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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© Copyright 2011 Morrison
& Foerster LLP. Because of the
generality of this update, the information provided herein may not be
applicable in all situations and should not be acted upon without specific
legal advice based on particular situations.