SEC Amends Definition of “Accredited Investors”
Last week the U.S. Securities and Exchange Commission (the “SEC”) amended its rules to exclude the value of a person’s home from net worth calculations used to determine whether such individual qualifies as an “accredited investor”. The amendment is not “new law” but rather simply conforms the SEC rules with the Reform and Consumer Protection Act (the “Dodd-Frank Act”) which already became law on July 21, 2010.
As discussed in SWA’s Issuing Securities in U.S. Private Offerings – New Higher Standard for “Accredited Investors” (August 22, 2010) the “accredited investor” is a key component of a limited offering of securities qualifying for exemption from registration under Regulation D of the United States Securities Act of 1933 (the “Securities Act”).
An individual can qualify as an “accredited investor” if his or her individual net worth, or joint net worth with his or her spouse, at the time of his or her purchase, exceeds $1 million. Under the amended rules, the $1 million net worth standard now excludes the value of the individual’s primary residence. In addition, in an effort, as per the SEC, to prevent manipulatory inflation of the net worth standard by borrowing against home equity shortly before participating in an exempt securities offering, the amended net worth calculation, other than as described in the next sentence, excludes indebtedness secured by the primary residence, up to the estimated fair market value of the primary residence, as a liability. However, if the borrowing is not in connection with the acquisition of the primary residence and occurs within the 60 days preceding the purchase of securities in the offering, the net worth calculation treats the debt secured by the primary residence as a liability. Indebtedness secured by a person’s primary residence in excess of the property’s estimated fair market value, on the other hand, is treated as a liability in calculating net worth.
The amended rules grandfather certain individuals who qualified as “accredited investors” prior to the enactment of the Dodd-Frank Act, allowing them to use the prior net worth standard, provided that (i) the individual held a right to purchase the securities prior to July 20, 2010, (ii) the individual qualified as an “accredited investor” on the basis of net worth when they acquired such right and (iii) the individual held securities of the issuer (other than the right to purchase) on July 20, 2010.
The Dodd-Frank Act requires the SEC to review the “accredited investor” definition in its entirety and to engage in further rulemaking to the extent it deems appropriate beginning in 2014, and every four years thereafter. For now, however, additional rule making is likely far off, as the SEC has determined that additional modifications are not necessary at this time.
The amended rules become effective 60 days after publication in the Federal Register.
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.
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