
[Federal Register Volume 77, Number 172 (Wednesday, September 5, 2012)]
[Proposed Rules]
[Pages 54464-54481]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-21681]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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 

  Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / 
Proposed Rules  

[[Page 54464]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 239

[Release No. 33-9354; File No. S7-07-12]
RIN 3235-AL34


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

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing amendments to Rule 506 of Regulation D and 
Rule 144A under the Securities Act of 1933 to implement Section 201(a) 
of the Jumpstart Our Business Startups Act. The proposed amendment to 
Rule 506 would provide that the prohibition against general 
solicitation and general advertising contained in Rule 502(c) of 
Regulation D would not apply to offers and sales of securities made 
pursuant to Rule 506, provided that all purchasers of the securities 
are accredited investors. The proposed amendment to Rule 506 would also 
require that, in Rule 506 offerings that use general solicitation or 
general advertising, the issuer take reasonable steps to verify that 
purchasers of the securities are accredited investors. The proposed 
amendment to Rule 144A(d)(1) would provide that securities may be 
offered pursuant to Rule 144A to persons other than qualified 
institutional buyers, provided that the securities are sold only to 
persons that the seller and any person acting on behalf of the seller 
reasonably believe are qualified institutional buyers. We are also 
proposing to revise Form D to add a separate check box for issuers to 
indicate whether they are using general solicitation or general 
advertising in a Rule 506 offering.

DATES: Comments should be received on or before October 5, 2012.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-07-12 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-07-12. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549-1090 on official business days between the hours of 10 a.m. and 3 
p.m. All comments received will be posted without change; we do not 
edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Charles Kwon, Special Counsel, or Ted 
Yu, Senior Special Counsel, Office of Chief Counsel, Division of 
Corporation Finance, at (202) 551-3500, or, with respect to privately 
offered funds, Holly Hunter-Ceci, Senior Counsel, Office of Chief 
Counsel, or Alpa Patel, Attorney-Adviser, Private Funds Branch, Office 
of Investment Adviser Regulation, Division of Investment Management, at 
(202) 551-6825 or (202) 551-6787, Securities and Exchange Commission, 
100 F Street NE., Washington, DC 20549-1090.

SUPPLEMENTARY INFORMATION: We are proposing amendments to Rule 144A,\1\ 
Form D,\2\ and Rules 500,\3\ 501,\4\ 502 \5\ and 506 \6\ of Regulation 
D \7\ under the Securities Act of 1933.\8\
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    \1\ 17 CFR 230.144A.
    \2\ 17 CFR 239.500.
    \3\ 17 CFR 230.500.
    \4\ 17 CFR 230.501.
    \5\ 17 CFR 230.502.
    \6\ 17 CFR 230.506.
    \7\ 17 CFR 230.500 through 230.508.
    \8\ 15 U.S.C. 77a et seq.
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Table of Contents

I. Introduction
II. Proposed Amendments to Rule 506 and Form D
    A. Eliminating the Prohibition Against General Solicitation
    B. Reasonable Steps to Verify Accredited Investor Status
    C. Reasonable Belief that All Purchasers Are Accredited 
Investors
    D. Form D Check Box for Rule 506(c) Offerings
    E. Specific Issues for Privately Offered Funds
    F. Technical and Conforming Amendments
    G. Request for Comment
III. Proposed Amendment to Rule 144A
    A. Offers to Persons Other Than Qualified Institutional Buyers
    B. Request for Comment
IV. Integration With Offshore Offerings
V. General Request for Comment
VI. Paperwork Reduction Act
VII. Economic Analysis
    A. Background and Summary of Proposed Rule and Form Amendments
    B. Baseline
    C. Eliminating the Prohibition Against General Solicitation in 
Rule 506 Offerings and Rule 144A Offerings
    D. Verifying Accredited Investor Status in Rule 506(c) Offerings
    E. Form D Check Box for Rule 506(c) Offerings
    F. Request for Comment
VIII. Small Business Regulatory Enforcement Fairness Act
IX. Initial Regulatory Flexibility Analysis
    A. Reasons for, and Objectives of, the Action
    B. Small Entities Subject to the Proposed Rule and Form 
Amendments
    C. Projected Reporting, Recordkeeping and Other Compliance 
Requirements
    D. Duplicative, Overlapping or Conflicting Federal Rules
    E. Significant Alternatives
    F. General Request for Comment
X. Statutory Authority and Text of Proposed Rule and Form Amendments

I. Introduction

    The Jumpstart Our Business Startups Act (the ``JOBS Act'') was 
enacted on April 5, 2012.\9\ Section 201(a)(1) of the JOBS Act directs 
the Commission, not

[[Page 54465]]

later than 90 days after the date of enactment, to amend Rule 506 of 
Regulation D \10\ under the Securities Act of 1933 (the ``Securities 
Act'') to permit general solicitation or general advertising in 
offerings made under Rule 506, provided that all purchasers of the 
securities are accredited investors. Section 201(a)(1) also states that 
``[s]uch rules shall require the issuer to take reasonable steps to 
verify that purchasers of the securities are accredited investors, 
using such methods as determined by the Commission.'' Section 201(a)(2) 
of the JOBS Act directs the Commission, not later than 90 days after 
the date of enactment, to revise Rule 144A(d)(1) \11\ under the 
Securities Act to permit offers of securities pursuant to Rule 144A to 
persons other than qualified institutional buyers (``QIBs''),\12\ 
including by means of general solicitation or general advertising, 
provided that the securities are sold only to persons that the seller 
and any person acting on behalf of the seller reasonably believe are 
QIBs.
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    \9\ Public Law 112-106, 126 Stat. 306.
    \10\ The Commission adopted Regulation D in 1982 as a result of 
the Commission's evaluation of the impact of its rules on the 
ability of small businesses to raise capital. See Revision of 
Certain Exemptions From Registration for Transactions Involving 
Limited Offers and Sales, Release No. 33-6389 (Mar. 8, 1982) [47 FR 
11251]. Over the years, the Commission has revised various 
provisions of Regulation D in order to address, among other things, 
specific concerns relating to facilitating capital-raising as well 
as abuses that have arisen under Regulation D. See, e.g., Additional 
Small Business Initiatives, Release No. 33-6996 (Apr. 28, 1993) [58 
FR 26509] and Revision of Rule 504 of Regulation D, the ``Seed 
Capital'' Exemption, Release No. 33-7644 (Feb. 25, 1999) [64 FR 
11090].
    \11\ 17 CFR 230.144A(d)(1).
    \12\ The term ``qualified institutional buyer'' is defined in 
Rule 144A(a)(1) [17 CFR 230.144A(a)(1)] and includes specified 
institutions that, in the aggregate, own and invest on a 
discretionary basis at least $100 million in securities of issuers 
that are not affiliated with such institutions. Banks and other 
specified financial institutions must also have a net worth of at 
least $25 million. A registered broker-dealer qualifies as a QIB if 
it, in the aggregate, owns and invests on a discretionary basis at 
least $10 million in securities of issuers that are not affiliated 
with the broker-dealer.
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    Rule 506 is a non-exclusive safe harbor under Section 4(a)(2) 
(formerly Section 4(2)) of the Securities Act,\13\ which exempts 
transactions by an issuer ``not involving any public offering'' from 
the registration requirements of Section 5 of the Securities Act.\14\ 
Under existing Rule 506, an issuer may offer and sell securities, 
without any limitation on the offering amount, to an unlimited number 
of ``accredited investors,'' as defined in Rule 501(a) of Regulation 
D,\15\ and to no more than 35 non-accredited investors who meet certain 
``sophistication'' requirements.\16\ The availability of the Rule 506 
safe harbor is subject to a number of requirements \17\ and is 
currently conditioned on the issuer, or any person acting on its 
behalf, not offering or selling securities through any form of 
``general solicitation or general advertising.'' \18\ Although the 
terms ``general solicitation'' and ``general advertising'' are not 
defined in Regulation D, Rule 502(c) does provide examples of general 
solicitation and general advertising, including advertisements 
published in newspapers and magazines, communications broadcast over 
television and radio, and seminars whose attendees have been invited by 
general solicitation or general advertising.\19\ By interpretation, the 
Commission has confirmed that other uses of publicly available media, 
such as unrestricted Web sites, also constitute general solicitation 
and general advertising.\20\ In this release, we will refer to both 
general solicitation and general advertising as ``general 
solicitation.''
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    \13\ 15 U.S.C. 77d(a)(2).
    \14\ 15 U.S.C. 77e.
    \15\ The definition of the term ``accredited investor'' is set 
forth in Rule 501(a) of Regulation D [17 CFR 230.501(a)] and 
includes any person who comes within one of the definition's 
enumerated categories of persons, or whom the issuer ``reasonably 
believes'' comes within any of the enumerated categories, at the 
time of the sale of the securities to that person.
    \16\ Under Rule 506(b)(2)(ii) [17 CFR 230.506(b)(2)(ii)], each 
purchaser in a Rule 506 offering who is not an accredited investor 
must possess, or the issuer must reasonably believe immediately 
before the sale that such purchaser possesses, either alone or with 
his or her purchaser representative, ``such knowledge and experience 
in financial and business matters that he [or she] is capable of 
evaluating the merits and risks of the prospective investment.''
    \17\ Offerings under Rule 506 are subject to all the terms and 
conditions of Rules 501 and 502. If securities are sold to any non-
accredited investors, specified information requirements apply. See 
Rule 502(b) [17 CFR 230.502(b)].
    \18\ Rule 502(c) of Regulation D [17 CFR 230.502(c)].
    \19\ Id.
    \20\ See Use of Electronic Media for Delivery Purposes, Release 
No. 33-7233 (Oct. 6, 1995) [60 FR 53458] at Ex. 20; Use of 
Electronic Media, Release No. 33-7856 (Apr. 28, 2000) [65 FR 25843] 
at footnotes 79-80 and accompanying text.
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    Rule 144A is a non-exclusive safe harbor exemption from the 
registration requirements of the Securities Act for resales of certain 
``restricted securities'' \21\ to QIBs. Resales to QIBs in accordance 
with the conditions of Rule 144A \22\ are exempt from registration 
pursuant to Section 4(a)(1) (formerly Section 4(1)) of the Securities 
Act,\23\ which exempts transactions by any person ``other than an 
issuer, underwriter, or dealer.'' Although Rule 144A does not include 
an express prohibition against general solicitation, offers of 
securities under Rule 144A currently must be limited to QIBs, which has 
the same practical effect. By its terms, Rule 144A is available solely 
for resale transactions; however, since its adoption by the Commission 
in 1990, market participants have used Rule 144A to facilitate capital-
raising by issuers. The term ``Rule 144A offering'' in this release 
refers to a primary offering of securities by an issuer to one or more 
financial intermediaries--commonly known as the ``initial 
purchasers''--in a transaction that is exempt from registration 
pursuant to Section 4(a)(2) or Regulation S,\24\ followed by the 
immediate resale of those securities by the initial purchasers to QIBs 
in reliance on Rule 144A.
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    \21\ ``Restricted securities'' are defined in Securities Act 
Rule 144(a)(3) [17 CFR 230.144(a)(3)] to include, in part, 
``[s]ecurities acquired directly or indirectly from the issuer, or 
from an affiliate of the issuer, in a chain of transactions not 
involving a public offering.''
    \22\ In order for a transaction to come within existing Rule 
144A, a seller must have a reasonable basis for believing that the 
offeree or purchaser is a QIB and must take reasonable steps to 
ensure that the purchaser is aware that the seller may rely on Rule 
144A. Further, only securities that were not, when issued, of the 
same class as securities listed on a U.S. securities exchange or 
quoted on a U.S. automated interdealer quotation system are eligible 
for resale under Rule 144A. Also, the seller and a prospective 
purchaser designated by the seller must have the right to obtain 
from the issuer, upon request, certain information on the issuer, 
unless the issuer falls within specified categories as to which this 
condition does not apply.
    \23\ 15 U.S.C. 77d(a)(1).
    \24\ Regulation S under the Securities Act [17 CFR 230.901 
through 230.905] was adopted in 1990 as a safe harbor from the 
registration requirements of the Securities Act for any offer or 
sale of securities made outside the United States. It provides that 
any ``offer,'' ``offer to sell,'' ``sell,'' ``sale'' or ``offer to 
buy'' that occurs outside the United States is not subject to the 
registration requirements of Section 5. Regulation S does not limit 
the scope or availability of the antifraud or other provisions of 
the Securities Act to offers and sales made in reliance on 
Regulation S.
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    Rule 506 offerings and Rule 144A offerings are widely used by U.S. 
and foreign issuers to raise capital. In 2011, the estimated amount of 
capital (including both equity and debt) raised in Rule 506 offerings 
and Rule 144A offerings was $895 billion and $168 billion, 
respectively, compared to $984 billion raised in registered offerings. 
In 2010, the estimated amount of capital (including both equity and 
debt) raised in Rule 506 offerings and Rule 144A offerings was $902 
billion and $233 billion, respectively, compared to $1.07 trillion 
raised in registered offerings.\25\

[[Page 54466]]

These data points underscore the importance of the Rule 506 and Rule 
144A exemptions for issuers seeking access to the U.S. capital markets.
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    \25\ These statistics are based on a review of Form D electronic 
filings with the Commission--specifically, the ``total amount sold'' 
as reported in Form D--and data regarding other types of offerings 
(e.g., public debt offerings and Rule 144A offerings) from 
Securities Data Corporation's New Issues database (Thomson 
Financial). See Vlad Ivanov and Scott Bauguess, Capital Raising in 
the U.S.: The Significance of Unregistered Offerings Using the 
Regulation D Exemption (Feb. 2012) (the ``Ivanov/Bauguess Study''), 
available at: http://www.sec.gov/info/smallbus/acsec/acsec103111_analysis-reg-d-offering.pdf. The amount of capital raised through 
offerings under Regulation D may be considerably larger than what is 
reported on Form D because, although the filing of a Form D is a 
requirement of Rule 503(a) of Regulation D [17 CFR 230.503(a)], it 
is not a condition to the availability of the exemptions under 
Regulation D. Further, once a Form D is filed, the issuer is not 
required to file an amendment to the notice to reflect a change that 
occurs after the offering terminates or a change that occurs solely 
with respect to certain information, such as the amount sold in the 
offering. For example, if the amount sold does not exceed the offer 
size by more than 10% or the offer closes within a year, the filing 
of an amendment to the initial Form D is not required. Therefore, a 
Form D filed for a particular offering may not reflect the total 
amount of securities sold in the offering in reliance on the 
exemption.
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    To implement Section 201(a) of the JOBS Act, we are proposing to 
amend Rule 506 to provide that the prohibition against general 
solicitation contained in Rule 502(c) shall not apply to offers and 
sales of securities made pursuant to Rule 506, as amended, provided 
that all purchasers of the securities are accredited investors and the 
issuer takes reasonable steps to verify that the purchasers are 
accredited investors. In addition, we are proposing to amend Form D, 
which is a notice required to be filed with the Commission by each 
issuer claiming a Regulation D exemption, to add a check box to 
indicate whether an offering is being conducted pursuant to the 
proposed amendment to Rule 506 that would permit general solicitation. 
We are also proposing to amend Rule 144A to provide that securities 
sold pursuant to Rule 144A may be offered to persons other than QIBs, 
including by means of general solicitation, provided that the 
securities are sold only to persons that the seller and any person 
acting on behalf of the seller reasonably believe are QIBs.
    We have considered comment letters received to date on Section 
201(a) of the JOBS Act, and we are requesting comment on various issues 
relating specifically to the proposed amendments described above.\26\ 
In this release, we are proposing only those rule and form amendments 
that are, in our view, necessary to implement the mandate in Section 
201(a). We recognize that commentators have urged us to consider and 
propose other amendments to Regulation D or to Form D that they believe 
are appropriate in connection with implementation of the rule and form 
amendments proposed here. For example, several commentators have 
recommended that the Commission also amend the definition of 
``accredited investor'' as it relates to natural persons.\27\ Other 
commentators have suggested that we amend the Form D filing 
requirement, including conditioning the availability of the proposed 
Rule 506 exemption on the filing of Form D,\28\ requiring the Form D to 
be filed in advance of any general solicitation,\29\ and adding to the 
information requirements of Form D.\30\ Other commentators have 
suggested that we propose rules governing the content and manner of 
advertising and solicitations used in offerings conducted under the 
proposed Rule 506 exemption,\31\ particularly with respect to privately 
offered funds.\32\
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    \26\ To facilitate public input on JOBS Act rulemaking before 
the issuance of rule proposals, the Commission has invited members 
of the public to make their views known on various JOBS Act 
initiatives in advance of any rulemaking by submitting comment 
letters to the Commission's Web site at http://www.sec.gov/spotlight/jobsactcomments.shtml. Comment letters received to date on 
Section 201(a) of the JOBS Act are available at http://www.sec.gov/comments/jobs-title-ii/jobs-title-ii.shtml, and we cite to many of 
them in this release. Comment letters on this release should be 
submitted as directed in ``Addresses'' above.
    \27\ See letters from Cambridge Innovation Center (suggesting 
that the Commission consider offering investor education classes 
whereby investors who meet a lower financial threshold but pass a 
qualifying test could be granted accredited investor status); Fund 
Democracy, Consumer Federation of America, Consumer Action, AFL-CIO, 
and Americans for Financial Reform (``Fund Democracy'') 
(recommending higher financial thresholds for natural persons 
claiming to be accredited investors); Investment Company Institute 
(``ICI'') (May 21, 2012) (recommending increased income and net 
worth thresholds in the accredited investor definition and inclusion 
of a new category of ``accredited natural persons'' in the 
accredited investor definition); Managed Funds Association (``MFA'') 
(May 4, 2012) (recommending adding ``knowledgeable employee'' under 
the Investment Company Act to the definition of ``accredited 
investor''); Public Citizen (recommending higher income and net 
worth thresholds in the accredited investor definition); Office of 
the Secretary of the Commonwealth of Massachusetts Securities 
Division (``Massachusetts Securities Division'') (same); Ilan 
Moscovitz and John Maxfield (``Moscovitz and Maxfield'') (same); 
Ohio Division of Securities (``Ohio Division'') (same). One 
commentator opposed increasing the thresholds for accredited 
investor status. See letter from National Small Business Association 
(``NSBA'') (June 12, 2012).
    \28\ See letters from Massachusetts Securities Division (``The 
filing of a Form D should be a condition of the availability of the 
new Rule 506 exemption.''); North American Securities Administrators 
Association, Inc. (``NASAA'') (July 3, 2012) (recommending that the 
failure to file a Form D prior to the use of general solicitation 
must result in the loss of the exemption and warning that without 
such a filing requirement, regulators would ``have no way of knowing 
whether a promoter is legitimately trying to comply with Rule 506, 
so a fraudulent offering will be allowed to continue until the 
regulators have gathered sufficient evidence to prove fraud has 
already occurred'').
    \29\ See letters from Fund Democracy; NASAA (July 3, 2012); 
Public Citizen.
    \30\ See, e.g., letters from NASAA (July 3, 2012) (listing a 
number of recommended amendments to Form D, such as the disclosure 
of the issuer's Web site address); Ohio Division (recommending that 
Form D provide more background information to allow broker-dealers, 
regulators, and investors to assess whether an issuer has been 
disqualified from using Rule 506).
    \31\ Letters from NASAA (July 3, 2012) (stating that advertising 
materials used in Rule 506 offerings should include a ``balanced 
presentation of risks and rewards'' and be subject to a requirement 
that statements in the advertising materials are consistent with 
representations in the offering documents); Ohio Division 
(recommending that, among other things, the Commission adopt a 
uniform set of required disclosures and content restrictions for 
general solicitation materials, such as a mandatory legend 
disclosing those jurisdictions where the offering is being made (and 
disclaiming sales in any others) and a prohibition on financial 
projections or statements of future performance).
    \32\ See, e.g., letters from ICI (May 21, 2012); Moscovitz and 
Maxfield; and Fund Democracy (Aug. 16, 2012).
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    We appreciate the suggestions made by these commentators; however, 
at this time, we are not proposing these or any other amendments to 
Regulation D or to Form D.

II. Proposed Amendments to Rule 506 and Form D

A. Eliminating the Prohibition Against General Solicitation

    Section 4(a)(2) exempts transactions by an issuer ``not involving 
any public offering.'' An issuer relying on Section 4(a)(2) is 
restricted in its ability to make public communications to attract 
investors for its offering because public advertising is incompatible 
with a claim of exemption under Section 4(a)(2).\33\ As noted above, 
Rule 506 currently conditions the availability of the safe harbor under 
Section 4(a)(2) on the issuer, or any person acting on its behalf, not 
offering or selling securities through any form of general 
solicitation.\34\ Section 201(a)(1) of the JOBS Act directs the 
Commission to amend Rule 506 to provide that the prohibition against 
general solicitation contained in Rule 502(c) shall not apply to offers 
and sales of securities made pursuant to Rule 506, as so amended, 
provided that purchasers of the securities are accredited investors. 
This mandate affects only the Rule 506 safe harbor, and not Section 
4(a)(2) offerings in general.\35\
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    \33\ See Non-Public Offering Exemption, Release No. 33-4552 
(Nov. 6, 1962) [27 FR 11316].
    \34\ See Rule 502(c) and Rule 506(b)(1) of Regulation D [17 CFR 
230.506(b)(1)].
    \35\ In this regard, we note that bills that would have amended 
Section 4(a)(2) itself to permit the use of general solicitation 
were introduced and considered by Congress but not enacted. See 
Access to Capital for Job Creators, H.R. 2940, 112th Cong. (2011) 
(proposing to amend Section 4(a)(2) by adding the phrase ``whether 
or not such transactions involve general solicitation or general 
advertising''); Access to Capital for Job Creators, S.1831, 112th 
Cong. (2011) (same).

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[[Page 54467]]

    To implement the mandated rule change, we are proposing new Rule 
506(c), which would permit the use of general solicitation to offer and 
sell securities under Rule 506, provided that certain conditions are 
satisfied.\36\ These conditions are:
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    \36\ We note that broker-dealers participating in offerings in 
conjunction with issuers relying on proposed Rule 506(c) would 
continue to be subject to the rules of the Financial Industry 
Regulatory Authority (``FINRA'') regarding communications with the 
public. See FINRA Rule 2210.
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     The issuer must take reasonable steps to verify that the 
purchasers of the securities are accredited investors;
     All purchasers of securities must be accredited investors, 
either because they come within one of the enumerated categories of 
persons that qualify as accredited investors or the issuer reasonably 
believes that they do, at the time of the sale of the securities; \37\ 
and
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    \37\ Rule 501(a) of Regulation D.
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     All terms and conditions of Rule 501 and Rules 502(a) and 
502(d) must be satisfied.\38\
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    \38\ Securities acquired under proposed Rule 506(c) would be 
subject to the resale limitations under Rule 502(d) [17 CFR 
230.502(d)] and therefore would be ``restricted securities'' as 
defined in Rule 144(a)(3)(ii) [17 CFR 230.144(a)(3)(ii)]. Further, 
Section 201(b) of the JOBS Act added Section 4(b) of the Securities 
Act, which provides that ``[o]ffers and sales exempt under [Rule 506 
as amended pursuant to Section 201 of the JOBS Act] shall not be 
deemed public offerings under the Federal securities laws as a 
result of general advertising or general solicitation.'' Thus, 
securities acquired under proposed Rule 506(c) would also meet the 
definition of ``restricted securities'' under Rule 144(a)(3)(i) [17 
CFR 230.144(a)(3)(i)] (``[s]ecurities acquired directly or 
indirectly from the issuer, or from an affiliate of the issuer, in a 
transaction or chain of transactions not involving any public 
offering'').

Offerings under proposed Rule 506(c) would not be subject to the 
requirement to comply with Rule 502(c), which contains the prohibition 
against general solicitation.\39\
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    \39\ Offerings under proposed Rule 506(c) would also not be 
subject to the information requirements in Rule 502(b), because all 
purchasers in proposed Rule 506(c) offerings would be accredited 
investors.
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    While we are proposing Rule 506(c) to allow for Rule 506 offerings 
that use general solicitation, we are preserving, under existing Rule 
506(b), the existing ability of issuers to conduct Rule 506 offerings 
without the use of general solicitation. We recognize that offerings 
under existing Rule 506 represent an important source of capital for 
issuers of all sizes and believe that the continued availability of 
existing Rule 506 will be important for those issuers that either do 
not wish to engage in general solicitation in their Rule 506 offerings 
(and become subject to the new requirement to take reasonable steps to 
verify the accredited investor status of purchasers) or wish to sell 
privately to non-accredited investors who meet Rule 506(b)'s 
sophistication requirements. Retaining the safe harbor under existing 
Rule 506 may also be beneficial to investors with whom an issuer has a 
pre-existing substantive relationship.\40\ In this regard, we do not 
believe that Section 201(a) requires the Commission to modify Rule 506 
to impose any new requirements on offers and sales of securities that 
do not involve general solicitation. Therefore, the amendments to Rule 
506 we are proposing today would not amend or modify the requirements 
relating to existing Rule 506.
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    \40\ In a series of no-action and interpretive letters, the 
Commission staff has indicated that an issuer would not contravene 
Rule 502(c)'s prohibition against general solicitation if the issuer 
has a pre-existing substantive relationship with the offerees. See, 
e.g., Mineral Lands Research and Marketing Corp. (Nov. 3, 1985). The 
Commission staff has also addressed how an intermediary, such as a 
broker-dealer acting as a placement agent, can establish a 
sufficient pre-existing substantive relationship with its customers 
such that there would be no general solicitation when an issuer 
engages that intermediary to offer securities to the intermediary's 
customers. See, e.g., E.F. Hutton & Co. (Dec. 3, 1985). The 
framework set forth by this staff guidance on pre-existing 
substantive relationships has also provided flexibility in the use 
of the Internet in Regulation D offerings. See, e.g., IPONET (July 
26, 1996); Lamp Technologies, Inc. (May 29, 1998).
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B. Reasonable Steps to Verify Accredited Investor Status

    While Section 201(a)(1) of the JOBS Act mandates that our 
amendments to Rule 506 require issuers using general solicitation in 
Rule 506 offerings ``to take reasonable steps to verify that purchasers 
of the securities are accredited investors,'' it does not specify the 
methods necessary to satisfy this requirement and instead requires 
issuers to use ``such methods as determined by the Commission.'' We 
believe that the purpose of the verification mandate is to address 
concerns, and reduce the risk, that the use of general solicitation 
under Rule 506 may result in sales to investors who are not, in fact, 
accredited investors.\41\ We also recognize, however, that it would be 
necessary that our proposed amendment to Rule 506 provide sufficient 
flexibility to accommodate the different types of issuers that would 
conduct offerings under proposed Rule 506(c) and the different types of 
accredited investors (such as natural persons, public and private for-
profit and not-for-profit corporations, general and limited 
partnerships, business and other types of trusts, and funds and other 
types of collective investment vehicles) that may purchase securities 
in these offerings.
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    \41\ See, e.g., Markup of H.R. 2940, Access to Capital for Job 
Creators Act, Subcommittee on Capital Markets and Government 
Sponsored Enterprises, House Financial Services Committee, 112th 
Cong. (Oct. 5, 2011) (remarks of Representative Waters, explaining 
that she is introducing the amendment that requires issuers to take 
reasonable steps to verify accredited investor status because ``we 
must take steps to ensure that those folks are indeed 
sophisticated''); 157 Cong. Rec. H7291 (daily ed. Nov. 3, 2011) 
(remarks of Representative Maloney (same)); 157 Cong. Rec. H7294 
(daily ed. Nov. 3, 2011) (remarks of Representative Lee (same)).
---------------------------------------------------------------------------

    We are proposing a requirement in Rule 506(c) that issuers using 
general solicitation ``take reasonable steps to verify'' that the 
purchasers of the offered securities are accredited investors. Whether 
the steps taken are ``reasonable'' would be an objective determination, 
based on the particular facts and circumstances of each transaction.
    Under this proposed approach, issuers would consider a number of 
factors when determining the reasonableness of the steps to verify that 
a purchaser is an accredited investor. Some examples of these factors 
include:
     The nature of the purchaser and the type of accredited 
investor that the purchaser claims to be;
     The amount and type of information that the issuer has 
about the purchaser; and
     The nature of the offering, such as the manner in which 
the purchaser was solicited to participate in the offering, and the 
terms of the offering, such as a minimum investment amount.

We discuss each of these factors in greater detail below.

    Nature of the Purchaser. The definition of ``accredited investor'' 
in Rule 501(a) includes natural persons and entities that come within 
any of eight enumerated categories in the rule, or that the issuer 
reasonably believes come within one of those categories, at the time of 
the sale of securities to that natural person or entity. Some 
purchasers may be accredited investors based on their status, such as:
     A broker or dealer registered pursuant to Section 15 of 
the Securities Exchange Act of 1934 (the ``Exchange Act''); \42\ or
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    \42\ See 17 CFR 230.501(a)(1).
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     An investment company registered under the Investment 
Company Act of 1940 (the ``Investment Company Act'') or a business 
development company as defined in Section 2(a)(48) of that Act.\43\
---------------------------------------------------------------------------

    \43\ See id.

Some purchasers may be accredited investors based on a combination of

[[Page 54468]]

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their status and the amount of their total assets, such as:

     A plan established and maintained by a state, its 
political subdivisions, or any agency or instrumentality of a state or 
its political subdivisions, for the benefit of its employees, if such 
plan has total assets in excess of $5 million; \44\ or
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    \44\ See id.
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     An Internal Revenue Code (``IRC'') Section 501(c)(3) 
organization, corporation, Massachusetts or similar business trust, or 
partnership, not formed for the specific purpose of acquiring the 
securities offered, with total assets in excess of $5 million.\45\
---------------------------------------------------------------------------

    \45\ See 17 CFR 230.501(a)(3).

Natural persons may be accredited investors based on either their net 
---------------------------------------------------------------------------
worth or their annual income, as follows:

     A natural person whose individual net worth, or joint net 
worth with that person's spouse, exceeds $1 million, excluding the 
value of the person's primary residence (the ``net worth test''); \46\ 
or
---------------------------------------------------------------------------

    \46\ See 17 CFR 230.501(a)(5).
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     A natural person who had an individual income in excess of 
$200,000 in each of the two most recent years, or joint income with 
that person's spouse in excess of $300,000 in each of those years, and 
has a reasonable expectation of reaching the same income level in the 
current year (the ``income test'').\47\
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    \47\ See 17 CFR 230.501(a)(6).
---------------------------------------------------------------------------

    As Rule 501(a) sets forth different categories of accredited 
investors, we expect the steps that would be reasonable for an issuer 
to take to verify whether a purchaser is an accredited investor under 
proposed Rule 506(c) would likely vary depending on the type of 
accredited investor that the purchaser claims to be. For example, the 
steps that may be reasonable to verify that an entity is an accredited 
investor by virtue of being a registered broker-dealer--such as by 
going to FINRA's BrokerCheck Web site \48\--would necessarily differ 
from the steps that would be reasonable to verify whether a natural 
person is an accredited investor.
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    \48\ This Web site is available at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/.
---------------------------------------------------------------------------

    We recognize that taking reasonable steps to verify the accredited 
investor status of natural persons poses greater practical difficulties 
as compared to other categories of accredited investors, and these 
practical difficulties likely would be exacerbated by natural persons' 
privacy concerns about the disclosure of personal financial 
information.\49\ As between the net worth test and the income test for 
natural persons, we recognize that commentators have suggested that it 
might be more difficult for an issuer to obtain information about a 
person's assets and liabilities than it would be to obtain information 
about a person's annual income,\50\ although there could be privacy 
concerns with respect to either test. The question of what type of 
information would be sufficient to constitute reasonable steps to 
verify accredited investor status under the particular facts and 
circumstances of each purchaser would also depend on other factors, as 
described below.
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    \49\ See, e.g., letters from BrokerBank Securities, Inc. 
(``BrokerBank'') (``By the time most people accumulate a net worth 
of $1,000,000+ not counting their principal residence, they usually 
really want to keep their financial information very close to the 
vest.''); Federal Regulation of Securities Committee of the Business 
Law Section of the American Bar Association (``ABA'') (stating that 
``the Commission should be sensitive to the legitimate privacy 
concerns of purchasers'' when considering the steps that issuers 
should take to verify accredited investor status); SecondMarket 
Holdings, Inc. (``SecondMarket'') (``In addition, legitimate privacy 
concerns may result in potential investors being unwilling to 
provide highly sensitive personal information outside of a clearly 
protective framework, which may cause such investors to avoid 
participating in Rule 506 offerings.'').
    \50\ See letters from NASAA (July 3, 2012) (``Verification of 
net worth is more challenging because an individual could provide 
proof of assets but not liabilities.''); SecondMarket (indicating 
that, in its experience, the majority of natural persons who 
indicated that they were accredited investors did so based on the 
income test of Rule 501(a)(6), which can be verified through tax 
returns, Form W-2, Form 1099, or other income documentation, in 
addition to a pay stub from the current year, whereas verifying that 
a purchaser satisfies the net worth test may be very difficult; 
therefore, this commentator recommended that a ``substantial minimum 
investment requirement,'' coupled with representations by the 
purchaser, should be deemed sufficient evidence to presume that a 
purchaser satisfies the net worth test without requiring additional 
verification of that purchaser's accredited investor status).
---------------------------------------------------------------------------

    Information about the Purchaser. The amount and type of information 
that an issuer has about a purchaser would be a significant factor in 
determining what additional steps would be reasonable to verify the 
purchaser's accredited investor status. The more information an issuer 
has indicating that a prospective purchaser is an accredited investor, 
the fewer steps it would have to take, and vice versa.\51\ Examples of 
the types of information that issuers could review or rely upon--any of 
which might, depending on the circumstances, in and of themselves 
constitute reasonable steps to verify a purchaser's accredited investor 
status--include, without limitation:
---------------------------------------------------------------------------

    \51\ If an issuer has actual knowledge that the purchaser is an 
accredited investor, then the issuer would not have to take any 
steps at all.
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     Publicly available information in filings with a federal, 
state or local regulatory body--for example, without limitation:
    [cir] The purchaser is a named executive officer of an Exchange Act 
registrant, and the registrant's proxy statement discloses the 
purchaser's compensation for the last three completed fiscal years; or
    [cir] The purchaser claims to be an IRC Section 501(c)(3) 
organization with $5 million in assets, and the organization's Form 990 
series return filed with the Internal Revenue Service discloses the 
organization's total assets; \52\
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    \52\ Such an organization is required to make the Form 990 
series returns available for public inspection. See Internal Revenue 
Service, Public Disclosure and Availability of Exempt Organizations 
Returns and Applications: Documents Subject to Public Disclosure, 
http://www.irs.gov/charities/article/0,,id=135008,00.html (last 
updated Sept. 21, 2011).
---------------------------------------------------------------------------

     Third-party information that provides reasonably reliable 
evidence that a person falls within one of the enumerated categories in 
the accredited investor definition--for example, without limitation:
    [cir] The purchaser is a natural person and provides copies of 
Forms W-2; or
    [cir] The purchaser works in a field where industry or trade 
publications disclose average annual compensation for certain levels of 
employees or partners, and specific information about the average 
compensation earned at the purchaser's workplace by persons at the 
level of the purchaser's seniority is publicly available; or
     Verification of a person's status as an accredited 
investor by a third party, such as a broker-dealer, attorney or 
accountant, provided that the issuer has a reasonable basis to rely on 
such third-party verification.\53\
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    \53\ For example, in the future, services may develop that 
verify a person's accredited investor status for purposes of 
proposed Rule 506(c) and permit issuers to check the accredited 
investor status of possible investors, particularly for web-based 
Rule 506 offering portals that include offerings for multiple 
issuers. This third-party service, as opposed to the issuer itself, 
could obtain appropriate documentation or otherwise verify 
accredited investor status. Several commentators, in fact, have 
recommended that the Commission take action to facilitate the 
ability of issuers to rely on third parties to perform the necessary 
verification. See letters from NASAA (July 3, 2012) (recommending 
that the Commission allow an issuer to obtain the necessary 
verification through registered broker-dealers, provided that there 
are independent liability provisions for failure to adequately 
perform the verification); Massachusetts Securities Division (urging 
the Commission to adopt as a safe harbor or best practice the use of 
an independent party, such as a broker-dealer, bank, or other 
financial institution, that would verify the accredited investor 
status of potential purchasers). One commentator, however, expressed 
concerns that some of the Web sites that currently offer lists of 
accredited investors could be used to facilitate fraud, noting that 
some offer lists based on ``ethnicity, gender, and lifestyle--
presumably to make [it] easier for scammers to relate to marks--and 
ominously, `seniors.' '' Letter from Moscovitz and Maxfield.

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[[Page 54469]]

    Nature and Terms of the Offering. The nature of the offering--such 
as the means through which the issuer publicly solicits purchasers--may 
be relevant in determining the reasonableness of the steps taken to 
verify accredited investor status. An issuer that solicits new 
investors through a Web site accessible to the general public or 
through a widely disseminated email or social media solicitation would 
likely be obligated to take greater measures to verify accredited 
investor status than an issuer that solicits new investors from a 
database of pre-screened accredited investors created and maintained by 
a reasonably reliable third party, such as a registered broker-dealer. 
In the case of the former, we do not believe that an issuer would have 
taken reasonable steps to verify accredited investor status if it 
required only that a person check a box in a questionnaire or sign a 
form, absent other information about the purchaser indicating 
accredited investor status. In the case of the latter, we believe an 
issuer would be entitled to rely on a third party that has verified a 
person's status as an accredited investor, provided that the issuer has 
a reasonable basis to rely on such third-party verification.
    The terms of the offering would also affect whether the 
verification methods used by the issuer are reasonable. Some 
commentators have expressed the view that a purchaser's ability to meet 
a high minimum investment amount could be relevant to the issuer's 
evaluation of the types of steps that would be reasonable to take in 
order to verify that purchaser's status as an accredited investor.\54\ 
We believe that there is merit to this view. By way of example, the 
ability of a purchaser to satisfy a minimum investment amount 
requirement that is sufficiently high such that only accredited 
investors could reasonably be expected to meet it, with a direct cash 
investment that is not financed by the issuer or by any other third 
party, could be taken into consideration in verifying accredited 
investor status.
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    \54\ See, e.g., letters from MFA (May 4, 2012) (stating that 
many hedge funds managed by its members obtain further assurance 
that investors meet the qualification standards in the Investment 
Company Act or the Investment Advisers Act of 1940, as applicable, 
through minimum investment thresholds that meet or exceed the net 
worth test of the accredited investor definition); NASAA (July 3, 
2012) (``For example, if an investor makes an investment of $1 
million in the issuer's securities, it would be reasonable for the 
issuer to assume that the investor has $1 million in net worth, even 
though it is not necessarily a certainty. NASAA would not oppose the 
creation of this type of specific safe harbor, provided the factors 
used to demonstrate the requisite net worth are set sufficiently 
high.''); SecondMarket (recommending that a ``substantial minimum 
investment requirement,'' coupled with representations by the 
purchaser, should be deemed sufficient evidence to presume that a 
purchaser satisfies the net worth test without requiring additional 
verification of that purchaser's accredited investor status). One 
commentator, however, disagreed with this approach, noting that 
``[w]hile a large investment amount may indicate that the investor 
is wealthy, it also might indicate that a non-wealthy investor is 
over-concentrated in the investment.'' Letter from Massachusetts 
Securities Division.
---------------------------------------------------------------------------

    These factors are interconnected, and the information gained by 
looking at these factors would help an issuer assess the reasonable 
likelihood that a potential purchaser is an accredited investor, which 
would, in turn, affect the types of steps that would be reasonable to 
take to verify a purchaser's accredited investor status. After 
consideration of the facts and circumstances of the purchaser and of 
the transaction, if it appears likely that a person qualifies as an 
accredited investor, the issuer would have to take fewer steps to 
verify accredited investor status, and vice versa. For example, if an 
issuer knows little about the potential purchaser who seeks to qualify 
under the natural person tests for accredited investor status, but the 
terms of the offering require a high minimum investment amount, then it 
may be reasonable for the issuer to take no steps to verify accredited 
investor status other than to confirm that the purchaser's cash 
investment is not being financed by the issuer or by a third party, 
absent any facts that may indicate that the purchaser is not an 
accredited investor.
    Regardless of the particular steps taken, it would be important for 
issuers to retain adequate records that document the steps taken to 
verify that a purchaser was an accredited investor. Any issuer claiming 
an exemption from the registration requirements of Section 5 has the 
burden of showing that it is entitled to that exemption.\55\
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    \55\ SEC v. Ralston Purina, 346 U.S. 119, 126 (1953) (``Keeping 
in mind the broadly remedial purposes of federal securities 
legislation, imposition of the burden of proof on an issuer who 
would plead the exemption seems to us fair and reasonable.'').
---------------------------------------------------------------------------

    We are mindful of the differing views expressed by commentators to 
date on how the Commission should implement the verification mandate of 
Section 201(a). A number of commentators have cautioned that unduly 
prescriptive or burdensome rules for verifying a purchaser's accredited 
investor status would have the potential to result in significant 
economic harm, could lead to reluctance on the part of issuers to 
access the relevant capital markets, or would contravene the purposes 
of the JOBS Act.\56\ Some commentators recommended approaches based on 
current practices or standards.\57\ One commentator, for example, 
stated that whether a purchaser is an accredited investor depends on 
the particular facts and circumstances, that the current practices 
already take these considerations into account, and that the Commission 
should therefore refrain from imposing any additional burdens on 
issuers or purchasers.\58\ Another commentator expressed similar views, 
recommending that the Commission adopt a principles-based non-exclusive 
safe harbor that would be flexible enough to accommodate new offering 
techniques and that would build on existing practices (such as broker-

[[Page 54470]]

dealers' account-opening and suitability procedures).\59\
---------------------------------------------------------------------------

    \56\ See, e.g., letters from Committee on Securities Regulation 
of the New York City Bar Association (``NYC Bar Association'') 
(stating that unduly detailed or prescriptive verification rules 
would ``have the potential to result in significant economic 
harm''); SecondMarket (asserting that ``[p]lacing too heavy a burden 
on issuers and investors could have the undesired effect of 
inhibiting private capital formation'' and that ``issuers are likely 
to be unwilling or unable to assume the liability and cost that 
would arise from a significant documentary verification 
requirement''); NSBA (Aug. 2, 2012) (stating that ``imposing 
additional burdens on Rule 506 issuers who engage in general 
solicitation or general advertising would make it more difficult for 
small firms to raise capital''); Small Biotechnology Business 
Coalition (``SBBC'') (stating that additional burdens on issuers 
seeking to utilize Rule 506 would make it more difficult for small 
firms to raise capital, and make it less likely that investors will 
invest in small firms); ABA (asserting that a verification 
requirement that imposes additional burdens on issuers or purchasers 
``would contravene the fundamental impetus for the JOBS Act''); MFA 
(June 26, 2012) (stating that ``overly restrictive procedures * * * 
would have the effect of thwarting the purposes of Title II of the 
JOBS Act'').
    \57\ See, e.g., letters from BrokerBank (noting that self-
certification of accredited investor status has been the ``procedure 
that has been followed by the industry for decades'' and urging the 
Commission to continue to allow self-certification of accredited 
status of individuals wishing to participate in Rule 506 offerings 
that utilize general solicitation); Phillip Goldstein, Bulldog 
Investors (``Goldstein'') (July 18, 2012) (urging that the 
Commission ``promptly create a simple form that an issuer can 
provide to an investor to certify that he or she is accredited''); 
MFA (May 4, 2012) (stating that methods similar to those currently 
used by hedge fund managers, which include the identification by the 
purchaser of the qualification standards that it meets and minimum 
investment thresholds, would achieve the objectives of Section 
201(a)); Securities Industry and Financial Markets Association 
(``SIFMA'') (urging that the requirement to take reasonable steps to 
verify should not impose a higher burden than the ``reasonable 
belief'' standard currently applicable to Rule 506 offerings and 
that an issuer should be deemed to have taken reasonable steps to 
verify if it has reasonable belief that the offeree is an eligible 
offeree).
    \58\ Letter from ABA.
    \59\ Letter from NYC Bar Association. For example, in connection 
with complying with anti-money laundering requirements, broker-
dealers already obtain certain identifying information about their 
customers.
---------------------------------------------------------------------------

    Other commentators stated that the verification mandate of Section 
201(a) requires the Commission to enhance the current standard under 
which issuers determine that purchasers are accredited investors.\60\ 
In their view, the verification mandate of Section 201(a) calls for a 
standard that is higher than the current reasonable belief standard in 
the Rule 501(a) definition of accredited investor and such higher 
standard is needed in light of the greater likelihood of fraudulent 
activities resulting from the removal of the prohibition against 
general solicitation. Therefore, these commentators believe that the 
Commission must mandate the specific steps that issuers must take in 
order to form a reasonable belief that a purchaser is an accredited 
investor.\61\
---------------------------------------------------------------------------

    \60\ See letters from Fund Democracy; Moscovitz and Maxfield; 
NASAA (July 3, 2012); Ohio Division; Public Citizen.
    \61\ Id.
---------------------------------------------------------------------------

    We also received a number of comments on specific methods that 
should or should not be viewed as reasonable steps for verifying 
accredited investor status. For example, some viewed a representation 
from the purchaser that it is an accredited investor as sufficient,\62\ 
while others asserted that such a representation alone would not be 
enough.\63\ Several commentators stated that the verification of 
accredited investor status should require the production of documentary 
evidence.\64\ One commentator recommended that only registered broker-
dealers, and not other intermediaries, be permitted to verify 
accredited investor status on behalf of issuers because registered 
broker-dealers are subject to existing regulatory schemes, including 
Commission oversight.\65\ Other commentators recommended allowing 
issuers to rely on third-party firms to verify accredited investor 
status.\66\ Some commentators suggested that purchasers be required to 
submit a letter from a third party with knowledge of the purchaser's 
financial status (such as a certified public accountant or attorney) 
indicating that the purchaser is an accredited investor,\67\ while 
another commentator suggested that, in combination with an independent 
professional's certification as to the purchaser's accredited investor 
status, the purchaser be required to certify his or her accredited 
investor status under penalty of perjury.\68\ Another commentator 
stated that issuers should be allowed to rely on basic information 
about a purchaser that they may already have (for example, that the 
purchaser is an officer of a Fortune 500 company).\69\ One commentator 
suggested that the Commission adopt an approach under which a minimum 
investment of 50% of the net worth or total assets requirement under 
the applicable category of accredited investor, coupled with a 
certification by the investor, would be deemed to constitute 
``reasonable steps'' to verify accredited investor status.\70\ Another 
commentator suggested that investors be permitted to self-certify their 
accredited investor status so long as at least 30 days have passed 
between the first date of public solicitation and the date of 
investment.\71\
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    \62\ Letters from Goldstein (June 3, 2012); Mona Shah & 
Associates; SIFMA; JC Williams II, Tucson Business Development Group 
(``Williams'').
    \63\ Letters from Fund Democracy (stating that a representation 
from the purchaser that it is an accredited investor would not 
satisfy the statutory mandate that the issuer take steps to verify 
accredited investor status); John C. Nimmer (``Nimmer''); Ohio 
Division (``A `check-the-box' approach to investor self-verification 
of accredited status will not suffice because the Title II issuer 
must have more than a belief that a prospective purchaser is 
accredited.'').
    \64\ See letters from Massachusetts Securities Division (stating 
that verification should require issuers to determine whether 
investors are accredited based on documentary evidence, rather than 
just representations from potential investors); NASAA (July 3, 2012) 
(recommending that the Commission require issuers to obtain 
documents such as tax returns, recent pay stubs, brokerage 
statements, tax assessment valuations, appraisals, list of 
liabilities (including a sworn statement that all material 
liabilities have been disclosed), organizational documents, balance 
sheets, and quarterly statements); Ohio Division (recommending that 
the issuer should ``review financial statements and/or tax returns 
evidencing actual satisfaction of accredited investor thresholds'' 
and, with respect to entities claiming to be accredited investors, 
should review ``regulatory letters or certificates approving or 
confirming the entity's status as a bank, insurance company, 
registered investment company, business development company, or 
small business investment company'').
    \65\ Letter from SecondMarket (also suggesting that the 
Commission establish specific guidelines that registered broker-
dealers must follow with respect to the verification process in 
order to be an approved ``accreditation verification provider'').
    \66\ See letters from National Investment Banking Association 
(``NIBA'') (recommending that if a FINRA member firm is not involved 
in the offering, then the issuer could satisfy the verification 
mandate by relying on a third-party report obtained from an 
investigatory firm indicating that a purchaser is an accredited 
investor; if a broker-dealer is involved in the offering as a 
placement agent, the issuer could satisfy the verification mandate 
by obtaining and reviewing a form from the broker-dealer that 
describes the process undertaken by the broker-dealer to establish 
accredited investor status for a purchaser); NSBA (Aug. 2, 2012) 
(stating that ``[r]equiring investors to provide to issuers an 
independent professional's certification as to the investor's 
accredited investor status and requiring the investor to certify his 
or her own status under penalty of perjury would provide a high 
degree of protection against non-accredited investors asserting 
accredited investor status in Regulation D offerings''); Sigelman 
Law Corporation (asserting that third-party verification of 
accredited investor status should not be limited to broker-dealers 
but that independent third-party professional intermediaries 
``registered with the Commission and sworn to follow the protocol 
rules'' should be allowed to provide such services).
    \67\ See letters from Frank Nagy; Williams.
    \68\ Letter from NSBA (Aug. 2, 2012) (stating that Section 1746 
of Title 28 of the United States Code authorizes this approach). One 
commentator stated that self-certification under penalty of perjury, 
in and of itself, should be sufficient. Letter from Nimmer.
    \69\ Letter from AngelList.
    \70\ Letter from MFA (June 26, 2012).
    \71\ Letter from SBBC (noting that such a ``cooling off'' period 
will help discourage impulse investments and will permit the issuer 
and the investor to assess one another).
---------------------------------------------------------------------------

    We believe that the approach we are proposing appropriately 
addresses these concerns by obligating issuers to take reasonable steps 
to verify that the purchasers are accredited investors, as mandated by 
Section 201(a), but not requiring them to follow uniform verification 
methods that may be ill-suited or unnecessary to a particular offering 
or purchaser, given the facts and circumstances. We also expect that 
such an approach would give issuers and market participants the 
flexibility to adopt different approaches to verification depending on 
the circumstances, to adapt to changing market practices, and to 
implement innovative approaches to meeting the verification 
requirement, such as the development of third-party databases of 
accredited investors. In addition, we anticipate that many practices 
currently used by issuers in connection with existing Rule 506 
offerings would satisfy the verification requirement proposed for 
offerings pursuant to Rule 506(c).
    We considered but have decided not to propose requiring issuers to 
use specified methods of verification. We believe that, at present, 
proposing to require issuers to use specified methods of verification 
would be impractical and potentially ineffective in light of the 
numerous ways in which a purchaser can qualify as an accredited 
investor, as well as the potentially wide range of verification issues 
that may arise, depending on the nature of the purchaser and the facts 
and circumstances of a particular Rule 506(c) offering. We are also 
concerned that a prescriptive rule that specifies required verification 
methods could be overly burdensome in some cases, by requiring issuers 
to follow the same steps, regardless of their particular circumstances, 
and ineffective in others, by requiring steps that, in the particular

[[Page 54471]]

circumstances, would not actually verify accredited investor status.
    For similar reasons, we considered but have decided not to propose 
providing a non-exclusive list of specified methods for satisfying the 
verification requirement.\72\ We are concerned that, in designating 
such a list--for example, by setting forth particular types of 
information that issuers may rely upon as conclusive means of verifying 
accredited investor status--there may be circumstances where such 
information would not actually verify accredited investor status or 
where issuers may unreasonably overlook or disregard other information 
indicating that a purchaser is not, in fact, an accredited investor. 
Indeed, a method that is reasonable under one set of circumstances may 
not be reasonable under a different set of circumstances. In addition, 
we are concerned that a non-exclusive list of specified verification 
methods could be viewed by market participants as the required 
verification methods, in which compliance with at least one of the 
enumerated methods could be viewed, in the practical application of the 
verification requirement, as necessary in all circumstances to 
demonstrate that the verification requirement has been satisfied, 
thereby eliminating the flexibility that proposed Rule 506(c) is 
intended to provide. Such flexibility is likely to mitigate the cost to 
issuers of complying with proposed Rule 506(c) because it would allow 
them to select the most cost-effective verification method for each 
offering, based on the particular facts and circumstances of the 
offering and of the investors.
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    \72\ See letters from MFA (June 26, 2012) (suggesting that the 
Commission publish a non-exclusive list of the types of third-party 
evidence that an investor could provide to establish accredited 
investor status, in conjunction with certifying that he or she is an 
accredited investor); NASAA (July 3, 2012) (recommending that the 
Commission set forth non-exclusive safe harbors to specify the types 
of actions that would be deemed ``reasonable steps to verify'' for 
three types of accredited investors: natural persons who purport to 
satisfy the income test; natural persons who purport to satisfy the 
net worth test; and entities who purport to meet one of the other 
tests set forth in Rule 501(a)).
---------------------------------------------------------------------------

    We are soliciting comment on a variety of possible approaches to 
verification. In addition, following the completion of this rulemaking, 
we intend to monitor and study the development of verification 
practices by issuers, securities intermediaries and others as well as 
the impact of compliance with this requirement on investor protection 
and capital formation.

C. Reasonable Belief That All Purchasers Are Accredited Investors

    A number of commentators have raised concerns that the language of 
Section 201(a) could be interpreted as precluding the use of the 
``reasonable belief'' standard in Rule 501(a) in determining whether a 
purchaser is an accredited investor, such that an issuer's 
determination as to whether a purchaser is an accredited investor is 
subject to an absolute, rather than a ``reasonable belief,'' 
standard.\73\ Section 201(a)(2) of the JOBS Act, which calls for 
amendments to Rule 144A, specifically refers to a ``reasonable belief'' 
standard as to whether a purchaser is a QIB, whereas Section 201(a)(1) 
does not mention a similar ``reasonable belief'' standard with respect 
to the amendments to Rule 506.\74\ From this, some commentators have 
requested that our proposed rule amendments ``confirm'' that the 
reasonable belief standard for accredited investor status in Rule 
501(a) continues to apply.\75\ In their view, issuers may be more 
reluctant to use general solicitation in Rule 506 offerings if their 
determinations as to whether a purchaser is an accredited investor are 
subject to an absolute standard. One commentator added that the 
Commission should adopt a safe harbor under which an issuer or broker-
dealer would not be penalized if it took the steps required by the 
Commission to verify a purchaser's accredited investor status, but 
later learned that the purchaser was not, in fact, an accredited 
investor.\76\ Other commentators have interpreted this omission as 
indicating Congress's intent that the Commission ``raise the 
`reasonable belief' standard for Rule 506 offerings. * * * '' \77\
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    \73\ See, e.g., letters from ABA; BlackRock, Inc. 
(``BlackRock''); NYC Bar Association; William K. Sjostrom, Jr.
    \74\ See, e.g., letters from ABA; Fund Democracy; NYC Bar 
Association.
    \75\ See, e.g., letter from ABA.
    \76\ Letter from NIBA. To facilitate third-party verification of 
accredited investor status, another commentator requested 
clarification that a third party providing verification services for 
issuers would not incur any liability as long as it had a reasonable 
belief that a purchaser was an accredited investor, based on its 
knowledge of the investor. Letter from AngelList.
    \77\ Letter from Fund Democracy. See also letter from 
Massachusetts Securities Division.
---------------------------------------------------------------------------

    Both Rule 506 and Rule 144A currently provide for a reasonable 
belief standard regarding the eligibility of an investor to participate 
in an offering under the respective rules, but they reach that result 
in different ways. For Rule 506, the Commission chose to include the 
reasonable belief standard within the Rule 501(a) definition of 
``accredited investor''; for Rule 144A, the Commission chose to include 
the standard as a condition, in paragraph (d)(1), to the use of the 
exemption.\78\ The definition of accredited investor remains unchanged 
with the enactment of the JOBS Act and includes persons that come 
within any of the listed categories of accredited investors, as well as 
persons that the issuer reasonably believes come within any such 
category. In our view, the difference in the language between Section 
201(a)(1) and Section 201(a)(2) reflects only the differing manner in 
which the reasonable belief standard was included in the respective 
rules at the time they were adopted, and does not represent a 
Congressional intent to eliminate the existing reasonable belief 
standard in Rule 501(a) or for Rule 506 offerings.
---------------------------------------------------------------------------

    \78\ Regulation S also has a reasonable belief standard with 
respect to the requirement that the offer or sale be made to a 
person outside the United States. See Rule 902(h)(1)(ii)(A) [17 CFR 
230.902(h)(1)(ii)(A)] (``At the time the buy order is originated, 
the buyer is outside the United States, or the seller and any person 
acting on its behalf reasonably believe that the buyer is outside 
the United States.'').
---------------------------------------------------------------------------

    We recognize that a person could provide false information or 
documentation to an issuer in order to purchase securities in an 
offering made under proposed Rule 506(c). Thus, even if an issuer has 
taken reasonable steps to verify that a purchaser is an accredited 
investor, it is possible that a person nevertheless could circumvent 
those measures.\79\ If a person who does not meet the criteria for any 
category of accredited investor purchases securities in a Rule 506(c) 
offering, we believe that the issuer would not lose the ability to rely 
on the proposed Rule 506(c) exemption for that offering, so long as the 
issuer took reasonable steps to verify that the purchaser was an 
accredited

[[Page 54472]]

investor and had a reasonable belief that such purchaser was an 
accredited investor.\80\
---------------------------------------------------------------------------

    \79\ We note that several federal courts have been unsympathetic 
to attempts by investors who represented that they were accredited 
investors at the time of the sale of securities to subsequently 
disavow those representations in order to pursue a cause of action 
under the federal securities laws. See, e.g., Wright v. Nat'l 
Warranty Co., 953 F.2d 256 (6th Cir. 1991) (rejecting the 
plaintiffs' argument that Rule 505 was unavailable because the 
plaintiffs ``specifically warranted and represented in the 
subscription agreement * * * that they were accredited investors''); 
Goodwin Properties, LLC v. Acadia Group, Inc., 2001 U.S. Dist. LEXIS 
9975 (D. Me. 2001) (noting that the plaintiffs ``provided the 
defendants with reason to believe that they were accredited 
investors as defined by 17 C.F.R. Sec.  230.501(a)'' and stating 
that therefore ``[t]hey cannot now disavow those representations in 
order to support their claims against the defendants''); Faye L. 
Roth Revocable Trust v. UBS Painewebber Inc., 323 F. Supp. 2d 1279 
(S.D. Fla. 2004) (stating that the plaintiffs ``cannot disavow their 
representations that they were accredited investors'' and concluding 
that there was no material dispute that the offering complied with 
Regulation D).
    \80\ Our views regarding an issuer's ability to maintain the 
exemption for a proposed Rule 506(c) offering notwithstanding the 
fact that not all purchasers are accredited investors are consistent 
with our views regarding the effect of attempts by prospective 
investors to circumvent the requirement in Regulation S that offers 
and sales be made only to non-U.S. persons. See Statement of the 
Commission Regarding Use of Internet Web Sites to Offer Securities, 
Solicit Securities Transactions or Advertise Investment Services 
Offshore, Release No. 33-7516 (Mar. 23, 1998) [63 FR 14806] (``In 
our view, if a U.S. person purchases securities or investment 
services notwithstanding adequate procedures reasonably designed to 
prevent the purchase, we would not view the Internet offer after the 
fact as having been targeted at the United States, absent 
indications that would put the issuer on notice that the purchaser 
was a U.S. person.'').
---------------------------------------------------------------------------

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

    Form D is the notice of an offering of securities made without 
registration under the Securities Act in reliance on an exemption 
provided by Regulation D.\81\ Under Rule 503 of Regulation D, an issuer 
offering or selling securities in reliance on Rule 504, 505 or 506 must 
file a notice of sales on Form D with the Commission for each new 
offering of securities no later than 15 calendar days after the first 
sale of securities in the offering. Form D is currently organized 
around 16 numbered ``items'' or categories of information. The 
information required to be provided in a Form D filing includes basic 
identifying information, such as the name of the issuer of the 
securities and the issuer's year and place of incorporation or 
organization; information about related persons (executive officers, 
directors, and promoters); identification of the exemption or 
exemptions being claimed for the offering; and factual information 
about the offering, such as the duration of the offering, the type of 
securities offered, and the total offering amount.
---------------------------------------------------------------------------

    \81\ Form D also applies to offerings conducted using the 
Section 4(a)(5) exemption. The Commission adopted Form D when it 
adopted Regulation D in 1982. Release No. 33-6389 (adopting Form D 
as a replacement for Forms 4(6), 146, 240 and 242).
---------------------------------------------------------------------------

    We are proposing a revision to Form D to add a separate field or 
check box for issuers to indicate whether they are claiming an 
exemption under Rule 506(c). Item 6 of Form D currently requires the 
issuer to identify the claimed exemption or exemptions for the offering 
from among Rule 504's paragraphs and subparagraphs, Rule 505, Rule 506 
and Section 4(5), as applicable. A new check box in Item 6 of Form D 
would require issuers to indicate specifically whether they are relying 
on the proposed Rule 506(c) exemption. In addition, the current check 
box for ``Rule 506'' would be renamed ``Rule 506(b),'' and the current 
check box for ``Section 4(5)'' would be renamed ``Section 4(a)(5)'' to 
update the reference to former Section 4(5) of the Securities Act.
    We are proposing to require this additional information in order to 
assist our efforts to monitor the use of general solicitation in Rule 
506(c) offerings and the size of this offering market. This information 
would also help us to look into the practices that would develop to 
satisfy the verification requirement, which would help us assess the 
effectiveness of various verification practices in identifying and 
excluding non-accredited investors from participation in proposed Rule 
506(c) offerings.

E. Specific Issues for Privately Offered Funds

    Privately offered funds, such as hedge funds, venture capital funds 
and private equity funds, typically rely on Section 4(a)(2) and the 
Rule 506 safe harbor to offer and sell their interests without 
registration under the Securities Act.\82\ In addition, privately 
offered funds generally rely on one of two exclusions from the 
definition of ``investment company'' under the Investment Company Act, 
which enables them to be excluded from the regulatory provisions of 
that Act. Privately offered funds are precluded from relying on either 
of the two exclusions set forth in Section 3(c)(1) \83\ and Section 
3(c)(7) \84\ of the Investment Company Act if they make a public 
offering of their securities.\85\ Section 3(c)(1) excludes from the 
definition of ``investment company''any issuer whose outstanding 
securities (other than short-term paper) are beneficially owned by not 
more than 100 beneficial owners,\86\ and which is not making and does 
not presently propose to make a public offering of its securities. 
Section 3(c)(7) excludes from the definition of ``investment company'' 
any issuer whose outstanding securities are owned exclusively by 
persons who, at the time of acquisition of such securities, are 
``qualified purchasers,'' \87\ and which is not making and does not at 
that time propose to make a public offering of its securities.
---------------------------------------------------------------------------

    \82\ See, e.g., Implications of the Growth of Hedge Funds, Staff 
Report to the Securities and Exchange Commission (Sept. 2003), 
available at: http://www.sec.gov/news/studies/hedgefunds0903.pdf.
    \83\ 15 U.S.C. 80a-3(c)(1).
    \84\ 15 U.S.C. 80a-3(c)(7).
    \85\ See also Section 202(a)(29) of the Investment Advisers Act 
of 1940 [15 U.S.C. 80b-2(a)(29)] (defining a ``private fund'' as an 
issuer that would be an investment company under the Investment 
Company Act, but for Sections 3(c)(1) and 3(c)(7) of that Act). Many 
issuers of asset-backed securities (``ABS'') also rely on the 
exclusions contained in Sections 3(c)(1) and 3(c)(7) of the 
Investment Company Act. These ABS issuers frequently participate in 
Rule 144A offerings.
    \86\ See also Rule 3c-5 under the Investment Company Act [17 CFR 
270.3c-5] (providing that the section's limit of 100 beneficial 
owners does not include ``knowledgeable employees,'' as defined in 
the rule).
    \87\ See Section 2(a)(51) of the Investment Company Act [15 
U.S.C. 80a-2(a)(51)] and the rules thereunder. See also Rule 3c-5 
under the Investment Company Act (excluding ``knowledgeable 
employees'' from the determination of whether all of the outstanding 
securities of the Section 3(c)(7) fund are owned exclusively by 
qualified purchasers).
---------------------------------------------------------------------------

    The JOBS Act directs the Commission to eliminate the prohibition 
against general solicitation for a new subset of Rule 506 offerings, 
and makes no specific reference to privately offered funds. Section 
201(b) of the JOBS Act also provides that ``[o]ffers and sales exempt 
under [Rule 506, as revised pursuant to Section 201(a)] shall not be 
deemed public offerings under the Federal securities laws as a result 
of general advertising or general solicitation.'' We historically have 
regarded Rule 506 transactions as non-public offerings for purposes of 
Sections 3(c)(1) and 3(c)(7).\88\ We believe the effect of Section 
201(b) is to permit privately offered funds to make a general 
solicitation under amended Rule 506 without losing either of the 
exclusions under the Investment Company Act.
---------------------------------------------------------------------------

    \88\ See Release No. 33-6389 (noting that the ``Commission 
regards rule 506 transactions as non-public offerings for purposes 
of the definition of `investment company' in section 3(c)(1) of the 
Investment Company Act''); Privately Offered Investment Companies, 
Release No. IC-22597 (Apr. 3, 1997) [62 FR 17512], at n.5 (noting 
that the ``Commission believes that section 3(c)(7)'s public 
offering limitation should be interpreted in the same manner as the 
limitation in section 3(c)(1)'').
---------------------------------------------------------------------------

F. Technical and Conforming Amendments

    We are proposing a number of technical and conforming amendments to 
Rules 502 and 506 of Regulation D. We are proposing amendments to 
various provisions in Rule 502(b) to clarify that the references to 
sales to non-accredited investors under Rule 506, and the corresponding 
informational requirements, would be applicable to offerings under Rule 
506(b) and not to offerings under proposed Rule 506(c). We are also 
proposing an amendment to Rule 502(c) to clarify that Rule 502(c)'s 
prohibition against general solicitation would not apply to offerings 
under proposed Rule 506(c).

[[Page 54473]]

    As Section 201(c) of the JOBS Act renumbered Section 4 of the 
Securities Act, we are also proposing amendments to Regulation D and 
Rule 144A to update the references to Section 4. We are also proposing 
to update references to Section 2 of the Securities Act in these rules 
as some of the references have not been updated to reflect the current 
numbering scheme in Section 2.

G. Request for Comment

    1. Will the Commission's proposed approach to implementing the 
verification mandate of Section 201(a) be effective in limiting 
issuers' sales to only accredited investors in Rule 506 offerings that 
use general solicitation? Should the Commission adopt a rule that 
specifies the methods that issuers must use or could use to verify 
accredited investor status? Would such an approach provide greater 
certainty for issuers than the approach that we are proposing? Would 
the inclusion of a specified list result in an assumption or practice 
that the listed methods are ``de facto'' requirements, thereby 
inappropriately reducing flexibility and effectiveness of the new rule? 
What are the benefits and costs of each approach? In the case of the 
latter, if the Commission were to adopt such a rule, should it be in 
the form of a safe harbor for compliance with the verification 
requirement? What would be examples of the types of methods that 
issuers could use to verify accredited investor status, and what would 
be the merits of each such method?
    2. Some commentators have recommended that the Commission look to 
current market practices in determining the methods that should be 
required or permitted for verifying accredited investor status. As 
noted above, we anticipate that many practices currently used by 
issuers in connection with existing Rule 506 offerings would satisfy 
the verification requirement proposed for offerings pursuant to Rule 
506(c). How effective have these practices been in assessing the 
eligibility of purchasers to participate in an offering made under 
Regulation D? Are certain practices more effective than others? If so, 
please describe these practices with specificity. What are the costs 
and benefits of these practices (to issuers, investors and other market 
participants)?
    3. Under what circumstances, if any, should an issuer be deemed to 
have taken ``reasonable steps to verify'' if the only action taken by 
the issuer is to request a representation from a purchaser that it is 
an accredited investor, as some have suggested? \89\ Should the 
Commission provide that an issuer is deemed to have taken ``reasonable 
steps to verify'' if the issuer ``reasonably believes'' that such a 
purchaser is an accredited investor, as some have suggested? \90\ What 
are the potential benefits and potential harms of such an approach?
---------------------------------------------------------------------------

    \89\ See, e.g., letter from SIFMA.
    \90\ See id.
---------------------------------------------------------------------------

    4. As we noted above, depending on the facts and circumstances, we 
believe there is merit to the view that the ability of a purchaser to 
satisfy the high minimum investment amount required to participate in 
an offering may be a relevant factor in determining whether that 
purchaser is an accredited investor. At the same time, we also believe 
that issuers must be mindful of any indications that the purchaser, 
despite the ability to provide the funds needed to satisfy a high 
minimum investment amount requirement, may not actually be an 
accredited investor. We have noted that the financing of a purchaser's 
cash investment by the issuer or a third party is a factor that an 
issuer should consider. Are there other factors? In light of these 
considerations, should the Commission specifically provide that a high 
minimum investment amount is sufficient, in and of itself, to satisfy 
the requirement that the issuer has taken reasonable steps to verify a 
purchaser's accredited investor status, provided that the high minimum 
investment amount is not being financed by the issuer or any third 
party? If so, should the rule specify an amount, and, if so, what 
amount would be appropriate?
    5. Are there certain types of issuers (e.g., shell companies, blank 
check companies or issuers of penny stock, as defined by Exchange Act 
Rule 3a51-1 \91\) that would present heightened investor protection 
concerns as a result of the removal of the prohibition against general 
solicitation? If so, what actions should the Commission take to address 
these concerns? Should these issuers be subject to a different 
verification standard for offerings made under proposed Rule 506(c)?
---------------------------------------------------------------------------

    \91\ 17 CFR 240.3a51-1.
---------------------------------------------------------------------------

    6. Verification methods could include obtaining information from 
prospective purchasers, such as Forms W-2, personal bank and brokerage 
account statements and similar documentation. We are cognizant that 
prospective purchasers may have privacy concerns when undergoing a 
verification process by issuers.\92\ Do any other concerns in addition 
to privacy concerns arise from a requirement to provide such 
information? How, if at all, could the Commission address these 
concerns? \93\ What other documentation could be used to verify 
accredited investor status while minimizing privacy concerns? Does use 
of a reasonably reliable third party to provide this information 
respond to those concerns?
---------------------------------------------------------------------------

    \92\ See, e.g., letter from ABA.
    \93\ See, e.g., letter from NASAA (July 3, 2012) (recommending 
that the Commission require issuers to maintain the confidentiality 
of any information received for the purpose of verifying accredited 
investors status).
---------------------------------------------------------------------------

    7. Currently, Rule 508 of Regulation D \94\ provides that the 
exemption in Rule 506 will not be lost due to an ``insignificant'' 
deviation from a term, condition, or requirement of Regulation D. 
Should Rule 508 be amended to include any additional provisions 
specifically related to proposed Rule 506(c)?
---------------------------------------------------------------------------

    \94\ 17 CFR 230.508.
---------------------------------------------------------------------------

    8. Should the Commission amend Form D to include a check box for 
issuers to indicate whether they are claiming an exemption under Rule 
506(c), as proposed? If not, why not?
    9. Are there any other rule amendments necessary or appropriate to 
implement the statutory mandate of Section 201(a) of the JOBS Act? Are 
there any other measures that the Commission should consider taking in 
connection with the removal of the prohibition against general 
solicitation?

III. Proposed Amendment to Rule 144A

A. Offers to Persons Other Than Qualified Institutional Buyers

    Section 201(a)(2) of the JOBS Act directs the Commission to revise 
Rule 144A(d)(1) under the Securities Act to provide that securities 
sold pursuant to Rule 144A may be offered to persons other than QIBs, 
including by means of general solicitation, provided that securities 
are sold only to persons that the seller and any person acting on 
behalf of the seller reasonably believe is a QIB. In the amendment to 
Rule 144A that we are proposing, we would amend Rule 144A(d)(1) to 
eliminate the references to ``offer'' and ``offeree.'' As amended, the 
rule would require only that the securities are sold to a QIB or to a 
purchaser that the seller and any person acting on behalf of the seller 
reasonably believe is a QIB.\95\ Under this proposed amendment, resales 
of securities pursuant to Rule 144A could be conducted using general 
solicitation, so long as the purchasers are limited in this manner.
---------------------------------------------------------------------------

    \95\ Proposed Rule 144A(d)(1).
---------------------------------------------------------------------------

B. Request for Comment

    10. Rule 144A currently provides a list of non-exclusive methods of

[[Page 54474]]

establishing a prospective purchaser's ownership and discretionary 
investments of securities for purposes of determining whether the 
prospective purchaser is a QIB.\96\ How has this non-exclusive list 
worked in practice? Do issuers favor a non-exclusive list? Why or why 
not? Has the non-exclusive list resulted in an assumption or practice 
that the listed methods are ``de facto'' requirements?
---------------------------------------------------------------------------

    \96\ Rule 144A(d)(1).
---------------------------------------------------------------------------

IV. Integration with Offshore Offerings

    Regulation S provides a safe harbor for offers and sales of 
securities outside the United States and includes an issuer and a 
resale safe harbor. Two general conditions apply to both safe harbors: 
(1) The securities must be sold in an offshore transaction and (2) 
there can be no directed selling efforts \97\ in the United States.\98\ 
The safe harbors are important when U.S. and foreign companies engage 
in global offerings of securities in which the U.S. portion of the 
offering is conducted in accordance with Rule 144A or Rule 506 and the 
offshore portion is conducted in reliance on Regulation S.
---------------------------------------------------------------------------

    \97\ Rule 902(c)(1) [17 CFR 230.902(c)(1)] broadly defines 
``directed selling efforts'' as: any activity undertaken for the 
purpose of, or that could reasonably be expected to have the effect 
of, conditioning the market in the United States for any of the 
securities offered in reliance on Regulation S. Such activity 
includes placing an advertisement in a publication ``with a general 
circulation in the United States'' that refers to the offering of 
securities being made in reliance upon Regulation S.
    \98\ See Rules 903 [17 CFR 230.903] and 904 [17 CFR 230.904] 
under the Securities Act.
---------------------------------------------------------------------------

    The mandate in Section 201(a) that the Commission amend Rule 506 
and Rule 144A to permit the use of general solicitation in transactions 
under those rules has raised questions from some commentators regarding 
the impact of the use of general solicitation on the availability of 
the Regulation S safe harbors for concurrent unregistered offerings 
inside and outside the United States.\99\ One commentator recommended 
that the Commission reexamine the directed selling efforts concept in 
light of the terms and policy objectives of Section 201 of the JOBS 
Act, as well as evolving technology and offering techniques.\100\ 
Another recommended that, although the JOBS Act does not explicitly 
address Section 4(a)(2) or the definition of directed selling efforts 
in Regulation S, there is no policy reason for distinguishing between 
the various exemptions and maintaining a prohibition against general 
solicitation in some but not others.\101\ We also received requests 
that the Commission confirm that the use of general solicitation in 
offerings conducted pursuant to Rule 506 or Rule 144A, as amended, 
would not be deemed to constitute directed selling efforts by that 
issuer in connection with a contemporaneous offering under Regulation 
S.\102\ One commentator asked for clarification that the limitations in 
Securities Act Rule 135c \103\ do not apply to offerings pursuant to 
Rule 506 or Rule 144A where general solicitation is permitted,\104\ 
while another commentator suggested that the information on Regulation 
S offerings that is permitted to be communicated in the United States 
continue to be limited to the information permitted under Rule 135c, 
but regardless of whether the issuer meets the eligibility criteria in 
Rule 135c.\105\
---------------------------------------------------------------------------

    \99\ See, e.g., letters from ABA; Lee D. Neumann (``Neumann''); 
NYC Bar Association; SecuritiesLawUSA, PC (``SecuritiesLawUSA''); 
SIFMA.
    \100\ Letter from NYC Bar Association.
    \101\ Letter from SIFMA.
    \102\ Letters from ABA; SecuritiesLawUSA.
    \103\ 17 CFR 230.135c.
    \104\ Letter from SecuritiesLawUSA.
    \105\ Letter from Neumann.
---------------------------------------------------------------------------

    In the adopting release for Regulation S, the Commission stated 
that ``[o]ffshore transactions made in compliance with Regulation S 
will not be integrated with registered domestic offerings or domestic 
offerings that satisfy the requirements for an exemption from 
registration under the Securities Act.'' \106\ We believe that this 
approach continues to apply. Consistent with the historical treatment 
of concurrent Regulation S and Rule 144A/Rule 506 offerings, concurrent 
offshore offerings that are conducted in compliance with Regulation S 
would not be integrated with domestic unregistered offerings that are 
conducted in compliance with Rule 506 or Rule 144A, as proposed to be 
amended.
---------------------------------------------------------------------------

    \106\ See Offshore Offers and Sales, Release 33-6863 (Apr. 24, 
1990) [55 FR 18306], at Section III.C.1. In addressing the offshore 
transaction component of the Regulation S safe harbor, the 
Commission stated, ``Offers made in the United States in connection 
with contemporaneous registered offerings or offerings exempt from 
registration will not preclude reliance on the safe harbors.'' Id. 
at fn. 36. Likewise, in addressing directed selling efforts, the 
Commission stated, ``Offering activities in contemporaneous 
registered offerings or offerings exempt from registration will not 
preclude reliance on the safe harbors.'' Id. at fn. 47. See also 
Rule 500(g) of Regulation D [17 CFR 230.500(g)] (formerly 
Preliminary Note No. 7 to Regulation D) (``Regulation S may be 
relied upon for such offers and sales even if coincident offers and 
sales are made in accordance with Regulation D inside the United 
States.'').
---------------------------------------------------------------------------

V. General Request for Comment

    We request and encourage any interested person to submit comments 
regarding the proposed rule and form amendments, specific issues 
discussed in this release, and other matters that may have an effect on 
the proposed rules. We request comment from the point of view of 
issuers, investors and other market participants. With regard to any 
comments, we note that such comments are of particular assistance to us 
if accompanied by supporting data and analysis of the issues addressed 
in those comments. Commentators are urged to be as specific as 
possible.

VI. Paperwork Reduction Act

    The proposed amendment to Form D contains a ``collection of 
information'' requirement within the meaning of the Paperwork Reduction 
Act of 1995 (``PRA'').\107\ The title of this requirement is: ``Form 
D'' (OMB Control No. 3235-0076).\108\ We adopted Regulation D and Form 
D as part of the establishment of a series of exemptions for offerings 
and sales of securities under the Securities Act. We are submitting 
this requirement to the Office of Management and Budget (``OMB'') for 
review and approval in accordance with the PRA and its implementing 
regulations.\109\
---------------------------------------------------------------------------

    \107\ 44 U.S.C. 3501 et seq.
    \108\ Form D was adopted pursuant to Sections 2(a)(15), 3(b), 
4(a)(2), 19(a) and 19(c)(3) of the Securities Act (15 U.S.C. 
77b(a)(15), 77c(b), 77d(a)(2), 77s(a) and 77s(c)(3)).
    \109\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    The information collection requirements related to the filing of 
Form D with the Commission are mandatory to the extent that an issuer 
elects to make an offering of securities in reliance on the relevant 
exemption. Responses are not confidential. The hours and costs 
associated with preparing and filing forms and retaining records 
constitute reporting and cost burdens imposed by the collection of 
information requirements. An agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
requirement unless it displays a currently valid OMB control number.
    The Form D filing is required to be made by issuers as a notice of 
sales without registration under the Securities Act based on a claim of 
exemption under Regulation D or Section 4(a)(5) of the Securities Act. 
The Form D is required to include basic information about the issuer, 
certain related persons, and the offering. This information is needed 
for implementing the exemptions and monitoring their use.

[[Page 54475]]

    We are proposing to amend Form D to add a check box to indicate an 
offering relying on the Rule 506(c) exemption. We believe this proposed 
change would have a negligible effect on the paperwork burden of the 
form. Accordingly, we estimate that under the proposed amendment to 
Form D, the burden for responding to the collection of information in 
Form D would be substantially the same as before the proposed amendment 
to Form D because the additional information required in the form is 
minimal. However, we believe that the proposed amendment to Rule 506 
would increase the number of Form D filings that are made with the 
Commission.
    The table below shows the current total annual compliance burden, 
in hours and in costs, of the collection of information pursuant to 
Form D. For purposes of the PRA, we estimate that, over a three-year 
period, the average burden estimate will be 4 hours per Form D. Our 
burden estimate represents the average burden for all issuers. This 
burden is reflected as a one hour burden of preparation on the company 
and a cost of $1,200 per filing. In deriving these estimates, we assume 
that 25% of the burden of preparation is carried by the issuer 
internally and that 75% of the burden of preparation is carried by 
outside professionals retained by the issuer at an average cost of $400 
per hour. The portion of the burden carried by outside professionals is 
reflected as a cost, while the portion of the burden carried by the 
issuer internally is reflected in hours.

                                       Table 1--Estimated Paperwork Burden Under Form D, Pre-Amendment to Rule 506
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            External
                                                       Number of      Burden hours/     Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                         (A) \110\              (B)                (C) = (A)*(B)  (D)              (E)   (F) = (E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D............................................          25,000                4          100,000           25,000           75,000      $30,000,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    According to our Division of Risk, Strategy, and Financial 
Innovation, in 2011, 15,930 companies made 18,174 new Form D filings. 
The annual number of new Form D filings rose from 13,764 in 2009 to 
18,174 in 2011, an average increase of approximately 2,205 Form D 
filings per year, or approximately 15%. Assuming the number of Form D 
filings continues to increase by 2,205 filings per year for each of the 
next three years, the average number of Form D filings in each of the 
next three years would be approximately 22,584.
---------------------------------------------------------------------------

    \110\ The information in this column is based on the number of 
responses for Form D as reported in the OMB's Inventory of Currently 
Approved Information Collections, available at http://www.reginfo.gov/public/do/PRAMain;jsessionid=D37174B5F6F9148DB767D63DF6983A65.
---------------------------------------------------------------------------

    We estimate that the proposed amendment to Rule 506 would result in 
an even greater annual increase in the number of Form D filings. As a 
reference point, we use the impact of a past rule change on the market 
for Regulation D offerings. In 1997, the Commission amended Rule 144(d) 
under the Securities Act \111\ to reduce the holding period for 
restricted securities from two years to one year,\112\ thereby 
increasing the attractiveness of Regulation D offerings to investors 
and to issuers. There were 10,341 Form D filings in 1996. This was 
followed by a 20% increase in the number of Form D filings in each of 
the subsequent three calendar years, reaching 17,830 by 1999. Although 
it is not possible to predict with any degree of accuracy the increase 
in the number of Rule 506 offerings following the elimination of the 
prohibition against general solicitation, we anticipate that there 
would be a similarly significant increase. For purposes of the PRA, we 
estimate that the proposed amendment to Rule 506 would result in a 20% 
increase in Form D filings relying on the Rule 506 exemption, or 
approximately 5,000 filings, based on the number of responses as 
reported in the OMB's Inventory of Currently Approved Information 
Collections.\113\ We also assume that the number of Form D filings 
would increase by approximately 5,000 in each year following the 
adoption of the rule.
---------------------------------------------------------------------------

    \111\ 17 CFR 230.144(d).
    \112\ See Revision of Holding Period Requirements in Rules 144 
and 145, Release No. 33-7390 (Feb. 20, 1997) [62 FR 9242].
    \113\ Based on the 18,174 new Form D filings that were actually 
made in 2011, the annual increase would be 3,635 filings.
---------------------------------------------------------------------------

    Based on this increase, we estimate that the annual compliance 
burden of the collection of information requirements for issuers making 
Form D filings after Rule 506 is amended to eliminate the prohibition 
against general solicitation would be an aggregate 30,000 hours of 
issuer personnel time and $36,000,000 for the services of outside 
professionals per year.
---------------------------------------------------------------------------

    \114\ The information in this column is based on the 25,000 
filings reported in the OMB's Inventory of Currently Approved 
Information Collections, plus the additional 5,000 filings we 
estimate would be filed as result of proposed Rule 506(c).

                                      Table 2--Estimated Paperwork Burden Under Form D, Post-Amendment to Rule 506
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            External
                                                       Number of      Burden hours/     Total burden   Internal issuer    professional     Professional
                                                       responses           form            hours             time             time            costs
                                                         (A) \114\              (B)                (C) = (A)*(B)  (D)              (E)   (F) = (E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form D............................................          30,000                4          120,000           30,000           90,000      $36,000,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We request comment on the accuracy of our estimates. Pursuant to 44 
U.S.C. 3506(c)(2)(A), the Commission solicits comments to: (1) Evaluate 
whether the collection of information is necessary for the proper 
performance of the functions of the agency, including whether the 
information will have practical utility; (2) evaluate the accuracy of 
the Commission's estimate of burden of the collection of information; 
(3) determine whether there are ways to enhance the quality, utility 
and clarity of the information to be collected; and (4) evaluate 
whether there are ways to minimize the burden of the collection of 
information on those who are required to respond, including

[[Page 54476]]

through the use of automated collection techniques or other forms of 
information technology.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and send a copy to Elizabeth M. Murphy, Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090, 
with reference to File No. S7-07-12. Requests for materials submitted 
to OMB by the Commission with regard to these collections of 
information should be in writing, refer to File No. S7-07-12, and be 
submitted to the Securities and Exchange Commission, Office of Investor 
Education and Advocacy, 100 F Street NE., Washington, DC 20549-1090. 
OMB is required to make a decision concerning the collection of 
information between 30 and 60 days after publication of this release. 
Consequently, a comment to OMB is assured of having its full effect if 
OMB receives it within 30 days of publication.

VII. Economic Analysis

A. Background and Summary of Proposed Rule and Form Amendments

    We are proposing amendments to Rule 506 and Rule 144A to implement 
the requirements of Section 201(a) of the JOBS Act. Section 201(a)(1) 
directs the Commission to revise Rule 506 to provide that the 
prohibition against general solicitation contained in Rule 502(c) shall 
not apply to offers and sales of securities made pursuant to Rule 506, 
as amended, provided that all purchasers of the securities are 
accredited investors. Section 201(a)(1) also provides that ``such rules 
shall require the issuer to take reasonable steps to verify that 
purchasers of the securities are accredited investors, using such 
methods as determined by the Commission.'' Section 201(a)(2) of the 
JOBS Act directs the Commission to revise Rule 144A(d)(1) to provide 
that securities sold pursuant to Rule 144A may be offered to persons 
other than QIBs, including by means of general solicitation, provided 
that securities are sold only to persons that the seller and any person 
acting on behalf of the seller reasonably believe are QIBs.
    We are mindful of the costs imposed by and the benefits obtained 
from our rules. The discussion below attempts to address the economic 
effects of the proposed amendments, including the likely costs and 
benefits of the amendments as well as the effect of the amendments on 
efficiency, competition and capital formation.\115\ Some of the costs 
and benefits stem from the statutory mandate of Section 201(a), while 
others are affected by the discretion we exercise in implementing this 
mandate. These two types of costs and benefits may not be entirely 
separable to the extent our discretion is exercised to realize the 
benefits that we believe were intended by Section 201(a). We request 
comment on all aspects of the economic effects, such as the costs and 
benefits, of the amendments that we are proposing. We particularly 
appreciate comments that distinguish between the economic effects that 
are attributed to the statutory mandate itself and the economic effects 
that are the result of policy choices made by the Commission in 
implementing the statutory mandate.
---------------------------------------------------------------------------

    \115\ Section 2(b) of the Securities Act requires the 
Commission, when engaging in rulemaking that requires it to consider 
whether an action is necessary or appropriate in the public 
interest, to consider, in addition to the protection of investors, 
whether the action would promote efficiency, competition, and 
capital formation. 15 U.S.C. 77b(b).
---------------------------------------------------------------------------

B. Baseline

    The baseline for our economic analysis is the market for Rule 506 
offerings and the market for Rule 144A offerings, as they exist today.
    The Regulation D market is large compared to other markets, and 
offerings claiming the Rule 506 exemption are by far the dominant type 
of offering in the Regulation D market. In 2011, 2010 and 2009, issuers 
raised an estimated $895 billion, $902 billion and $581 billion, 
respectively, in transactions claiming the Rule 506 exemption.\116\ 
These amounts represent approximately 99% of the capital reported as 
raised under Regulation D during this period and approximately 93% of 
the number of Regulation D offerings during this period. In 2011 and 
2010, the estimated amounts raised in Regulation D offerings exceeded 
the amounts raised in all other private offerings (Rule 144A offerings, 
Regulation S offerings, and other Section 4(a)(2) offerings), public 
debt and public equity offerings, combined. In 2009, the estimated 
amounts raised in Regulation D offerings were second only to the 
amounts raised in public debt offerings.
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    \116\ The statistics in this section are based on a review of 
Form D electronic filings with the Commission--specifically, the 
``total amount sold'' as reported in Form D--and data regarding 
other types of offerings (e.g., public debt offerings and Rule 144A 
offerings) from Securities Data Corporation's New Issues database 
(Thomson Financial). See note 25, supra.
---------------------------------------------------------------------------

    The Rule 144A market is also an important market for raising 
capital. In 2011 and 2010, the estimated amount of capital (including 
both equity and debt securities) raised in Rule 144A offerings was $168 
billion and $233 billion, compared to $984 billion and $1.07 trillion, 
respectively, raised in registered offerings.

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

    The elimination of the prohibition against general solicitation for 
a subset of Rule 506 offerings would likely have a number of effects on 
issuers and investors. When using general solicitation, issuers would 
be able to reach a greater number of potential investors, thus 
increasing their access to capital. The proposed amendment to Rule 506 
would likely reduce search costs associated with finding accredited 
investors who may be interested in a particular private offering, thus 
enhancing efficiency. The increase in the number of potential investors 
could result in greater competition among investors interested in 
investing in an issuer, which may result in a lower cost of capital for 
issuers. We expect these benefits to issuers to generally be lower for 
Rule 144A offerings because QIBs, who are the investors in Rule 144A 
offerings, are generally fewer in number, known by market participants, 
and better networked than accredited investors. Thus, the elimination 
of the prohibition against general solicitation for Rule 144A offerings 
is unlikely to dramatically increase issuers' access to QIBs in such 
offerings or to have a meaningful effect on the cost of capital in Rule 
144A offerings.
    When using general solicitation, issuers may be able to reach 
investors directly, without the need of an intermediary, which could 
result in lower transaction costs, and perhaps a lower cost of capital, 
for issuers. An analysis of all Form D filings on EDGAR made during the 
period from 2009 to 2011 shows that approximately 11% of all new 
offerings reported sales commissions of greater than zero because the 
issuers used intermediaries.\117\ The average commission paid to these 
intermediaries was 5.7% of the offering size, with the median 
commission being approximately 5%. For a $5 million offering, which was 
the median size of a Regulation D offering with a commission during 
this period, an

[[Page 54477]]

issuer could potentially save up to $250,000 if the issuer reaches 
investors directly rather than through an intermediary, minus the cost 
of its own solicitation efforts and the cost associated with verifying 
accredited investor status.\118\ This potential benefit would likely be 
larger for smaller issuers. Based on the analysis of these Form D 
filings as described above, issuers reporting annual revenues up to $25 
million pay on average a 6.4% commission, while issuers with annual 
revenues over $100 million pay approximately a 3.3% commission and 
hedge funds and other privately offered funds pay approximately a 2.7% 
commission.
---------------------------------------------------------------------------

    \117\ Ivanov/Bauguess Study.
    \118\ We recognize, of course, that the involvement of an 
intermediary can provide benefits in addition to locating investors. 
For example, an intermediary may be able to help an issuer obtain 
better pricing and terms or provide access to investors that can 
provide strategic or other advice to the issuer.
---------------------------------------------------------------------------

    The elimination of the prohibition against general solicitation 
also would reduce the uncertainty for issuers as to whether a Rule 506 
offering can be completed in certain situations, and would eliminate 
the costs of complying with the prohibition.\119\ Under existing Rule 
506, an inadvertent leak of information about an offering to entities 
or persons with whom the issuer does not have a pre-existing 
substantive relationship has been viewed by some as raising questions 
about the issuer's ability to rely on the exemption for the entire 
offering.\120\ In addition, some privately offered funds have been 
reluctant to respond to press inquiries or to correct inaccurate 
reports due to concerns about these discussions being misconstrued as a 
general solicitation.\121\ Under proposed Rule 506(c), any such 
uncertainty as to the availability of the exemption would likely be 
reduced, so long as issuers take reasonable steps to verify that they 
are selling only to accredited investors.
---------------------------------------------------------------------------

    \119\ Letter from MFA (May 4, 2012).
    \120\ See, e.g., letter from Simon M. Lorne and Joseph 
McLaughlin (Aug. 5, 2008) on Revisions of Limited Offering 
Exemptions in Regulation D, Release No. 33-8828 (Aug. 3, 2007) [72 
FR 45116] (``On occasion, the prohibition forces issuers to delay or 
even cancel offerings because of communications--sometimes 
inadvertent--that could be viewed in hindsight as a solicitation. 
The need to police communications by transaction participants, and 
to analyze and remedy inadvertent communications, also adds 
significantly to the cost of effecting private placements.'').
    \121\ See, e.g., letters from D.E. Shaw & Co. (Apr. 3, 2006) on 
Exposure Draft of Final Report of Advisory Committee on Smaller 
Public Companies, Release No. 33-8666 (Feb. 28, 2006); MFA (May 4, 
2012).
---------------------------------------------------------------------------

    From the standpoint of investors, accredited investors who 
previously have found it difficult to identify investment opportunities 
in Rule 506 offerings would be able to identify, and potentially invest 
in, a larger and more diverse pool of potential investment 
opportunities. In addition, the elimination of the prohibition against 
general solicitation in some Rule 506 offerings would likely increase 
the flow of information about issuers to investors that may not have 
been publicly available previously, thereby potentially leading to more 
efficient pricing for the offered securities.\122\ Thus, the proposed 
rule amendment may increase capital formation and at the same time 
improve its allocative efficiency.\123\ With respect to privately 
offered funds in particular, eliminating the prohibition would allow 
accredited investors to gather information about privately offered 
funds at relatively lower costs and to allocate their capital more 
efficiently.\124\ Increased information about privately offered fund 
strategies, management fees and performance information would likely 
lead to greater competition among privately offered funds for investor 
capital.
---------------------------------------------------------------------------

    \122\ This may not be applicable with respect to every issuer 
(e.g., certain privately offered funds that offer their shares 
continuously at net asset value).
    \123\ Allocative efficiency is a condition that is reached when 
resources are allocated in a way that allows the maximum possible 
net benefit from their use. In this context, it means the right 
number of dollars from the right types of investors going to the 
most suitable investments on efficient terms.
    \124\ See, e.g., letter from MFA (May 4, 2012) and Managed Funds 
Association, Petition for Rulemaking on Rule 502 of Regulation D 
under the Securities Act of 1933, File No. 4-643 (Jan. 9, 2012).
---------------------------------------------------------------------------

    Although proposed Rule 506(c) would directly affect the private 
offering market, it could also have an indirect effect on other 
markets. The elimination of the prohibition against general 
solicitation for a subset of Rule 506 offerings may lower the degree of 
information asymmetry between Rule 506 issuers and potential investors. 
The lower search costs associated with finding Rule 506(c) offerings 
may cause some investors that currently invest in public equity and 
debt markets or other private offering markets to reallocate capital to 
the offerings made under proposed Rule 506(c). If a significant number 
of investors make a greater proportion of their investments in the Rule 
506(c) market, such investor behavior may have a negative effect on the 
supply of capital and prices in the public equity and debt markets and 
in other non-registered offering markets. For example, issuers 
currently using the exemptions in Regulation A \125\ and in Rule 
504(b)(1)(i)-(iii) to solicit investors could prefer to rely on the 
exemption under proposed Rule 506(c) because they would be able to 
raise unlimited amounts of capital under proposed Rule 506(c) and state 
blue sky securities registration requirements would not apply to these 
offerings. While it is difficult to estimate how many of these issuers 
would choose to rely on proposed Rule 506(c) in lieu of the other 
available exemptions from registration, we believe that it is likely 
that Rule 506(c) would have a larger impact on issuers using Rule 504 
rather than Regulation A, mainly because very few issuers have been 
using the Regulation A exemption in recent years.\126\ In addition, to 
the extent that accredited investors have invested in registered 
investment companies instead of privately offered funds because of 
information asymmetry between privately offered funds and registered 
investment companies, it is possible that registered investment 
companies' assets may be negatively affected if these investors now 
transfer their assets to privately offered funds.
---------------------------------------------------------------------------

    \125\ 17 CFR 230.251 through 17 CFR 230.263.
    \126\ From 2009 to 2011, based on our review of Form D filings 
and Forms 1-A, 1,735 issuers relied on the Rule 504 exemption, and 
10 issuers relied on Regulation A. The number of issuers using 
Regulation A to raise capital may increase once the Commission 
adopts rules implementing Title IV of the JOBS Act.
---------------------------------------------------------------------------

    We believe that retaining the existing Rule 506 as Rule 506(b) 
would generate benefits for both issuers and investors. It would allow 
issuers that do not wish to generally solicit in their private 
offerings to avoid the added expense of complying with the rules 
applicable to Rule 506(c) offerings. It would also allow issuers to 
continue selling privately to up to 35 non-accredited investors who 
meet existing Rule 506's sophistication requirements. The continued 
availability of Rule 506(b) may also be beneficial to investors with 
whom the issuer has a pre-existing substantive relationship and who do 
not wish to bear additional verification costs that may be associated 
with participation in Rule 506(c) offerings.
    On the other hand, eliminating the prohibition against general 
solicitation could make it easier for promoters of fraudulent schemes 
to reach potential investors through public solicitation and other 
methods previously not allowed. This could result in an increase in the 
level of due diligence conducted by investors in assessing proposed 
Rule 506(c) offerings, and in the event of fraud, would likely lead to 
costly lawsuits for investors seeking damages. In general, an increase 
in fraud in this market would harm investors who are defrauded, would 
undermine investor confidence in Rule 506 offerings and could 
negatively affect

[[Page 54478]]

capital-raising by legitimate issuers--for example, by reducing 
investor participation in Rule 506 offerings--thus inhibiting capital 
formation and reducing efficiency. Further, one commentator is 
concerned that investors may confuse privately offered funds with 
registered investment companies.\127\ In such cases, fraud that occurs 
with privately offered funds may cause investors to associate the 
wrongdoing with registered investment companies, and therefore refrain 
from investing in registered investment companies. In addition, some 
issuers with publicly-traded securities may use general solicitation 
for a purported Rule 506 offering to generate investor interest in the 
secondary trading markets, especially in the over-the-counter markets, 
which could be used by insiders to resell securities at inflated 
prices. This ``pump and dump'' activity would impose costs to investors 
in these secondary markets, as well as investors in Rule 506 offerings, 
and could erode investor confidence in Rule 506 offerings, thus 
potentially raising the cost of capital for issuers in this market.
---------------------------------------------------------------------------

    \127\ See letter from ICI re: Rulemaking Petition File No. 4-
463: Request by MFA for Rulemaking to Amend Rule 502(c) of 
Regulation D to Eliminate the Prohibition on Offers or Sales of 
Securities by General Solicitation or Advertising With Respect to 
Private Funds (Feb. 7, 2012); and letter from ICI (May 21, 2012).
---------------------------------------------------------------------------

    The risks to investors of fraudulent offerings conducted under 
proposed Rule 506(c) may be mitigated to some extent by the requirement 
that issuers sell only to accredited investors (with reasonable steps 
to verify such status), who may be better able to assess their ability 
to take financial risks and bear the risk of loss than investors who 
are not accredited. In addition, issuers would still be subject to the 
antifraud provisions under the federal securities laws, and the public 
nature of these solicitations may facilitate detection of fraudulent 
activity.
    We expect that there would be fewer occurrences of general 
solicitation-facilitated fraud in Rule 144A offerings, as compared to 
Rule 506(c) transactions. Unlike most Rule 506 transactions, Rule 144A 
offerings always include a financial intermediary. The due diligence 
conducted by these intermediaries is an additional layer of protection 
against fraud. Also, Rule 144A investors are generally large 
institutions, which are better able to identify fraudulent activities 
than smaller institutions and retail investors.
    In regard to Rule 144A, we anticipate that eliminating the 
prohibition against general solicitation would significantly affect 
private trading systems by permitting information vendors to provide 
more information about Rule 144A securities. Indeed, since offers could 
be made to the public, the information on private trading systems for 
Rule 144A securities could be made available to all investors, even 
though sales would be limited to QIBs.\128\ In addition, currently 
there is no public dissemination through Trade Reporting and Compliance 
Engine (``TRACE'') of transactions in Rule 144A securities.\129\ Once 
Rule 144A is amended to permit offers to be made to persons other than 
QIBs, FINRA may decide to amend its rules to permit public 
dissemination of transaction information with respect to Rule 144A 
securities. Such improvements in the information available to potential 
investors could enhance efficiency in this market.
---------------------------------------------------------------------------

    \128\ Under the PORTAL Trading System developed by the Nasdaq 
Stock Market for trading Rule 144A securities, access is restricted 
to QIBs. Other privately developed Rule 144A trading systems, such 
as Portal Alliance, have similar restrictions.
    \129\ See FINRA Rule 6750. There is mandatory reporting of over-
the-counter trades in fixed income securities.
---------------------------------------------------------------------------

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

    The requirement in proposed Rule 506(c) for issuers to take 
reasonable steps to verify that purchasers are accredited investors 
would likely make it more difficult for those issuers whose existing 
practices do not already satisfy the verification requirement to sell 
securities to non-accredited investors, thereby lessening the 
likelihood that fraudulent offerings would be completed because those 
who are eligible to purchase are more likely to be able to protect 
their interests than investors who are not accredited investors. 
Preserving the integrity of the Rule 506 market and reducing the 
incidence of fraud would benefit investors by giving them greater 
assurance that they are investing in legitimate issuers. In turn, 
issuers would also benefit from measures that improve the integrity and 
reputation of the Rule 506 market because they would be able to attract 
more investors and capital. Issuers would benefit as well from the 
additional certainty that the Rule 506 safe harbor is available for an 
offering when this verification requirement is met.
    Our proposal not to specify the verification methods that an issuer 
must use or could use in taking reasonable steps to verify accredited 
investor status would provide issuers with flexibility to use methods 
that are appropriate, given the facts and circumstances of each 
offering and each purchaser. Such flexibility is likely to mitigate the 
cost to issuers of complying with proposed Rule 506(c) because it would 
allow them to select the most cost-effective verification method for 
each offering.
    The verification requirement in proposed Rule 506(c) would impose 
costs as well. Some potential investors likely would have to provide 
more information to issuers than they currently provide, while some 
issuers may have to apply a stricter and more costly process to 
determine accredited investor status than what they currently use. 
While it is reasonable to expect that the costs associated with the 
verification requirement could be offset somewhat by its benefits, it 
is also reasonable to expect that some accredited investors who would 
participate in existing Rule 506(b) offerings would decline to 
participate in proposed Rule 506(c) offerings. Compared to an 
alternative that prescribes specific verification methods or provides a 
non-exclusive list of verification methods, the greater flexibility of 
the proposed verification standard could result in less rigorous 
verification, thus allowing some unscrupulous issuers to more easily 
sell securities to purchasers who are not accredited investors and 
perpetrate fraudulent schemes. In addition, a flexible 
``reasonableness'' verification approach may create or promote legal 
uncertainty about the availability of the exemption from Section 5 
registration, which may cause some issuers to interpret ``reasonable 
steps to verify'' in a manner that is more burdensome than if specific 
verification methods were prescribed, thus incurring higher cost. 
Similarly, some issuers may decide to use additional internal or 
external resources (e.g., retaining lawyers, soliciting opinions, etc.) 
that they would not have used if specific verification methods were 
prescribed or if a non-exclusive list of methods was provided, in order 
to make sure they are compliant with the rule, which would also 
increase their costs.
    To the extent that issuers require investors to provide personally 
identifiable information (e.g., Social Security numbers, tax 
information, bank or brokerage account information) in order to verify 
their accredited investor status, these investors may be reluctant to 
do so in the context of making an investment in an issuer, particularly 
an issuer with which they may have no prior relationship.\130\ In 
addition to concerns about maintaining personal privacy, investors may 
be concerned that their personally identifiable information could be 
stolen or accessed

[[Page 54479]]

by third parties or used by unscrupulous issuers in various ways (e.g., 
identity theft, which could impose costs to investors that go well 
beyond the costs typically associated with investing). As a 
consequence, some potential investors may elect not to participate in 
this market, thus impeding capital formation to some extent.
---------------------------------------------------------------------------

    \130\ Letter from SecondMarket.
---------------------------------------------------------------------------

    As there is no information available to us on the costs currently 
incurred by issuers to form a reasonable belief that a purchaser in a 
Rule 506 offering is an accredited investor, we are unable to quantify 
the estimated costs and benefits of the verification requirement in 
proposed Rule 506(c). We are requesting comment from the public on this 
issue.

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

    Much of what we know about the size and characteristics of the 
private offering market comes from Form D filings. The information 
collected to date and described in this release illustrates and 
underscores the importance of the private offering market in the U.S. 
economy. The continued collection of this information following the 
elimination of the prohibition against general solicitation in Rule 
506(c) and Rule 144A offerings will be an important monitoring tool in 
assessing the ongoing economic impact of the new rules. We are 
proposing to amend Form D to add a new check box in Item 6 of Form D, 
which would require an issuer to indicate whether it is relying on Rule 
506(c) in conducting its offering. This information would assist the 
Commission in monitoring the use of proposed Rule 506(c), and the 
marginal cost to issuers of providing this information is likely to be 
low because Form D already requires issuers to identify the exemption 
on which they are relying.

F. Request for Comment

    11. Are there other benefits and costs associated with the 
elimination of the prohibition against general solicitation that should 
be considered? Are those more pertinent to proposed Rule 506(c) 
offerings or Rule 144A offerings?
    12. Is it likely that the removal of the prohibition against 
general solicitation would increase fraudulent activity in these 
markets? If so, to what extent, and what form is this fraudulent 
activity likely to take? Please provide data where possible.
    13. How costly is it to comply with the existing requirements of 
Rule 506(b)? What would the incremental cost be to comply with the 
proposed requirements of Rule 506(c)? What would be the impact, if any, 
of the proposed Rule 506(c) check box on Form D? Please provide data 
where possible.
    14. Are there any other benefits or costs associated with the 
accredited investor verification requirement in proposed Rule 506(c) 
that the Commission has not identified?
    15. Do the types, or extent, of any benefits or costs from the 
proposed amendments to Rule 506 and Rule 144A differ depending on the 
type of issuer, other than as described above? If so, please explain.
    16. Are there any additional economic effects related to 
efficiency, capital formation, or competition that the Commission has 
not identified?

VIII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\131\ the Commission must advise the OMB as to 
whether a proposed regulation constitutes a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results or 
is likely to result in:
---------------------------------------------------------------------------

    \131\ Public Law 104-121, Tit. II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment or 
innovation.
    If a rule is ``major,'' its effectiveness will generally be delayed 
for 60 days pending Congressional review.
    We request comment on whether our proposed amendments would be a 
``major rule'' for purposes of SBREFA. We solicit comment and empirical 
data on:
     The potential effect on the U.S. economy on an annual 
basis;
     Any potential increase in costs or prices for consumers or 
individual industries; and
     Any potential effect on competition, investment or 
innovation.
    We request those submitting comments to provide empirical data and 
other factual support for their views to the extent possible.

IX. Initial Regulatory Flexibility Analysis

    The Commission has prepared this Initial Regulatory Flexibility 
Analysis (``IRFA'') in accordance with Section 603 of the Regulatory 
Flexibility Act.\132\ This IRFA relates to the amendments to Rules 500, 
501, 502 and 506 of Regulation D, Form D and Rule 144A that we are 
proposing in this release.
---------------------------------------------------------------------------

    \132\ See 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Action

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

B. Small Entities Subject to the Proposed Rule and Form Amendments

    For purposes of the Regulatory Flexibility Act, under our rules, an 
issuer, other than an investment company, is a ``small business'' or 
``small organization'' if it has total assets of $5 million or less as 
of the end of its most recent fiscal year and is engaged or proposing 
to engage in an offering of securities which does not exceed $5 
million.\133\ For purposes of the Regulatory Flexibility Act, an 
investment company is a small entity if it, together with other 
investment companies in the same group of related investment companies, 
has net assets of $50 million or less as of the end of its most recent 
fiscal year.\134\
---------------------------------------------------------------------------

    \133\ 17 CFR 230.157.
    \134\ 17 CFR 270.0-10(a).

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[[Page 54480]]

    Proposed Rule 506(c) would affect small issuers (including both 
operating businesses and investment funds that raise capital under Rule 
506) relying on this safe harbor from Securities Act registration. All 
issuers that sell securities in reliance on Regulation D are required 
to file a Form D with the Commission reporting the transaction. For the 
fiscal year ended December 31, 2011, 18,174 issuers filed an initial 
notice on Form D, of which 16,692 relied on the Rule 506 exemption. 
Based on information reported by issuers on Form D, there were 3,823 
small issuers \135\ relying on the Rule 506 exemption in 2011. This 
number likely underestimates the actual number of small issuers relying 
on the Rule 506 exemption, however, because over 50% of issuers 
declined to report their size.
---------------------------------------------------------------------------

    \135\ Of this number, 3,344 of these issuers are not investment 
companies, and 479 are investment companies.
---------------------------------------------------------------------------

    The proposed amendment to Rule 144A would affect small entities 
that engage in Rule 144A offerings.\136\ Unlike issuers that use 
Regulation D, issuers conducting Rule 144A offerings are not required 
to file any form with the Commission. This lack of data significantly 
limits our ability to assess the number and the size of issuers that 
use Rule 144A offerings. Still, we are able to obtain some data on Rule 
144A offerings during the 2009 to 2011 period from two commercial 
databases.\137\ Based on these data, we identified 681 offerings 
involving 607 issuers from 2009 to 2011. Of these 607 issuers, only 316 
provided information on their total assets. With respect to these 316 
issuers, we identified 42 issuers with total assets of less than $50 
million.
---------------------------------------------------------------------------

    \136\ While it may be theoretically possible for a small entity 
to meet one part of the definition of ``qualified institutional 
buyer'' (e.g., an ``entity, all of the equity owners of which are 
qualified institutional buyers, acting for its own account or the 
accounts of other qualified institutional buyers''), we do not have 
any information to suggest that there are such small entities. 
Accordingly, the regulatory flexibility analysis in regard to Rule 
144A is focused on small issuers that engage in Rule 144A offerings.
    \137\ Thomson Financial's SDC Platinum Service and Sagient 
Research System's Placement Tracker database.
---------------------------------------------------------------------------

C. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The proposed amendments to Rule 506 would impose certain reporting 
and compliance requirements on issuers that engage in general 
solicitation in Rule 506 offerings. As discussed above, issuers taking 
advantage of proposed Rule 506(c) to engage in general solicitation in 
Rule 506 offerings would be required to take reasonable steps to verify 
that the purchasers of the securities are accredited investors. The 
steps required would vary with the circumstances, but we anticipate 
that some potential investors may have to provide more information to 
issuers than they currently provide, while issuers may have to apply a 
stricter and more costly process to verify accredited investor status 
than what they currently use. We expect that the costs of compliance 
would vary depending on the size and nature of the offering, the nature 
and extent of the verification methods used, and the number and nature 
of potential purchasers in the offering. Proposed Rule 506(c) does not 
impose any recordkeeping requirements. However, we anticipate that 
issuers would document the steps they take to verify that purchasers 
are accredited investors in Rule 506 offerings involving general 
solicitation.
    The proposed amendment to Form D would also impose an information 
requirement with respect to Rule 506 offerings that use general 
solicitation. Each issuer submitting a Form D for a Rule 506 offering 
would be required to check a box on the form to indicate whether the 
issuer is relying on the proposed Rule 506(c) exemption. We do not 
believe that this proposed revision to Form D would increase in any 
material way the time or information required to complete the Form D 
that must be filed with the Commission in connection with a Rule 506 
offering.
    The proposed amendment to Rule 144A contains no reporting, 
recordkeeping or compliance requirements for issuers that engage in 
Rule 144A offerings.

D. Duplicative, Overlapping or Conflicting Federal Rules

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

E. Significant Alternatives

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

[[Page 54481]]

investor confidence to further clarify, consolidate or simplify the 
amendments for small entities. With respect to exempting small entities 
from coverage of these proposed amendments, we believe such an approach 
would be contrary to the requirements of, and the legislative intent 
behind, Section 201(a), as evidenced by the plain language of the 
statute.

F. General Request for Comment

    The Commission is soliciting comments regarding this analysis. The 
Commission requests comment on the number of small entities that would 
be subject to the rules and whether the proposed rules would have any 
effects that have not been discussed. The Commission requests that 
commentators describe the nature of any effects on small entities 
subject to the rules and provide empirical data to support the nature 
and extent of the effects.

X. Statutory Authority and Text of Proposed Rule and Form Amendments

    The amendments contained in this release are being proposed under 
the authority set forth in Sections 4(a)(1), 4(a)(2) and 19 of the 
Securities Act, as amended, and Section 201(a) of the JOBS Act.

List of Subjects in 17 CFR Parts 230 and 239

    Reporting and recordkeeping requirements, Securities.

    For the reasons set out above, the Commission proposes to amend 
Title 17, chapter II of the Code of Federal Regulations, as follows:

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

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

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, Sec.  201(a), 126 Stat. 313 
(2012), unless otherwise noted.
* * * * *
    2. Amend Sec.  230.144A by:
    a. Removing the reference to ``section 4(2)'' and adding in its 
place ``section 4(a)(2)'' in Preliminary Note 7;
    b. Removing the reference to ``section 2(13)'' and adding in its 
place ``section 2(a)(13)'' in paragraph (a)(1)(i)(A);
    c. Removing the reference to ``sections 2(11) and 4(1)'' and adding 
in its place ``sections 2(a)(11) and 4(a)(1)'' in paragraph (b);
    d. Removing the references to ``section 4(3)(C),'' ``section 
2(11)'' and ``section 4(3)(A)'' and adding in their place ``section 
4(a)(3)(C),'' ``section 2(a)(11)'' and ``section 4(a)(3)(A),'' 
respectively, in paragraph (c);
    e. Removing the phrase ``offered or'' after the phrase ``The 
securities are'' in paragraph (d)(1); and
    f. Removing the phrase ``an offeree or'' after the phrase ``a 
qualified institutional buyer or to'' and adding in its place ``a'' in 
paragraph (d)(1).
* * * * *
    3. Amend Sec.  230.500(c) by removing the reference to ``section 
4(2)'' and adding in its place ``section 4(a)(2)''.
* * * * *
    4. Amend Sec.  230.501 by:
    a. Removing the reference to ``section 2(13)'' and adding in its 
place ``section 2(a)(13)'' in paragraph (a)(1); and
    b. Removing the reference to ``section 2(4)'' and adding in its 
place ``section 2(a)(4)'' in paragraph (g).
* * * * *
    5. Amend Sec.  230.502 by:
    a. Removing the reference to ``Sec.  230.506'' and adding in its 
place ``Sec.  230.506(b)'' in paragraph (b)(1);
    b. Removing the reference to ``Sec.  230.506'' and adding in its 
place ``Sec.  230.506(b)'' in paragraph (b)(2)(iv);
    c. Removing the reference to ``Sec.  230.506'' and adding in its 
place ``Sec.  230.506(b)'' in paragraph (b)(2)(v);
    d. Removing the reference to ``Sec.  230.506'' and adding in its 
place ``Sec.  230.506(b)'' in the first sentence of paragraph 
(b)(2)(vii);
    e. Adding to the first sentence of paragraph (c) the phrase ``or 
Sec.  230.506(c)'' after the phrase ``Except as provided in Sec.  
230.504(b)(1)'';
    f. Removing the reference to ``section 4(2)'' and adding in its 
place ``section 4(a)(2)'' in paragraph (d); and
    g. Removing the reference to ``section 2(11) of the Act'' and 
adding in its place ``section 2(a)(11) of the Act'' in paragraph (d).
* * * * *
    6. Amend Sec.  230.506 by:
    a. Adding to paragraph (a) the phrase ``or paragraph (c)'' after 
the phrase ``satisfy the conditions in paragraph (b)'';
    b. Removing the reference to ``section 4(2)'' and adding in its 
place ``section 4(a)(2)'' in paragraph (a);
    c. Adding to paragraph (b) the phrase ``in offerings not using 
general solicitation or general advertising'' after the phrase 
``Conditions to be met'';
    d. Removing the reference to ``this section'' and adding in its 
place ``Sec.  230.506(b)'' in the note to paragraph (b)(2)(i); and
    e. Adding paragraph (c).
    The addition reads as follows:


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

* * * * *
    (c) Conditions to be met in offerings using general solicitation or 
general advertising.
    (1) General conditions. To qualify for exemption under this 
section, sales must satisfy all the terms and conditions of Sec. Sec.  
230.501 and 230.502(a) and (d).
    (2) Specific conditions.
    (i) Nature of purchasers. All purchasers of securities sold in any 
offering under this Sec.  230.506(c) are accredited investors.
    (ii) Verification of accredited investor status. The issuer shall 
take reasonable steps to verify that purchasers of securities sold in 
any offering under this Sec.  230.506(c) are accredited investors.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

    7. The authority citation for Part 239 continues to read, in part, 
as follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll, 
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 
80a-29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *
    8. Amend Form D (referenced in Sec.  239.500) by:
    a. Removing the phrase ``Rule 506'' and adding in its place ``Rule 
506(b)'' next to the appropriate check box;
    b. Removing the phrase ``Securities Act Section 4(5)'' and adding 
in its place ``Securities Act Section 4(a)(5)'' next to the appropriate 
check box; and
    c. Adding a check box that reads ``Rule 506(c)'' between the 
revised ``Rule 506(b)'' check box and the revised ``Securities Act 
Section 4(a)(5)'' check box.

    Note: The text of Form D does not, and the amendments will not, 
appear in the Code of Federal Regulations.


    Dated: August 29, 2012.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-21681 Filed 9-4-12; 8:45 am]
BILLING CODE 8011-01-P


