On January 12, 2016, the Securities and Exchange Commission’s Division of Corporation Finance (the “Division”) granted no-action relief to the College Savings Plan Network (“CSPN”), an affiliate of the National Association of State Treasurers that represents eleven International Revenue Code §529-qualified prepaid tuition programs (the “§529 Programs”), in connection with its request for the §529 Programs to qualify as “qualified institutional buyers” (“QIBs”) pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and “accredited investors” pursuant to Rule 501(a)(3) of Regulation D under the Securities Act.

In its letter to the Division, CSPN argued that the §529 Programs should qualify as both QIBs and accredited investors because the §529 Programs: (1) are business trusts or corporations that engage in business activities typically associated with QIBs and accredited investors; (2) should be treated as favorably as §529 prepaid tuition plans created especially for private universities; (3) are maintained by unique entities; and (4) do not need the protection of registration under the Securities Act.

In concluding that the §529 Programs are eligible for both QIB and accredited investor status, the Division emphasized the fact that the §529 Programs parallel the structure of trusts and corporations and do not need the protections associated with Securities Act registration.

A copy of the no-action letter is available at https://www.sec.gov/divisions/corpfin/cf-noaction/2016/cspn-011216-501a.htm.

On July 10, the Investment Advisory Committee will be meeting to consider various topics, including the definition of the term “accredited investor.”  The Committee had previously discussed amendments to the natural persons prong of the definition to better account for the financial sophistication of purchasers.  Meetings are webcast.

Read the meeting notice here.

Read the meeting agenda here.

In September 2013, the SEC’s Office of Investor Education and Advocacy issued an alert for investors relating to the SEC’s new general solicitation rules.  In addition, a second bulletin provides details on the definition of “accredited investor.”  These documents are available on the SEC’s website at the following links:



The general solicitation alert reminds investors that private placements often involve a variety of risks, including that the relevant offering documents do not typically contain the same amount of information relating to an issuer and the offering as is the case for a registered offering.  In addition, if an issuer does not take steps to verify an investor’s accredited investor status, it could be a warning sign that something isn’t quite kosher about the offering.

The SEC’s “accredited investor” bulletin is designed to help individuals determine whether they are in fact accredited investors.  The bulletin includes a few examples as to how the “net worth” test may be (or may not be) satisfied in different scenarios.

These bulletins reflect the SEC’s continuing efforts to ensure that market participants do not utilize the new rules in an inappropriate manner, and that private placement investors understand the risks of their investments.

The Dodd-Frank Act mandated that the GAO conduct a study regarding the “accredited investor” standard in order to understand whether the existing criteria serves the intended purpose or whether alternative criteria should be considered.  The report was recently released and can be accessed here:  http://gao.gov/products/GAO-13-640?source=ra.  In addition to reviewing data, the GAO conducted interviews with market participants.

In connection with the SEC’s proposal to relax the ban on general solicitation released in August 2012, various commenters expressed their concern that the “accredited investor” standard should be reviewed, especially if general solicitation and general advertising were to be permitted in connection with private offerings.  Again, more recently, in connection with the SEC’s open meeting to approve final rules to amend Rule 506, an SEC Commissioner urged the SEC to review the “accredited investor” standard.  The SEC’s proposal regarding private offerings seeks comment on the standard.

In connection with its study, the GAO considered whether there should be an investments owned criterion added to the standard, or a tiered approach that would limit investments to a fixed percentage of an individual’s net worth (this sounds similar to the approach used in connection with crowdfunded investments under Title III of the JOBS Act).  The GAO also considered whether the standard should be modified to introduce a sophistication or financial literacy prong.  In its report, the GAO notes that market participants seemed to consider a minimum investments owned criterion as practicable.

This is not the first time that the standard has been under consideration.  For example, in 2007, when the SEC considered amendments to Regulation D, it had considered a new category of larger accredited investors.  Of course, more recently, in 2010, the Dodd-Frank Act modified the definition slightly and also required that the SEC revisit and review the standard at least every four years.  In light of the considerable debate regarding the appropriate balance between facilitating capital formation and protecting investors, it is reasonable to expect that the accredited investor standard will be revised soon.

The SEC recently posted on its website the Final Report from the 2012 SEC Government-Business Forum on Small Capital Formation, which was held in the fall of 2012.  The report may be accessed at http://www.sec.gov/info/smallbus/sbforum.shtml.  The report includes 35 recommendations from the Forum, with quite a number of these focused on crowdfunding.  Setting aside those related to crowdfunding, not surprisingly, the Forum recommends that the SEC finalize the Rule 506 rulemaking; address the Section 3(b)(2) (or Reg A+) exemption; implement the bad actor provisions that were required to be adopted some time ago; and relax the eligibility criteria for use of Form S-3.  The Forum also recommends retaining the current income and net worth levels in the “accredited investor” definition.  The definition of “accredited investor” has come under close scrutiny in recent months and many commentators have advocated adding a financial literacy prong, as well as an invested assets prong.

Today, Commissioner Elise Walter testified before the House Subcommittee on Oversight and Investigations of the Committee on Financial Services regarding the SEC’s implementation of Title II of the JOBS Act.  Commissioner Walter noted that finalizing the rulemaking is one of the SEC’s “top priorities.”  The Commissioner reviewed the pre-rulemaking comments that were received, as well as the comments received on the SEC’s proposed rules.  The Commissioner explained that the SEC’s proposed rule included only the rule amendments that a majority of the Commission members believed were necessary to carry out the mandate in Title II of the JOBS Act, and did not address amendments to Form D or to the definition of “accredited investor.”  She noted that following the SEC proposal over 220 comment letters were received, and the commenters were divided in their reactions.  She characterized the comments as follows:  61 commenters expressing general support; several commenters recommending that the verification process be supplemented in the final rule through the inclusion of a non-exclusive list of verification methods that could be used; and 81 commenters expressing opposition to the proposal due to concerns regarding investor protection issues.  Commissioner Walter also noted that the SEC Staff in the Division of Corporation Finance and Risk, Strategy and Financial Innovation are working on recommendations for the Commission’s consideration.  The full text of her testimony is available at:  http://www.sec.gov/news/testimony/2013/ts041713ebw.htm.

The Division of Trading & Markets also issued no-action letter guidance to AngelList in which the Staff indicated that it would not recommend enforcement action for failure to register as a broker-dealer if AngelList and its affiliates were to establish an internet-based platform to facilitate angel investing by accredited investors.  An affiliate of AngelList that intends to register as an investment adviser will provide certain advisory services to investment vehicles established for the purpose of investing in companies identified by AngelList.  The no-action letter guidance is premised on the SEC’s longstanding views of the factors that are indicative of broker-dealer activity (namely, AngelList will not receive transaction-based compensation), and is consistent with the matchmaking guidance contained in Title II of the JOBS Act.  The letter can be downloaded here:  http://www.sec.gov/divisions/marketreg/mr-noaction/2013/angellist-15a1.pdf.

It is important to note that the letter does not address any issues related to “general solicitation” or the means by which investors are identified or contacted, nor does the letter address “crowdfunding” issues.

On March 26, 2013, the SEC’s Division of Trading and Markets provided no-action relief to FundersClub Inc. and FundersClub Management LLC, indicating that the Division would not recommend enforcement action under Section 15(a)(1) of the Exchange Act if FundersClub and FundersClub Management LLC operated a platform through which its members could participate in Rule 506 offerings.  FundersClub identifies start-up companies in which its affiliated fund will invest, and then posts information about the start-up companies on its website so that the information is only available to FundersClub members, who are all accredited investors. The FundersClub members may submit non-binding indications of interest in an investment fund, which is relying on Rule 506 of Regulation D to conduct the offering. When a target level of capital is reached, the indication of interest process is closed and FundersClub reconfirms investors’ interest and accredited investor status, and negotiates the final terms of the investment fund’s investment in the start-up company.  Members may withdraw their indications of interest at any time.  In this process, FundersClub and FundersClub Management do not receive any compensation, however some administrative fees are charged.  FundersClub and FundersClub Management intend to be compensated through their role in organizing and managing the investment funds (at a rate of 20% or less of the profits of the investment fund, but never exceeding 30%).

The SEC Staff notes in the no-action letter that FundersClub’s and FundersClub Management’s current activities appear to comply with Section 201 of the JOBS Act, in part because they and each person associated with them receive no compensation (or the promise of future compensation) in connection with the purchase or sale of securities. However, once FundersClub, FundersClub Management or persons associated with them receive compensation or the promise of future compensation, as described in their incoming letter, they will no longer be able to rely on Section 201 of the JOBS Act.

This no-action letter is notable because it is the first relief from broker-dealer registration for a platform that provides investors with a means to invest in start-up companies following the enactment of the JOBS Act, but in many ways the relief follows a well-established path that developed over the years prior to enactment of the JOBS Act. The letter does not in any way address the JOBS Act’s crowdfunding exemption, or the ability to conduct a Rule 506 offering using general solicitation, neither of which avenues are currently available to issuers as we await SEC rulemaking.

In considering the relaxation of the prohibition against general solicitation and general advertising that was incorporated into the JOBS Act, Congressional attention seemed to focus on some quid pro quo arrangement that demands verification of accredited investor status.  This leads us to wonder why it takes a “trade” of this sort to justify removing the ban on general solicitation, which was deemed anachronistic long before the JOBS Act was contemplated.  For at least the last decade, practitioners have been urging the SEC to consider whether the prohibition against general solicitation made sense given advances in communications.  In fact, the deregulation of “offers” had been proposed as far back as the late 80s.  Throughout this period, there have been few studies regarding any fraud or evidence that investors misrepresent their status as accredited investors in order to gain access to certain investment opportunities, or that this type of conduct might be so prevalent that traditional means of certifying investor status should be set aside in favor of a more burdensome process.  In the pre-comment period, we note that a variety of views have been submitted to the SEC Staff regarding investor accreditation.  Some suggested approaches advance the notion of a bifurcated path—that is, if you want to use general advertising, you must may the price and engage in a more rigorous verification process.  Why?  Again, we understand the idea of rough justice.  If you will not benefit from the more relaxed communications rules, then you shouldn’t pay the added toll of verifying.  But, neither experience nor logic suggests that investors are not that likely to embellish their status if there is no general solicitation but more prone to do so if they are alerted to an opportunity through the use of general advertising.  Other commenters have suggested that if a broker-dealer or financial intermediary is involved in facilitating the private placement, the broker-dealer should be the “gatekeeper,” and should take additional steps (beyond the traditional certification process) to verify status.  Don’t the know-your-customer and suitability rules already require a baseline level of inquiry?  All in all, the intense focus on verification of accreditation seems overdone.