On January 25, 2011, the Securities and Exchange Commission (the "SEC") voted to propose amendments to its rules under the Securities Act of 1933 (the "Securities Act") to conform the definition of "accredited investor" to reflect the requirements of section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd- Frank Act").

Change to "Accredited Investor" Definition under the Dodd-Frank Act

Regulation D, promulgated under the Securities Act, provides a "safe harbor" for the sale of securities to accredited investors without complying with burdensome disclosure requirements applicable to other offerings. Section 413(a) of the Dodd-Frank Act provides for a narrowing of the definition of "accredited investor" as that term applies to natural persons.

For years, the definition of "accredited investor" for natural persons has included persons (i) whose net worth, or joint net worth with that person's spouse, exceeds $1,000,000 or (ii) who had individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching that income level in the current year.

Section 413(a) of the Dodd-Frank Act altered the definition of "accredited investor" to exclude the value of a person's primary residence in determining whether the person qualifies for accredited investor status under the net worth standard. Therefore, in order to qualify as an accredited investor under the net worth standard, the person must have a net worth in excess of $1,000,000, excluding that person's primary residence. The substantive change to the definition became effective upon enactment of the Dodd- Frank Act on July 21, 2010.

Proposed Amendments to Securities Act Rules

Although the SEC interpreted the change to the definition of "accredited investor" as being effective upon enactment of the Dodd-Frank Act, section 413(a) requires the SEC to adjust the definition under its Securities Act rules to reflect the new net worth standard. Accordingly, the SEC has proposed to amend Securities Act rules 501(a)(5) and 215, which define the term "accredited investor" under Regulation D and section 2(a)(15) of the Securities Act, respectively, to exclude the value of a person's primary residence from the net worth standard within the definition of "accredited investor." The SEC has also proposed technical amendments to Form D and corrections to crossreferences to former section 4(6) of the Securities Act (renumbered section 4(5) by the Dodd-Frank Act), which provides an exemption from registration for certain limited offerings to accredited investors.

In addition to implementing the amendments to the Securities Act rules mandated by the Dodd-Frank Act, the SEC's proposed amendments provide guidance on how to exclude the value of the primary residence from the net worth calculation. The proposed amendments explain that the value of a primary residence is "calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property." The SEC's purpose in adding the explanatory phrase to the definition of "accredited investor" is to clarify that net worth is calculated by excluding only the investor's net equity in the primary residence or, in other words, the "value" that the primary residence contributed to the investor's net worth.

The SEC is seeking public comments on the proposed amendments through March 11, 2011. Beginning July 21, 2014, the SEC is charged with reassessing every four years the definition of "accredited investor" as it applies to natural persons, including both the income and net worth standards.

For more information on the proposed amendments or how they may affect your company, please contact one of the attorneys in our Corporate and Securities Practice Group.

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