Release No. 33-6758

March 3, 1988

Regulation D Revisions

ACTION: Final Rules.

SUMMARY: The Commission announces the adoption of several amendments to the rules comprising Regulation D which provides for certain exemptions from the registration requirements of the Securities Act of 1933 (the "Securities Act"). The revisions expand the "accredited investor" definition, eliminate the $150,000 purchaser of securities from that definition, increase the total offering amount permitted for certain Rule 504 offerings, and revise general solicitation restrictions under Rule 504 for certain state registered offerings. Disclosure standards for offerings of less than $2 million also have been simplified to parallel more closely requirements applicable to Regulation A offerings. Certain technical revisions have been made to the regulation, as proposed.

EFFECTIVE DATE: 30 days after publication in the Federal Register. For offerings commenced but not completed prior to this date, issuers may opt to follow the rules in effect at the date of commencement.

FOR FURTHER INFORMATION CONTACT: Richard K. Wulff or Karen M. OBrien, (202) 272-2644, Office of Small Business Policy, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: On January 16, 1987, the Commission published for comment ¹ certain revisions to Regulation D, ² the limited offering exemptive provisions from the registration requirements of the Securities Act. ³ The proposals have been adopted substantially as proposed.

The revisions change the definition of accredited investor ⁴ by including additional institutional investors such as savings and loan associations, credit unions and broker-dealers, certain trusts, partnerships and corporations, permitting a joint as well as an individual income test for accrediting natural persons, and eliminating the $150,000 purchaser of securities. The total offering price for Rule 504 transactions has been increased from $500,000 to $1 million, if at least $500,000 is registered at the state level, and general solicitation now will be permitted under certain circumstances for offerings pursuant to Rule 504 in states which provide no qualifying registration procedure. A new level of disclosure, keyed to Regulation A, ⁵ but requiring that a certified balance sheet of the issuer be prepared, has been adopted for offerings of less than $2 million. The other technical revisions proposed for comment have been adopted. In a companion release issued today, ⁶ the Commission is soliciting comment on a number of additional revisions to Regulation D, many of which address issues raised for comment in the Reg. D. Release. These new proposals primarily respond to the comments received about adding a substantial or good-faith compliance provision to the regulation, and solicit comment on further changes to the accredited investor category.

Table of Contents

I. Amendments to Regulation D

Regulation D provides for three different exemptions from the registration requirements of the Securities Act, Rule 504 is available for offerings of $500,000 or less by companies not subject to the reporting provisions of the Securities Exchange Act of 1934 ("Exchange Act"), ⁷ but not investment companies as defined in the Investment Company Act of 1940. ⁸ This rule imposes no limitation on the number of purchasers and in certain cases permits general solicitations of potential purchasers. Rule 505 may be used by any company, except investment companies, for offerings that do not exceed $5 million. Subject to a prohibition of general solicitations, the number of accredited investors that may participate in a Rule 505 offering is unlimited; an additional 35 non-accredited investors, who need not be sophisticated, also may purchase. Rules 504 and 505 are promulgated under section 3(b) of the Securities Act. Rule 506 is the Commissions safe-harbor rule for the "non-public offering" exemption, established by section 4(2) of the Securities Act. This rule is available to any issuer and there is no dollar limit as to the amount of funds which can be raised. However, there may be no general solicitation or advertising and sales can only be made to accredited investors and an additional 35 sophisticated investors.

A. Accredited Investors

The "accredited investor" is a central concept to all of the exemptions provided by Regulation D. ⁹ The Commission proposed to expand the definition to include virtually all classes of institutional investors. The institutional investor category has been expanded to include savings and loan associations and similar institutions such as credit unions, ¹⁰ whether acting for their own accounts or as fiduciaries, and broker-dealers if registered under the Exchange Act and purchasing for their own accounts. As the Commission indicated in the Reg. D Release, there does not appear to be a compelling reason to distinguish these institutions from banks, insurance companies or registered investment companies which are already defined to be accredited. Most of the states in their institutional investor exemptions already exempt securities offerings to these categories of investors. ¹¹

One of the commenters noted that employee benefit plans within the meaning of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") which have savings and loan associations as plan fiduciaries were not proposed to be treated the same as ERISA plans with, for example, banks as such fiduciaries. This omission was not intentional. Consequently, the language of both Rules 215 and 501(a) has been amended to indicate that ERISA plans which have savings and loan associations as plan fiduciaries are accredited investors. The staffs interpretation ¹² that a self-directed employee benefit plan, where investment decisions are solely within the control of an accredited investor, is itself an accredited investor, has been codified.

The proposal to accredit corporations, partnerships and business trusts with total assets in excess of $5 million was generally approved by the commenters. The formation of the entity may not be for the purpose of making the particular investment in question. ¹³ Since the adoption of the regulation, certain non-profit organizations with total assets in excess of $5 million have been accredited investors; for-profit organizations will now be treated in the same way.

The Commission asked for comments as to the desirability of including officers who, while sophisticated, served no policy-making role for a company within the ranks of accredited investors. A number of commenters felt that the expansion would be desirable. Nonetheless, the Commission has decided not to accredit these officers at this time, since it has not been persuaded that, absent a policy-making function characterizing an executive officer position, employees regardless of their titles meet the standards of access to information and ability to bear the risk which are necessary to achieve the status of accredited investor.

A joint-income test for purposes of accrediting natural persons was proposed at the $300,000 level. Many commenters suggested a lower level for the joint income test along with lowering the existing individual income and net worth tests. Others have expressed their concerns about the appropriateness of the current levels in the income and net worth tests and that such levels may not represent a level of financial wherewithal which equates with an ability to get information about an issuer. In the absence of compelling empirical data establishing the financial sophistication of natural persons with lower incomes and net worth, the Commission has determined to make no further revisions to the natural persons accreditation standards. The joint-income test of $300,000 has been adopted.

Under the new provisions, trusts may be accredited if they have $5 million in total assets and have investment decisions made by a sophisticated person. The proposal to limit the trusts purchase to 10 percent of its total assets has not been adopted because general fiduciary principles and legal investment laws appear to be sufficient safeguards against concentration abuses which might arise. In addition, as proposed, a trust formed solely to make the investment would not be accredited under this provision.

The Commission in the proposing release advised that consideration was being given to eliminating the $150,000 purchaser item set forth in Rule 501(a)(5), given anomalies with the net worth test, and concerns that size of purchase alone, particularly at the $150,000 level, does not assure sophistication or access to information. While some persons previously accredited would no longer be accredited (i.e., individuals with net worths of $750,000 but less than $1 million, and corporations, partnerships, and trusts which do not meet the new standards but have $750,000 in net worth), many of the persons who used the $150,000 purchaser item will now become accredited investors by virtue of the revisions to Rule 501 made today. Therefore, the $150,000 purchaser accreditation standard is rescinded.

B. Rule 504

Both of the proposals relating to Rule 504 have been adopted without change. Thus, the $500,000 ceiling is now increased to $1 million as long as no more than $500,000 worth of securities are offered and sold without registration under states securities laws.

The modification which broadens the scope of permissible general solicitations in Rule 504 offerings to states which have no registration procedure or one which does not provide for registration and delivery of a disclosure document prior to sale has been adopted. The rule has been modified to make clear that the offering must be made in the state of registration in addition to the state which has no registration procedure, so as to minimize forum shopping. As adopted the rule also is intended to accommodate offerings in large metropolitan areas where the central jurisdiction has no registration process but the surrounding jurisdictions do, e.g., New York and the District of Columbia. Sales in non-qualifying states could not exceed the $500,000 ceiling for purposes of Rule 504.

C. Disqualification Provisions

The Commission solicited comments about imposing disqualifiers in Rule 506 offerings which would be similar to those currently applicable to Rule 505 offerings. The request for comments was in response to a suggestion by representatives of the North American Securities Administrators Association, Inc. ("NASAA") ¹⁴ who believed that such a provision might assist in getting the uniform limited offering exemption ("ULOE"), an official NASAA policy guideline, ¹⁵ adopted by more of the states. The commenters were almost unanimously opposed to the suggestion. No state commented on this issue. While NASAA has not withdrawn its support for this proposal, it is not clear to the Commission that the adoption of this proposal would encourage a significant number of additional states to adopt ULOE. ¹⁶ Thus, no change to the current system is being made at this time.

D. Disclosure for Offerings Not in Excess of $2 Million

The Commission asked for and received some comments about the value of a reduced level of disclosure for non-reporting company offerings of a relatively small dollar amount. As stated in the Reg. D Release, when the Commission initially proposed the regulation in 1981 ¹⁷ a reduced level of disclosure was set for offerings under $1.5 million, tied to Regulation A disclosure standards but requiring certified financial statements. Because the need for an additional level of disclosure standards was not compelling, measured by the public comments at the time, the Commission did not adopt the proposal. Now, however, it appears that there would be some benefit to another level of disclosure under the regulation as long as investor protection is not being compromised. The comments in response to the Reg. D Release support this position. Therefore, for offerings not in excess of $2 million, the information required in Regulation A offerings will satisfy the requirements of Rule 502(b)(2) if the issuer provides investors with a certified balance sheet, dated within 120 days of the commencement of the offering.

E. Other Revisions

All of the proposed technical revisions have been adopted. These changes included the clarification of the "aggregate offering price" definition in Rule 501(c), the single counting of non-contributory employee benefit plans in Rule 501(e), and keying the disclosure requirements to a $7.5 million level in Rule 502(b). Further, more Commission registration statement forms now are specified as being appropriate to satisfy the disclosure obligations of reporting companies under the regulation. For business combinations, the Commissions specific registration statement form is specified as the appropriate guideline.

II. NASAA Cooperation

In the proposing release, the Commission acknowledged NASAAs cooperation. Because Regulation D provides the framework for ULOE, such cooperation is invaluable to the goal of uniform application of the exemption at both the state and federal levels. The Commission understands that NASAAs State-Federal Coordination Committee and Disclosure Standards Committee will consider the Commissions final adoption today, with a view to recommending parallel changes to ULOE. The cooperation of NASAA in these efforts is appreciated and greater uniformity between the state and federal systems of securities regulation will ultimately be achieved, promoting ever increasingly efficient capital formation processes consistent with the protection of investors.

III. Availability of Final Regulatory Flexibility Analysis

A final Regulatory Flexibility Analysis in accordance with the Regulatory Flexibility Act regarding the revisions to Regulation D has been prepared. A summary of the corresponding Initial Regulatory Flexibility Analysis was included in the proposing release. Members of the public who wish to obtain a copy of the Final Regulatory Flexibility Analysis should contact Twanna Young in the Office of Small Business Policy, Division of Corporation Finance, U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

IV. Cost-Benefit Analysis

No specific data was provided on the Commissions request for costs and benefits of the proposals; yet, it appears that the revisions will work some savings by increasing the classes of accredited investors, raising the Rule 504 ceiling and reducing the level of disclosure requirements for offerings that do not exceed $2 million.

V. Statutory Basis, Text of Amendments and Authority

The amendments to the Commissions rules are being adopted pursuant to sections 2(15), 3(b), 4(2), 4(6), 19(a) and 19(c) of the Securities Act.

List of Subjects in 17 CFR Part 230.

Reporting and recordkeeping requirements, securities.

TEXT OF AMENDMENTS

In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is amended as follows:

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

1. The authority citation for Part 230 continues to read, in part, as follows:

AUTHORITY: Sections 230.100 to 230.174 issued under Sec. 19, 48 Stat. 85 as amended; 15 U.S.C. 77s, * * *

2. Section 230.215 is amended by revising paragraphs (a), (c) and (h), removing paragraph (e), redesignating paragraphs (f) and (g) as paragraphs (e) and (f), revising newly redesignated paragraph (f), and adding a new paragraph (g), as follows:

§230.215 Accredited Investor.

* * * * *

(a) Any savings and loan association or other institution specified in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is a savings and loan association, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

* * * * *

(c) Any organization described in section 501(c)(3) of the Internal Revenue Code, 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 $5,000,000;

* * * * *

(f) Any 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 persons 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;

(g) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in §230.506(b)(2)(ii); and

(h) Any entity in which all the equity owners are accredited investors.

3. Section 230.501 is amended by revising paragraphs (a)(1), (a)(3), (a)(8), and the first sentence of paragraph (c), removing paragraph (a)(5), redesignating paragraphs (a)(6) and (a)(7) as (a)(5) and (a)(6), revising newly redesignated paragraph (a)(6), and adding new paragraphs (a)(7) and (e)(3) before the Note as follows:

§230.501 Definitions and terms used in Regulation D.

* * * * *

(a)* * *

(1) Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; insurance company as defined in section 2(13) of the Act; investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

* * * * *

(3) Any organization described in section 501(c)(3) of the Internal Revenue Code, 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 $5,000,000;

* * * * *

(6) Any 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 persons 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;

(7) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in §230.506(b)(2)(ii);

and

(8) Any entity in which all of the equity owners are accredited investors.

* * * * *

(c) Aggregate offering price. "Aggregate offering price" shall mean the sum of all cash, services, property, notes, cancellation of debt, or other consideration to be received by an issuer for issuance of its securities.

* * *

* * * * *

(e) Calculation of number of purchasers.* * *

(3) A non-contributory employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 shall be counted as one purchaser where the trustee makes all investment decisions for the plan.

* * * * *

4. Section 230.502 is amended by redesignating paragraph (b)(2)(i)(A) as (b)(2)(i)(B) and paragraph (b)(2)(i)(B) as (b)(2)(i)(C), redesignating paragraph (b)(2)(i)(C) as (b)(2)(i)(D) adding a new paragraph (b)(2)(i)(A), revising the paragraph headings of newly redesignated (b)(2)(i)(B) and (C), and revising paragraphs (b)(2)(ii)(B) and (b)(2)(vi) as follows:

§203.502 General conditions to be met.

* * * * *

(b) Information requirements.

(2) Type of information to be furnished.

(i)* * *

(A) Offerings up to $2,000,000. The same kind of information as would be required in Part II of Form 1-A 17 CFR 239.90, except that the issuers balance sheet, which shall be dated within 120 days of the start of the offering, must be audited.

(B) Offerings up to $7,500,000.

* * * * *

(C) Offerings over $7,500,00.

* * * * *

(ii)* * *

(B) The information contained in an annual report on Form 10-K under the Exchange Act or in a registration statement on Form S-1 17 CFR 239.11, Form S-11 17 CFR 239.18, or Form S-18 17 CFR 239.28 under the Act or on Form 10 17 CFR 249.210 under the Exchange Act, whichever filing is the most recent required to be filed.

* * * * *

(vi) For business combinations or exchange offers, in addition to information required by Form S-4 17 CFR 239.25, the issuer shall provide to each purchaser at the time the plan is submitted to security holders, or, with an exchange, during the course of the transaction and prior to sale, written information about any terms or arrangements of the proposed transactions that are materially different from those for all other security holders. For purposes of this subsection, an issuer which is not subject to the reporting requirements of section 13 or 15(d) of the Exchange Act may satisfy the requirements of Part I.B. or C. of Form S-4 by compliance with paragraph (b)(2)(i) of this §230.502.

* * * * *

5. Section 230.504 is amended by revising the section heading, paragraph (b), and Notes 1 and 2, and adding a new Note 3 as follows:

§230.504 Exemption for Limited Offerings and Sales of Securities Not Exceeding $1,000,000.

* * * * *

(b) Conditions to be met.

(1) General conditions. To qualify for exemption under this §230.504, offers and sales must satisfy the terms and conditions of §§230.501 through 230.503, except that the provisions of §§230.502(c) and (d) shall not apply to offers and sales of securities under this §230.504 that are made (i) exclusively in one or more states each of which provides for the registration of the securities and requires the delivery of a disclosure document before sale and that are made in accordance with those state provisions; or (ii) in one or more states which have no provision for the registration of the securities and the delivery of a disclosure document before sale, if the securities have been registered in at least one state which provides for such registration and delivery before sale, offers and sales are made in the state of registration in accordance with such state provisions, and such document is in fact delivered to all purchasers in the states which have no such procedure, before the sale of securities.

(2) Specific condition. Limitation on aggregate offering price. The aggregate offering price for an offering of securities under this §230.504, as defined in §230.501(c), shall not exceed $1,000,000 less the aggregate offering price for all securities sold within the twelve months before the start of and during the offering of securities under this §230.504 in reliance on any exemption under section 3(b) of the Act or in violation of section 5(a) of the Act, provided that no more than $500,000 of such aggregate offering price is attributable to offers and sales of securities without registration under a states securities laws.

Note 1: The calculation of the aggregate offering price is illustrated as follows:

Example 1. If an issuer sells $500,000 worth of its securities pursuant to state registration on January 1, 1988 under this §230.504, it would be able to sell an additional $500,000 worth of securities either pursuant to state registration or without state registration during the ensuing twelve-month period, pursuant to this §230.504.

Example 2. If an issuer sold $900,000 pursuant to state registration on June 1, 1987 under this §230.504 and an additional $4,100,000 on December 1, 1987 under §230.505, the issuer could not sell any of its securities under this §230.504 until December 1, 1988. Until then the issuer must count the December 1, 1987 sale towards the $1,000,000 limit within the preceding twelve months.

Note 2: If a transaction under this §230.504 fails to meet the limitation on the aggregate offering price, it does not affect the availability of this §230.504 for the other transactions considered in applying such limitation. For example, if an issuer sold $1,000,000 worth of its securities pursuant to state registration on January 1, 1988 under this §230.504 and an additional $500.000 worth on July 1, 1988, this §230.504 would not be available for the later sale, but would still be applicable to the January 1, 1988 sale.

Note 3: In addition to the aggregation principles, issuers should be aware of the applicability of the integration principles set forth in §230.502(a).

By the Commission.

Jonathan G. Katz

Secretary

¹ Release No. 33-6683 (January 16, 1987) 52 FR 3015 ("Reg. D Release"). The comment letters received and a summary of the comments (File No. S7-1-87) are available for public inspection and copying at the Commissions Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549.

² 17 CFR 230.501-230.506.

³ 15 U.S.C. 77a et seq.

⁴ 15 U.S.C. 77b(15); 17 CFR 230.215; 17 CFR 230.501.

⁵ 17 CFR 230.251-230.264.

⁶ Release No. 33-6759.

⁷ 15 U.S.C. 78a et seq.

⁸ 15 U.S.C. 80a-1 et seq.

⁹ A uniform definition of "accredited investor" is used for both section 4(6) and Regulation D. Section 2(15) of the Securities Act and Rule 215, 17 CFR 230.215 together provide the same listing of investors as Rule 501(a). Amendments to Rule 215 are made today in order to maintain the consistency.

¹⁰ The Commissions staff interprets the "similar institution" language in section 3(a)(5)(A) of the Securities Act to encompass credit unions whose accounts are insured by the National Credit Union Administration. See, e.g., In re Idaho Central Credit Union (January 24, 1977) ("no action" letter from the Division of Corporation Finance). Rather than provide a complete listing in the definition, the Commission has determined to maintain interpretative flexibility through the use of the "similar institution" language.

¹¹See Uniform Securities Act, Section 402(b)(8). This section exempts any offer or sale to a bank, savings institution, trust company, insurance company, investment company as defined in the Investment Company Act of 1940, pension or profit sharing trust, or other financial institution or institutional buyer, or to a broker-dealer, whether the purchaser is acting for itself or in some fiduciary capacity. Forty-five or more of the states either use these terms as included in the Uniform Securities Act or specifically include savings and loan associations, credit unions and broker-dealers as institutional investors.

¹²In re Diane P. Weiss (December 21, 1983) (interpretative letter from the Division of Corporation Finance.)

¹³ This amendment, as well as the revision to accredited trusts infra, makes no change in the availability of Rule 215(h) or Rule 501(a)(8) which accredit entities, all of whose equity owners are otherwise accredited.

¹⁴ NASAA is an association of securities commissioners from each of the 50 states, the District of Columbia, Puerto Rico and several of the Canadian provinces.

¹⁵ CCH NASAA Rep. 6201 at 6101. Such a guideline represents endorsement of a principle which NASAA believes has general application. NASAA does not have the power to enact legislation, promulgate regulations or otherwise bind legislatures or administrative agencies.

¹⁶ The Commission understands that a majority of states now apply disqualification provisions to Rule 506 offerings.

¹⁷ Release No. 33-6339 (August 7, 1981)46 FR 41791.