by Kristy T. Harlan and Vincent J. Pisano
On July 21, President Obama signed the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). A change to the definition of "accredited investor" under the Securities Act of 1933, takes effect immediately and may impact issuers currently engaged in private offerings.
The authors write:
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.
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Kristy T. Harlan is a partner at K&L Gates. Ms. Harlan's practice focuses on representing clients in corporate, securities and business-related transactions, including securities offerings, mergers and acquisitions, financings, joint ventures and strategic alliances.Vincent J. Pisano is a partner at K&L Gates. Mr. Pisano focuses his practice on securities and mergers and acquisitions matters. He has significant experience representing corporations and investment banks in their public and private offerings, U.S. and international transactions, initial public offerings, high yield debt offerings, special product development and leveraged buyout and other acquisition financings.