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Immediate Change in Accredited Investor Requirements

July 22, 2010


On July 20, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”).  One provision of the Act changes the financial qualifications for “accredited investors” under Regulation D of the Securities Act of 1933 on which many issuers (including hedge funds and private equity funds) rely to conduct private offerings and other exempt transactions.

Although many provisions of the Act take effect after a transition period of one year, the SEC Staff considers the “accredited investor” changes to be immediately effective.  As a result, any new investment from a natural person (whether from a new or existing investor) must meet this new standard:

If relying on the net worth component of the “accredited investor” requirements, the person must have a net worth of at least $1 million, excluding the value of the investor’s primary residence.

Section 413(a) of the Act requires the SEC to maintain this minimum net worth requirement for at least four years from the date of the Act and after that time, empowers the SEC to adjust the standard upward.

Any issuer conducting a Regulation D offering should take the following steps right away in order to ensure compliance with the new standard:

1.  Determine which prospects and current investors are relying on their net worth to qualify as “accredited investors;”
2.  Send to such prospects and investors a supplement to the issuer’s subscription documents explaining the new standard and asking for the person’s confirmation of their net worth under the new standard, keeping a signed copy of the supplement for the issuer’s files;
3.  Where a prospect’s net worth does not qualify (and there is no other basis for “accredited” status), discontinue discussions about the offering with such person and retrieve all copies of the offering documents and sales materials from that prospect and note this action on the issuer’s log;
4.  For current investors who do not qualify (and have no other basis to rely on), block all additional purchases (unless the investor submits contrary documentation at a later date); and
5.  Update the issuer’s subscription documents to reflect the new net worth standard for natural persons.

Where an investor signed a binding capital commitment to an issuer prior to the Act (as is typically the case with private equity and real estate investment funds), it is our belief that subsequent draw-downs should not be subject to the new requirements; however, the SEC Staff has not yet addressed this issue, and we can offer no general guidance at this time.  We will be paying close attention to SEC remarks and discussions regarding these provisions in the coming weeks.