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SEC Adopts Revised “Accredited Investor” Standard

December 22, 2011

 

The Securities and Exchange Commission (the “Commission”) adopted revisions to the “accredited investor” standard that exclude the value of a person’s primary residence for purposes of determining whether that person qualifies as an accredited investor on the basis of having a net worth in excess of $1 million. The Commission was required to implement the revised standard by Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

The Commission’s release adopting the revised accredited investor standard is available here.

Background

Generally, the Securities Act of 1933 (the “Securities Act”) requires all offers and sales of securities in the United States to be registered or exempt from registration. The accredited investor standard is used to determine investor eligibility to participate in offerings that are exempt from registration pursuant to Section 4(5) of the Securities Act and Rules 504, 505, and 506 under Regulation D. In part, the accredited investor standard serves to identify persons who can bear the economic risk of an investment in unregistered securities and for whom the benefits of registration may not be necessary.

The new accredited investor standard became effective upon enactment of the Dodd-Frank Act in July, 2010. The amendments adopted by the Commission amend Securities Act Rules 215 and 501 to conform the definitions contained in those rules to the new standard. Importantly, the Commission’s new rules also confirm that when determining net worth for purposes of the accredited investor standard, indebtedness secured by a person’s primary residence, up to the fair market value of the primary residence at the time of sale of the securities, shall not be included as a liability. To the extent that a person’s primary residence secures debt in excess of it’s fair market value, however, that excess will be considered a liability in the determination of that person’s net worth.

Although it did not propose transition rules for the new accredited investor standard, in its adopting release the Commission did provide limited transition relief by permitting investors who would be disqualified by the new accredited investor standard to exercise rights to acquire securities where such rights were obtained prior to the adoption of the Dodd-Frank Act.

If You Have Any Questions About the Accredited Investor Standard

The revisions to the “accredited investor” standard adopted by the Commission today affect the ability of persons to participate in transactions that are exempt from the Securities Act registration requirements. If you have any questions regarding the new “accredited investor” standard, including the transition rules, please contact the authors of this Client Alert or your O’Melveny & Myers advisor.