Alert July 20, 2010

Dodd-Frank Act to Change Accredited Investor Definition for Individuals to Exclude Primary Residence from Net Worth Calculation

The Dodd-Frank Act, includes a change to the definition of an individual “accredited investor” in Regulation D under the Securities Act of 1933.  This provision would have an apparently immediate effect on companies of all types, including those outside the financial services industry, and on private funds.  Specifically, Section 413 of the Dodd‑Frank Act provides that the SEC must adjust the definition of “accredited investor” under Regulation D to exclude the value of a natural person’s primary residence when calculating that person’s net worth.  However, because Section 413 contemplates both that the SEC must act to give it effect and that the new standard takes effect on the date of enactment of the law (as show below, with emphasis added), there may be some ambiguity as to when this change actually takes effect.

The Commission shall adjust any net worth standard for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, so that the individual net worth of any natural person, or joint net worth with the spouse of that person, at the time of purchase, is more than $1,000,000 (as such amount is adjusted periodically by rule of the Commission), excluding the value of the primary residence of such natural person, except that during the 4-year period that begins on the date of enactment of this Act, any net worth standard shall be $1,000,000, excluding the value of the primary residence of such natural person.”

Also, it is not clear when or how the SEC will act on this provision (and whether it might address the potential problem resulting from this uncertainty regarding timing).  Issuers in the process of preparing, distributing and accepting subscriptions in connection with a pending private placement relying on Regulation D may wish to consider obtaining appropriate representations from individual investors addressing the Dodd-Frank Act’s accredited investor standard even before the legislation is formally enacted.