July 2010
Authors:
Kristy T. Harlan
kristy.harlan@klgates.com
206.370.6651
Vincent J. Pisano
vince.pisano@klgates.com
212.536.4810
Dodd-Frank Act Includes Immediate Change to
“Accredited Investor” Definition for Natural
Persons
On July 21, President Obama signed into law the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act). Among the many provisions of the
Dodd-Frank Act is a change to the definition of “accredited investor” under the
Securities Act of 1933, which takes effect immediately and may impact issuers
currently engaged in private offerings.
Revisions to Accredited Investor Definition
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
Issuers raising capital in private offerings often rely on the accredited investor
definition in determining whether the offering is exempt from the registration
requirements of the Securities Act. The definition of accredited investor contained in
Rule 215 and Regulation D currently 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 purchase exceeds $1 million (such calculation includes the value of
an investor’s primary residence).
The Dodd-Frank Act revises the accredited investor definition as it relates to
natural persons to exclude the value of a person’s primary residence from the $1
million net worth test. This change will effectively increase the net worth
requirement for many investors that are natural persons. The other provisions of the
accredited investor definition, including the net income test for natural persons, remain
unchanged at this time.
It is anticipated that the Staff of the Securities and Exchange Commission (SEC), in
applying the $1 million net worth test, will allow investors to exclude any mortgage or
any other debt secured by the investor’s primary residence that does not exceed the fair
market value of the residence. If, however, the amount of such debt exceeds the fair
market value of the residence and the lender has recourse to the investor personally for
any deficiency, investors would be required to deduct the excess liability from the net
worth calculation.
Changes Immediate
The revision to the accredited investor definition as it applies to natural persons is
effective immediately, with no transition period or grandfathering for private offerings
that are already in progress but have not yet been completed.
Financial Services Reform Alert
With the passage of the Dodd-Frank Act, private
funds and other issuers relying on the accredited
investor definition in connection with ongoing
private offerings that may involve investors who are
natural persons should revise disclosure and
subscription documents now to reflect this
modification of the net worth test. To the extent
subscription materials have already been received
from investors who are natural persons, private
funds and other issuers should consider whether new
accredited investor representations are required to
ensure the availability of an exemption from the
registration requirements of the Securities Act.
Additional Changes May Be Coming
The Dodd-Frank Act also lays the following
groundwork for potential future changes to the
accredited investor standards:
•
The SEC is authorized to review the
definition of accredited investors as it
applies to natural persons and make
adjustments, by notice and comment
rulemaking, as it deems appropriate for the
protection of investors, in the public
interest, and in light of the economy.
However, the SEC cannot, during the first
four years after enactment, modify the net
worth standard.
•
After four years from the date of
enactment, and not less than once every
four years thereafter, the SEC must review
the accredited investor definition as it
applies to natural persons, including both
the net worth and income tests, and may
make such adjustments, by notice and
comment rulemaking, as it deems
appropriate for the protection of investors,
in the public interest, and in light of the
economy.
•
The U.S. Comptroller General is required
to conduct a study on the appropriate
criteria for determining the financial
thresholds or other criteria needed to
qualify for accredited investor status and
eligibility to invest in private funds, and
must submit a report on the results of such
study to Senate and House committees,
within three years after the enactment of the
Dodd-Frank Act.
This client alert is part of a series of alerts focused on
monitoring financial regulatory reform.
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K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous
GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market
participants and public sector entities. For more information, visit www.klgates.com.
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in regard to any particular facts or circumstances without first consulting a lawyer.
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July 2010
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