NEWS AND ARTICLES
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The Dodd-Frank Act Includes Immediate Changes to the Accredited Investor Definition for Natural Persons.
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On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the "Dodd-Frank Act". Among other provisions, the Dodd Frank Act revises the definition of "accredited investor" under Rule 215 of the Securities Act of 1933, as amended (the "1933 Act"), and Rule 501 of Regulation D under the 1933 Act. This change to the definition of "accredited investor" takes effect immediately and may impact issuers currently engaged in private offerings.
Immediate Changes to the Accredited Investor Definition
Prior to the enactment of the Dodd-Frank Act, the definition of "accredited investor" included a natural person with a net worth of at least $1 million, either individually or jointly with the investor's spouse, and the value of such investor's primary residence was included in the calculation of his or her net worth for purposes of determining "accredited investor" status. Section 413(a) of the Dodd-Frank Act amends the definition of "accredited investor" to exclude the value of an investor's primary residence from the $1 million net worth calculation. The remaining aspects of the accredited investor definition remain unchanged at this time, including the alternative net-income test for natural persons, which is included in the definition of "accredited investor." The effect of this change will make it more difficult for natural persons to meet the definition of "accredited investor" utilizing the net worth test of the definition. Further, this amendment is effective immediately, with no transition period or grandfathering for private offerings that are already in progress but have not yet been completed.
With the passage of the Dodd-Frank Act, private funds and other issuers relying on the accredited investor definition in connection with ongoing private offerings that involve investors who are natural persons should immediately revise disclosure and subscription documents to reflect the revised net worth standard for such natural persons. Particular attention should be given to existing investors who may no longer be eligible to make additional purchases under the applicable exemption from the registration requirements of the 1933 Act due to changes in the "accredited investor" definition. To the extent disclosure and subscription documents have been received from investors in ongoing private offerings but not accepted before July 21, 2010, issuers should obtain updated accredited investor representations from such investors who claim accredited investor status based on a net worth of at least $1 million to ensure the continued availability of the applicable exemption.
Potential Future Changes
The Dodd-Frank Act also provides for potential future changes to the accredited investor standards by requiring the Securities and Exchange Commission (the "SEC") to review the definition of accredited investor as it applies to natural persons and to make adjustments, by notice and rulemaking, subject to public comment, that it deems appropriate for the protection of investors, in the public interest, and in light of the economy, provided the SEC cannot alter the net-worth threshold of $1 million (excluding the value of a natural person's primary residence) for the first four years after enactment of the Dodd-Frank Act. Beginning four years from the Dodd-Frank Act's enactment, and not less than once every four years thereafter, the SEC is required to review the accredited investor definition as it applies to natural persons, including both the net worth and income tests and in its discretion make such further adjustments as it deems warranted.
The Dodd-Frank Act also requires the Comptroller of the Currency to conduct a study on the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status and eligibility to invest in private funds and submit a report on the results of such study to the appropriate Senate and House committees within three years after the enactment of the Dodd-Frank Act.
Contact Information
If you have any questions regarding these matters, please contact Rob Kaplan at 804-897-0645 Bob Kaplan at 804-916-9032, or Pam Catania at 804-916-9068.
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