Regulation
D of the Securities Act of 1933 (Reg D), is one of several "safe
harbors" or alternate methods available to companies trying to raise money
without going through an extensive registration process with the US Securities
and Exchange Commission (SEC). A key to the availability of the most
widely-used Reg D safe harbors is the limitation of the offering to
"accredited investors." In general, an investor is
"accredited" if he/she/it can meet certain financial tests. For
example, an individual qualifies as an accredited investor if his or her net
worth, or joint net worth with spouse, exceeds $1 million.
At the
end of 2011, the SEC issued SEC Release No. 33-9287 (the Release) amending the
individual accredited investor net worth calculation method under Reg D, as
required by the Dodd-Frank Wall Street Reform and Consumer Protection Act
adopted on July 20, 2010 (Dodd Frank).
Prior
to the adoption of Dodd-Frank, the value of an individual investor’s primary
residence was included in the net worth calculation. Dodd-Frank revised the
accredited investor net worth standard to exclude the value of the investor’s
primary residence from the net worth calculation. This left open an issue as to
whether the mortgage debt had to be included in the calculation of net worth,
even if the home was not.
The
Release conforms the requirements of Reg D to Dodd-Frank, and clarifies the
SEC’s position with regard to indebtedness secured by the primary residence
(i.e., a mortgage). Under the revised net worth calculation, a mortgage will
not be treated as a liability unless (a) the mortgage exceeds the fair market
value of the property (then the excess amount will be included as a liability),
or (b) it is obtained within the 60 days prior to the purchase of the
securities in the exempt offering, and is not in connection with the purchase
of the primary residence. (Clause (b) is intended to prohibit investors from
artificially inflating their net worth by purchasing assets with the mortgage
proceeds if their only intent is to qualify as an accredited investor).
The
Release will take effect on or after February 27, 2012. There are no
grandfathering provisions from this revised net worth calculation other than
for a purchaser who (a) acquired the securities under a right to purchase prior
to July 21, 2010, (b) qualified as an accredited investor at the time the he or
she acquired the right, and (c) was a securities holder of the same issuer at
that time the right was acquired.
If you
have any questions about the information presented here, please contact Darren L. Braham, the author of this alert. You can reach
Darren at 617 456 8014 or dbraham@princelobel.com. If you would like to learn more
about the legal services Prince Lobel’s Corporate Practice Group can provide to your organization,
please contact Group Chair Robert P. Maloney at 617 456 8008 or rmaloney@princelobel.com.