The massive Dodd-Frank Wall Street Reform and Consumer Protection Act (\u201cDodd-Frank\u201d), signed by President Obama on July 21, 2010, changes the standards for determining whether an individual is an \u201caccredited investor\u201d for private offerings by companies raising capital. The change became effective immediately upon enactment of Dodd-Frank. Accordingly, companies that may have begun, but not completed, a private offering may have to re-submit investor questionnaires to subscribers prior to closing their offerings. Obviously, any issuer contemplating a private offering in the future will have to comply with the newly-enacted standard.<\/p>\n
Rules 505 and 506, adopted by the Securities and Exchange Commission (the \u201cSEC\u201d), permit business to raise capital without the expensive and time-consuming process of registering their offerings under the Securities Act of 1933. In particular, those rules permit business to issue securities to an unlimited number of accredited investors and up to 35 non-accredited investors. The definition of \u201caccredited investor\u201d includes, among others, an individual who has a net worth in excess of $1,000,000 (either alone or with the individual\u2019s spouse). Prior to Dodd-Frank, a potential investor could include the value of his or her primary residence for determining net worth. Section 413 of Dodd-Frank, however, provides that the value of the potential investor\u2019s primary residence cannot be included for determining net worth.<\/p>\n
Dodd-Frank does not define the term \u201cvalue of the primary residence\u201d of an individual. In addition, the act does not address the effect of a mortgage or other indebtedness, if any, secured by the residence on determining net worth. The staff of the SEC recently offered its interpretation of these issues in a Compliance and Disclosure Interpretation (\u201cCDI\u201d). The CDI states that, for purposes of complying with Dodd-Frank, the \u201camount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor\u2019s net worth.\u201d<\/p>\n
These interpretations are not, however, binding on the SEC and come with a heavy disclaimer. As the staff points out, CDI\u2019s reflect only the views of the staff of the Division of Corporation Finance and are not rules, regulations, or statements of the SEC. Further, the SEC \u201chas neither approved nor disapproved these interpretations. These positions do not necessarily contain a discussion of all material considerations necessary to reach the conclusions stated, and they are not binding due to their highly informal nature. Accordingly, these responses are intended as general guidance and should not be relied on as definitive. There can be no assurance that the information presented in these interpretations is current, as the positions expressed may change without notice.\u201d In fact, Dodd-Frank permits (and, beginning four years after its enactment, requires) the SEC to review the definition of \u201caccredited investor\u201d and to make changes to the definition. Accordingly, companies intending to raise capital from accredited investors should follow SEC action in this area for updates or changes.<\/p>\n
Dodd-Frank\u2019s change to the determination of net worth will undoubtedly shrink the pool of available investors for issuers contemplating a private offering of securities to accredited investors. Those issuers that target their offerings to individuals who are accredited investors will need to change their disclosure and subscription documents to reflect the change. The same is true for issuers that have begun, but not completed, a private offering, as the Dodd-Frank change became effective upon its enactment (July 21, 2010).<\/p>\n","protected":false},"excerpt":{"rendered":"
SECURITIES ALERT DODD-FRANK ACT EXCLUDES VALUE OF PRIMARY RESIDENCE FOR DETERMINING STATUS AS AN ACCREDITED INVESTOR FOR PRIVATE OFFERINGS SEC STAFF PROVIDES INFORMAL GUIDANCE Change in Qualification Standards for \u201cAccredited Investors\u201d The massive Dodd-Frank Wall Street Reform and Consumer Protection Act (\u201cDodd-Frank\u201d), signed by President Obama on July 21, 2010, changes the standards for determining […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[83],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/posts\/1869"}],"collection":[{"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/comments?post=1869"}],"version-history":[{"count":1,"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/posts\/1869\/revisions"}],"predecessor-version":[{"id":1870,"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/posts\/1869\/revisions\/1870"}],"wp:attachment":[{"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/media?parent=1869"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/categories?post=1869"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/rwolaw.com\/wp-json\/wp\/v2\/tags?post=1869"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}