Regulation D of the Securities Act of 1933 includes rules governing the limited offerings and sales of securities that are not registered under the 1933 Act. “Accredited investor” is an important term that is defined and used throughout Regulation D.
Since unregistered, Regulation D offerings and sales of securities are often used to raise funds, any change to the definition of an accredited investor is critical. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted on July 21, 2010, changed the definition of accredited investor and allows for subsequent changes to that definition.
First, Dodd-Frank immediately changed the definition of accredited investor. Effective on the date of enactment of Dodd-Frank, the net worth standard for a natural person remains at $1,000,000; however, the value of the investor’s primary residence now must be excluded from that person’s net worth. This change is effective from July 21, 2010, through July 21, 2014.
This amendment to the net worth standard for an accredited investor requires immediate attention. It impacts how an issuer or manager conducts its business. For example, a fund’s subscription agreement may need to be changed, and an adviser’s policies and procedures may need to be amended.
Second, within four years of July 21, 2010, the U.S. Securities and Exchange Commission may review and modify by regulation the definition of accredited investor as the term applies to a natural person. Any modification shall not affect the exclusion of the primary residence from the net worth of the individual. Also, every four years thereafter, the SEC shall review the definition of accredited investor and may make changes by regulation.
Third, by July 21, 2013, the Comptroller General of the United States shall study, and submit its report to Congress, the following: the appropriate financial thresholds or other criteria needed to qualify as an accredited investor and eligibility to invest in private funds. Congress could then enact additional legislation affecting Regulation D offerings and accredited investors.
