On January 25, 2011, the Securities and Exchange Commission (the “Commission”) proposed revisions to the definition of an “accredited investor” pursuant to Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Dodd-Frank changed the definition of “accredited investor” effective on the date of enactment, but also directed the Commission to adjust the definition under Securities Act Rules 215 and 501(a)(5) to exclude the value of a natural person’s primary residence when determining that natural person’s net worth. The proposed rules would impact not only the definition of “accredited investor,” but would also impact Rule 144(a), Rule 155(a), Rules under the Investment Company Act of 1940 and Rules under the Investment Advisors Act of 1940. Under the proposed rules, the definition would be:
Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of purchase, exceeds $1,000,000, excluding the value of the primary residence of such natural person, 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 proposed definition is consistent with a Compliance and Disclosure Interpretation that the Staff issued shortly after enactment of Dodd-Frank providing guidance regarding how to determine the “value of the primary residence” for purposes of calculating an investor’s net worth.
Although all five Commissioners voted in favor of the proposed rules, two of the Commissioners did not support the fact that the proposed rules do not include a provision allowing investors who had previously invested with an issuer to participate in future investments with the same issuer, even in circumstances involving contractual rights to do so. The release notes that under the current rules, a company or fund is not permitted to treat an investor as accredited if the investor subsequently loses that status, even if the investor has previously invested in the company or fund at a time when it satisfied the accredited investor standard. The proposed amendments would not change this situation but the release requests comment on the need to create a “grandfather” provision.
The new net worth standard must remain in effect until July 21, 2014, four years after enactment of Dodd-Frank. Beginning in 2014, the Commission is required to review the definition of the term “accredited investor” in its entirety every four years and engage in further rulemaking to the extent it deems appropriate.
The proposed rules can be found at http://www.sec.gov/rules/proposed/2011/33-9177.pdf. Comments are due March 11, 2011.
Also on January 25, 2011, the Commission proposed rules requiring disclosure by advisers to hedge funds and other private funds, as well as final rules implementing Dodd-Frank’s say-on-pay and golden parachute provisions.