On December 21, 2011, the SEC finalized its amendments to the individual accredited investor net worth standards under Regulation D of the Securities Act of 1933. Issuers that conduct private offerings of securities under an exemption from securities registration usually rely on the exemption found under Regulation D that permits sales of the securities in the offering to persons who are “accredited investors,” as defined under Rule 501 of Regulation D. One way an individual investor may qualify as an accredited investor is if his or her net worth, or joint net worth with the investor’s spouse, exceeds $1 million.
The Dodd-Frank Wall Street Reform and Consumer Protection Act on July 20, 2010 revised the accredited investor net worth standard to exclude the value of the investor’s primary residence from the net worth calculation. Prior to that time, the value of the investor’s primary residence was included in the calculation. Dodd-Frank also mandated that the SEC revise its rules to reflect the new standard. The SEC’s final rule (contained in SEC Release No. 33-9287) implements that mandate. Accordingly, for private securities offerings relying upon the Regulation D exemption, a person who subscribes to purchase securities in such offerings, and who wishes to qualify as an accredited investor by having a net worth in excess of $1 million, will need to fit within the revised criteria. Under the SEC’s amended net worth calculation, indebtedness secured by the person’s primary residence, up to the estimated fair market value of the property, is not treated as a liability, except when the amount of such indebtedness outstanding at the time of sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess is included as a liability. In addition, any such indebtedness in excess of the fair market value of the residence is included as a liability.
This final amendment to the Regulation D exemption is effective 60 days from the date it appears in the Federal Register. There are no “grandfathering” provisions from this revised net worth requirement other than for purchasers who: are acquiring the securities under a right to purchase which right was held by the person on July 21, 2010; the person qualified as an accredited investor on the basis of the net worth definition in effect at the time the person acquired the right; and, was a securities holder of the issuer at that time the right was awarded.
It is estimated that prior to this net worth change for individual accredited investors under Dodd-Frank, approximately nine percent of U.S. households qualified for accredited investor status. It is further estimated that after the enactment of the Dodd-Frank provision, approximately six percent of U.S. households will qualify. This decrease in the pool of accredited investors will make it more difficult to raise capital in a private placement offering.
Issuers that are relying or will rely on the Regulation D exemption should amend their subscription or purchaser agreements to reflect the new net worth calculation requirements.
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Terry D. Nelson