On December 21, 2011 the Securities and Exchange Commission (the “Commission”) adopted new rules to codify Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Section 413(a) requires the definition of "accredited investor" in the Securities Act of 1933, as amended (the "Securities Act"), to exclude the value of a person’s primary residence for purposes of determining whether the person qualifies as an "accredited investor" on the basis of having a net worth in excess of $1 million. This change to the net worth standard was effective upon enactment by operation of the Dodd-Frank Act, but Section 413(a) also requires the Commission to revise its current Securities Act rules to conform to the new standard.
The definition of "accredited investor" is used in determining certain exemptions from Securities Act registration of private and limited offerings. Securities Act Rules 215 and 501 define "accredited investor." Under these rules, an accredited investor includes any natural person whose individual net worth, or joint net worth with his or her spouse, exceeds $1 million. Prior to the Dodd-Frank Act, an investor was allowed to include the value of his or her primary residence in calculating net worth in order to qualify as an "accredited investor." Section 413(a) now requires the exclusion of the value of a person's primary residence as an asset for purposes of determining if that person meets the net worth standard under the definition of an "accredited investor."
The Commission amended the net worth standard set forth in Rules 215 and 501 of the Securities Act, to comply with Section 413(a) of Dodd-Frank as follows:
- A person's primary residence shall not be included as an asset in determining his or her net worth.
- Indebtedness secured by a person's primary residence, up to the estimated fair market value of his or her primary residence, is not treated as a liability, unless the borrowing occurs in the 60 days preceding the purchase of securities in the exempt offering and is not in connection with the acquisition of their primary residence. In such cases, the debt secured by the primary residence shall be treated as a liability in the net worth calculation.
- Any indebtedness secured by a person's primary residence in excess of the property's estimated fair market value is treated as a liability under the new standard.
The new rules will take effect 60 days after publication in the Federal Register. The new rules provides for a grandfathering provision that permits the application of the former accredited investor net worth standard in certain limited circumstances. Beginning in 2014, and every four years thereafter, the Commission will review the "accredited investor" definition in its entirety and may engage in further rulemaking to the extent the Commission deems appropriate.
What To Do Now
The increased accredited investor threshold will likely decrease the number of qualified natural persons who may participate in unregistered private placement offerings and may make it more difficult to raise capital on a private placement basis. Private placement issuers should review and revise any private offering memoranda, securities purchase agreement or any other similar agreement to ensure potential investors meet the new accredited investor standard.
For questions or more information, contact one of the members of the firm's Securities & SEC Practice Group including:
Lewis U. Davis, Jr. — 412 562 8953; firstname.lastname@example.org
Jeremiah G. Garvey — 412 562 8811; email@example.com
Jennifer R. Minter — 412 562 8444; firstname.lastname@example.org
Brian S. North — 215 665 3828; email@example.com
Brian S. Novosel — 412 562 5266; firstname.lastname@example.org