Issuing Securities in U.S. Private Offerings – New Higher Standard for “Accredited Investors”
When issuing securities in private offerings to U.S. investors, issuers (from companies to investment funds) often look to the registration exemptions and safe harbors afforded by Regulation D of the United States Securities Act of 1933 (the “Securities Act”). One of the key components of an exempted Regulation D offering is the “accredited investor” – the individual with significant net worth and deemed to not be in need of the protections afforded by a registered offering. While the pool of accredited investors may have already been dwindling in light of the economic downturn, that pool just became even more limited with an individual’s primary residence no longer being included in the calculation of net worth; all due to the change to the definition of “accredited investor” effected by the recent sweeping Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).[1] The change is effective immediately and applies to future offerings as well as offerings that are currently in progress.
The definition of “accredited investor” under Rule 215 of the Securities Act and Regulation D includes, among other categories, 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 his or her 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; or
- whose individual net worth, or joint net worth with his or her spouse, at the time of his or her purchase exceeds $1 million.
As indicated above, the calculation of an investor’s net worth now excludes such person’s primary residence. Without the value of a person’s primary residence in the calculation (often the largest asset and component of net worth), many persons who once would have been considered “accredited investors” no longer make the grade.
In addition, the United States Securities and Exchange Commission (the “SEC”) has released guidance on how the value of a primary residence should be determined for purposes of decreasing an investor’s net worth. Namely, any indebtedness secured by the residence in excess of “fair market value” of the residence should be considered a liability and deducted from the investor’s net worth.
This change has a broad and significant impact on current and future private placements to U.S. individuals. Any sales to non-accredited investors under the Securities Act rules require significantly enhanced disclosure. Therefore, in light of the new definition of “accredited investor” and the immediate impact on current and future offerings, issuers must review their offering materials and determine whether revision for enhanced disclosure and investor representations is necessary.
There may be more rulemaking and changes down the road (under the Dodd-Frank Act, the SEC must review the “accredited investor” definition, as it deems appropriate). In the meantime, issuers have the immediate action items of ensuring that their current U.S. private placement investors meet the new standard of accredited investor and that those who no longer qualify – with their primary residence taken out of their net worth – receive the appropriate enhanced offering disclosure and other materials.
Craig Tzvi Gherman is a member of the Corporate and Securities practice groups at Schwell Wimpfheimer & Associates. His clients range from individuals and start-ups to Fortune 500 public companies. His practice focuses on public and private company stock and asset based acquisitions and sales, mergers, tender offers, joint ventures and corporate governance/Sarbanes-Oxley compliance. He can be reached at cgherman@swalegal.com or 646 328 0788.
Jan S. Wimpfheimer is Co-Managing Partner and head of the private equity and investment funds practices at Schwell Wimpfheimer & Associates. He practices general corporate and transactional law, with a focus on representing sponsors and investors in all types of private investment funds and handling international mergers and acquisitions and other corporate transactions for financial institutions, multi-national businesses, and other clients. He can be reached at jan@swalegal.com or 646 328 0670.
The information contained in this publication is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Craig Tzvi Gherman or Jan S. Wimpfheimer. The invitation to contact is not to be construed as a solicitation for legal work. Any new attorney/client relationship will be confirmed in writing.
[1] See Title IV, Section 413 “Regulation of Advisers to Hedge Funds and Others”.
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