On January 25, 2011, the Securities and Exchange Commission (the “SEC”) proposed rules amending the “accredited investor” net worth standard to reflect the requirements of Section 413(a) of the Dodd-Frank Act (the “Act”).
According to Regulation D promulgated under the Securities Act of 1933, individuals and entities that qualify as accredited investors are eligible to participate in certain private and limited offerings that are exempt from Securities Act registration requirements. Previously, the accredited investor net worth standard required a minimum net worth of $1,000,000, but permitted the investor’s primary residence to be included in the calculation. However, Section 413(a) of the Act requires the SEC to amend this net worth standard to exclude the value of the investor’s primary residence. This change became effective upon adoption of the Act.
The proposed rules define an accredited investor, among other things, as “any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of purchase, exceeds $1,000,000, excluding the value of the primary residence of such natural person, calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.”
The SEC clarified that “net worth” is calculated by excluding only the investor’s net equity in the primary residence. The SEC considered but declined to define the term “primary residence” in order to avoid unnecessary complexity, believing that issuers and investors should be able to rely on the common understanding of the term as the home where a person resides most of the time. If additional guidance is needed in complex situations, issuers and investors should look to income tax rules and rules that apply when acquiring a mortgage loan for a primary residence.
The SEC did not propose any special rules for transition to the new net worth standard because the new standard was effective upon enactment of the Act. Notably, neither the Act nor the proposed rules amend the annual income test for natural person investors (an accredited investor also includes any natural person with individual income in excess of $200,000, or $300,000 jointly with a spouse, for each of the last two years and a reasonable expectation of reaching the same level in the current year).
Issuers making private placement offerings should pay special attention to these recent changes. Issuers seeking to raise capital through private offerings will need to revise their disclosure and purchase documents to ensure that they address the change in the accredited investor definition. The SEC is seeking comments on whether the final rule should allow an investor who previously qualified as an accredited investor before enactment of 413(a) to retain the status for purposes of “follow-on” investments with the same company. Nevertheless, issuers should re-examine past investors to ensure that such investors will be eligible to participate in future capital raises as accredited investors.
The SEC is seeking public comment on the proposed rules through March 11, 2011. If you have any questions or concerns regarding the proposed rules or any other SEC compliance matter, please contact Daniel Nunn in the Jacksonville office (904) 598-3100, David Shobe in the Tampa office (813) 228-7411 or Arnold Zipper in the Fort Lauderdale office (954) 703-3900 of Fowler White Boggs PA.
SEC Proposes Net Worth Standard for Accredited Investor Status
