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44772 Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations

1 17 CFR 230.144A.2 17 CFR 239.500.3 17 CFR 230.500.4 17 CFR 230.501.5 17 CFR 230.502.6 17 CFR 230.506.7 17 CFR 230.500 through 230.508.8 15 U.S.C. 77a et seq.9 17 CFR 242.101.10 17 CFR 242.102.11 17 CFR 242.104.12 17 CFR 242.100 through 242.105.13 15 U.S.C. 78a et seq.

14 See Eliminating the Prohibition AgainstGeneral Solicitation and General Advertising inRule 506 and Rule 144A Offerings, Release No. 33–9354 (Aug. 29, 2012) [77 FR 54464 (Sept. 5, 2012)](the ‘‘Proposing Release’’).

15 Public Law 112–106, sec. 201(a), 126 Stat. 306,313 (Apr. 5, 2012).

16

The Commission adopted Regulation D in 1982as a result of the Commission’s evaluation of theimpact of its rules on the ability of small businessesto raise capital. See Revision of Certain ExemptionsFrom Registration for Transactions InvolvingLimited Offers and Sales, Release No. 33–6389(Mar. 8, 1982) [47 FR 11251 (Mar. 16, 1982)]. Overthe years, the Commission has revised variousprovisions of Regulation D in order to address,among other things, specific concerns relating tofacilitating capital-raising as well as abuses thathave arisen under Regulation D. See, e.g.,Additional Small Business Initiatives, Release No.33–6996 (Apr. 28, 1993) [58 FR 26509 (May 4,1993)] and Revision of Rule 504 of Regulation D, the‘‘Seed Capital’’ Exemption, Release No. 33–7644(Feb. 25, 1999) [64 FR 11090 (Mar. 8, 1999)].

17 The definition of the term ‘‘accreditedinvestor’’ that is applicable to Rule 506 is set forthin Rule 501(a) of Regulation D [17 CFR 230.501(a)]and includes any person who comes within one ofthe definition’s enumerated categories of persons,or whom the issuer ‘‘reasonably believes’’ comeswithin any of the enumerated categories, at the timeof the sale of the securities to that person. Fornatural persons, Rule 502(a) defines an accreditedinvestor as a person: (1) Whose individual networth, or joint net worth with that person’s spouse,exceeds $1 million, excluding the value of theperson’s primary residence (the ‘‘net worth test’’);or (2) who had an individual income in excess of$200,000 in each of the two most recent years, orjoint income with that person’s spouse in excess of$300,000 in each of those years, and has areasonable expectation of reaching the same incomelevel in the current year (the ‘‘income test’’).

Although the Dodd-Frank Act did not change theamount of the $1 million net worth test, it didchange how that amount is calculated—byexcluding the value of a person’s primary residence.This change took effect upon the enactment of theDodd-Frank Act. In December 2011, we amendedRule 501 to incorporate this change into thedefinition of accredited investor. See Net WorthStandard for Accredited Investors, Release No. 33–9287 (Dec. 21, 2011) [76 FR 81793 (Dec. 29, 2011)].

18 17 CFR 230.144A(d)(1).19 The term ‘‘qualified institutional buyer’’ is

defined in Rule 144A(a)(1) [17 CFR 230.144A(a)(1)]and includes specified institutions that, in theaggregate, own and invest on a discretionary basisat least $100 million in securities of issuers that arenot affiliated with such institutions. Banks andother specified financial institutions must also havea net worth of at least $25 million. A registered

broker-dealer qualifies as a QIB if it, in theaggregate, owns and invests on a discretionary basisat least $10 million in securities of issuers that arenot affiliated with the broker-dealer.

20 15 U.S.C. 77d(a)(2).21 15 U.S.C. 77e.

DATES : The final rule and formamendments are effective on September23, 2013.FOR FURTHER INFORMATION CONTACT :Charles Kwon, Special Counsel, or TedYu, Senior Special Counsel, Office ofChief Counsel, Division of CorporationFinance, at (202) 551–3500, or, withrespect to private funds, Holly Hunter-Ceci, Senior Counsel, Chief Counsel’sOffice, or Alpa Patel, Senior Counsel,Investment Adviser Regulation Office,Division of Investment Management, at(202) 551–6825 or (202) 551–6787,Securities and Exchange Commission,100 F Street NE., Washington, DC20549.SUPPLEMENTARY INFORMATION : We areadopting amendments to Rule 144A, 1 Form D, 2 and Rules 500, 3 501, 4 502 5 and 506 6 of Regulation D 7 under theSecurities Act of 1933, 8 and to Rules101, 9 102 10 and 104 11 of RegulationM 12 under the Securities Exchange Actof 1934. 13

Table of ContentsI. IntroductionII. Final Amendments to Rule 506 and Form

DA. Eliminating the Prohibition Against

General Solicitation1. Proposed Rule Amendment2. Comments on the Proposed Rule

Amendment3. Final Rule AmendmentB. Reasonable Steps To Verify Accredited

Investor Status1. Proposed Rule Amendment2. Comments on the Proposed Rule

Amendment3. Final Rule Amendmenta. Principles-Based Method of Verification

b. Non-Exclusive Methods of VerifyingAccredited Investor Status

C. Reasonable Belief That All PurchasersAre Accredited Investors

D. Form D Check Box for Rule 506(c)Offerings

1. Proposed Form Amendment2. Comments on the Proposed Form

Amendment3. Final Form AmendmentE. Specific Issues for Private FundsF. Technical and Conforming Amendments

III. Final Amendment to Rule 144AIV. Integration With Offshore Offerings

V. Paperwork Reduction Act

A. BackgroundB. Revisions to PRA Reporting and Cost

Burden EstimatesVI. Economic Analysis

A. BackgroundB. Economic Baseline1. Size of the Exempt Offering Market2. Affected Market Participantsa. Issuers

b. Investorsc. Investment Advisersd. Broker-Dealers3. Current PracticesC. Analysis of the Amendment to Rule 5061. Benefits to Issuers2. Benefits to Investors3. Costs4. Indirect Effects on Other Markets5. Retention of Rule 506(b)D. Verifying Accredited Investor Status in

Rule 506(c) OfferingsE. Analysis of the Amendment to Rule

144AF. Additional Information Collection and

Disclosur esVII. Final Regulatory Flexibility Analysis

A. Reasons for, and Objectives of, the

ActionB. Significant Issues Raised by PublicComments

C. Small Entities Subject to the Final Ruleand Form Amendments

D. Projected Reporting, Recordkeeping andOther Compliance Requirements

E. Duplicative, Overlapping or ConflictingFederal Rules

F. Significant AlternativesVIII. Statutory Authority and Text of Final

Rule and Form Amendments

I. IntroductionOn August 29, 2012, we proposed rule

and form amendments 14 to implementSection 201(a) of the Jumpstart OurBusiness Startups Act (the ‘‘JOBSAct’’). 15 Section 201(a)(1) of the JOBSAct directs the Commission, not laterthan 90 days after the date of enactment,to amend Rule 506 of Regulation D 16 under the Securities Act of 1933 (the‘‘Securities Act’’) to permit generalsolicitation or general advertising in

offerings made under Rule 506,provided that all purchasers of thesecurities are accredited investors. 17 Section 201(a)(1) also states that ‘‘[s]uchrules shall require the issuer to takereasonable steps to verify thatpurchasers of the securities areaccredited investors, using suchmethods as determined by theCommission.’’ Section 201(a)(2) of the

JOBS Act directs the Commission, notlater than 90 days after the date ofenactment, to revise Rule 144A(d)(1)under the Securities Act 18 to permitoffers of securities pursuant to Rule144A to persons other than qualifiedinstitutional buyers (‘‘QIBs’’), 19 including by means of generalsolicitation or general advertising,provided that the securities are soldonly to persons that the seller and anyperson acting on behalf of the sellerreasonably believe are QIBs.

The Commission originally adopted

Rule 506 as a non-exclusive safe harborunder Section 4(a)(2) (formerly Section4(2)) of the Securities Act, 20 whichexempts transactions by an issuer ‘‘notinvolving any public offering’’ from theregistration requirements of Section 5 ofthe Securities Act. 21 Under existingRule 506, an issuer may sell securities,

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44773Federal Register / Vol. 78, No. 142 / Wednesday, July 24, 2013 / Rules and Regulations

22 Under Rule 506(b)(2)(ii) [17 CFR230.506(b)(2)(ii)], each purchaser in a Rule 506offering who is not an accredited investor mustpossess, or the issuer must reasonably believeimmediately before the sale of securities that suchpurchaser possesses, either alone or with his or herpurchaser representative, ‘‘such knowledge andexperience in financial and business matters that he[or she] is capable of evaluating the merits and ri sksof the prospective investment.’’

23 Offerings under Rule 506 are subject to all theterms and conditions of Rules 501 and 502. Ifsecurities are sold to any non-accredited investors,specified information requirements apply. See Rule502(b) [17 CFR 230.502(b)].

24 Rule 502(c) of Regulation D [17 CFR230.502(c)].

25 Id.26 See Use of Electronic Media for Delivery

Purposes, Release No. 33–7233 (Oct. 6, 1995) [60 FR53458, 53463–64 (Oct. 13, 1995)]; Use of ElectronicMedia, Release No. 33–7856 (Apr. 28, 2000) [65 FR25843, 25851–52 (May 4, 2000)].

27 ‘‘Restricted securities’’ are defined in SecuritiesAct Rule 144(a)(3) [17 CFR 230.144(a)(3)] toinclude, in part, ‘‘[s]ecurities acquired directly orindirectly from the issuer, or from an affiliate of theissuer, in a transaction or chain of transactions notinvolving any public offering.’’

28 In order for a transaction to come withinexisting Rule 144A, a seller must have a reasonable

basis for believing that the offeree or purchaser isa QIB and must take reasonable steps to ensure thatthe purchaser is aware that the seller may rely on

Rule 144A. Further, only securities that were not,when issued, of the same class as securities li stedon a U.S. securities exchange or quoted on a U.S.automated interdealer quotation system are eligiblefor resale under Rule 144A. Also, the seller and aprospective purchaser designated by the seller musthave the right to obtain from the issuer, uponrequest, certain information on the issuer, unlessthe issuer falls within specified categories as towhich this condition does not apply.

29 15 U.S.C. 77d(a)(1).30 See Resale of Restricted Securities; Changes to

Method of Determining Holding Period of RestrictedSecurities Under Rules 144 and 145, Release No.33–6862 (Apr. 23, 1990) [55 FR 17933 (Apr. 30,1990)].

31 While Rule 144A applies to resales of securitiesof both U.S. and non-U.S. issuers, one of theobjectives of Rule 144A was to make primaryofferings of non-U.S. issuers’ securities available toU.S. institutions in the U.S. market throughintermediaries (rather than compelling suchinvestors to go to overseas markets) by making theprivate offering market in the United States more

attractive to non-U.S. issuers. See Resale ofRestricted Securities; Changes to Method ofDetermining Holding Period of Restricted SecuritiesUnder Rules 144 and 145, Release No. 33–6806(Oct. 25, 1988) [53 FR 44016 (Nov. 1, 1988)].

32 Regulation S under the Securities Act [17 CFR230.901 through 230.905] was adopted in 1990 asa safe harbor from the registration requirements ofthe Securities Act for any offer or sale of securitiesmade outside the United States. It provides that any‘‘offer,’’ ‘‘offer to sell,’’ ‘‘sell,’’ ‘‘sale’’ or ‘‘offer to

buy’’ that occurs outside the United States is notsubject to the registration requirements of Section5. Regulation S does not affect the scope oravailability of the antifraud or other provisions ofthe Securities Act to offers and sales made inreliance on Regulation S.

33 These statistics are based on a review of FormD electronic filings with the Commission—specifically, the ‘‘total amount sold’’ as reported in

the filings—and data regarding other types ofofferings ( e.g., public debt offerings and Rule 144Aofferings) from Securities Data Corporation’s NewIssues database (Thomson Financial). See VladimirIvanov and Scott Bauguess, Capital Raising in theU.S.: An Analysis of Unregistered Offerings Usingthe Regulation D Exemption, 2009–2012 (July 2013)(the ‘‘Ivanov/Bauguess Study’’), available at: http:// www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf . For non-ABS Rule144A offerings, since the databases we used toobtain the Rule 144A data do not distinguish

between operating companies and funds, weclassified issuers with SIC codes between 6200 and6299 as funds, and the rest as operating companies.

The amount of capital raised through offeringsunder Regulation D may be larger than what isreported in Form D filings because, although thefiling of a Form D is a requirement of Rule 503(a)

of Regulation D [17 CFR 230.503(a)], it is not acondition to the availability of the exemptionsunder Regulation D. Further, once a Form D is filed,the issuer is not required to file an amendment tothe filing to reflect a change that occurs after theoffering terminates or a change that occurs solelywith respect to certain information, such as theamount sold in the offering. For example, if theamount sold does not result in an increase in thetotal offering amount of more than 10% or theoffering closes within a year, the filing of anamendment to the initial Form D is not required.Therefore, a Form D filed for a particular offeringmay not reflect the total amount of securities soldin the offering in reliance on the exemption.

34 See id.

without any limitation on the offeringamount, to an unlimited number of‘‘accredited investors,’’ as defined inRule 501(a) of Regulation D, and to nomore than 35 non-accredited investorswho meet certain ‘‘sophistication’’requirements. 22 The availability of Rule506 is subject to a number ofrequirements 23 and is currentlyconditioned on the issuer, or any personacting on its behalf, not offering orselling securities through any form of‘‘general solicitation or generaladvertising.’’ 24 Although the terms‘‘general solicitation’’ and ‘‘generaladvertising’’ are not defined inRegulation D, Rule 502(c) does provideexamples of general solicitation andgeneral advertising, includingadvertisements published innewspapers and magazines,communications broadcast overtelevision and radio, and seminarswhere attendees have been invited by

general solicitation or generaladvertising. 25 By interpretation, theCommission has confirmed that otheruses of publicly available media, suchas unrestricted Web sites, also constitutegeneral solicitation and generaladvertising. 26 In this release, we refer to

both general solicitation and generaladvertising as ‘‘general solicitation.’’

Rule 144A is a non-exclusive safeharbor exemption from the registrationrequirements of the Securities Act forresales of certain ‘‘restrictedsecurities’’ 27 to QIBs. Resales to QIBs inaccordance with the conditions of Rule144A 28 are exempt from registration

pursuant to Section 4(a)(1) (formerlySection 4(1)) of the Securities Act, 29 which exempts transactions by anyperson ‘‘other than an issuer,underwriter, or dealer.’’ Although Rule144A does not include an expressprohibition against general solicitation,offers of securities under Rule 144Acurrently must be limited to QIBs,which has the same practical effect. Byits terms, Rule 144A is available solelyfor resale transactions; however, sinceits adoption by the Commission in1990, 30 market participants have usedRule 144A to facilitate capital-raising byissuers. 31 The term ‘‘Rule 144Aoffering’’ in this release refers to aprimary offering of securities by anissuer to one or more financialintermediaries—commonly known asthe ‘‘initial purchasers’’—in atransaction that is exempt fromregistration pursuant to Section 4(a)(2)or Regulation S under the Securities

Act,32

followed by the resale of thosesecurities by the initial purchasers toQIBs in reliance on Rule 144A.

Rule 506 offerings and Rule 144Aofferings are widely used by U.S. andnon-U.S. issuers to raise capital. In2012, the estimated amount of capital(including both equity and debt)reported as being raised in Rule 506offerings and non-asset-backed

securities (‘‘non-ABS’’) Rule 144Aofferings by operating companies was$173 billion and $636 billion,respectively, and by pooled investmentfunds, such as venture capital funds,private equity funds and hedge funds,was $725 billion and $4 billion,respectively, compared to $1.2 trillionraised in registered offerings. 33 In 2011,the estimated amount of capital(including both equity and debt)reported as being raised in Rule 506offerings and non-ABS Rule 144Aofferings by operating companies was$71 billion and $438 billion,respectively, and by pooled investmentfunds was $778 billion and $4 billion,respectively, compared to $985 billionraised in registered offerings. 34 Thesedata points underscore the importanceof the Rule 506 and Rule 144Aexemptions for issuers seeking access tothe U.S. capital markets.

To implement Section 201(a) of the

JOBS Act, we proposed amending Rule506 to add new paragraph (c), underwhich the prohibition against generalsolicitation contained in Rule 502(c)would not apply, provided that allpurchasers of the securities areaccredited investors and the issuer takesreasonable steps to verify that suchpurchasers are accredited investors. Inaddition, we proposed amending FormD, which is a notice required to be f iledwith the Commission by each issuer


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35 The SEC Investor Advisory Committee(‘‘Investor Advisory Committee’’) was established inApril 2012 pursuant to Section 911 of the Dodd-Frank Wall Street Reform and Consumer ProtectionAct [Pub. L. 111–203, sec. 911, 124 Stat. 1376, 1822(July 21, 2010)] (the ‘‘Dodd-Frank Act’’) to advisethe Commission on regulatory priorities, theregulation of securities products, trading strategies,fee structures, the effectiveness of disclosure,initiatives to protect investor interests and topromote investor confidence and the integrity of thesecurities marketplace. The Dodd-Frank Actauthorizes the Investor Advisory Committee tosubmit findings and recommendations for reviewand consideration by the Commission.

36 To facilitate public input on JOBS Actrulemaking before the issuance of rule proposals,the Commission invited members of the public to

make their views known on various JOBS Actinitiatives in advance of any rulemaking bysubmitting comment letters to the Commission’sWeb site at http://www.sec.gov/spotlight/

jobsactcomments.shtml . The comment lettersrelating to Section 201(a) of the JOBS Act submittedin response to this invitation are located at http:// www.sec.gov/comments/jobs-title-ii/jobs-title-ii.shtml . The comment letters submitted in responseto the Proposing Release are located at http:// www.sec.gov/comments/s7-07-12/s70712.shtml .Many commenters submitted comment letters both

before and after the issuance of the ProposingRelease. Dated comment letters refer to thosesubmitted before the issuance of the ProposingRelease or by commenters that submitted multipleletters.

37 See, e.g., letters from Investor AdvisoryCommittee; North American SecuritiesAdministrators Association, Inc. (‘‘NASAA’’);Consumer Federation of America (‘‘ConsumerFederation’’).

38 Disqualification of Felons and Other ‘‘BadActors’’ from Rule 506 Offerings, Release No. 33–9414 (July 10, 2013) (the ‘‘Bad Actor Release’’).

39 See Amendments to Regulation D, Form D andRule 156, Release No. 33–9416 (July 10, 2013).

40 See Non-Public Offering Exemption, ReleaseNo. 33–4552 (Nov. 6, 1962) [27 FR 11316 (Nov. 16,1962)].

41 See Rule 502(c) and Rule 506(b)(1) ofRegulation D [17 CFR 230.506(b)(1)]. The failure tocomply with Rule 502(c) is deemed to be significantto the offering as a whole, which means that anissuer cannot rely on the ‘‘insignificant deviation’’relief in Rule 508 of Regulation D for violations ofRule 502(c). See Rule 508(a)(2) [17 CFR230.508(a)(2)].

42 In this regard, we also note that bills that wouldhave amended Section 4(a)(2) directly, rather thanrequiring the Commission to amend Rule 506, topermit the use of general solicitation wereintroduced and considered by Congress, but werenot enacted. See Access to Capital for Job Creators,H.R. 2940, 112th Cong., 1st Sess. (2011) (proposingto amend Section 4(a)(2) by adding the phrase‘‘whether or not such transactions involve generalsolicitation or general advertising’’); Access toCapital for Job Creators, S.1831, 112th Cong., 1stSess. (2011) (same).

43 As revised, Rule 500(c) reads as follows:‘‘Attempted compliance with any rule in RegulationD does not act as an exclusive election; the issuercan also claim the availability of any otherapplicable exemption. For instance, an issuer’sfailure to satisfy all the terms and conditions of rule506 (b) (§ 230.506 (b)) shall not raise anypresumption that the exemption provided bysection 4 (a) (2) of the Act is not available.’’(additions italicized).

44 Section 201(a)(1) of the JOBS Act.

claiming a Regulation D exemption, toadd a check box to indicate whether anissuer is claiming an exemption underRule 506(c). We also proposed anamendment to Rule 144A to providethat securities sold pursuant to Rule144A may be offered to persons otherthan QIBs, including by means ofgeneral solicitation, provided that thesecurities are sold only to persons thatthe seller and any person acting on

behalf of the seller reasonably believeare QIBs.

The comment period for the proposedrule and form amendments closed onOctober 5, 2012. We received over 225comment letters on the ProposingRelease, including from professionaland trade associations, investororganizations, law firms, investmentcompanies and investment advisers,members of Congress, the Commission’sInvestor Advisory Committee, 35 statesecurities regulators, issuers,

individuals and other interested parties.Most of the comment letters focused onthe proposed amendments to Rule 506.As discussed below, commenters weresharply divided in their views on theproposed amendments to Rule 506,whereas commenters generallysupported the proposed amendments toRule 144A and Form D.

We have reviewed and considered allof the comments that we received on theproposed rule and form amendmentsand on Section 201(a) of the JOBS Act. 36 We are adopting new paragraph (c) toRule 506 as proposed, with one

modification, and the amendments toForm D and to Rule 144A as proposed.We are also adopting the technical andconforming rule amendments asproposed. We discuss theseamendments in detail below.

We acknowledge the concerns ofsome commenters that the eliminationof the prohibition against generalsolicitation for a subset of Rule 506offerings may affect the behavior ofissuers and other market participants inways they believe could compromiseinvestor protection. 37 Preserving theintegrity of the Rule 506(c) market andminimizing the incidence of fraud arecritical objectives for the Commission inimplementing Section 201(a) of the

JOBS Act. We are adopting today the bad actor disqualification for Rule 506offerings mandated by the Dodd-FrankAct, which may address some of thoseconcerns. 38 We are also issuing aproposing release to amend Regulation

D and Form D to enhance theCommission’s ability to analyze theRule 506 market and to amend Rule 156under the Securities Act to provideguidance to private funds on theapplication of the antifraud provisionsof the federal securities laws to theirsales literature. 39 Upon the effectivenessof Rule 506(c), the Commission staffwill monitor developments in themarket for Rule 506(c) offerings so as to

be able to undertake a review of marketpractices in Rule 506(c) offerings,including the steps taken by issuers andother market participants to verify thatthe purchasers of the offered securitiesare accredited investors, as well as theimpact of the amendments to Rule 506on capital formation.II. Final Amendments to Rule 506 andForm D

A. Eliminating the Prohibition AgainstGeneral Solicitation

Section 4(a)(2) of the Securities Actexempts transactions by an issuer ‘‘notinvolving any public offering.’’ Anissuer relying on Section 4(a)(2) isrestricted in its ability to make publiccommunications to attract investors forits offering because public advertising isincompatible with a claim of exemptionunder Section 4(a)(2). 40 As noted above,

Rule 506 currently conditions theavailability of the safe harbor underSection 4(a)(2) on the issuer, or anyperson acting on its behalf, not offeringor selling securities through any form ofgeneral solicitation. 41 Section 201(a)(1)of the JOBS Act directs the Commissionto amend Rule 506 to provide that theprohibition against general solicitationcontained in Rule 502(c) shall not applyto offers and sales of securities madepursuant to Rule 506, as so amended,provided that all purchasers of thesecurities are accredited investors andthe issuer takes reasonable steps toverify their status as accreditedinvestors.

This mandate affects only Rule 506,and not Section 4(a)(2) offerings ingeneral, 42 which means that even afterthe effective date of Rule 506(c), anissuer relying on Section 4(a)(2) outsideof the Rule 506(c) exemption will berestricted in its ability to make public

communications to solicit investors forits offering because public advertisingwill continue to be incompatible with aclaim of exemption under Section4(a)(2). We are amending Rule 500(c) ofRegulation D accordingly to make thisclear. 43 Congress’ directive in Section201(a)(1) of the JOBS Act, and notSection 4(a)(2) of the Securities Act orour interpretation of Section 4(a)(2), isthe reason that Rule 506, ‘‘as revisedpursuant to [Section 201(a)(1)], shallcontinue to be treated as a regulationissued under section 4[(a)](2) of theSecurities Act of 1933’’ (emphasis

added).44

Similarly, securities issued inRule 506(c) offerings are deemed to be‘‘covered securities’’ for purposes of


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45 15 U.S.C. 77r(b)(4)(E). This means that state blue sky registration requirements do not apply tosecurities offered or sold in Rule 506(c) offerings.

46 Rule 501 sets forth definitions for the termsused in Regulation D, such as ‘‘accredited investor.’’

47 Rule 502(a) addresses the question ofintegration by providing a six-month safe harborfrom integration for successive Regulation Dofferings and a five-factor framework to apply incases in which the six-month safe harbor is notavailable.

48 Rule 502(d) provides that, for resale purposes,securities acquired in a Regulation D offering,except as provided in Rule 504(b)(1), have thestatus of securities acquired in a transaction underSection 4(a)(2) of the Securities Act. Rule144(a)(3)(ii) [17 CFR 230.144(a)(3)(ii)] defines

‘‘restricted securities’’ as securities ‘‘acquired fromthe issuer that are subject to the resale limitationsof §230.502(d) under Regulation D. . . .’’Separately, Section 201(b) of the JOBS Act addedSection 4(b) of the Securities Act, which providesthat ‘‘[o]ffers and sales exempt under [Rule 506 asamended pursuant to Section 201 of the JOBS Act]shall not be deemed public offerings under theFederal securities laws as a result of generaladvertising or general solicitation.’’ Thus, securitiesacquired under new Rule 506(c) would also meetthe definition of ‘‘restricted securities’’ under Rule144(a)(3)(i) [17 CFR 230.144(a)(3)(i)] (‘‘[s]ecuritiesacquired directly or indirectly from the issuer, orfrom an affiliate of the issuer, in a transaction orchain of transactions not involving any publicoffering’’).

49 See, e.g., letters from Biotechnology IndustryOrganization (‘‘BIO’’); National Small BusinessAssociation (‘‘NSBA’’).

50 See letters from Linklaters LLP (‘‘Linklaters’’)(stating that a ‘‘straightforward, focused rule thatprovides issuers with the flexibility to continue toadapt to market practice is the best way to realizethe spirit and intent of the Jumpstart Our BusinessStartups Act’’); BlackRock (stating that ‘‘[o]verall,we believe that the Proposed Rule is in accordancewith the intent of Congress and will facilitate the

formation of capital’’); Securities RegulationCommittee, Business Law Section of the New YorkState Bar Association (‘‘SRC of NYSBA’’).

51 See, e.g., letters from the Federal Regulation ofSecurities Committee, Business Law Section of theAmerican Bar Association (‘‘ABA Fed. Reg.Comm.’’); Angel Capital Association (‘‘ACA’’) (Sept.27, 2012); The CrowdFund Intermediary RegulatoryAdvocates (‘‘CFIRA’’); Investment ProgramAssociation (‘‘IPA’’); Montgomery & Hansen, LLP(‘‘Montgomery & Hansen’’); NSBA; Committee onSecurities Regulation of the New York City BarAssociation (‘‘NYCBA’’); Sullivan & Cromwell LLP(‘‘S&C’’); Securities Industry and Financial MarketsAssociation (‘‘SIFMA’’) and The Financial ServicesRoundtable (‘‘FSR’’) (Oct. 5, 2012).

52 See, e.g., letters from BlackRock; Dukas PublicRelations (‘‘Dukas’’); Forum for U.S. SecuritiesLawyers in London; Hedge Fund Association

(‘‘HFA’’); Investment Adviser Association (‘‘IAA’’);Managed Funds Association (‘‘MFA’’) (Sept. 28,2012); NYCBA; SRC of NYSBA. In the ProposingRelease, we stated that private funds that engage ingeneral solicitation under proposed Rule 506(c)would not be precluded from relying on theexclusions from the definition of ‘‘investmentcompany’’ set forth in Section 3(c)(1) and Section3(c)(7) of the Investment Company Act of 1940.

53 See, e.g., letters from AARP; AFL–CIO andAmericans for Financial Reform (‘‘AFR’’); Sen.Levin; CFA Institute; Council of InstitutionalInvestors (‘‘CII’’); Consumer Federation; FundDemocracy, Inc. (‘‘Fund Democracy’’); Office of theSecretary of the Commonwealth of MassachusettsSecurities Division (‘‘Massachusetts SecuritiesDivision’’); NASAA.

54 Public Law 111–203, sec. 926, 124 Stat. 1376,1851 (July 21, 2010) (to be codified at 15 U.S.C. 77dnote). See, e.g., letters from AFL–CIO and AFR;Consumer Federation; Fund Democracy;Commissioner of Securities, State of Hawaii(‘‘Hawaii Commissioner of Securities’’); InvestorAdvisory Committee; Rep. Waters; Commissioner ofSecurities, State of Missouri (‘‘MissouriCommissioner of Securities’’); NASAA.

55 See, e.g., letters from AARP; AFL–CIO andAFR; BetterInvesting; CFA Institute; ConsumerFederation; Investor Advisory Committee;Investment Company Institute (‘‘ICI’’); Rep. Waters;Massachusetts Securities Division (July 2, 2012).

56 See, e.g., letters from AARP; AFL–CIO andAFR; Consumer Federation; Hawaii Commissionerof Securities; Investor Advisory Committee;Massachusetts Securities Division (July 2, 2012);Missouri Commissioner of Securities;Commissioner of Securities and Insurance, State ofMontana (‘‘Montana Commissioner of Securities’’);NASAA; Ohio Division of Securities.

57 See, e.g., letters from Sen. Levin; ConsumerFederation; ICI; Independent Directors Council(‘‘IDC’’); Rep. Waters; Montana Commissioner ofSecurities; NASAA.

58 See, e.g., letters from AFL–CIO and AFR;Investor Advisory Committee; ICI; MassachusettsSecurities Division (July 2, 2012).

59 See letters from ABA Fed. Reg. Comm.; Forumfor U.S. Securities Lawyers in London; S&C; IPA.

60 See letter from ABA Fed. Reg. Comm.

Section 18(b)(4)(E) of the SecuritiesAct, 45 only by virtue of Section 201(a)(1)of the JOBS Act.

1. Proposed Rule AmendmentTo implement the mandated rule

change, we proposed new Rule 506(c),which would permit the use of generalsolicitation to offer and sell securitiesunder Rule 506, provided that thefollowing conditions are satisfied:

• All terms and conditions of Rule501 46 and Rules 502(a) 47 and 502(d) 48 must be satisfied;

• all purchasers of securities must beaccredited investors; and

• the issuer must take reasonablesteps to verify that the purchasers of thesecurities are accredited investors.Offerings under proposed Rule 506(c)would not be subject to the requirementto comply with Rule 502(c), whichcontains the prohibition against generalsolicitation. While we proposed Rule

506(c) to enable issuers to use generalsolicitation in Rule 506 offerings, wealso preserved, in current Rule 506(b),the existing ability of issuers to conductRule 506 offerings subject to theprohibition against general solicitation.

2. Comments on the Proposed RuleAmendment

Commenters were sharply divided intheir views on the proposed amendmentto Rule 506. Commenters whosupported the proposed amendment toRule 506 stated that Rule 506(c), ifadopted, would assist issuers,particularly early stage and smaller

issuers, in raising capital by allowingthem to solicit investments from a largerpool of investors. 49 These commentersgenerally approved of the flexibilityafforded by the manner in which weproposed to implement Rule 506(c)’sverification requirement, 50 as furtherdiscussed below, and supportedretaining, in its current form, the abilityof issuers under existing Rule 506(b) toconduct Rule 506 offerings subject tothe prohibition against generalsolicitation. 51 A number of commentersstated that they supported theavailability of Rule 506(c) for privatefunds pursuant to the Commission’sguidance in the Proposing Release. 52

Other commenters opposed theproposed amendment to Rule 506 in itsentirety or in part. Many of thesecommenters expressed concern that theproposed amendment, if adopted,would increase the risk of fraudulentand abusive Rule 506 offerings and

asserted that additional investorsafeguards are necessary under Rule506(c). 53 A number of these commentersurged the Commission to adopt rulesconcerning bad actor disqualificationsfor Rule 506 offerings, as required by

Section 926 of the Dodd-Frank Act. 54 Other commenters recommended thatthe Commission amend the definition of‘‘accredited investor’’ by raising theincome and net worth thresholds fornatural persons or by implementingother measures of financialsophistication. 55 Some commentersstated that the Commission shouldcondition the availability of the Rule506(c) exemption on the filing of FormD or require the advance filing of FormD, or both. 56 Other commenters arguedthat the Commission should adoptspecific standards or requirements thatwould govern the content and/ormanner of general solicitations in Rule506(c) offerings, particularly withrespect to advertising by privatefunds. 57 A number of commenters urgedthe Commission to require that thematerials used to generally solicitinvestors in Rule 506(c) offerings befiled with or furnished to either the

Commission or to FINRA.58

A number of commenters requestedthat the Commission providetransitional guidance with respect toongoing offerings under existing Rule506 that commenced before theeffectiveness of Rule 506(c). 59 Forexample, in some situations, the initialclosings in these offerings may havealready occurred, and could haveincluded non-accredited investorspursuant to offering procedures thatwould not have involved any form ofgeneral solicitation. 60 Severalcommenters suggested that theCommission clarify that an issuer would

be entitled to conduct the portion of the


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61 See letters from ABA Fed. Reg. Comm.; S&C(stating that ‘‘[w]e believe that such issuers should

be allowed, upon effectiveness of the final rule, touse the new Rule 506(c) exemption and use generalsolicitation for the remaining portion of theirofferings, provided that they satisfy therequirements of Rule 506(c) going forward.’’).

62 We also note that broker-dealers participatingin offerings in conjunction with issuers relying onRule 506(c) would continue to be subject to FINRArules regarding communications with the public,which, among other things, (1) generally require allmember communications to be based on principlesof fair dealing and good faith, to be fair and

balanced, and to provide a sound basis forevaluating the facts in regard to any particularsecurity or type of security, industry or service; and(2) prohibit broker-dealers from making false,exaggerated, unwarranted, promissory ormisleading statements or claims in anycommunications. See FINRA Rule 2210.

63 New Rule 506(c)(1).64 New Rule 506(c)(2)(i).65 New Rule 506(c)(2)(ii).66 Offerings under Rule 506(c) will also not be

subject to the information requirements in Rule502(b) for non-accredited investors, because allpurchasers in Rule 506(c) offerings are required to

be accredited investors.

67 See Release No. 33–7856, at 25852 (noting that‘‘one method of ensuring that general solicitation isnot involved is to establish the existence of a ‘pre-existing, substantive relationship’’’ and that ‘‘theremay be facts and circumstances in which a thirdparty, other than a registered broker-dealer, couldestablished a ‘pre-existing, substantive relationship’sufficient to avoid a ‘general solicitation’ ’’).

68 See, e.g., Markup of H.R. 2940, Access toCapital for Job Creators Act, Subcommittee onCapital Markets and Government SponsoredEnterprises, House Financial Services Committee,112th Cong. (Oct. 5, 2011) (remarks of Rep. Waters,

explaining that she is introducing the amendmentthat requires issuers to take reasonable steps toverify accredited investor status because ‘‘we musttake steps to ensure that those folks are indeedsophisticated’’); 157 Cong. Rec. H7291 (daily ed.Nov. 3, 2011) (remarks of Rep. Maloney (same)); 157Cong. Rec. H7294 (daily ed. Nov. 3, 2011) (remarksof Rep. Lee (same)).

69 See letters from MFA (June 26, 2012)(suggesting that the Commission publish a non-exclusive list of the types of third-party evidencethat an investor could provide to establishaccredited investor status, in conjunction withcertifying that he or she is an accredited investor);NASAA (July 3, 2012) (recommending that theCommission set forth non-exclusive safe harbors tospecify the types of actions that would be deemed

offering following the effectiveness ofRule 506(c) in accordance with therequirements of new Rule 506(c),without the portion of the offeringoccurring after the rule’s effectivenessaffecting the portion of the offering thatwas completed prior to the rule’seffectiveness. 61

3. Final Rule AmendmentAfter considering the comments, weare adopting Rule 506(c) as proposed,with one modification. Under new Rule506(c), issuers can offer securitiesthrough means of general solicitation,provided that they satisfy all of theconditions of the exemption. 62 Theseconditions are:

• all terms and conditions of Rule 501and Rules 502(a) and 502(d) must besatisfied; 63

• all purchasers of securities must beaccredited investors; 64 and

• the issuer must take reasonablesteps to verify that the purchasers of thesecurities are accredited investors. 65 Issuers relying on Rule 506(c) for theirofferings will not be subject to theprohibition against general solicitationfound in Rule 502(c). 66 In addition andas further discussed below, in responseto comments from a wide range ofcommenters asking for greater certaintywith respect to satisfying theverification requirement, we are alsoincluding in Rule 506(c) a non-exclusivelist of methods that issuers may use toverify the accredited investor status ofnatural persons.

Issuers will continue to have theability under Rule 506(b) to conductRule 506 offerings subject to theprohibition against general solicitation.As we noted in the Proposing Release,

offerings under existing Rule 506(b)represent an important source of capitalfor issuers of all sizes, and we believethat the continued availability ofexisting Rule 506(b) will be importantfor those issuers that either do not wishto engage in general solicitation in theirRule 506 offerings (and become subjectto the requirement to take reasonablesteps to verify the accredited investorstatus of purchasers) or wish to sellprivately to non-accredited investorswho meet Rule 506(b)’s sophisticationrequirements. Retaining the safe harborunder existing Rule 506(b) may also be

beneficial to investors with whom anissuer has a pre-existing substantiverelationship. 67 In this regard, we do not

believe that Section 201(a) requires theCommission to modify Rule 506 toimpose any new requirements on offersand sales of securities that do notinvolve general solicitation. Therefore,the amendment to Rule 506 we are

adopting today does not amend ormodify the requirements relating toexisting Rule 506(b).

Finally, with respect to transitionmatters, for an ongoing offering underRule 506 that commenced before theeffective date of Rule 506(c), the issuermay choose to continue the offeringafter the effective date in accordancewith the requirements of either Rule506(b) or Rule 506(c). If an issuerchooses to continue the offering inaccordance with the requirements ofRule 506(c), any general solicitation thatoccurs after the effective date will not

affect the exempt status of offers andsales of securities that occurred prior tothe effective date in reliance on Rule506(b).

B. Reasonable Steps To VerifyAccredited Investor Status

Section 201(a)(1) of the JOBS Actmandates that our amendment to Rule506 require issuers using generalsolicitation in Rule 506 offerings ‘‘totake reasonable steps to verify thatpurchasers of the securities areaccredited investors, using suchmethods as determined by the

Commission.’’ As noted in theProposing Release, we believe that thepurpose of the verification mandate is toaddress concerns, and reduce the risk,that the use of general solicitation inRule 506 offerings could result in sales

of securities to investors who are not, infact, accredited investors. 68 1. Proposed Rule Amendment

To implement the verificationmandate of Section 201(a)(1), weproposed to condition the Rule 506(c)exemption on the requirement thatissuers using general solicitation ‘‘take

reasonable steps to verify’’ that thepurchasers of the offered securities areaccredited investors. As proposed,whether the steps taken are‘‘reasonable’’ would be an objectivedetermination by the issuer (or thoseacting on its behalf), in the context ofthe particular facts and circumstances ofeach purchaser and transaction. Underthis principles-based approach, issuerswould consider a number of factorswhen determining the reasonableness ofthe steps to verify that a purchaser is anaccredited investor, such as:

• The nature of the purchaser and thetype of accredited investor that thepurchaser claims to be;

• the amount and type of informationthat the issuer has about the purchaser;and

• the nature of the offering, such asthe manner in which the purchaser wassolicited to participate in the offering,and the terms of the offering, such as aminimum investment amount.These factors would be interconnected,and the information gained by lookingat these factors would help an issuerassess the reasonable likelihood that apotential purchaser is an accreditedinvestor, which would, in turn, affectthe types of steps that would bereasonable to take to verify a purchaser’saccredited investor status.

In the Proposing Release, weconsidered providing a list of specifiedmethods for satisfying the verificationrequirement, which was suggested bysome commenters on Section 201(a)prior to the issuance of the ProposingRelease. 69 We expressed concern that, in


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‘‘reasonable steps to verify’’ for three types ofaccredited investors: natural persons who purportto satisfy the income test; natural persons whopurport to satisfy the net worth test; and entiti eswho purport to meet one of the other tests set forthin Rule 501(a)).

70 See, e.g., letters from HFA; MFA (Sept. 28,2012); BIO; ABA Fed. Reg. Comm.; IAA; Linklaters;NYCBA; SRC of NYSBA; SIFMA and FSR (Oct. 5,2012); Artivest Holdings, Inc. (‘‘Artivest’’).

71 See letter from SIFMA and FSR (Oct. 5, 2012).72 See, e.g., letters from SRC of NYSBA; S&C;

SIFMA and FSR (Oct. 5, 2012); IAA.73 See letters from ACA (Sept. 27, 2012); CFIRA.74 See, e.g., letters from IAA; SIFMA and FSR

(Oct. 5, 2012); Tannenbaum Helpern Syracuse &Hirschtritt LLP (‘‘Tannenbaum Helpern’’). Anumber of commenters noted that the availabilityof third-party verification could address investors’privacy and security concerns in providinginformation to an issuer. See, e.g., letters from L.Neumann; NSBA. One commenter urged theCommission not to limit third-party verificationproviders to certain types of entities. See letter fromTannenbaum Helpern. One commenter suggestedthe possibility of requiring investors to self-certifyas to accredited investor status under penalty ofperjury. See letter from NSBA.

75 See, e.g., letters from C. Hague; G. Brooks;Golenbock Eiseman Assor Bell & Peskoe LLP; P.Christenson; W. Johnson.

76 See, e.g., letters from AFL–CIO and AFR; Sen.Levin; Consumer Federation; Fund Democracy;Rep. Waters; Massachusetts Securities Division; TheOptions Clearing Corporation (‘‘OCC’’); OhioDivision of Securities.

77 See letter from IPA.78 See letter from S. Keller.79 See, e.g., letters from ACA (Sept. 27, 2012 and

Dec. 11, 2012); BIO; CFIRA; HFA; HawaiiCommissioner of Securities; IAA; Investor AdvisoryCommittee (stating that the ‘‘facts andcircumstances’’ based approach proposed by theCommission does not do enough either to ensureonly accredited investors purchase in the offeringor to provide issuers with the certainty they needto develop appropriate procedures); J. McLaughlin;MFA (Sept. 28, 2012); Montana Commissioner ofSecurities; NASAA; Tufts Stephenson & Kasper,LLP; Nevada Securities Division; OCC; OhioDivision of Securities; Pepper Hamilton LLP(‘‘Pepper Hamilton’’); Plexus Consulting Group,LLC (‘‘Plexus Consulting Group’’); Small BusinessInvestor Association (‘‘SBIA’’); South CarolinaSecurities Commissioner; Virginia Division ofSecurities.

80 See, e.g., letters from ACA (Sept. 27, 2012 andDec. 11, 2012); HFA; Investor Advisory Committee;OCC.

81 See, e.g., letters from ABA Fed. Reg. Comm.;Artivest; BlackRock; S&C; SIFMA and FSR (Oct. 5,2012).

82 See, e.g., letters from B. Methven; L. Neumann;NASAA.

designating such a list—for example, bysetting forth particular types ofinformation that issuers may rely uponas conclusive means of verifyingaccredited investor status—there may becircumstances where such informationwill not actually verify accreditedinvestor status or where issuers mayunreasonably overlook or disregardother information indicating that apurchaser is not, in fact, an accreditedinvestor. Also, we were concerned thatrequiring issuers to use specifiedmethods of verification would beimpractical, burdensome andpotentially ineffective in light of thenumerous ways in which a purchasercan qualify as an accredited investor, aswell as the potentially wide range ofverification issues that may arise,depending on the nature of thepurchaser and the facts andcircumstances of a particular Rule506(c) offering. Even if the list of

specified methods was not mandatory, but rather, constituted a non-exclusivelist, we were concerned that a non-exclusive list of specified methodscould be viewed by market participantsas, in effect, required methods, in whichcompliance with at least one of theenumerated methods could be viewedas necessary in all circumstances todemonstrate that the verificationrequirement has been satisfied, therebyeliminating the flexibility that proposedRule 506(c) was intended to provide.

We requested comment in theProposing Release on our proposed

principles-based method and itseffectiveness in limiting sales ofsecurities in Rule 506(c) offerings toonly accredited investors. We alsorequested comment on possiblealternative approaches for implementingthe verification mandate of Section201(a)(1), such as a rule that specifiesmandatory methods for verifyingaccredited investor status or a non-exclusive list of verification methodsthat would function as a safe harbor forcompliance with the verificationrequirement.

2. Comments on the Proposed Rule

AmendmentCommenters expressed a wide range

of views on the proposed approach tothe verification requirement in Rule506(c). Some commenters commendedthe Commission for proposing a flexible,principles-based standard for

verification. 70 For example, onecommenter stated that the Commission’sproposed approach would provideissuers with the flexibility to developtailored, reliable and cost-effectiveprocedures for verification. 71 A numberof commenters stated that thediscussion in the Proposing Release ofthe factors that issuers may take intoaccount in verifying accredited investorstatus would assist issuers in assessingthe reasonableness of their verificationprocesses. 72 Other commenters assertedthat not requiring issuers to use certainspecified methods to verify apurchaser’s accredited investor statuswould permit advancements inverification methods over time. 73 Somecommenters expressed support for theCommission’s proposal that accreditedinvestor status may be verified throughan attestation or certification by a thirdparty, provided that the issuer has areasonable basis to rely on such third-

party verification.74

Other commenters opposed theCommission’s proposed approach, forvarious reasons. A number of thesecommenters opposed the proposedverification standard because, in theirview, self-certification by itself should

be sufficient to satisfy the verificationrequirement. 75 Some commentersopposed the proposed verificationstandard because it did not prescribespecific verification methods, whichthey believed is required in order tosatisfy the verification mandate inSection 201(a). 76 One commenter statedthat the Commission should deem theverification requirement to be satisfiedif all purchasers in a Rule 506(c)offering are in fact accredited

investors. 77 Another commenter statedthat verification of accredited investorstatus should not be a condition of theRule 506(c) exemption when thepurchaser is actually an accreditedinvestor. 78

Commenters expressed differingviews on whether the Commissionshould include a non-exclusive list ofmethods in proposed Rule 506(c) forsatisfying the verification requirement.Many commenters, encompassing awide range of perspectives ( e.g., stategovernment officials, law firms, investororganizations, professional and tradeassociations, and individuals), urged theCommission to provide such a non-exclusive list. 79 A number of thesecommenters cited the lack of legalcertainty that the verificationrequirement has been satisfied in anygiven situation as the reason why, intheir view, the Commission shouldinclude a non-exclusive list of

verification methods in Rule 506(c).80

Incontrast, other commenters stated thatthe Commission should not include anon-exclusive list of verificationmethods in Rule 506(c), arguing thatsuch a list could be viewed by marketparticipants as the required verificationmethods, which would therebyundermine the flexibility of theCommission’s proposed approach. 81

If there were to be a non-exclusive listof verification methods, commentersexpressed a range of views on whatshould be included in such a list, suchas verification by certain third parties or

through tax returns and third-partydocumentary proof such as Forms W–2,Forms 1099, bank statements, brokerageaccount statements, tax assessmentvaluations and appraisal reports. 82 With


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83 See, e.g., letters from Massachusetts SecuritiesDivision (July 2, 2012); J. McLaughlin; NASAA;OCC; Pepper Hamilton; Plexus Consulting Group;SBIA.

84 See letter from Massachusetts SecuritiesDivision (July 2, 2012).

85 See, e.g., letters from Plexus Consulting Group;SBIA.

86 See, e.g., letters from Plexus Consulting Group;NSBA (stating that ‘‘if there must be some kind ofenhanced verification, we recommend that acertification by the investor’s attorney, CPA,certified financial advisor or other licensedprofessional should be sufficient’’).

87 Id.88 Id.89 See letter from Montgomery & Hansen.90 See letters from B. Methven; SBIA (provided

the issuer is a small business investment company(‘‘SBIC’’) or a fund that has been authorized toapply to be an SBIC by the U.S. Small BusinessAdministration).

91 See letter from J. Joseph (stating that ‘‘[s]omemay feel that that number is $25,000, perhaps$100,000 but certainly at $250,000 there should beno question that the investor is properly qualifiedand accredited’’).

92 See letter from MFA (Sept. 28, 2012) (statingthat ‘‘[i]n considering the appropriate minimuminvestment level, we have previously recommendeda minimum investment level of 50% of theaccredited investor net worth or total assetthresholds, currently $500,000 for an individual,and $2,500,000 for an entity’’).

93 See letter from Pepper Hamilton.94 Letter from Massachusetts Securities Division

(July 2, 2012).95 See letter from NASAA.96 See letters from MFA (Sept. 28, 2012); IAA;

Tannenbaum Helpern.

97 See letter from Pepper Hamilton.98 See letters from MFA (Sept. 28, 2012);

Tannenbaum Helpern.99 See letter from Tannenbaum Helpern.100 See letter from Pepper Hamilton.101 This will avoid diminishing the incentive for

issuers to undertake the reasonable verificationsteps envisioned by the statute.

respect to the types of third parties thatcould provide verification services,commenters named registered brokers-dealers, 83 banks and other financialinstitutions, 84 registered investmentadvisers, 85 certified financialplanners, 86 attorneys, 87 andaccountants. 88 Other commenterssuggested including in a non-exclusivelist of verification methods self-certification, plus a minimuminvestment amount such as $25,000, 89 $100,000, 90 $250,000, 91 $500,000 92 or$1,000,000. 93

In contrast, one commenter arguedthat the ability to satisfy a minimuminvestment amount would notnecessarily mean a person is anaccredited investor, but rather, that theinvestor could be ‘‘over-concentrated inthe investment.’’ 94 Another commenterstated that the verification requirementshould not be deemed satisfied simply

because an issuer possesses general

information about the averagecompensation in the investor’sprofession or workplace. 95

Several commenters stated that thereshould be a ‘‘grandfather’’ provisionfrom the verification mandate for anissuer’s existing investors whopurchased securities in a Rule 506(b)offering prior to the effective date ofRule 506(c), 96 and one commenter

proposed to limit the scope of anygrandfather provision to only existingaccredited investors. 97 Two of thesecommenters reasoned that, as issuers areprohibited from engaging in generalsolicitation activities in Rule 506(b)offerings, their existing investors did notpurchase securities in offerings thatused general solicitation, and any futureinvestments by these investors would be

based on their pre-existing relationshipwith the issuers, and not as a result ofgeneral solicitation. 98 Therefore, agrandfather provision would beappropriate because the purpose of theverification mandate in Section 201(a)of the JOBS Act is to require theverification of the accredited investorstatus of only prospective purchaserswho come to the issuer ‘‘as a result of’’the issuer’s general solicitationactivities. 99 One commenter stated that,for existing investors, a ‘‘reaffirmationrepresentation’’ of accredited investor

status received shortly before orsimultaneously with any subsequentinvestment should be sufficient for Rule506(c) purposes. 100 3. Final Rule Amendment

After considering the comments andas directed by Section 201(a) of the

JOBS Act, we are adopting as acondition of new Rule 506(c) therequirement that issuers take‘‘reasonable steps to verify’’ thatpurchasers of the offered securities areaccredited investors. This requirementis separate from and independent of therequirement that sales be limited toaccredited investors, and must besatisfied even if all purchasers happento be accredited investors. 101 We arealso including in Rule 506(c) a non-exclusive list of methods that issuersmay use to satisfy the verificationrequirement. As discussed above, anumber of commenters urged theCommission to provide greater certaintyfor issuers that the verificationrequirement has been satisfied byproviding a non-exclusive list ofmethods for verifying the accreditedinvestor status of purchasers in Rule506(c) offerings. Upon further

consideration, we have concluded that ageneral requirement that issuers take‘‘reasonable steps to verify’’ that thepurchasers are accredited investors,combined with a non-exclusive list ofverification methods that are deemed to

meet this requirement, would maintainthe flexibility of the verificationstandard while providing additionalclarity and certainty that thisrequirement has been satisfied if one ofthe specified methods is used. We havespecified methods for verifying theaccredited investor status of naturalpersons because we believe that thepotential for uncertainty and the risk ofparticipation by non-accreditedinvestors is highest in offeringsinvolving natural persons as purchasers.a. Principles-Based Method ofVerification

Under Rule 506(c), issuers arerequired to take reasonable steps toverify the accredited investor status ofpurchasers. Consistent with theProposing Release, whether the stepstaken are ‘‘reasonable’’ will be anobjective determination by the issuer (orthose acting on its behalf), in the contextof the particular facts and circumstancesof each purchaser and transaction.Among the factors that issuers shouldconsider under this facts andcircumstances analysis are:

• the nature of the purchaser and thetype of accredited investor that thepurchaser claims to be;

• the amount and type of informationthat the issuer has about the purchaser;and

• the nature of the offering, such asthe manner in which the purchaser wassolicited to participate in the offering,and the terms of the offering, such as aminimum investment amount.

As noted in the Proposing Release,these factors are interconnected and areintended to help guide an issuer inassessing the reasonable likelihood thata purchaser is an accredited investor—which would, in turn, affect the types ofsteps that would be reasonable to taketo verify a purchaser’s accreditedinvestor status. After consideration ofthe facts and circumstances of thepurchaser and of the transaction, themore likely it appears that a purchaserqualifies as an accredited investor, thefewer steps the issuer would have totake to verify accredited investor status,

and vice versa. For example, if the termsof the offering require a high minimuminvestment amount and a purchaser isable to meet those terms, then thelikelihood of that purchaser satisfyingthe definition of accredited investormay be sufficiently high such that,absent any facts that indicate that thepurchaser is not an accredited investor,it may be reasonable for the issuer totake fewer steps to verify or, in certaincases, no additional steps to verifyaccredited investor status other than toconfirm that the purchaser’s cash


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102 SEC v. Ralston Purina, 346 U.S. 119, 126(1953) (‘‘Keeping in mind the broadly remedialpurposes of federal securities legislation,imposition of the burden of proof on an issuer whowould plead the exemption seems to us fair andreasonable.’’).

103 See 17 CFR 230.501(a)(1).104 See id.105 See id.106 See 17 CFR 230.501(a)(3).

107 See 17 CFR 230.501(a)(5).108 See 17 CFR 230.501(a)(6).109 This Web site is available at: http://

www.finra.org/Investors/ToolsCalculators/ BrokerCheck/ .

110 See letters from NASAA (stating that‘‘[v]erification of net worth is more challenging

because an individual could provide proof of assets but not liabilities.’’); P. Sigelman (Sept. 28, 2012).

111 If an issuer has actual knowledge that thepurchaser is an accredited investor, then the issuerwill not have to take any steps at all.

112 Such an organization is required to make theForm 990 series returns available for publicinspection. See Internal Revenue Service, PublicDisclosure and Availability of ExemptOrganizations Returns and Applications:Documents Subject to Public Disclosure, availableat: http://www.irs.gov/Charities-&-Non-Profits/ Public-Disclosure-and-Availability-of-Exempt- Organizations-Returns-and-Applications:- Documents-Subject-to-Public-Disclosure (lastreviewed or updated April 28, 2013).

investment is not being financed by athird party.

Regardless of the particular stepstaken, because the issuer has the burdenof demonstrating that its offering isentitled to an exemption from theregistration requirements of Section 5 ofthe Securities Act, 102 it will beimportant for issuers and theirverification service providers to retainadequate records regarding the stepstaken to verify that a purchaser was anaccredited investor.

Nature of the Purchaser. Indetermining the reasonableness of thesteps to verify accredited investorstatus, an issuer should consider thenature of the purchaser of the offeredsecurities. The definition of ‘‘accreditedinvestor’’ in Rule 501(a) includesnatural persons and entities that comewithin any of eight enumeratedcategories in the rule, or that the issuerreasonably believes come within one ofthose categories, at the time of the saleof securities to that natural person orentity. Some purchasers may beaccredited investors based on theirstatus, such as:

• a broker or dealer registeredpursuant to Section 15 of the SecuritiesExchange Act of 1934 (the ‘‘ExchangeAct’’); 103 or

• an investment company registeredunder the Investment Company Act of1940 (the ‘‘Investment Company Act’’)or a business development company asdefined in Section 2(a)(48) of thatAct. 104 Some purchasers may be accreditedinvestors based on a combination oftheir status and the amount of their totalassets, such as:

• a plan established and maintained by a state, its political subdivisions, orany agency or instrumentality of a stateor its political subdivisions, for the

benefit of its employees, if such planhas total assets in excess of $5million; 105 or

• an Internal Revenue Code (‘‘IRC’’)Section 501(c)(3) organization,corporation, Massachusetts or similar

business trust, or partnership, notformed for the specific purpose ofacquiring the securities offered, withtotal assets in excess of $5 million. 106

Natural persons may be accreditedinvestors based on either their net worthor their annual income, as follows:

• a natural person whose individualnet worth, or joint net worth with thatperson’s spouse, exceeds $1 million,excluding the value of the person’sprimary residence; 107 or

• a natural person who had anindividual income in excess of $200,000in each of the two most recent years, orjoint income with that person’s spousein excess of $300,000 in each of thoseyears, and has a reasonable expectationof reaching the same income level in thecurrent year. 108

As Rule 501(a) sets forth differentcategories of accredited investors, anissuer should recognize that the stepsthat will be reasonable to verify whethera purchaser is an accredited investorwill vary depending on the type ofaccredited investor that the purchaserclaims to be. For example, the steps thatmay be reasonable to verify that anentity is an accredited investor by virtueof being a registered broker-dealer—such as by going to FINRA’sBrokerCheck Web site 109 —willnecessarily differ from the steps thatmay be reasonable to verify whether anatural person is an accredited investor.

As we stated in the Proposing Release,the verification of natural persons asaccredited investors may pose greaterpractical difficulties as compared toother categories of accredited investors,particularly for natural persons claimingto be accredited investors based on thenet worth test. These practicaldifficulties likely will be exacerbated byprivacy concerns about the disclosure ofpersonal financial information. As

between the net worth test and theincome test for natural persons, werecognize that commenters havesuggested that it might be more difficultfor an issuer to obtain information aboutthe assets and liabilities that determinea person’s net worth—particularly theliabilities—than it would be to obtaininformation about a person’s annualincome, 110 although there could beprivacy concerns with respect to either

test. The question of what type ofinformation would be sufficient toconstitute reasonable steps to verifyaccredited investor status under theparticular facts and circumstances will

also depend on other factors, asdescribed below.

Information about the Purchaser. Theamount and type of information that anissuer has about a purchaser can also bea significant factor in determining whatadditional steps would be reasonable totake to verify the purchaser’s accredited

investor status. The more informationan issuer has indicating that aprospective purchaser is an accreditedinvestor, the fewer steps it may have totake, and vice versa. 111 Examples of thetypes of information that issuers couldreview or rely upon—any of whichmight, depending on the circumstances,in and of themselves constitutereasonable steps to verify a purchaser’saccredited investor status—include,without limitation:

• publicly available information infilings with a federal, state or localregulatory body—for example, without

limitation:Æ the purchaser is a named executiveofficer of an Exchange Act registrant,and the registrant’s proxy statementdiscloses the purchaser’s compensation;or

Æ the purchaser claims to be an IRCSection 501(c)(3) organization with $5million in assets, and the organization’sForm 990 series return filed with theInternal Revenue Service discloses theorganization’s total assets; 112

• third-party information thatprovides reasonably reliable evidencethat a person falls within one of theenumerated categories in the accreditedinvestor definition—for example,without limitation:

Æ the purchaser is a natural personand provides copies of pay stubs for thetwo most recent years and the currentyear; or

Æ specific information about theaverage compensation earned at thepurchaser’s workplace by persons at thelevel of the purchaser’s seniority ispublicly available; or

• verification of a person’s status asan accredited investor by a third party,

provided that the issuer has a


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http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/http://www.irs.gov/Charities-&-Non-Profits/Public-Disclosure-and-Availability-of-Exempt-Organizations-Returns-and-Applications:-Documents-Subject-to-Public-Disclosurehttp://www.irs.gov/Charities-&-Non-Profits/Public-Disclosure-and-Availability-of-Exempt-Organizations-Returns-and-Applications:-Documents-Subject-to-Public-Disclosurehttp://www.irs.gov/Charities-&-Non-Profits/Public-Disclosure-and-Availability-of-Exempt-Organizations-Returns-and-Applications:-Documents-Subject-to-Public-Disclosurehttp://www.irs.gov/Charities-&-Non-Profits/Public-Disclosure-and-Availability-of-Exempt-Organizations-Returns-and-Applications:-Documents-Subject-to-Public-Disclosurehttp://www.finra.org/Investors/ToolsCalculators/BrokerCheck/http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/http://www.irs.gov/Charities-&-Non-Profits/Public-Disclosure-and-Availability-of-Exempt-Organizations-Returns-and-Applications:-Documents-Subject-to-Public-Disclosurehttp://www.irs.gov/Charities-&-Non-Profits/Public-Disclosure-and-Availability-of-Exempt-Organizations-Returns-and-Applications:-Documents-Subject-to-Public-Disclosurehttp://www.irs.gov/Charities-&-Non-Profits/Public-Disclosure-and-Availability-of-Exempt-Organizations-Returns-and-Applications:-Documents-Subject-to-Public-Disclosurehttp://www.irs.gov/Charities-&-Non-Profits/Public-Disclosure-and-Availability-of-Exempt-Organizations-Returns-and-Applications:-Documents-Subject-to-Public-Disclosure


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113 For example, in the future, services maydevelop that verify a person’s accredited investorstatus for purposes of new Rule 506(c) and permitissuers to check the accredited investor status ofpossible investors, particularly for web-based Rule506 offering portals that include offerings formultiple issuers. This third-party service, asopposed to the issuer itself, could obtainappropriate documentation or otherwise takereasonable steps to verify accredited investor status.Several commenters, in fact, have recommendedthat the Commission take action to facilitate theability of issuers to rely on third parties to performthe necessary verification. See letters from NASAA(July 3, 2012) (recommending that the Commissionallow an issuer to obtain the necessary verification

through registered broker-dealers, provided thatthere are independent liability provisions for failureto adequately perform the verification);Massachusetts Securities Division (July 2, 2012)(urging the Commission to adopt as a safe harboror best practice the use of an independent party,such as a broker-dealer, bank, or other financialinstitution, that would verify the accreditedinvestor status of purchasers). One commenter,however, expressed concerns that some of the Websites that currently offer lists of accredited investorscould be used to facilitate fraud, noting that someoffer lists based on ‘‘ethnicity, gender, andlifestyle—presumably to make [it] easier forscammers to relate to marks—and ominously,‘seniors.’ ’’ Letter from I. Moscovitz and J. Maxfield(June 27, 2012).

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

116 Because an issuer must have a reasonable belief that the purchaser is an accredited investor,the issuer could not form such reasonable belief ifit has knowledge that the purchaser is not anaccredited investor. See Section II.C of this releasefor a discussion of the reasonable belief standard inthe definition of accredited investor in Rule 501(a).

117 See, e.g., letters from ACA (Sept. 27, 2012 andDec. 11, 2012); Investor Advisory Committee; MFA(Sept. 28, 2012).

118 Information and documentation collected forthese verification purposes may be subject tofederal and/or state privacy and data securityrequirements. See, e.g., Regulation S–P [17 CFR248.1–248.30] (implementing notice requirementsand restrictions on a financial institution’s abilityto disclose nonpublic personal information aboutcustomers); Privacy of Consumer FinancialInformation (Regulation S–P), Release No. 34–42974(June 22, 2000) [65 FR 40334 (June 29, 2000)].

119 We expect that many issuers will conductRule 506(c) offerings in reliance on the principles-

based method of verification, in light of itsflexibility and efficiency.

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

Nature and Terms of the Offering. Thenature of the offering—such as themeans through which the issuerpublicly solicits purchasers—may berelevant in determining thereasonableness of the steps taken toverify accredited investor status. Anissuer that solicits new investorsthrough a Web site accessible to thegeneral public, through a widelydisseminated email or social mediasolicitation, or through print media,such as a newspaper, will likely beobligated to take greater measures toverify accredited investor status than anissuer that solicits new investors from adatabase of pre-screened accreditedinvestors created and maintained by areasonably reliable third party. We

believe that an issuer will be entitled torely on a third party that has verified aperson’s status as an accredited

investor, provided that the issuer has areasonable basis to rely on such third-party verification. We do not believethat an issuer will have taken reasonablesteps to verify accredited investor statusif it, or those acting on its behalf,required only that a person check a boxin a questionnaire or sign a form, absentother information about the purchaserindicating accredited investor status.

The terms of the offering will alsoaffect whether the verification methodsused by the issuer are reasonable. Wecontinue to believe that there is merit tothe view that a purchaser’s ability tomeet a high minimum investmentamount could be a relevant factor to the

issuer’s evaluation of the types of stepsthat would be reasonable to take inorder to verify that purchaser’s status asan accredited investor. By way ofexample, the ability of a purchaser tosatisfy a minimum investment amountrequirement that is sufficiently highsuch that only accredited investorscould reasonably be expected to meet it,with a direct cash investment that is notfinanced by the issuer or by any thirdparty, could be taken into considerationin verifying accredited investor status.

Commenters suggested a number ofalternative approaches to implementingthe verification mandate. Somecommenters urged us to adopt arequirement that prescribes specificmethods of verification that issuersmust use, either because they believedsuch methods are needed for issuersseeking clarity on how to comply withthis condition of Rule 506(c) 114 or

because they believed that such

methods are needed to maintaininvestor protection. 115 We have decidednot to take such an approach. As westated in the Proposing Release, we

believe that, at present, requiring issuersto use specified methods of verificationwill be impractical and potentiallyineffective in light of the numerousways in which a purchaser can qualifyas an accredited investor, as well as thepotentially wide range of verificationissues that may arise, depending on thenature of the purchaser and the factsand circumstances of a particular Rule506(c) offering. We are also concernedthat a prescriptive rule that specifiesrequired verification methods could beoverly burdensome in some cases, byrequiring issuers to follow the samesteps, regardless of their particularcircumstances, and ineffective in others,

by requiring steps that, in the particularcircumstances, would not actuallyverify accredited investor status.

We believe that the approach we areadopting appropriately addresses theconcerns underlying the verificationmandate by obligating issuers to takereasonable steps to verify that thepurchasers are accredited investors, butnot requiring them to follow uniform

verification methods that may be ill-suited or unnecessary to a particularoffering or purchaser in light of the factsand circumstances. We also expect thatsuch an approach will give issuers andmarket participants the flexibility toadopt different approaches toverification depending on thecircumstances, to adapt to changingmarket practices, and to implementinnovative approaches to meeting the

verification requirement, such as thedevelopment of reliable third-partydatabases of accredited investors andverification services. In addition, weanticipate that many practices currentlyused by issuers in connection withexisting Rule 506 offerings will satisfythe verification requirement forofferings pursuant to Rule 506(c).

b. Non-Exclusive Methods of VerifyingAccredited Investor Status

In addition to adopting a principles- based method of verification, we areincluding in Rule 506(c) four specificnon-exclusive methods of verifyingaccredited investor status for naturalpersons that, if used, are deemed tosatisfy the verification requirement inRule 506(c); provided, however, thatnone of these methods will be deemedto satisfy the verification requirement ifthe issuer or its agent has knowledgethat the purchaser is not an accreditedinvestor. 116 While the principles-basedmethod of verification is intended toprovide an issuer with the flexibility toaddress the particular facts andcircumstances surrounding its offering,we appreciate the view of somecommenters that the final rule shouldinclude a non-exclusive list of specificverification methods for natural personsthat may be relied upon by those issuersseeking greater certainty that theysatisfy the rule’s verificationrequirement. 117 Accordingly, we areadding a non-exclusive list of specificverification methods to supplement ourprinciples-based framework forverifying accredited investor status. 118 Issuers are not required to use any of themethods discussed below, and canapply the reasonableness standarddirectly to the specific facts andcircumstances presented by the offeringand the investors. 119


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120 A person could provide a redacted version ofan Internal Revenue Service form so as to discloseonly information about annual income and to avoiddisclosure of personally identifiable information,such as a Social Security number, or otherinformation that would not be relevant to thedetermination of a person’s annual income.

121 A person could provide redacted versions ofthese documents so as to disclose only informationabout the amounts of assets and liabilities and toavoid disclosure of personally identifiableinformation, such as a Social Security number, orother information that would not be relevant to thedetermination of a person’s net worth.

122 We note that the Fair Credit Reporting Act(‘‘FCRA’’) [15 U.S.C. 1681 et seq. ] requires each ofthe nationwide consumer reporting agencies toprovide a person with a free copy of his or herconsumer report, upon request, once every 12months. In addition, the FCRA permits third partiesto access individual consumer reports with thewritten permission of the individual.

123

One commenter suggested that theCommission ‘‘require the issuer to obtain a list ofliabilities from the investor, which would includea sworn statement that all material liabilities aredisclosed.’’ Letter from NASAA. Anothercommenter noted that liabilities can be crosschecked against UCC 1 filings, bankruptcyinformation on Public Access to Court ElectronicRecords (PACER), and credit reports. See letter fromP. Sigelman (Sept. 28, 2012).

124 For purposes of this method, a licensedattorney must be in good standing under the lawsof the jurisdictions in which the attorney isadmitted to practice law, and a certified publicaccountant must be in good standing under the lawsof the place of the accountant’s residence orprincipal office.

125 Registered broker-dealers are subject to acomprehensive system of oversight by theCommission as well as FINRA. In particular,registered broker-dealers, among other things, mustmaintain and preserve specified books and records,

develop effective supervisory policies and controls,and comply with FINRA rules regarding registrationand qualification requirements for their associatedpersons as well as general and specific conductrules. In addition, registered broker-dealers aresubject to examinations by both FINRA andCommission staff.

126 An investment adviser must register with theCommission unless it is prohibited from registeringunder Section 203A of the Investment Advisers Actof 1940 [15 U.S.C. 80b–3a] (the ‘‘Advisers Act’’) oris exempt from registration under Advisers ActSection 203 [15 U.S.C. 80b–3]. Investment advisersthat are prohibited from registering with theCommission instead may be subject to regulation bythe states, but the antifraud provisions of the

Continued

First, in verifying whether a naturalperson is an accredited investor on the

basis of income, an issuer is deemed tosatisfy the verification requirement inRule 506(c) by reviewing copies of anyInternal Revenue Service (‘‘IRS’’) formthat reports income, including, but notlimited to, a Form W–2 (‘‘Wage and TaxStatement’’), Form 1099 (report ofvarious types of income), Schedule K–1 of Form 1065 (‘‘Partner’s Share ofIncome, Deductions, Credits, etc.’’), anda copy of a filed Form 1040 (‘‘U.S.Individual Income Tax Return’’), 120 forthe two most recent years, along withobtaining a written representation fromsuch person that he or she has areasonable expectation of reaching theincome level necessary to qualify as anaccredited investor during the currentyear. In the case of a person whoqualifies as an accredited investor basedon joint income with that person’sspouse, an issuer would be deemed to

satisfy the verification requirement inRule 506(c) by reviewing copies of theseforms for the two most recent years inregard to, and obtaining writtenrepresentations from, both the personand the spouse.

Second, in verifying whether a naturalperson is an accredited investor on the

basis of net worth, an issuer is deemedto satisfy the verification requirement inRule 506(c) by reviewing one or more ofthe following types of documentation,dated within the prior three months, 121 and by obtaining a writtenrepresentation from such person that allliabilities necessary to make adetermination of net worth have beendisclosed. In the case of a person whoqualifies as an accredited investor basedon joint net worth with that person’sspouse, an issuer would be deemed tosatisfy the verification requirement inRule 506(c) by reviewing suchdocumentation in regard to, andobtaining representations from, both theperson and the spouse. For assets: Bankstatements, brokerage statements andother statements of securities holdings,certificates of deposit, tax assessmentsand appraisal reports issued byindependent third parties are deemed to

be satisfactory; and for liabilities: A

consumer report (also known as a creditreport) from at least one of thenationwide consumer reporting agenciesis required. 122 Commenters did notprovide examples of any other type ofdocumentation that would, in our view,adequately evidence liabilities. 123 Werecognize that it will be difficult for anissuer to determine whether it has acomplete picture of a natural person’sliabilities, and therefore, for purposes ofthis method, consistent with thesuggestions of some commenters, we arerequiring a consumer report and awritten representation from such personthat all liabilities necessary to make adetermination of net worth have beendisclosed.

Third, an issuer is deemed to satisfythe verification requirement in Rule506(c) by obtaining a writtenconfirmation from a registered broker-dealer, an SEC-registered investmentadviser, a licensed attorney, or a

certified public accountant that suchperson or entity has taken reasonablesteps to verify that the purchaser is anaccredited investor within the priorthree months and has determined thatsuch purchaser is an accreditedinvestor. 124 While third-partyconfirmation by one of these parties will

be deemed to satisfy the verificationrequirement in Rule 506(c), dependingon the circumstances, an issuer may beentitled to rely on the verification ofaccredited investor status by a person orentity other than one of these parties,provided that any such third party takes

reasonable steps to verify thatpurchasers are accredited investors andhas determined that such purchasers areaccredited investors, and the issuer hasa reasonable basis to rely on suchverification.

Fourth, with respect to any natur