of increased returns only serves to encourage government
entities to keep more taxpayer funds in city hall rather than
returning them to their rightful owner-the taxpayer'').
    \163\ See Arnold & Porter Letter; ICI Letter; PFM Letter;
Southern Ute Letter; and NAFOA Letter.
    \164\ See Southern Ute Letter and NAFOA Letter.
    \165\ See Arnold & Porter Letter (suggesting the following list:
``State, Commonwealth or Territory of the United States, the
District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands,
and any county or subdivision thereof; `Municipal government entity'
as that term is defined in Section 15B(8) of the Securities Exchange
Act of 1934 and regulations thereunder, including, without
limitation, a state government, county government or city
government; United States government branch, agency, department or
unit; Federal or state-recognized tribe within the United States;
Foreign sovereign government recognized by the United States
government; Multi-lateral agency such as those listed in 17 CFR
230.902(k)(2)(vi); Subdivision, department, agency, bureau or other
formally-constituted body of a municipal government entity, United
States federal government entity, or foreign sovereign entity that
is recognized by the United States; Sovereign investment fund; or
Fund, pool or endowment, established by a federal, state, local,
tribal or foreign government pursuant to a Constitution, statute,
regulation, executive order, or treaty, for a specified use or
purpose, subject to oversight and control by a government officer,
board or similar governing body with the powers to contract and to
litigate'').
    \166\ See letter from Oregon State Treasury dated Mar. 16, 2020
(``OST Letter'') (recommending the use of Section 2(a)(2)'s
``person'' because it ``is not wholly clear whether all state and
local governmental funds are completely separate `entities' in a
legal sense''). In the alternative, this commenter suggested that
``unincorporated organization, or governmental or political
subdivision thereof'' be added after ``entity.''
---------------------------------------------------------------------------

    The Proposing Release requested comment on whether any restrictions
should be applied with respect to entities covered by proposed Rule
501(a)(9), such as restrictions on entities organized or incorporated
under the laws of a foreign country. Two commenters responded that they
did not support restrictions,\167\ one of whom noted that international
investment should not be discouraged.\168\ In addition, two commenters
noted that Indian tribes are not foreign governments or countries.\169\
---------------------------------------------------------------------------

    \167\ See Arnold & Porter Letter and D. Burton Letter.
    \168\ See D. Burton Letter.
    \169\ See NAFOA Letter and Southern Ute Letter.
---------------------------------------------------------------------------

    Regarding the use of an investments test for this category of
institutional investors, the Proposing Release sought comment on
several topics. The Commission requested comment on whether an
investments test or an asset test was appropriate. A few commenters
supported an asset test over an investments test,\170\ noting that an
asset test is already used in the accredited investor definition. One
commenter supported an investment test, noting that an investment test
``demonstrates that an entity has sufficient investment experience and
financial sophistication,'' \171\ and a few other commenters supported
either test.\172\ The Commission also requested comment on whether $5
million in investments is the appropriate threshold. A few commenters
stated that $5 million is an appropriate threshold,\173\ while one
commenter supported a $10 million threshold.\174\ One commenter took no
position on a threshold but noted that it did not support a
``substantial increase'' in the amount proposed,\175\ and no commenters
indicated support for a lower threshold.
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    \170\ See Southern Ute Letter; MFA and AIMA Letter; and D.
Burton Letter.
    \171\ See Artivest Letter (noting that ``[w]e agree with the
Commission's view, with respect to the $5 million catch-all for
entities described above, that an investment test is appropriate as
it demonstrates that an entity has sufficient investment experience
and financial sophistication to automatically qualify as an
accredited investor'').
    \172\ See Arnold & Porter Letter (stating that ``[i]n the case
of governmental entities, the test (whether investments or assets)
should include investment (or assets) of related governmental
entities if either: (a) They are consolidated into the same
financial reporting unit for governmental accounting standards; or
(b) they are managed by the same office or officer of the broader
government of which they are a part'') and NAFOA Letter.
    \173\ See Arnold & Porter Letter; NAFOA Letter; and Artivest
Letter.
    \174\ See NASAA Letter.
    \175\ See Southern Ute Letter (noting that the ``Tribe does not
take a position on whether $5 million in investments or assets is
the appropriate threshold, although it would not support a
substantial increase in the threshold'').
---------------------------------------------------------------------------

    The Commission also requested comment on whether using the
definition of investments from Rule 2a51-1(b) under the Investment
Company Act was appropriate. A few commenters stated that using the
definition from Rule 2a51-1(b) was appropriate,\176\ while a few
commenters indicated it was not.\177\ Two commenters noted that the use
of the terms ``Prospective Qualified Purchaser'' and ``qualified
purchaser'' in the definition of investments has the

potential to confuse.\178\ Given the presence of the qualified-
purchaser-specific terminology in the definition of ``investments,''
these commenters sought clarification on the use of the term
``investments'' in the accredited investor context.
---------------------------------------------------------------------------

    \176\ See P. Rutledge Letter (noting that the use of the term
``gives certainty as to what assets held by the entity qualify for
purposes of being deemed an accredited investor'') and A. Hemmingsen
Letter (stating that ``[a]n important feature of Rule 2a51-1(b) is
its inclusion of binding capital commitments. This inclusion is an
important facilitator for funds structured as draw down vehicles'').
    \177\ See Southern Ute Letter (noting that ``the definition of
`investments' from Section 270.2a51-1 currently applies in the
context of establishing status as a `qualified purchaser' under the
[Investment Company Act],'' which ``complicates the application of
this definition to a determination of `accredited investor' status .
. .'') and D. Burton Letter (noting that ``[u]sing assets [instead
of investments] as defined by generally accepted accounting
principles would eliminate most ambiguity'').
    \178\ See Southern Ute Letter and NAFOA Letter.
---------------------------------------------------------------------------

ii. Final Amendments
    We are adopting the amendment as proposed. Consistent with the
support of many commenters, we are adopting the amendment to add a new
category to the accredited investor definition that includes any entity
owning ``investments,'' as that term is defined in Rule 2a51-1(b) under
the Investment Company Act, in excess of $5 million that is not formed
for the specific purpose of acquiring the securities being
offered.\179\ While we agree with some commenters that clarification of
the types of entities included in the new category is warranted, we do
not believe that enumerating a list of entities in the rule is
necessary. Instead, we reiterate that the intent of this new category
is to capture all entity types not already included in the definition
of accredited investor as well as those entity types that may be
created in the future. We believe the term ``entity'' is sufficiently
broad in this context to encompass Indian tribes and the divisions and
instrumentalities thereof, federal, state, territorial, and local
government bodies, funds of the types identified by commenters, and
entities organized or under the laws of foreign countries.
---------------------------------------------------------------------------

    \179\ Rule 501(a)(9).
---------------------------------------------------------------------------

    We do not agree with commenters who suggested substituting an asset
test for the investment test. We continue to believe that requiring
more than $5 million in investments instead of assets for this catch-
all category of entities may better demonstrate that the investor has
experience in investing and is therefore more likely to have a level of
financial sophistication similar to that of other institutional
accredited investors. Certain types of entities covered by the
amendment, such as governmental entities, may have more than $5 million
in non-financial assets such as land, buildings, and vehicles, but not
have any investment experience. We continue to believe that an
investments test may be more likely than an assets-based test to serve
as a reliable method for ascertaining whether an entity is likely to
require the protections of Securities Act registration. We also believe
that $5 million in investments is an appropriate threshold that
demonstrates the investor's experience in investing. Although one
commenter suggested a $10 million threshold, we are not persuaded that
setting the threshold at double the amount applicable under the assets
test for other institutional accredited investors is warranted in order
to illustrate a similar level of financial sophistication.
    We are applying the definition of investments from Rule 2a51-1(b)
under the Investment Company Act to Rule 501(a)(9), as proposed. We
believe that the use of an existing definition will facilitate
compliance and alleviate confusion. We do not believe that additional
guidance is necessary to enable market participants to apply this
definition in the accredited investor context, notwithstanding the use
of the terms ``Prospective Qualified Purchaser'' and ``qualified
purchaser'' in the definition of ``investments.''
e. Certain Family Offices and Family Clients
    In the Proposing Release, the Commission proposed to add new
categories to the accredited investor definition for certain ``family
offices'' and ``family clients of family offices.'' ``Family offices''
are entities established by families to manage their assets, plan for
their families' financial future, and provide other services to family
members. The Commission has previously observed that single family
offices generally serve families with at least $100 million or more of
investable assets.\180\ Family offices generally meet the definition of
``investment adviser'' under the Advisers Act, as the Commission has
interpreted the term, because, among the variety of services provided,
family offices are in the business of providing advice about securities
for compensation. However, the Commission adopted the ``family office
rule'' \181\ in 2011 to exclude single family offices from regulation
under the Advisers Act under certain conditions.\182\ Under that rule,
a family office generally is a company that has no clients other than
``family clients.'' \183\ ``Family clients'' generally are family
members, former family members, and certain key employees of the family
office, as well as certain of their charitable organizations, trusts,
and other types of entities.\184\
---------------------------------------------------------------------------

    \180\ See Family Offices, Release No. IA-3098 (Oct. 12, 2010)
[75 FR 63753 (Oct. 18, 2010)] (``Family Office Proposing Release'').
See also Proposing Release at note 158.
    \181\ 17 CFR 275.202(a)(11)(G)-1.
    \182\ See Family Offices, Release No. IA-3220 (June 22, 2011)
[76 FR 37983 (June 29, 2011)] (``Family Office Adopting Release'').
See also Family Office Proposing Release (``We viewed the typical
single family office as not the sort of arrangement that Congress
designed the Advisers Act to regulate. We also were concerned that
application of the Advisers Act would intrude on the privacy of
family members. . . . The Act was not designed to regulate the
interactions of family members in the management of their own
wealth'').
    \183\ A family office also (1) must be wholly owned by family
clients and exclusively controlled (directly or indirectly) by one
or more family members or family entities (each as defined in the
rule), and (2) must not hold itself out to the public as an
investment adviser. See Rule 202(a)(11)(G)-1(b) under the Advisers
Act.
    \184\ For a full list of family clients, see 17 CFR
275.202(a)(11)(G)-1(d)(4). The family office rule defines a ``family
member'' to include ``all lineal descendants (including by adoption,
stepchildren, foster children, and individuals that were a minor
when another family member became a legal guardian of that
individual) of a common ancestor (who may be living or deceased),
and such lineal descendants' spouses or spousal equivalents;
provided that the common ancestor is no more than 10 generations
removed from the youngest generation of family members.'' 17 CFR
275.202(a)(11)(G)-1(d)(6).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission proposed that for a family
office to qualify as an accredited investor, it would need to have more
than $5 million in assets under management and its investments would
need to be directed by a person who has such knowledge and experience
in financial and business matters that such family office would be
capable of evaluating the merits and risks of the prospective
investment.
i. Comments
    Commenters generally supported the proposed amendments to the
definition of accredited investor to include any ``family office'' with
more than $5 million in assets under management,\185\ and no commenters
opposed the amendments. One commenter noted that under the current
regulatory scheme, depending on their organizational structure, many
family offices are already able to meet the definition of an accredited
investor, and establishing a clear standard would allow family offices
to manage family assets more prudently and make issuers more
comfortable working with family office investors.\186\
---------------------------------------------------------------------------

    \185\ See J. LaBerge Letter; M. Trudeau Letter; SBIA Letter;
ILPA Letter; CCMC Letter; Carta Letter; AIC Letter; PIC Letter;
Artivest Letter. One commenter also recommended that the Commission
provide an exemption from the definition of ``investment company''
under the Investment Company Act for family offices and their family
clients. See PIC Letter. This rulemaking is intended to amend the
definition of accredited investor under the Securities Act.
Accordingly, the suggested exemption from the definition of
investment company is beyond the scope of this rulemaking.
    \186\ See M. Trudeau Letter. See also PIC Letter.
---------------------------------------------------------------------------

    Several commenters supported the proposed requirement that
qualifying family offices have more than $5 million in assets under
management.\187\ While

no commenters disagreed with the proposal to require that family
offices have a minimum amount of assets under management, one commenter
proposed increasing the minimum to $10 million.\188\ The commenter
stated that this higher threshold would be more likely to capture
investors who can reasonably be expected to have the sophistication and
ability to withstand economic losses as to enable them to fend for
themselves.
---------------------------------------------------------------------------

    \187\ See J. LaBerge Letter; M. Trudeau Letter; A. Hemmingsen
Letter (noting it would be appropriate to impose a financial
threshold for a family office to qualify as an accredited investor
as proposed); Carta Letter; PIC Letter; Artivest Letter; and ILPA
Letter.
    \188\ See NASAA Letter.
---------------------------------------------------------------------------

    Commenters generally supported the requirement that the family
office's prospective investments be directed by a person who has such
knowledge and experience in financial and business matters that such
family office is capable of evaluating the merits and risks of the
prospective investment,\189\ noting that the underlying premise of the
amendments is that family offices and their professionals have the
knowledge, experience and sophistication to apply to investment
decisions, even though a family client may not.\190\
---------------------------------------------------------------------------

    \189\ See M. Trudeau Letter (adding a sophistication requirement
for family office managers is integral to the rationale of the
accredited investor definition); ILPA Letter; and PIC Letter.
    \190\ See PIC Letter. The commenter also noted structural
similarities of this requirement with the trust category in
accredited investor definition in Rule 501(a)(7) of the Securities
Act that requires that the purchase of a trust be directed by a
sophisticated person as described in Rule 506(b)(2)(ii).
---------------------------------------------------------------------------

    On the other hand, one commenter opposed the inclusion of the
knowledge and experience requirement under proposed Rule
501(a)(12)(iii).\191\ The commenter suggested that the Commission
should instead require an issuer to obtain a written representation
that the purchaser qualifies as a family office under Rule
202(a)(11)(G)-1 under the Advisers Act and, at the time of the
purchase, meets all of the requirements of that rule.
---------------------------------------------------------------------------

    \191\ See P. Rutledge Letter.
---------------------------------------------------------------------------

    Nearly all commenters that addressed the issue were supportive of
including in the definition of accredited investor family clients of a
family office that meets the proposed requirements of Rule
501(a)(12).\192\ One of these commenters expressed support for allowing
a family client to ``piggyback'' on the sophistication of the family
office for purposes of meeting the accredited investor requirement as
long as the family office is involved in the investment decision-making
process for the particular investment in question.\193\ One commenter
opposed including in the accredited investor definition family clients
of a family office meeting the proposed requirements of Rule
501(a)(12).\194\ The commenter raised investor protection concerns and
stated that including family clients in the definition would reduce
what it means to be a sophisticated investor to a test of familial
relationships.
---------------------------------------------------------------------------

    \192\ See ILPA Letter; J. LaBerge Letter; CCMC Letter; Carta
Letter; P. Rutledge Letter; AIC Letter; PIC Letter; and Artivest
Letter.
    \193\ See PIC Letter (expressing the view that the family client
should not meet the accredited investor definition unless the family
client relies on the family office for investment support with
respect to the investment in question).
    \194\ See M. Trudeau Letter.
---------------------------------------------------------------------------

    The Proposing Release also requested comment on whether a person
who receives assets upon the death of a family member (or other
involuntary transfer from a family member) (``a beneficiary'') should
qualify as an accredited investor during the year following such
involuntary transfer if the beneficiary would not otherwise
qualify.\195\ One commenter expressly supported this approach, noting
that it would be consistent with the family office rule.\196\ The
commenter also stated that carving out such a ``beneficiary'' from the
accredited investor definition could potentially prevent or complicate
the orderly liquidation or transition of the beneficiary from its
status as a family client.
---------------------------------------------------------------------------

    \195\ The family office rule deems a person who receives assets
upon the death of family member (or other involuntary transfer from
a family member) to be a family client for one year following the
involuntary transfer. See Rule 202(a)(11)(G)-1(b) under the Advisers
Act.
    \196\ See PIC Letter.
---------------------------------------------------------------------------

ii. Final Amendments
    We are adopting, substantially as proposed, amendments to the
definition of accredited investor to include certain family offices and
their family clients. The definition encompasses a ``family office'' as
defined in the ``family office rule'' \197\ that meets the following
additional requirements: (i) It has more than $5 million in assets
under management,\198\ (ii) it is not formed for the specific purpose
of acquiring the securities offered,\199\ and (iii) its prospective
investment is directed by a person who has such knowledge and
experience in financial and business matters that such family office is
capable of evaluating the merits and risks of the prospective
investment.\200\ The final amendments to the definition of accredited
investor also include ``family clients'' (as defined in the family
office rule) of a family office that meets the requirements stated
above, whose prospective investment in the issuer is directed by such
family office.\201\
---------------------------------------------------------------------------

    \197\ 17 CFR 275.202(a)(11)(G)-1. One commenter suggested that
we emphasize that Rule 501(a)(12) does not apply to multi-family
offices. See M. Trudeau Letter. Rule 501(a)(12) directly references
the definition of ``family office'' under the family office rule,
and as such, the amendments apply only to family offices that meet
this definition and do not apply to multi-family offices. See also
Family Office Adopting Release (noting that the family office
exclusion does not extend to family offices serving multiple
families).
    \198\ Rule 501(a)(12)(i).
    \199\ Rule 501(a)(12)(ii).
    \200\ Rule 501(a)(12)(iii).
    \201\ Rule 501(a)(13). A family client will not qualify as an
accredited investor under Rule 501(a)(13) with respect to a
prospective investment if the family client's prospective investment
is not directed by a family office meeting all the requirements of
Rule 501(a)(12).
---------------------------------------------------------------------------

    We believe the policy rationale for adopting the family office rule
also supports the adoption of these amendments to the definition of
accredited investor for family offices and their family clients. We
continue to believe that family offices and their family clients can
sustain the risk of loss of investment, given their assets.\202\ We
also continue to believe that certain protections otherwise afforded to
less financially sophisticated investors by federal securities laws are
not necessary to protect family offices or their clients. Finally,
while one commenter raised concerns that including family clients in
the accredited investor definition reduces what it means to be a
sophisticated investor to a test of familial relationships, we believe
these concerns are mitigated by the requirements of the definition. In
particular, to qualify as an accredited investor, a person must be a
family client of a family office meeting the requirements of Rule
501(a)(12), including that the family office has more than $5 million
in assets under management and its investments are directed by a person
who has such knowledge and experience in financial and business matters
that such family office is capable of evaluating the merits and risks
of the prospective investment.
---------------------------------------------------------------------------

    \202\ See Proposing Release at 2589.
---------------------------------------------------------------------------

    After considering comments, the amendment will require a family
office to have more than $5 million in assets under management as
proposed. We believe a $5 million threshold, and not a $10 million
threshold as suggested by one commenter, is the appropriate level to
ensure the family office has sufficient assets to sustain the risk of
loss. We believe the $5 million threshold sufficiently captures
investors who can reasonably be expected to have financial
sophistication and the ability to

withstand economic losses and fend for themselves. This threshold also
is consistent with the asset threshold required by other accredited
investor categories.\203\
---------------------------------------------------------------------------

    \203\ Rule 501(a)(1), (a)(3), and (a)(7).
---------------------------------------------------------------------------

    In addition, as proposed, the amendment will require that the
family office's purchase be directed by a person who has such knowledge
and experience in financial and business matters that such family
office is capable of evaluating the merits and risks of the prospective
investment. This requirement is designed to ensure that the person
directing the investments of the family office is able to evaluate the
risks and take steps to protect the interests of family clients,
particularly with respect to family clients who do not on their own
meet the definition of an accredited investor.\204\ This requirement is
similar to the financial sophistication requirement for trusts to meet
the definition of an accredited investor under Rule 501(a)(7) under the
Securities Act, and we do not believe that determining that the family
office or family client meets the relevant definition will create an
undue burden for issuers.\205\
---------------------------------------------------------------------------

    \204\ Additionally, the amendments require family clients to
invest through a family office that meets the requirements of Rule
501(a)(12) to qualify as an accredited investor.
    \205\ An issuer could, for example, obtain a representation that
the family office meets the requirement of Rule 501(a)(12)(iii) as
part of a traditional investor questionnaire.
---------------------------------------------------------------------------

    Finally, after considering comments, we are not excluding from the
accredited investor definition a beneficiary that temporarily qualifies
as a family client under the family office rule. That is, a person who
receives assets upon the death of a family member or key employee (or
other involuntary transfer from a family member or key employee) will
qualify as a family client for purposes of the accredited investor
definition for one year. We do not believe it is appropriate to
differentiate family clients within the definition and agree with
commenters that excluding a beneficiary from the accredited investor
definition could negatively impact the family office's management and
transition of the beneficiary from its status as a family client.\206\
---------------------------------------------------------------------------

    \206\ A person is determined to be an accredited investor at the
time of investment, so a beneficiary would not be required to unwind
any holdings acquired through an involuntary transfer from a family
member (or made during the period that the beneficiary is a family
client), but the beneficiary would not be able purchase additional
holdings, unless the beneficiary qualifies as an accredited investor
on another basis. See Rule 501(a).
---------------------------------------------------------------------------

3. Permitting Spousal Equivalents To Pool Finances for the Purposes of
Qualifying as Accredited Investors
    In the Proposing Release, the Commission proposed to allow natural
persons to include joint income from spousal equivalents when
calculating joint income under Rule 501(a)(6), and to include spousal
equivalents when determining net worth under Rule 501(a)(5). The
proposed amendments would define spousal equivalent as a cohabitant
occupying a relationship generally equivalent to that of a spouse. The
Commission previously has used this formulation of spousal equivalent.
As discussed above, a family office is exempted from regulation under
the Advisers Act when the family office advises ``family clients.''
\207\ The Commission defined ``family clients'' to include ``family
members,'' of which ``spousal equivalents'' are a part, with ``spousal
equivalent'' defined as a cohabitant occupying a relationship generally
equivalent to that of a spouse.\208\ The crowdfunding rules adopted to
implement the requirements of Title III of the Jumpstart Our Business
Startups Act (``JOBS Act'') also use this definition of ``spousal
equivalent.'' \209\ In Regulation Crowdfunding, the Commission included
the term ``spousal equivalent'' in the definition of the term ``member
of the family of the purchaser or the equivalent,'' with ``spousal
equivalent'' having the same definition used in the Advisers Act and as
the one we proposed to use in Rule 501(a).\210\
---------------------------------------------------------------------------

    \207\ See Family Office Adopting Release.
    \208\ Rule 202(a)(11)(G)-1(d)(9).
    \209\ Public Law 112-106, 126 Stat. 306 (2012). The JOBS Act
provides that securities issued in reliance on the crowdfunding
exemption may not be transferred by the purchaser for one year after
the date of purchase, except when transferred to, among other
persons, ``a member of the family of the purchaser or the
equivalent'' (emphasis added). See JOBS Act Section 302(e)(1)(D). In
addition, though the Commission rule governing accountant
independence also includes ``spousal equivalents,'' the term is not
defined in that rule. See 17 CFR 210.2-01.
    \210\ 17 CFR 227.501(c).
---------------------------------------------------------------------------

a. Comments
    Several commenters supported adding spousal equivalents,\211\ with
one commenter noting that adding spousal equivalents may allow more
investment opportunities for investors.\212\ A few commenters did not
support adding spousal equivalents,\213\ with one commenter opposed to
the addition because of potential tax consequences,\214\ and another
suggesting a different definition limited solely to ``legally-
recognized relationships besides marriage.'' \215\
---------------------------------------------------------------------------

    \211\ See letter from Sean Mortensen dated Dec. 18, 2019 (``S.
Mortensen Letter''); P. Rutledge Letter; letter from Daniel Hoeller
dated Feb. 19, 2020 (``D. Hoeller Letter''); J. LaBerge Letter; A.
Hemmingsen Letter; CCMC Letter; NASAA Letter; SBIA Letter; Mercer
Advisors Letter; S. Moller Letter; Better Markets Letter; M. Trudeau
Letter; and Artivest Letter.
    \212\ See D. Hoeller Letter (positing that the amendment ``would
help . . . thousands more to access potentially better investment
opportunities'').
    \213\ See Md St. Bar Assn. Comm. on Sec. Laws Letter
(recommending a different definition) and Cornell Sec. Clinic
Letter.
    \214\ See Cornell Sec. Clinic Letter (positing that the addition
``might encourage tax shifting because individuals who are taxed
separately could be taxed less than a married couple due to
different tax brackets between the two taxable units'').
    \215\ See Md St. Bar Assn. Comm. on Sec. Laws Letter
(recommending that the definition be limited ``solely to persons in
other legally-recognized relationships besides marriage, including
domestic partnerships and civil unions, that provide legal rights to
the participants in such an arrangement that are similar to those
accorded to legal spouses (at least with respect to financial
matters)'').
---------------------------------------------------------------------------

b. Final Amendments
    We are adopting the amendment as proposed for the reasons noted in
the Proposing Release. We continue to believe that there is no need to
deviate from the definition of ``spousal equivalent'' already used in
Commission rules. Revising Rule 501(a)(5) and (6) to permit spousal
equivalents to pool their financial resources will promote consistency
with these existing rules. By contrast, using a different, more limited
definition, as suggested by one commenter, would add complexity to our
rules without an obvious benefit in terms of investor protection.
4. Notes to 501(a)
    The Commission proposed to amend the accredited investor definition
to incorporate three long-standing staff interpretations. The first is
the inclusion of limited liability companies in Rule 501(a)(3), which
is discussed in Section II.B.2.c above. The second relates to the term
``joint'' in Rule 501(a)(5), and the third relates to the identity of
the owners of entities seeking accreditation under Rule 501(a)(8).
a. Note to Rule 501(a)(5)
    The Commission proposed to add a note to Rule 501 to clarify that
the calculation of ``joint net worth'' for purposes of Rule 501(a)(5)
can be the aggregate net worth of an investor and his or her spouse (or
spousal equivalent if ``spousal equivalent'' is included in Rule
501(a)(5)), and that the securities being purchased by an investor
relying on the joint net worth test of Rule 501(a)(5) need not be
purchased jointly.

    The Commission noted that nothing in previous Regulation D releases
indicates that the Commission intended the term ``joint'' in Rule
501(a)(5) to require (1) joint ownership of assets when calculating the
net worth of the spouses, or (2) that an investor relying on the joint
net worth test acquire the security jointly instead of separately. The
Commission also noted that allowing spouses to own assets in various
forms for the purposes of the net worth test is consistent with how the
Commission treats spousal ownership of assets in other contexts.\216\
---------------------------------------------------------------------------

    \216\ See Rule 2a51-1 under the Investment Company Act, which
permits separate ownership, joint ownership, and community property
ownership.
---------------------------------------------------------------------------

i. Comments
    Every commenter that addressed this amendment supported it,\217\
with one commenter noting that the addition ``may help some investors
and practitioners to better understand the rules.'' \218\
---------------------------------------------------------------------------

    \217\ See P. Rutledge Letter; Mercer Advisors Letter; CCMC
Letter; D. Burton Letter; and ABA FR of Sec. Comm. Letter.
    \218\ See D. Burton Letter.
---------------------------------------------------------------------------

ii. Final Amendments
    We are adopting the amendment as proposed. We continue to believe
that it does not appear necessary in the accredited investor context to
limit how an investor takes title to securities or how spouses or
spousal equivalents own assets.
b. Note to Rule 501(a)(8)
    Under Rule 501(a)(8), an entity qualifies as an accredited investor
if all of the equity owners of that entity are accredited investors.
Because in some instances, an equity owner of an entity is another
entity, not a natural person, the Commission proposed to add a note to
Rule 501(a)(8) that would clarify that, in determining accredited
investor status under Rule 501(a)(8), one may look through various
forms of equity ownership to natural persons. Thus, if those natural
persons are themselves accredited investors, and if all other equity
owners of the entity are accredited investors, the entity would be an
accredited investor under Rule 501(a)(8). The Commission noted its
belief that this approach is appropriate because the intent of Rule
501(a)(8) is to qualify as accredited investors those entities that are
100% owned by accredited investors and, for this purpose, it should not
matter whether the ownership is direct or indirect.
i. Comments
    Several commenters supported adding the note as written,\219\ while
two commenters supported the note but with modifications, positing that
the proposed note would have a disproportionate impact on Indian tribes
and other entities because tribes may use limited liability companies
and other entities to make investments, with the tribes, not individual
natural persons, as the owner of the entity.\220\
---------------------------------------------------------------------------

    \219\ See P. Rutledge Letter; Arnold & Porter Letter (would also
add a related note stating that ``one may look through the various
forms of ownership and control of a governmental entity to the
overarching government of which a specific governmental entity is a
part when determining accredited investor status under Rule
501(a)(9)''); NAFOA Letter; CCMC Letter; NASAA Letter; and D. Burton
Letter.
    \220\ See Southern Ute Letter (stating that ``[t]he Tribe
regularly invests and conducts business through state-organized
limited liability companies and other entities, and the proposed
rule that allows a look through only to natural persons would
disadvantage the Tribe and other Indian tribes'') and NAFOA Letter
(stating that ``[s]ince Indian tribes would be included as an
accredited investor[, the Commission] should add the generic
``entities'' to the ``natural persons'' to read ``natural persons or
entities'' to avoid disadvantaging Indian tribes'').
---------------------------------------------------------------------------

ii. Final Amendments
    We are adopting the amendment as proposed. We do not share the
commenters' concerns that the note, as drafted, would
disproportionately disadvantage Indian tribes and other entities. The
purpose of the amendment is to clarify that it is appropriate to look
through various forms of ownership under Rule 501(a)(8) to natural
persons in those cases where an equity owner of an entity is itself an
entity, but that owner-entity does not qualify on its own merits as an
accredited investor (e.g., if the owner-entity is an LLC that does not
meet the $5 assets test). This clarification does not supersede the
application of Rule 501(a)(8) to entities; therefore, for example, if
an Indian tribe or state forms and is the sole equity owner of an LLC,
such LLC could qualify as an accredited investor either if it meets the
requirements of Rule 501(a)(3), or if the Indian tribe or state equity-
owner meets the requirements of Rule 501(a)(9).
5. Amendment to Rule 215
    The Commission proposed to amend the accredited investor definition
in Rule 215 to conform to the amendments to the accredited investor
definition in Rule 501(a). Rule 215 defines the term ``accredited
investor'' under Section 2(a)(15) of the Securities Act \221\ for
purposes of Section 4(a)(5) of the Securities Act.\222\ The accredited
investor definition in Rule 215 has historically been substantially
consistent but not identical to the accredited investor definition in
Rule 501(a) of Regulation D. For example, in contrast to the definition
in Rule 501(a), the scope of the accredited investor definition in Rule
215 does not include banks, insurance companies, registered investment
companies, business development companies as defined in Section
2(a)(48) of the Investment Company Act, or SBICs. In addition, the
accredited investor definition in Rule 215 does not contain a
reasonable belief standard as in Rule 501(a).\223\
---------------------------------------------------------------------------

    \221\ 15 U.S.C. 77b(a)(15). Section 2(a)(15) of the Securities
Act sets forth an enumerated list of entities that qualify as
accredited investors as well as ``any person who, on the basis of
such factors as financial sophistication, net worth, knowledge, and
experience in financial matters, or amount of assets under
management qualifies as an accredited investor under rules and
regulations which the Commission shall prescribe.''
    \222\ 15 U.S.C. 77d(a)(5). Section 4(a)(5) of the Securities Act
provides an exemption for issuers for the offer and sale of
securities to accredited investors if the aggregate offering amount
does not exceed $5 million; the issuer, or anyone acting on its
behalf, does not engage in general solicitation or general
advertising; and the issuer files a notice on Form D with the
Commission. Based on DERA staff's review of Form D filings from
January 1, 2009 through December 31, 2019, no issuer reported
relying on the Section 4(a)(5) exemption during that time period.
    \223\ Under Rule 501(a), natural persons and entities that come
within any of eight enumerated categories in the definition, or that
the issuer reasonably believes comes within any of the categories,
are accredited investors.
---------------------------------------------------------------------------

    To ensure uniformity in the accredited investor definition in both
provisions, the Commission proposed to replace the existing definition
in Rule 215 with a cross reference to the accredited investor
definition in Rule 501(a). By including this cross reference, the
definition of ``accredited investor'' in Rule 215 as amended would be
expanded to include any amendments to the accredited investor
definition in Rule 501(a), as well as those entities that are presently
included in the definition in Rule 501(a) but not the definition in
Rule 215. As amended, the definition would also contain the same
reasonable belief standard as in Rule 501(a).
a. Comments
    All of the commenters responding to this proposed amendment
supported its adoption.\224\ The Proposing Release also requested
comment on whether amending the scope of the accredited investor
definition in Rule 215 as proposed would raise concerns regarding the
application of the Section 4(a)(5) exemption. No commenters

indicated that the amendment would raise concerns about Section
4(a)(5), while one commenter expressly stated that it did not believe
that Section 4(a)(5) would be affected.\225\ The Commission also
requested comment on whether adding a reasonable belief standard to the
definition in Rule 215 would raise concerns. No commenters indicated
that adding a reasonable belief standard raised concerns, while two
commenters expressly stated that no concerns would exist.\226\
---------------------------------------------------------------------------

    \224\ See P. Rutledge Letter; Arnold & Porter Letter; CCMC
Letter; Republic Letter; D. Burton Letter; and ABA FR of Sec. Comm.
Letter.
    \225\ See Arnold & Porter Letter.
    \226\ See Arnold & Porter Letter and D. Burton Letter.
---------------------------------------------------------------------------

b. Final Amendments
    We are adopting the amendment as proposed. We continue to believe
that the historical intended consistency between Rules 215 and 501(a)
should be maintained, and we agree with the commenter that replacing
the definition in Rule 215 with a cross-reference to Rule 501(a) would
simplify compliance.\227\
---------------------------------------------------------------------------

    \227\ See Arnold & Porter Letter.
---------------------------------------------------------------------------

6. Other Comments
    The Proposing Release also requested comment on other topics
related to the accredited investor definition but not the subject of
specific proposals, including whether the Commission should adjust the
financial thresholds for inflation, whether the Commission should
include geographic-specific financial thresholds, and whether investors
advised by a registered investment adviser or a registered broker-
dealer should be included as accredited investors.
a. Adjustments to Financial Thresholds
    With respect to inflation adjustment, comments were mixed. Several
commenters expressed support for maintaining the thresholds as they
are,\228\ with one commenter suggesting that raising the thresholds
would adversely affect certain real estate investors \229\ and another
commenter suggesting that certain manufacturing investors would be
adversely affected.\230\
---------------------------------------------------------------------------

    \228\ See IPA Letter; Morningstar Letter; Md St. Bar Assn. Comm.
on Sec. Laws Letter; CCMC Letter; NAM Letter; Republic Letter; AIC
Letter; D. Burton Letter (this commenter also believes that the
threshold could ``possibly'' be reduced); and Geraci Letter and AAPL
Letter.
    \229\ See IPA Letter (noting that raising the thresholds could
affect the ability of some to accomplish like-kind exchanges under
Section 1031 of the Internal Revenue Code).
    \230\ See NAM Letter (positing that ``[i]ncreasing the income or
net worth tests would reclassify many manufacturing investors as
non-accredited, disrupting the businesses that already rely on their
investment capital and reducing capital formation opportunities for
manufacturers on a going forward basis'').
---------------------------------------------------------------------------

    A number of commenters supported raising the thresholds to reflect
inflation either since adoption of the rule, on a going-forward basis,
or both.\231\ One commenter noted that unadjusted thresholds have
lowered the level of sophistication required for accredited investor
status over time; \232\ while several other commenters posited that
investor protections have been weakened over time.\233\ A few
commenters supported lowering the financial thresholds,\234\ with one
commenter positing that changes in the availability of information
since the adoption of the accredited investor definition reduced the
efficacy of the financial thresholds in identifying sophisticated
investors.\235\
---------------------------------------------------------------------------

    \231\ See letter from George Humm dated Jan. 29, 2020 (``G. Humm
Letter''); letter from Howard Lichtman dated Feb. 21, 2020 (``H.
Lichtman Letter''); letter from Marc. I. Steinberg dated Jan. 23,
2020; B. Delaplane Letter; M. L. Letter; ICI Letter; S. Moller
Letter; St. John's Sec. Arbitration Clinic Letter; NASAA Letter;
Better Markets Letter; CA Attorney General et al. Letter; M. Trudeau
Letter; MFA and AIMA Letter; Cornell Sec. Clinic Letter; R. Maud
Letter; PIABA Letter (suggesting that the Commission ``rais[e] the
net worth threshold to $2.5 million and income threshold to
$500,000/$750,000 for individuals and couples''); letter from Tyler
Yagman and Nicholas Bruno dated Mar. 15, 2020; and Artivest Letter.
See also SBCFAC Recommendations (recommending that the Commission
``[g]oing forward, index the financial thresholds for inflation on
periodic basis'') and IAC Recommendations (recommending that the
Commission consider ``whether financial thresholds need to be
adjusted for inflation'').
    \232\ See B. Delaplane Letter.
    \233\ See ICI Letter (stating that ``changes in technology that
have occurred since 1982 do not make up for the loss of investor
protection as a result of the erosion of the financial
thresholds''); S. Moller Letter (stating that ``adjustment is not
only definitively warranted but essential for the protection of
investors''); St. John's Sec. Arbitration Clinic Letter (stating
that ``the SEC's purpose in setting those monetary requirements in
1982 is undermined as inflation increases and yet the thresholds
remain the same''); M. Trudeau Letter (positing that the thresholds
should be raised to ``get back to the original intent of the
category''); PIABA Letter (stating that raising the thresholds would
``be a meaningful step forward in moving back to the original
intention of limiting the pool of accredited investors''); and
Better Markets Letter (stating that ``there may indeed now [be]
hundreds of thousands of investors who have become qualified as
Accredited Investor solely on the virtue of inflation of their asset
prices but who otherwise lack necessary financial sophistication to
carefully weigh the risks associated in investing in exempt
offerings'').
    \234\ See letter from Stuart dated Dec. 19, 2019; letter from
Max Harker dated Dec. 19, 2019 (``M. Harker Letter''); letter from
Robert Hall dated Feb. 23, 2020 (``R. Hall Letter''); and B. Andrews
et al. Letter (stating that ``[t]he current income and wealth
standards that determine who can participate in private capital
markets shut out even many `wealthy' Americans from investing in
founders from their communities'').
    \235\ See R. Hall Letter (noting that ``[w]e are in an age of
information where plenty of performance data is available for your
average citizen to make intelligent investments in small
companies'').
---------------------------------------------------------------------------

    The Proposing Release also requested comment on whether certain
assets or liabilities should be excluded from or included in the
calculation of net worth under Rule 501(a)(5). A few commenters
responded that home equity should be included as an asset; \236\
another commenter proposed to exclude ``agricultural land and machinery
held for production;'' \237\ and a few commenters proposed to exclude
the value of certain retirement accounts.\238\ One commenter suggested
that the net worth calculation be based on ``documented liquid net
worth.'' \239\ Another commenter did not believe changes were
necessary.\240\
---------------------------------------------------------------------------

    \236\ See J. Evans Letter and B. Andrews et al. Letter (stating
that ``[a]lthough there are over 600,000+ Black people that have a
$1M net worth in the US; with most of that net worth in personal
residences, Dodd Frank excludes them from meeting the [accredited
investor] rule'').
    \237\ See NASAA Letter.
    \238\ See NASAA Letter (recommending exclusion of ``the value of
any defined benefit or defined contribution tax-deferred retirement
accounts'') and D. Kui Letter (recommending exclusion of a portion
of the investor's ``retirement accounts'' and suggesting that the
Commission could ``(i) [set] forth a maximum amount of money from a
retirement account which can be included in the calculation of net
worth, (ii) [use] a discount or likewise formula to proportionately
include the money from a retirement account into the calculation of
net worth, and (iii) set a maximum amount that an investor may
invest by fund from his/her retirement account'').
    \239\ See Mercer Advisors Letter.
    \240\ See D. Burton Letter.
---------------------------------------------------------------------------

    After considering these comments, we continue to believe that it is
not necessary or appropriate to modify the definition's financial
thresholds at this time. As stated in the Proposing Release, we believe
that in evaluating the effectiveness of the current thresholds, it is
appropriate to consider changes beyond the impact of inflation, such as
changes over the years in the availability of information and advances
in technologies. Information about many issuers and other participants
in the exempt markets is more readily available now to a wide range of
market participants, which was not the case at the time the accredited
investor definition was adopted. In addition, we continue to believe
that (1) at an individual level, removing investors from the current
pool, particularly those who have participated, or are currently
participating, in the private placement market would be inappropriate
on various grounds, including the imposition of costs and principles of
fairness more generally and (2) at a more general level, a significant
reduction in the accredited investor pool through an increase in the
definition's financial thresholds could have disruptive effects on
certain aspects of the Regulation D

market.\241\ For example, a sharp decrease in the accredited investor
pool may result in a higher cost of capital for certain companies,
particularly companies in regions of the country with lower venture
capital activity who may rely on ``angel'' or other individual
investors as a primary source of funding, as well as for regions of the
country with relatively lower wages and net worth.\242\
---------------------------------------------------------------------------

    \241\ See Proposing Release at 2594. Substantially increasing
the thresholds to reflect, for example, the effect of inflation
since they were adopted, would reduce significantly the number of
individuals that currently qualify as accredited investors under
those tests. Such an increase would reduce the percentage of
qualifying households from approximately 13.0% today to
approximately 4.2%.
    \242\ See, e.g., Laura Lindsey & Luke C.D. Stein, Angels,
Entrepreneurship, and Employment Dynamics: Evidence from Investor
Accreditation Rules (Working Paper, 2019) (examining the effects of
changes in angel financing stemming from the 2011 amendment to the
accredited investor definition required by the Dodd-Frank Act, which
excluded an investor's primary residence in determining an
accredited investor's net worth and finding as the pool of potential
accredited investors was reduced, there was an increase in negative
effects to firm entry, reduced employment levels at small entrants,
and a decline in relative wages for the startup sector).
---------------------------------------------------------------------------

    We remain mindful of investor protection concerns raised by the
wealth tests. Notwithstanding the assertions of some commenters, we are
not persuaded that the investor protections provided by the financial
thresholds have been meaningfully weakened over time due to inflation.
Although it may be argued that an investor with an income of $200,000
or a net worth of $1 million now is not as ``wealthy'' as such an
investor would have been in 1982, we do not believe that this
correlates to a lower level of financial sophistication. It is not
clear what specific factors the Commission took into account in 1982
when it established the individual income and net worth thresholds.
Further, we note that in 1982, the calculation of net worth included
the value of the primary residence, but in 2011, the Commission amended
the net worth standard to exclude the value of the investor's primary
residence.\243\
---------------------------------------------------------------------------

    \243\ Net Worth Standard for Accredited Investors, Release No.
33-9287 (Dec. 21, 2011) [76 FR .81793 (Dec. 29, 2011)].
---------------------------------------------------------------------------

    In the Proposing Release the Commission noted that it was not
``aware of widespread problems or abuses associated with Regulation D
offerings to accredited investors that would indicate that an immediate
and/or significant adjustment to the rule's financial thresholds is
warranted.'' \244\ The Commission requested comment in the Proposing
Release on whether there is evidence that any fraud in the private
markets is driven or affected by the levels at which the accredited
investor definition is set, or that maintaining the current financial
thresholds would place investors at a greater risk of fraud. We also
asked whether there is any quantitative data available that shows an
increased incidence of fraud in particular types of exempt offerings or
in the market for exempt offerings as a whole. One commenter responded
with references to various Commission enforcement actions involving
private offerings,\245\ and another commenter responded that ``evidence
strongly suggests that private markets are highly risky and are fertile
environments for fraud.'' \246\ However, commenters did not provide
information that would indicate that any such incidents of fraud in the
private markets are driven or affected by the levels at which the
accredited investor definition is set.
---------------------------------------------------------------------------

    \244\ See Proposing Release at 2594.
    \245\ See NASAA Letter (also noting that ``private offerings are
often characterized by opaque disclosures, related party
transactions, illiquidity, minimal financial information and,
unfortunately, fraud'').
    \246\ See CA Attorney General et al. Letter (also referencing
NASAA's Enforcement Reports for 2013-15 and referencing statements
on the Commission's Investor.gov website and Division of
Enforcement's Annual Report for 2018).
---------------------------------------------------------------------------

    We do not believe the financial thresholds need to be adjusted at
this time. The Commission will continue to monitor the size of the
accredited investor pool, the characteristics of individual accredited
investors who participate in the private markets, the appropriateness
of the income and net worth thresholds, and, to the extent data is
available, performance and incidence of fraud in exempt offerings,
including in connection with the Commission's quadrennial review of the
accredited investor definition required by the Dodd-Frank Act.\247\
---------------------------------------------------------------------------

    \247\ See supra note 110.
---------------------------------------------------------------------------

b. Geography-Specific Thresholds
    A few commenters expressed support for geography-specific financial
thresholds,\248\ noting that incomes vary throughout the country. The
SBCFAC Recommendations proposed to ``possibly adjust [the financial
thresholds] downwards for certain regions of the country.'' \249\ The
SEC Small Business Forum Report proposed to ``[r]evise the dollar
amounts to scale for geography, lowering the thresholds in states/
regions with a lower cost of living.'' \250\ A few commenters were
opposed to geography-specific financial thresholds,\251\ with one
commenter highlighting that it would add complexity to the accredited
investor definition \252\ and another commenter noting that it would
add administrative complexity for issuers,\253\ which could ultimately
result in a higher cost of capital. Although we acknowledge that
geographical income and wealth disparities may lead to bunching of
accredited investors in large coastal cities, we believe the
complexities that geography-specific financial thresholds would create
for issuers and investors do not weigh in favor of adding such
geography-specific financial thresholds to the accredited investor
definition at this time. Further, we believe the new accredited
investor criteria we are adopting today may help mitigate the disparate
geographic effects of the current wealth-based criteria by including
non-wealth-based alternative criteria for natural persons to qualify
under the definition. The Commission will have the opportunity to
further consider this issue in connection with its quadrennial reviews
of the accredited investor definition.
---------------------------------------------------------------------------

    \248\ See D. Kui Letter (noting that ``income levels largely
vary among different regions in the United States'') and K.
Pulavarthi Letter.
    \249\ See supra note 18.
    \250\ See supra note 19.
    \251\ See CFA Letter and D. Burton Letter.
    \252\ See D. Burton Letter.
    \253\ See CFA Letter (noting that ``[g]iven the challenge small
issuers can face in verifying accredited investor status, the
Commission should avoid over-complicating the calculation,
particularly with so little evidence that a problem exists that
merits this adjustment'').
---------------------------------------------------------------------------

c. Advised by Third Parties
    Regarding whether the Commission should permit an investor advised
by a registered investment adviser or broker-dealer to be deemed an
accredited investor, many commenters expressed support,\254\ with a
number of these commenters positing that the client would be able to
rely on the knowledge and the sophistication of the adviser to
determine whether an investment is appropriate.\255\ One commenter
stated

that the idea could merit consideration in the future once the market
gains some experience under Regulation Best Interest.\256\ Another
commenter suggested the use of the purchaser representative concept of
Regulation D as a possible means of permitting advised investors to
participate in exempt offerings.\257\ Commenters that supported
treating clients of financial intermediaries as accredited investors
did not offer additional conditions or protections that should be
considered as part of this expansion.\258\
---------------------------------------------------------------------------

    \254\ See SAF Financial Letter; C. Lakumb Letter; letter from
Brian Schreiner dated Feb. 20, 2020; letter from Robert R. Champion
dated Jan. 15, 2020; letter from Seth Haymes dated Dec. 29, 2019;
letter from Dolan McEniry Capital Management, LLC dated Mar. 9,
2020; IPA Letter; ALTI Letter; letter from GW&K Investment
Management, LLC dated Mar. 16, 2020 (``GW&K Letter''); letter from
iCapital Network dated Mar. 16, 2020; Fidelity Letter; Artivest
Letter; letter from GTS Securities LLC dated May 5, 2020; and M.
Harker Letter (suggesting that investors advised by funding portals
be included).
    \255\ See Fidelity Letter (indicating that ``[a] retail investor
who does not qualify as an accredited investor and yet would like to
access private offering opportunities should be able to work with,
and rely on, the knowledge and sophistication that registered
investment advisers and broker-dealers have in determining whether
such an investment is appropriate for the investor, as analyzed
under the appropriate standard of conduct'') and IPA Letter (noting
that the adviser acts as a fiduciary for the client).
    \256\ See ABA FR of Sec. Comm. Letter (noting that ``this idea
may merit further consideration after there has been some experience
with Regulation Best Interest and with the rule amendments (once
adopted) proposed here'').
    \257\ See D. Burton Letter (positing that ``[f]leshing out the
purchaser representative concept [of Regulation D] seems to me to be
a more fruitful path forward than treating advised investors as
accredited'').
    \258\ See, e.g., Fidelity Letter (stating ``we do not believe
that additional limits would be necessary should the SEC permit this
expansion'').
---------------------------------------------------------------------------

    Several commenters were opposed,\259\ with one stating that such an
amendment would expand the definition of accredited investor without
ensuring that adequate protections exist that would make the
protections of the securities laws unnecessary.\260\ Another commenter
posited that such an expansion would negate the investor protections
provided by the accredited investor definition and generally shift
capital formation efforts from the public markets to the private
markets.\261\ One commenter predicted that only intermediaries with
conflicts of interest would participate and argued that the supposed
expertise of a financial intermediary is no substitute for the
investor's own sophistication, experience, and wherewithal.\262\
Finally, one commenter stated that expanding the definition of
accredited investor to clients of financial intermediaries raises
concerns about economies of scale and adverse selection.\263\
---------------------------------------------------------------------------

    \259\ See J. LaBerge Letter; A. Hemmingsen Letter; CFA Letter;
Mercer Advisors Letter; St. John's Sec. Arbitration Clinic Letter;
ICI Letter (noting that ``even if a financial intermediary has the
sophistication to make informed decisions about private market
offerings, that alone would not satisfy the Commission's
longstanding policy of considering retail investors' access to
resources to bear loss from products that lack Securities Act
protections''); NASAA Letter; CA Attorney General et al. Letter; and
PIABA Letter.
    \260\ See St. John's Sec. Arbitration Clinic Letter.
    \261\ See CA Attorney General et al. Letter (stating that
``broker-dealers and investment advisors often have conflicts of
interest in their relationships with individual investors . . . data
suggests that broker-dealers who market securities in private
offerings are more likely to be the subject of complaints to FINRA .
. . [and] this expansion of accredited investor status is likely to
swallow the general rule that private placements are limited to a
select pool of accredited investors'').
    \262\ See NASAA Letter (indicating that ``[r]esponsible,
reputable investment advisers will be unlikely to recommend private
offerings to clients unless they are already sophisticated and
wealthy enough to qualify as accredited. The only investment
advisers who would do so are those whose business models are
conflicted in favor of private issuers. Further, a review of
suitability cases brought by NASAA members, [FINRA], and in private
FINRA arbitrations reveals that conflicted investment advice is not
uncommon'').
    \263\ See, e.g., ICI Letter (stating ``[w]hile larger retail or
institutional investors with research staffs and large pools of
capital can access the more attractive investment opportunities and
negotiate pricing and access to information, smaller retail
investors and their financial intermediaries only may be able to
access less-attractive opportunities. In addition, it is possible
that at least some intermediaries will not have the expertise to
properly evaluate those investments'').
---------------------------------------------------------------------------

    After considering the comments received, we are not expanding the
accredited investor definition to include customers of a broker-dealer
or clients of a registered investment adviser. We believe that neither
a recommendation by a broker-dealer nor advice by a registered
investment adviser should serve as a proxy for an individual investor's
financial sophistication or his or her ability to sustain the risk of
loss of investment or ability to fend for him or herself. Additionally,
we are concerned that allowing investors receiving recommendations or
investment advice to be considered accredited investors, regardless of
their financial sophistication, experience, or ability to bear loss,
could undermine the purpose of the accredited investor definition in
identifying investors who possess a sufficient level of financial
sophistication to participate in investment opportunities that do not
have the additional protections provided by registration under the
Securities Act and our framework for regulating the offering process.
    Furthermore, as the Commission noted in the Proposing Release,
being advised by a financial professional has historically not been a
complete substitute for the protections of the Securities Act
registration requirements and, if applicable, the Investment Company
Act.\264\ The presence of a financial intermediary may not solve for
certain of the investment protection concerns associated with private
offerings, such as illiquidity, agency costs (including bargaining
power in contracting when the investor has less money to invest),
information asymmetry, as well as high transaction and search costs.
For the reasons discussed above, we are not expanding the accredited
investor definition to include investors advised by a registered
investment adviser or broker-dealer.
---------------------------------------------------------------------------

    \264\ See Proposing Release at 2595.
---------------------------------------------------------------------------

d. Other Comments Received
    Several commenters responded with ideas that were not responses to
specific requests for comment. A few commenters proposed a multi-level
accreditation system for natural persons \265\ allowing investors at a
lower level of income or net worth \266\ to invest either a capped
amount \267\ or invest through an investor group.\268\ Another
commenter proposed an ``investments assets'' test for natural persons
with $1 million in investments.\269\ One commenter proposed to remove
the requirement that any institutional investor not be formed for the
purposes of investing in the offered securities.\270\ Other commenters
suggested changes related to the financial thresholds, with one
commenter suggesting that accredited-investor status be maintained for
life,\271\ and another suggesting that accredited-investor status
should not need to be re-evaluated often.\272\ One commenter suggested
that ``sophisticated investors'' be allowed to invest in Rule 506(c)
offerings.\273\ A few commenters suggested changes related to how
defined contribution employee benefit plans count beneficial owners for
the purposes of compliance with the Investment Company Act.\274\ Some
commenters proposed to eliminate the accredited investor
definition,\275\ with one of these commenters recommending that the
definition be replaced with an online acknowledgement-of-risk form
\276\ and another recommending

elimination of the distinction between accredited and non-accredited
investors in Regulation D offerings.\277\
---------------------------------------------------------------------------

    \265\ See J. Kelner Letter; Cityvest Letter; and T. Parker
Letter.
    \266\ See J. Kelner Letter (did not specify thresholds);
Cityvest Letter ($100,000 in annual income or $500,000 in net
worth); and T. Parker Letter ($100,000 in annual income or $500,000
in net worth).
    \267\ See J. Kelner Letter ($25,000 or $50,000) and Cityvest
Letter ($50,000).
    \268\ See T. Parker Letter (proposing to allow investors to
``invest in deals through an established Angel Group that provides
education and possibly also a more experienced mentor'').
    \269\ See G. Fryer Letter.
    \270\ See CCMC Letter.
    \271\ See G. Hodge Letter.
    \272\ See K. Pulavarthi Letter.
    \273\ See R. Courtney Letter.
    \274\ See letters from Institute for Portfolio Alternatives
dated July 10, 2020 and from Defined Contribution Alternatives
Association dated July 20, 2020. These commenters also recommended
changes to Rule 22e-4 under the Investment Company Act.
    \275\ See supra note 16.
    \276\ See K. Wilson Letter (stating that ``[a]cknowledging risks
could be as simple as having a person go through an online survey,
providing a written verification or clicking an acceptance of terms
that a person understands the risks, no matter what their level of
net worth is'').
    \277\ See J. Peter Letter (stating ``please treat all equal and
let everyone invest in accredited deals'').
---------------------------------------------------------------------------

    After considering these comments, we do not believe additional
amendments to the definition of accredited investor are warranted at
this time. Nor are we eliminating the accredited investor definition.
We believe that the amendments we are adopting in this release provide
appropriate investor protections while facilitating capital formation.
The Commission will have the opportunity to consider these and other
matters in connection with its quadrennial review of the accredited
investor definition required by the Dodd-Frank Act.\278\
---------------------------------------------------------------------------

    \278\ See supra note 110.
---------------------------------------------------------------------------

III. Amendments to Securities Act Rule 163B and Exchange Act Rule 15g-1

A. Securities Act Rule 163B

    In registered offerings under the Securities Act, issuers may
engage in test-the-waters communications with qualified institutional
buyers or institutional accredited investors to gauge their interest in
a contemplated offering. Under Section 5(d) of the Securities Act, an
emerging growth company, as defined in Securities Act Rule 405,\279\ is
permitted to engage in oral or written communications with potential
investors that are either qualified institutional buyers, as defined in
Rule 144A(a)(1), or institutions that are accredited investors as
defined in Rule 501(a), to offer securities before or after the filing
of a registration statement.
---------------------------------------------------------------------------

    \279\ An emerging growth company is defined in Rule 405 as an
issuer that had total annual gross revenues of less than
$1,070,000,000 during its most recently completed fiscal year.
---------------------------------------------------------------------------

    In September 2019, the Commission adopted Securities Act Rule 163B,
which extends this testing-the-waters accommodation to all
issuers.\280\ Pursuant to Rule 163B, an issuer may engage in test-the-
waters communications with potential investors that are, or that the
issuer or person authorized to act on its behalf reasonably believes
are, qualified institutional buyers, as defined in Rule 144A, or
institutions that are accredited investors, as defined in Rule
501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8).
---------------------------------------------------------------------------

    \280\ See Solicitations of Interest Prior to a Registered Public
Offering, Release No. 33-10699 (Sept. 25, 2019) [84 FR 53011 (Oct.
4, 2019)].
---------------------------------------------------------------------------

    In connection with the amendments to the accredited investor
definition in Rule 501(a), the Commission also proposed to amend Rule
163B to include a reference to proposed Rules 501(a)(9) and (a)(12).
The proposed amendment was intended to maintain consistency between
Rule 163B and Section 5(d), in that institutional accredited investors
under proposed Rules 501(a)(9) and (a)(12) would automatically fall
within the scope of Section 5(d).
1. Comments
    The Proposing Release requested comment on whether Rule 163B should
be amended to include a reference to Rules 501(a)(9) and (a)(12). Three
commenters responded, with two commenters supporting inclusion of a
reference to Rule 501(a)(9) and (a)(12).\281\ The other commenter
supported including a reference only to Rule 501(a)(9), and indicated
that he had no view on whether to include 501(a)(12).\282\ The
Commission also requested comment on whether the proposed amendments to
the accredited investor definition and the qualified institutional
buyer definition raise concerns in connection with the test-the-waters
communications that issuers may engage in pursuant to Rule 163B or
Section 5(d) of the Securities Act. One commenter responded that the
proposed amendments would raise no concerns.\283\
---------------------------------------------------------------------------

    \281\ See CCMC Letter and ABA FR of Sec. Comm. Letter.
    \282\ See D. Burton Letter.
    \283\ Id.
---------------------------------------------------------------------------

2. Final Amendments
    We are adopting the amendment as proposed with one addition. We
continue to believe that expanding the types of entities with whom an
issuer may engage in test-the-waters communications, by amending the
accredited investor definition and the qualified institutional buyer
definition,\284\ may increase the use of Rule 163B, as well as Section
5(d), and may result in issuers more effectively gauging market
interest in contemplated registered offerings. We also continue to
believe that the expanded scope of entities that would receive test-
the-waters communications under the proposed amendment to Rule 163B
have the financial sophistication to process this information and to
review the registration statement that is filed with the Commission
against the test-the-waters materials before making an investment
decision.
---------------------------------------------------------------------------

    \284\ The amendments to the qualified institutional buyer
definition in Rule 144A are discussed below in Section IV.
---------------------------------------------------------------------------

    Accordingly, we are amending Rule 163B to include references to
Rules 501(a)(9) and (a)(12). We are also including a reference to Rule
501(a)(13) to cover family clients that are institutions and qualify as
accredited investors under such rule. As noted above, the definition of
``family client'' includes both natural persons and institutions.
Section 5(d) of the Securities Act refers to ``institutions that are
accredited investors,'' and, unlike Rule 163B, does not specify
particular paragraphs of Rule 501(a) that refer to such institutions.
As the intent in proposing to amend Rule 163B was to maintain
consistency between Rule 163B and Section 5(d) of the Securities Act
and capture institutions that are able to newly qualify as accredited
investors, we believe including family clients that are institutions in
the list of institutional accredited investors is appropriate.

B. Exchange Act Rule 15g-1

    The Proposing Release also proposed to amend Rule 15g-1(b) to
include a reference to proposed Rules 501(a)(9) and (a)(12).\285\
Pursuant to Exchange Act Rule 15g-2 through Rule 15g-6, broker-dealers
are required to disclose certain specified information to their
customers prior to effecting a transaction in a ``penny stock,'' as
defined in 17 CFR 240.3a51-1 under the Exchange Act.\286\ Rule 15g-1
under the Exchange Act exempts certain transactions from these
disclosure requirements. In particular, paragraph (b) of Rule 15g-1
exempts transactions in which the customer is an institutional
accredited investor, as defined in Rule 501(a)(1), (2), (3), (7), or
(8) of Regulation D.\287\
---------------------------------------------------------------------------

    \285\ We are also adopting a technical amendment to Rule 15g-
1(c) to update the reference to Section 4(2) of the Securities Act
to reflect the current numbering scheme in Section 4.
    \286\ Rules 15g-1 through 15g-9 under the Exchange Act [17 CFR
240.15g-2 through 15g-9] are collectively known as the ``penny stock
rules.'' See also Schedule 15G under the Exchange Act.
    \287\ In addition, Rule 15g-1(a), (d), (e), and (f) exempt
certain other transactions from the disclosure requirements in Rules
15g-2 through 15g-6. Rule 15g-1(c) exempts transactions that meet
the requirements of Regulation D or that are exempt from the
registration requirements of the Securities Act pursuant to Section
4(a)(2). Rule 15g-1 also includes a provision the Commission can use
to exempt by order any other transactions or persons from the penny
stock rules as consistent with the public interest and the
protection of investors.
---------------------------------------------------------------------------

1. Comments
    The Proposing Release requested comment on whether Rule 15g-1(b)
should be amended to include a reference to Rules 501(a)(9) and
(a)(12). A few commenters supported adding Rule 501(a)(9).\288\ No
commenters responded on whether 501(a)(12) should be added, and no
commenters indicated that neither should be added. The

Commission also requested comment on whether limited liability
companies should continue to be included in the exemption set forth in
Rule 15g-1(b). One commenter responded that limited liability companies
should continue to be included.\289\
---------------------------------------------------------------------------

    \288\ See P. Rutledge Letter and CCMC Letter.
    \289\ See D. Burton Letter.
---------------------------------------------------------------------------

2. Final Amendments
    We are adopting the amendment as proposed with one addition. We
continue to believe that, like the institutional accredited investors
currently within the scope of Rule 15g-1(b), those institutions that we
are adding to the accredited investor definition in Rule 501(a)(1),
entities owning investments in excess of $5 million that are not formed
for the specific purpose of acquiring the securities being offered, and
family offices do not need the additional protections provided by Rules
15g-2 through 15g-6.\290\ We also continue to believe that, consistent
with the categories of institutional accredited investors presently
listed in Rule 15g-1(b), entities within the scope of Rule 501(a)(9),
family offices, and the other types of entities we are adding to the
accredited investor definition generally invest in speculative equity
securities as part of an overall investment plan, have a good
understanding of the risks of investing in penny stocks, and have the
ability to obtain and evaluate independent information regarding these
stocks.\291\
---------------------------------------------------------------------------

    \290\ As discussed above, we are also amending a number of the
existing categories in the accredited investor definition relating
to institutional investors that fall within the scope of the
exemption in Rule 15g-1(b).
    \291\ See Penny Stock Disclosure Rules, Release No. 34-29093
(Apr. 17, 1991) [56 FR 19165 (Apr. 25, 1991)] and Penny Stock
Disclosure Rules, Release No. 34-30608 (Apr. 20, 1992) [57 FR 18004
(Apr. 28, 1992)].
---------------------------------------------------------------------------

    As discussed above in connection with the addition of institutional
``family clients'' to Rule 163B, we are also including institutional
family clients in the list of institutional accredited investors in
Rule 15g-1(b). We believe this addition is appropriate to capture
institutions that are newly able to qualify as accredited investors and
to prevent confusion that could arise if we do not maintain consistency
in the references to institutional accredited investors across our
rules.

IV. Discussion of the Final Amendments to the Qualified Institutional
Buyer Definition

A. Proposed Amendments

    Rule 144A(a)(1)(i) specifies the types of institutions that are
eligible for qualified institutional buyer status if they meet the $100
million in securities owned and invested threshold.\292\ The Commission
proposed to expand the qualified institutional buyer definition by
adding RBICs to Rule 144A(a)(1)(i)(C) and limited liability companies
to Rule 144A(a)(1)(i)(H) to correspond to the proposed amendments to
Rule 501(a)(1) and Rule 501(a)(3). In addition, to ensure that entities
that qualify for accredited investor status also qualify for qualified
institutional buyer status when they meet the $100 million in
securities owned and invested threshold in Rule 144A(a)(1)(i), the
Commission proposed to add new paragraph (J) to Rule 144A(a)(1)(i). The
proposed new paragraph would permit institutional accredited investors
under Rule 501(a), of an entity type not already included in paragraphs
144A(a)(1)(i)(A) through (I) or 144A(a)(1)(ii) through (vi), to qualify
as qualified institutional buyers when they satisfy the $100 million
threshold.\293\ This new category in the qualified institutional buyer
definition would encompass the new category in the accredited investor
definition for entities owning investments in excess of $5 million that
are not formed for the specific purpose of acquiring the securities
being offered under Regulation D,\294\ as well as any other entities
that may be added to the accredited investor definition in the future,
although such entities would also have to meet the $100 million
threshold in order to be qualified institutional buyers under Rule
144A.
---------------------------------------------------------------------------

    \292\ Rule 144A(a)(1)(i)(A)-(G) and (I).
    \293\ Because Rule 144A(a)(1)(i)(J) covers entities not included
in paragraphs (A) through (I), a bank or other financial institution
specified in those paragraphs would continue to be required to
satisfy the net worth test in Rule 144A(a)(vi).
    \294\ Rule 501(a)(9).
---------------------------------------------------------------------------

B. Final Amendments

1. Comments
    Commenters generally supported expanding the definition of
qualified institutional buyer in Rule 144A,\295\ with several
specifically supporting the amendments to Rule 144A(a)(1)(i)(C),\296\
Rule 144A(a)(1)(i)(H),\297\ and Rule 144A(a)(1)(i)(J).\298\ No
commenter opposed the proposed amendments to Rule 144A.
---------------------------------------------------------------------------

    \295\ See Better Markets Letter; ICI Letter; Fidelity Letter;
and letter from Corbyn Investment Management, Inc. dated Jul. 15,
2020 (``Corbyn Letter'').
    \296\ See CCMC Letter and ABA FR of Sec. Comm. Letter.
    \297\ See Arnold & Porter Letter; CCMC Letter; and ABA FR of
Sec. Comm. Letter.
    \298\ See letter from Matthew L. Clark, State Investment Officer
South Dakota Investment Council dated Feb. 7, 2020 (``SD Investment
Council Letter''); letter from Income Research + Management dated
Feb. 13, 2020 (``IR+M Letter'') (positing that ``permitting
institutional accredited investors that meet the asset threshold of
$100 million to be considered qualified institutional buyers under
Rule 144A will allow for greater investment opportunities within the
fixed income markets that are already afforded to other
institutional investors of a similar nature''); CMTA Letter; Arnold
& Porter Letter; J. LaBerge Letter; PIC Letter; ICI Letter; Am.
Bankers Assn. Letter; OST Letter; TIAA Letter; CCMC Letter; Fidelity
Letter; PFM Letter; letter from Coalition of Collective Investment
Trusts dated Mar. 16, 2020 (``CCIT Letter''); Better Markets Letter;
CACTTC Letter; and ABA FR of Sec. Comm. Letter.
---------------------------------------------------------------------------

    We also received comments from several commenters with specific
support for including in the definition of qualified institutional
buyer all state and local governments.\299\ A few commenters discussed
the changing nature of the commercial paper markets in which they
invest, with one commenter stating that ``[w]ith the growth of the
[Securities Act Section] 4(a)(2) and [Rule] 144A commercial paper
markets and the recent trend of public corporations replacing exempt
and registered securities programs with private placement programs,
local governments face growing challenges to invest public funds for
the benefit of our constituents.'' \300\ Another commenter noted that,
as a state government investor, it ``can only purchase commercial paper
issued under [Securities Act] Section 3(a)(3), which is relatively
rare, compared to commercial paper issued under [Securities Act]
Section 4(a)(2).'' \301\ Another commenter noted that changes have
occurred in the Rule 144A market for bond offerings in the last 20
years, with more fixed income issuers opting to rely on the Rule 144A
process for bond issuances, rather than going through the more
expensive and burdensome public offering process.\302\
---------------------------------------------------------------------------

    \299\ See SD Investment Council Letter (indicating that
``[s]tate governmental entities have the expertise to evaluate the
144A securities and make prudent investments in these securities'');
letter from Amundi Pioneer Institutional Asset Management, Inc.
dated Feb. 12, 2020 (``Amundi Pioneer Letter''); NAST et al. Letter;
letter from David C. Damschen, Utah State Treasurer dated Feb. 26,
2020 (``Utah State Treasurer Letter'') (stating that ``[o]ur
investments would be greatly advantaged through increased
diversification and marginally enhanced yield by expanding the pool
of available securities to include corporate bonds and commercial
paper available only to QIBs''); TIAA Letter; and Arnold & Porter
Letter (positing that ``[a]llowing governmental entities that meet
the investment size threshold to qualify as QIBs would increase such
entities' flexibility in their investments without posing an
increased risk to the markets or investors'').
    \300\ See CACTTC Letter.
    \301\ See Utah State Treasurer Letter.
    \302\ See IAA Letter.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission noted that proposed Rule
144A(a)(1)(i)(J) would encompass bank-

maintained collective investment trusts that include as participants
individual retirement accounts or H.R. 10 plans that are currently
excluded from the qualified institutional buyer definition pursuant to
Rule 144A(a)(1)(i)(F), so long as the collective investment trust
satisfies the $100 million threshold.\303\ A few commenters supported
the addition of Rule 144A(a)(1)(i)(J) specifically because it would
capture certain collective investment trusts.\304\ One of these
commenters supported the addition of Rule 144A(a)(1)(i)(J) because it
would allow ``bank-maintained [collective investment trusts and common
trust funds] to qualify as qualified institutional buyer[s] if they
satisfy the other requirements of Rule 144A.'' \305\
---------------------------------------------------------------------------

    \303\ See Proposing Release at note 241.
    \304\ See CCIT Letter and Am. Bankers Assn. Letter.
    \305\ See Am. Bankers Assn. Letter.
---------------------------------------------------------------------------

    The Proposing Release also requested comment on whether certain
types of entities are less likely to have experience in the private
resale market for restricted securities and may have more need for the
protections afforded by the Securities Act registration provisions. The
only commenter responding to this request for comment stated that it
was not aware of any such entities.\306\ The Proposing Release also
requested comment on whether the proposed amendments to the qualified
institutional buyer definition would result in a greater likelihood of
restricted securities sold under Rule 144A flowing into the public
market. All of the commenters responding to this request indicated that
they did not foresee such a likelihood.\307\
---------------------------------------------------------------------------

    \306\ See Utah State Treasurer Letter.
    \307\ See SD Investment Council Letter; Arnold & Porter Letter;
and Utah State Treasurer Letter.
---------------------------------------------------------------------------

    We received comments proposing additional expansions to Rule 144A.
One commenter requested that the Commission include family clients in
addition to family offices, which could be included under proposed Rule
144A(a)(1)(i)(J).\308\ One commenter proposed adding private funds with
$100 million in gross asset value and investment advisers managing the
investments of such a private fund.\309\ A few commenters proposed to
include clients of any SEC-registered adviser that manages more than
$100 million in securities.\310\ Another commenter proposed to allow
SEC-registered investment advisers to purchase 144A securities for
clients that are not qualified institutional buyers.\311\
---------------------------------------------------------------------------

    \308\ See PIC Letter.
    \309\ See AIC Letter.
    \310\ See IAA Letter; GW&K Letter; and Corbyn Letter.
    \311\ See GW&K Letter.
---------------------------------------------------------------------------

2. Final Amendments
    We are adopting the amendments as proposed and are adding a note in
response to comments. We continue to believe that the $100 million
threshold for these entities to qualify for qualified institutional
buyer status should ensure that these entities have sufficient
financial sophistication and access to resources to participate in
investment opportunities that do not have the additional protections
provided by registration under the Securities Act. The scope of Rule
144A(a)(1)(i)(J) encompasses all entity types that are not already
listed in paragraphs (a)(1)(i)(A) through (I) or paragraphs (a)(1)(ii)
through (vi) of Rule 144A, including Indian tribes, governmental
bodies, and bank-maintained collective investment trusts. We also
believe that the inclusion of Indian tribes and governmental bodies
will provide these entities with expanded access to the commercial
paper markets, which, according to the commenters discussed above, have
changed in recent years.
    Regarding the requests from commenters to expand Rule 144A to
include various persons, including ``family clients,'' private funds
with $100 million in gross asset value and their investment advisers,
clients of SEC-registered advisers that manage more than $100 million
in securities, and clients of any SEC-registered investment advisers,
at this time, we are not expanding the scope of Rule 144A further than
what the Commission proposed in the Proposing Release.
    We are not expanding the definition to include private funds with
$100 million in gross asset value as one commenter suggested. Although
we acknowledge that such funds likely have a high level of financial
sophistication, we do not believe it is appropriate to add a new
financial threshold to the definition exclusively for private funds. We
are concerned about the application of different thresholds to
similarly situated investors. We are also concerned about the confusion
this would create. Furthermore, we believe that most private funds with
$100 million in gross asset value will already meet the definition of a
qualified institutional buyer under Rule 144A (a)(1)(i)(H) or Rule
144A(a)(1)(i)(J).
    We also are not expanding the definition to include clients of SEC-
registered advisers. As discussed above with respect to the accredited
investor definition, being advised by a financial professional has
historically not been a complete substitute for the protections of the
Securities Act registration requirements and, if applicable, the
Investment Company Act.\312\ We do not believe it is appropriate to
effectively transfer the status of an adviser to its individual
clients, or to expand the aggregation of investments managed by an
adviser in order to permit such persons to qualify as qualified
institutional buyers. We do note, however, that, if such a person is an
institutional accredited investor, then it could also qualify as a
qualified institutional buyer under Rule 144A(a)(1)(i)(J) if it meets
the requirements of Rule 144A(a)(1)(i).\313\
---------------------------------------------------------------------------

    \312\ See supra note 264.
    \313\ For example, a family client that is an institution and
qualifies as an accredited investor under Rule 501(a) and meets the
$100 million in securities owned and invested threshold of Rule
144A(a)(1)(i), will qualify as a qualified institutional buyer.
---------------------------------------------------------------------------

    One commenter noted that the addition of Rule 144A(a)(1)(i)(J)
would import the ``not formed for the specific purpose of acquiring the
securities offered'' modifier of Rule 501(a) to several categories of
institutional accredited investors that would qualify as qualified
institutional buyers, a condition that does not appear at all in the
current definition.\314\ The provision in Rule 501(a) that the entity
not be formed for the purpose of acquiring securities does not apply in
the Rule 144A context. Consistent with the Proposing Release, we intend
that eligible purchasers under Rule 144A(a)(1)(i) will continue to
include entities formed solely for the purpose of acquiring restricted
securities under Rule 144A, provided that they satisfy the test for
qualified institutional buyer status.\315\ To address the potential for
confusion, we are adding a note to Rule 144A(a)(1)(i)(J) to clarify
that the entity seeking qualified institutional buyer status under Rule
144A(a)(1)(i)(J) may be formed for the purpose of acquiring the 144A
securities being offered.
---------------------------------------------------------------------------

    \314\ See CCMC Letter.
    \315\ See Proposing Release at 2598. This is in contrast to the
amendment to the accredited investor definition in Rule 501(a)(3),
which will continue to require that the entity not be formed for the
specific purpose of acquiring the securities offered.
---------------------------------------------------------------------------

V. Other Matters

    If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect

without the invalid provision or application.
    Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated these rules as a ``major rule,''
as defined by 5 U.S.C. 804(2).

VI. Economic Analysis

    We are attentive to the costs imposed by and the benefits obtained
from the final amendments.\316\ The discussion below addresses the
potential economic effects of the final amendments, including the
likely benefits and costs, as well as the likely effects on efficiency,
competition, and capital formation. We also analyze the potential costs
and benefits of reasonable alternatives to the amendments.
---------------------------------------------------------------------------

    \316\ Section 2(b) [15 U.S.C. 77b(b)] and Section 3(f) [15
U.S.C. 78c(f)] of the Exchange Act directs the Commission, when
engaging in rulemaking where it is required to consider or determine
whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation. Further, Section 23(a)(2) [15 U.S.C. 78w(a)(2)] of the
Exchange Act requires the Commission, when making rules under the
Exchange Act, to consider the impact that the rules would have on
competition, and prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

A. Introduction and Broad Economic Considerations

    As discussed above, we are adopting amendments, generally as
proposed, to the ``accredited investor'' definition in Rule 501(a) of
Regulation D to, among other things: (1) Add new categories of natural
persons that qualify as accredited investors based on certain
professional certifications or designations or other credentials, or
with respect to investments in a private fund, as a ``knowledgeable
employee'' of the private fund; (2) add certain entity types to the
current list of entities that qualify as accredited investors and a new
category for any entity with ``investments,'' as defined in Rule 2a51-
1(b) under the Investment Company Act, in excess of $5 million and that
was not formed for the specific purpose of investing in the securities
offered; (3) add family offices with more than $5 million in assets
under management and their family clients to the definition; (4) add
the term ``spousal equivalent'' to the definition, so that spousal
equivalents may pool their finances for the purpose of qualifying as
accredited investors; and (5) codify certain staff interpretive
positions that relate to the accredited investor definition. We also
are adopting an amendment to the definition of ``qualified
institutional buyer'' in Rule 144A to expand the list of entities that
are eligible to qualify as qualified institutional buyers. The final
amendments are designed to better align access to unregistered
offerings with the financial sophistication required to assess an
investment opportunity without the added investor protections that come
with registration under the Securities Act.
    Registration under the Securities Act is intended to provide
certain investor protections, for example, by imposing procedural and
substantive disclosure requirements that go significantly beyond
general antifraud rules. These requirements are designed to mitigate
certain information asymmetry and principal-agent problems that can
arise when companies make public offerings of securities to investors,
and also provide other investor protections, including, for example, a
right of rescission under Section 12 of the Securities Act, if certain
procedural requirements are not followed, and rights of action under
Sections 11 and 12(a)(2) of the Securities Act, in the event of
material misstatements or omissions that in certain cases do not
require proof of intent or reliance. Registration also imposes various
costs, such as compliance costs and the risk of issuers disclosing
sensitive proprietary information to competitors. Although registration
is the default under our rules, Congress and the Commission have long
recognized that the investor protection benefits of registration may
not be necessary or appropriate in various circumstances, including in
light of the significant attendant fixed and variable costs of
registration, and have provided exemptions for certain offerings based
on various factors, including when the offerings are generally limited
to individuals and entities that do not require the protection of
registration. We note that issuers conducting larger offerings with
broad investor participation continue to rely on our public markets to
avail themselves of the various attendant benefits of being a public
company. The final amendments adjust the categories of individuals and
entities eligible for participation in certain exempt offerings in
several areas by expanding the definitions of accredited investor and
qualified institutional buyer to include additional individuals and
institutions that the Commission believes have sufficient knowledge and
expertise to participate in investment opportunities that do not come
with the additional protections provided by registration under the
Securities Act.
    In 2019, the estimated amount of capital reported as being raised
in offerings under Regulation D was over $1.5 trillion,\317\ which was
larger than the $1.2 trillion raised in registered offerings.\318\ As
private capital markets have grown, the vast majority of the capital
that has been raised in unregistered offerings under Regulation D has
been through investment by accredited investors. For example, though
securities sold in offerings conducted pursuant to Rule 506(b) are
permitted to be purchased by up to 35 non-accredited investors who are
sophisticated, we estimate that, from 2009 to 2019, only between 3.4%
and 6.9% of the aggregate number of offerings conducted under Rule
506(b) included non-accredited investor purchasers.\319\ Further, these
non-

accredited investors in the aggregate likely accounted for a negligible
amount of the capital raised in those offerings, and any impact was
likely heavily weighted towards smaller offerings.\320\ These facts
emphasize the prominent role our private markets play, and, as a
result, accredited investors (particularly institutional accredited
investors) play, in capital formation.\321\
---------------------------------------------------------------------------

    \317\ See infra Table 4 in Section VI.B. Offerings under
Regulation D include offerings under Rules 504, 506(b), and 506(c).
DERA staff analysis is based on Form D filings from 2019. These
estimates are based on the reported ``total amount sold'' at the
time of the original filing--required within 15 days of the first
sale--as well as any additional capital raised and reported in
amended filings. The data likely underreport the actual amount sold
due to two factors. First, underreporting could occur in all years
because Regulation D filings can be made prior to the completion of
the offering, and amendments to reflect additional amounts sold
generally are not required if the offering is completed within one
year and the amount sold does not exceed the original offering size
by more than 10%. Second, Rule 503 requires the filing of a notice
on Form D, but filing a Form D is not a condition to the
availability of a Regulation D exemption. Hence, it is possible that
some issuers do not file a Form D for offerings relying on
Regulation D. Finally, in their annual amendments, some funds appear
to report net asset values for total amount sold under the offering.
Net asset values could reflect fund performance as well as new
investment into, and redemptions from, the fund. For these reasons,
based on Form D data, it is not possible to distinguish between the
two impacts.
    \318\ We obtain data for issuers conducting registered offerings
from SDC Platinum's New Issues database. We select all public
offerings conducted in the U.S. market during 2019, excluding IPOs
and government/federal agency offerings. For this comparison, we
consider follow-on equity offerings and debt offerings as more
appropriate benchmarks for Regulation D offerings because the
motivations for conducting an IPO extend beyond raising capital to
meet company's financial needs, such as considerations of pre-IPO
owners' diversification and liquidity needs, among others.
    \319\ This estimated range is based on DERA staff analysis of
Form D data on initial Form D filing among all Rule 506(b) offerings
from 2009 to 2019. In particular, the 3.4% estimate is based on
offerings that report that at least one non-accredited investor
already have invested in the offering as of the Form D filing and
may represent a lower bound because it relies on available Form D
filings, and because a final Form D upon the conclusion of an
offering is not required to be filed. If we also include Rule 506(b)
offerings on Form D that accept non-accredited investors but
reported having zero non-accredited investors in the initial filing,
the estimated percentage of offerings involving accredited investors
during the 2009-2019 period is approximately 6.9%, which may be
viewed as an upper bound estimate.
    \320\ For example, based on Form D filings during the period
2009-2019, the aggregate amount raised in offerings reporting
participation by at least one non-accredited investor in their
initial Form D filings was approximately 2.5% of the total aggregate
amount raised in 506(b) offerings. Based on offerings reporting a
non-zero amount of capital raised in their initial Form D filings,
the median amount raised in offerings that included non-accredited
investors was $463,000, whereas the median amount raised in
offerings with only accredited investors was approximately
$1,552,000.
    \321\ Individual accredited investors play an important role in
certain aspects of the market, particularly for smaller, early stage
issuers. However, they likely represent a much smaller portion of
the overall investment in our private markets as a whole, including
Regulation D, Rule 144A offerings, etc.
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    We anticipate that the final amendments may, in certain
circumstances, reduce the costs of finding investors (i.e., search
costs) for issuers in private offerings, as well as reduce their
transactions costs (e.g., through a potentially lower cost of
determining and verifying accredited investor status and a potentially
lower level of intermediation) and cost of capital, thereby
facilitating capital formation in those circumstances. In general, we
expect these effects will be more meaningful for smaller private
offerings than for larger private offerings.
    The final amendments will also affect investors. Investors with
specified attributes of financial sophistication who do not otherwise
qualify as accredited investors will be able to participate in
investment opportunities that historically generally have not been
available to them, such as investments in issuers that are not Exchange
Act reporting companies and offerings by certain private equity funds,
venture capital (VC) funds, and hedge funds, which are frequently
offered under Rule 506.\322\ Additionally, accredited investors are not
subject to investment limits in offerings made under Tier 2 of
Regulation A. Thus, expanding the definition of accredited investor
will permit additional investors to participate in Regulation A
offerings at higher amounts. In addition, expanding the definition of
qualified institutional buyer in the final rule will give certain
institutional investors the opportunity to participate in the Rule 144A
market, thereby giving those investors access to an expanded set of
investment opportunities.
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    \322\ See, e.g., infra Table 2 in Section VI.B.
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    As discussed in more detail below, the main anticipated benefit to
investors from the final amendments is access to a broader investment
opportunity set that can potentially improve the risk-return
characteristics of their portfolios. However, we recognize that any
potential gains in the efficiency of investors' portfolios from access
to exempt offerings may be moderated by the lower levels of investor
protection provided by these offerings as compared to registered
offerings, and factors such as information asymmetry, illiquidity, and
prevailing market practices (such as specific investor solicitation
practices across different types of issuers) that nevertheless limit
investors' opportunity set for private markets.
    We generally expect the individuals and institutions that will
become newly eligible accredited investors or qualified institutional
buyers to have a level of financial sophistication that will enable
them to assess both the opportunities and risks offered by private
offerings. For example, for reasons discussed in more detail
above,\323\ we think it is reasonable to believe that individuals that
pass one or more of the Series 7, 65, and 82 exams, and meet the
requirements to represent or advise others in connection with
securities market transactions (including private securities
offerings), have demonstrated a sufficient level of financial
sophistication to be able to evaluate and participate in investment
opportunities that do not have the additional protections provided by
registration under the Securities Act.
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    \323\ See supra Section II.B.1.a.
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    The final amendments could increase the size and alter the
composition of the pool of accredited investors by providing additional
measures of financial sophistication (e.g., professional certifications
for individuals and an investments-owned threshold for entities) to
qualify for accredited investor status. If many of the individuals who
qualify as accredited investors under the final amendments already meet
the income and wealth thresholds in the current accredited investor
definition, then the impact of the change on the pool of individuals
that qualify as accredited investors could be limited. For entities, we
anticipate that the impact of the amendments could be more significant,
as we are amending the accredited investor definition to include a
broad range of entities not previously covered under the definition.
Because we believe family offices have generally qualified as
accredited investors under the existing definition, we expect that the
effect of the amendments on them will be much smaller than on other
entities.
    Expanding the pool of accredited investors may have a positive
impact on capital formation in certain circumstances, such as in
offerings by issuers that are small, in development stages, or in
geographic areas that currently have lower concentrations of accredited
investors. Similarly, the final amendments to the qualified
institutional buyer definition in Rule 144A will increase the number of
entities that qualify for this status, thus improving the ability of
issuers to raise capital in the institutional investor market,
including by enhancing competition among investors in this market.\324\
Further, the final amendments will permit issuers to engage in test-
the-waters communications in registered offerings with a larger set of
investors as a result of changes to the scope of entities that qualify
as institutional accredited investors and qualified institutional
buyers, further facilitating capital formation.
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    \324\ Although Rule 144A is a non-exclusive safe harbor for
resale transactions, market participants have used Rule 144A since
its adoption in 1990 to facilitate capital raising by issuers. See,
e.g., Eliminating the Prohibition Against General Solicitation and
General Advertising in Rule 506 and Rule 144A Offerings, Release No.
33-9415 (July 10, 2013) [78 FR 44771 (July 24, 2013)].
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    Where possible, we have attempted to quantify the benefits, costs,
and effects on efficiency, competition, and capital formation expected
to result from the amendments. In many cases, however, we are unable to
quantify the economic effects because we lack the information necessary
to derive a reasonable estimate. We have incorporated feedback provided
by commenters in our analysis of the economic effects of the final
amendments. However, as explained in more detail below, because we do
not have, have not received, and, in certain cases, do not believe we
can obtain data that may inform on certain economic effects, we are
unable to quantify those effects. For example, we are unable to
quantify the costs to issuers and investors of verifying an investor's
accredited investor status and the potential capital raising and
compliance cost savings that may arise from the amendments to the
accredited investor definition. We further note that, even in cases
where we have some data or have received some data regarding certain
economic effects, the quantification of these effects is

particularly challenging due to the number of assumptions that we would
need to make to forecast how issuers and newly eligible (and
potentially eligible) accredited investors and qualifying institutional
buyers will respond to the final amendments, and how those responses
will, in turn, affect the broader private and public securities
markets.
    Although many commenters supported expanding the accredited
investor definition,\325\ some commenters raised a number of concerns
with the proposed amendments and the analysis of their anticipated
economic effects in the Proposing Release.\326\ We have considered
those concerns and, in appropriate circumstances, have expanded our
economic analysis to address those concerns.
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    \325\ See supra note 14.
    \326\ See supra note 15 for comment letters generally objecting
to expanding the definition of accredited investor.
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    The remainder of this economic analysis presents the baseline;
anticipated benefits and costs from the final amendments; potential
effects on efficiency, competition, and capital formation; and
alternatives to the final amendments.

B. Baseline and Affected Parties

    The main affected parties of the final amendments to the accredited
investor definition will be investors and issuers. For example, certain
entities that are currently not designated accredited investors will
become accredited investors under the final amendments and will be
eligible to participate in an expanded array of private offerings.
Correspondingly, current accredited investors may face greater
competition from newly qualified accredited investors to participate in
investment opportunities in this market. Similarly, we anticipate that
certain issuers, such as issuers that are smaller or in early stages of
development, will need to compete less intensively and may incur fewer
costs to access accredited investors under the final amendments.
    We do not have precise data on the number of individuals and
entities that currently qualify as accredited investors. Rule 501(a) of
Regulation D uses net worth and income as bright-line criteria to
identify natural persons as accredited investors.\327\ Using data on
household wealth from the Federal Reserve's Survey of Consumer Finances
(SCF) database,\328\ we estimate that under the current income and
wealth thresholds noted above, approximately 16.0 million U.S.
households representing 13% of the total population of U.S. households,
qualify as accredited investors. This estimate does not, however,
identify the precise number of accredited investors that do or could
invest in the Regulation D market or in other exempt offerings.\329\
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    \327\ Under the current definition, individuals may qualify as
accredited investors if (i) their net worth exceeds $1 million
(excluding the value of the investor's primary residence), (ii)
their income exceeds $200,000 in each of the two most recent years,
or (iii) their joint income with a spouse exceeds $300,000 in each
of those years and the individual has a reasonable expectation of
reaching the same income level in the current year.
    \328\ See https://www.federalreserve.gov/econresdata/scf/scfindex.htm.
    \329\ Form D data and other data available to us on private
placements do not allow us to estimate the number of unique
accredited investors that participate in exempt offerings.
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    Based on Form D filings during the period 2009-2019, we estimate
that there were on average approximately 295,069 accredited investors
participating annually in Regulation D offerings at the time of the
initial filing.\330\ However, because an investor can participate in
more than one Regulation D offering, this number likely includes
duplicate investors and therefore represents an upper bound estimate.
We lack data to estimate the actual number of unique accredited
investors who participate annually in Regulation D offerings.
Additionally, from the information reported on Form D, we cannot
distinguish accredited investors that are natural persons from
accredited investors that are institutions.\331\ The average number of
accredited investors per offering during the period 2009-2019 was 14,
and the median number was four.
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    \330\ We estimate the number of accredited investors as the
number of total investors minus the number of non-accredited
investors reported on initial Form D filings.
    \331\ Other limitations of the data gathered from Form D may
reduce the accuracy of the estimated number of accredited investors.
For example, an issuer is required to file a Form D generally no
later than 15 calendar days after the first sale of securities in a
Regulation D offering, regardless of whether the offering will be
ongoing after the filing of the Form D. Further, issuers are
required to file amendments to Form D only in limited circumstances:
(i) To correct a material mistake of fact or error in a previously
filed Form D, (ii) to reflect a change in certain information
provided in a previously filed Form D, and (iii) on an annual basis
if the offering is continuing at that time. Also, because the Form D
filing requirement is not a condition to claiming an exemption under
Rule 506(b) or 506(c) but rather is a requirement of Regulation D,
it is possible that some issuers do not file Form D when conducting
Regulation D offerings.
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    Table 2 presents evidence on investor participation in Regulation D
offerings by industry type during the period 2009-2019. The
participation of accredited investors in Regulation D offerings during
that period varied by type of issuer as well, with offerings by real
estate investment trusts (REITs) having the largest average number of
accredited investors per offering, and those by operating companies
having the smallest average number.
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    \332\ The estimated percentages are based on offerings that
report that at least one non-accredited investor already invested in
the offering as of the Form D filing and may represent a lower bound
because it relies on available Form D filings, and because a final
Form D upon the conclusion of an offering is not required to be
filed.
    \333\ The estimated percentages are based on offerings that
indicate on their initial Form D filing that they accept non-
accredited investors, whether or not they reported having non-
accredited investors at the time of the initial filing.

                      Table 2--Investors Participating in Regulation D Offerings: 2009-2019
----------------------------------------------------------------------------------------------------------------
                                                                                Fraction of       Fraction of
                                                                               offerings with       offerings
                               Total number   Mean investors      Median      one or more non-   accepting non-
                              of investors *   per offering    investors per     accredited        accredited
                                                                 offering      investors \332\   investors \333\
                                                                                (percent)         (percent)
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Hedge Fund..................          28,875              16               2                 3                 7
Private Equity Fund.........          28,062              17               2                 2                 3
Venture Capital Fund........          11,809              15               4                 0                 1
Other Investment Fund.......          38,445              22               5                 2                 4
Financial Services..........          18,450              15               4                 7                12