Sales of equity to the public are subject to both state and federal securities laws.  If the securities are not registered, they must be issued under an exemption afforded under applicable law.  One of the exemptions afforded under the Securities Act of 1933 is issuances to individuals who are deemed “accredited investors” as defined by rules issued under such Act.  In general, “accredited investors” (as applied to natural persons) are individuals who have a net worth in excess of $1 million.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which became law on July 21, 2010, changed the manner in which the net worth for individuals is calculated when determining “accredited investor” status.  Prior to the Dodd-Frank Act, an individual’s primary residence was included when calculating net worth.  Not anymore; Section 413(a) of the Dodd-Frank Act adjusted the net worth standards for natural persons by specifically “excluding the value of the primary residence of such natural person.”
In the proposed implementing regulations, the SEC seeks to further clarify the “net worth” calculation by deducting from net worth any primary residence debt that exceeds the property’s value.  In a declining real estate market, where many properties are “under water,” the proposed regulations will further decrease an individual’s net worth and reduce the “accredited investor” pool.
The Dodd-Frank Act’s definitional change, and the implementing regulations, will likely disqualify many investors (who have a substantial portion of their net worth attributable to their primary residence) from the “accredited investor” exemption.  With fewer eligible “accredited investors,” the aggregate supply of capital available to satisfy the capital demands of the private placement market will decrease.  It is economics 101 – with a decrease in supply, private capital will be harder to find and the price for such capital, to the extent available, will increase.  Small businesses and entrepreneurs looking to raise funds will now have a more onerous and costly task in satisfying their capital needs.  Once again, the Federal government has implemented legislation whose result will likely reduce economic growth and job creation.
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