Dodd-Frank Increases Financial Threshold for Accredited Investor Status

August 2010Newsletters Small Cap Securities Update

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) includes a provision increasing the minimum net worth required for natural persons to be an “accredited investor” under Regulation D under the Securities Act of 1933, as amended. Section 413(a) of Dodd-Frank is immediately effective and excludes the value of a natural person’s primary residence in determining whether the net worth of such person, or joint net worth together with such person’s spouse, exceeds the $1 million required for such person to be considered an accredited investor. Prior to Dodd-Frank, the value of a person’s primary residence was included in determining whether such person satisfied the $1 million net worth requirement. The SEC is required to adjust the $1 million net worth threshold every four years.

In response to this change, the Securities and Exchange Division of Corporation Finance (the Division) withdrew its prior published interpretation that permitted a natural person to include in his or her net worth calculation the value of his or her primary residence when determining whether he or she satisfied the net worth requirement. The Division also issued a new interpretation requiring a person to deduct in his or her net worth calculation, the amount by which the value of such person’s primary residence is less than any outstanding mortgage(s) on such property. The SEC will issue amendments to its rules regarding accredited investor net worth standards to conform with Dodd-Frank.

This is very significant particularly for smaller reporting companies and other young companies seeking to raise capital. By reducing the pool of accredited investors, the increased threshold could make it more difficult for issuers to raise capital on a private placement basis. Issuers currently engaged in private offerings should immediately review, and if necessary revise, any private offering memoranda and securities purchase or similar agreements to ensure that investors who purchase their securities meet the new accredited investor standard.