Morrison Foerster-One Down, One to Go: The SEC Completes the First Required Dodd-Frank Act Regulation D Rulemaking

The Securities and Exchange Commission (the "SEC") recently completed the first of two Regulation D rulemakings mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"). The Dodd-Frank Act modified the net worth standard included in the definition of "accredited investor" under the Securities Act, as well as directed the SEC to adopt amendments disqualifying the offer or sale of securities in Rule 506 offerings by certain felons and similarly situated bad actors. In December 2011, the SEC adopted amendments to the net worth standard, with those changes effective on February 27, 2012. Meanwhile, the agency now expects to adopt amendments providing for disqualifications with respect to felons and bad actors in the first half of 2012.

Final Amendments to the New Worth Standard

As contemplated by Section 413(a) of the Dodd-Frank Act - which was effective upon enactment on July 21, 2010 - the SEC has amended the net worth standard included in the "accredited investor" definition specified in Securities Act Rules 215 and 501 to now exclude the value of an individual's primary residence from the calculation used to determine if the individual (either alone, or jointly with the individual's spouse) qualifies as an "accredited investor" on the basis of having a net worth in excess of $1 million, as measured at the time of exempt sale of the security to the individual.

Before the enactment of the Dodd-Frank Act, an individual could include the value of his or her primary residence when calculating net worth. In an era of rapidly rising home values, some became concerned that the net worth standard became too easy to achieve, and these concerns ultimately resulted in the enactment of Section 413(a) of the Dodd-Frank Act, which immediately removed the value of a person's primary residence from the net worth calculation. Since that time, market participants have been relying on guidance provided by the staff of the SEC's Division of Corporation Finance to determine how to exclude the value of the primary residence, particularly when the primary residence secures a mortgage debt.

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