Dodd Act Change Immediately Affects Private Offerings

The Dodd-Frank Wall Street Reform and Consumer Protection Act immediately revised the net worth test for determining whether an individual investor is an “accredited investor” for purposes of Regulation D and Section 4(6) of the Securities Act of 1933. Specifically, as revised, prospective investors can no longer include the value of their primary residence for purposes of satisfying the $1 million net worth test. Historically, many investors have relied on the value of their homes for purposes of qualifying as an accredited investor. This immediately effective provision applies to offerings that are already in progress, including those that have had initial closings.

Private entities engaging in current offerings must amend offering and subscription materials to conform to the revised test. On July 23, 2010, the SEC issued this new Compliance and Disclosure Interpretation to initially implement the new test until the SEC completes its formal rulemaking process.

Law firms should take this opportunity to review and update form accredited investor questionnaires and subscription agreements that have likely become stale.

Keep in mind that the accredited investor tests are predicated by the qualification that an accredited investor means "any person who comes within" or any person who "the issuer reasonably believes comes within" one or more of the various categories. Establishing accredited investor status has always been a challenge for issuers who go beyond their inner circle for investors, and certifications in subscription materials may not fully protect an issuer.

Years ago, when working on a private offering, a client informed me that a prospective investor, when told of the client's venture, dug a jar filled with cash out of his yard and offered the cash as investment proceeds. We advised the client that, absent other facts like six vintage Ferraris in the prospective investor's garage, no matter what the prospective investor signed, the client could not form a "reasonable belief" that the prospective investor qualified as an accredited investor.