21 July 2010
The Dodd-Frank Wall Street Reform Act (the “Act”) changed the net worth test for meeting the “Accredited Investor” standard. The SEC has released guidance on how the value of a primary residence should be determined for purposes of calculating an investor’s net worth.
Regulation D, promulgated under the Securities Act of 1933, as amended (the “Securities Act”), creates several safe harbors from the registration requirements of the Securities Act for transactions in securities by an issuer not involving a public offering. In many Regulation D offerings, the “accredited investor” status of the offerees is an important element in determining the availability of the safe harbor. “Accredited investors” include, among other categories, any natural person whose individual net worth, or net worth with the person’s spouse, at the time of purchase, exceeds $1 million (known as the “net worth test”).
Prior to the enactment of the Act, an investor was allowed to include the net value of the investor’s primary residence in calculating his or her net worth to establish “accredited investor” status. Under the new definition (effective July 21, 2010), a natural person investor is no longer allowed to include the value of his or her primary residence in calculating his or her net worth. In connection with the net worth calculation, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth.1 The Act does not amend the annual income test for natural person investors (an “accredited investor” also includes any natural person with individual income in excess of $200,000, or joint income with a spouse in excess of $300,000, for each of the last two years and a reasonable expectation of reaching the same level in the current year).
This change will have a significant and immediate impact on issuers effecting private offerings in reliance on Rule 506 under Regulation D, including issuers who accept additional subscriptions from existing investors. Any such issuer should consider whether it will be necessary to revise their subscription materials or obtain new representations from prospective investors in connection with offerings that have not yet been consummated or current investors making new contributions pursuant to additional subscriptions.
For more information about the impact of this change please contact your usual Mayer Brown lawyer or any member of our Private Investment Fund Practice.
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1. SEC Compliance and Disclosure Interpretations: Securities Act Rules, available at http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm as of July 23, 2010