On July 15, 2010, the U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act). President Obama is expected to sign the Act into law during the week of July 19, 2010.
Most of the Act's regulatory provisions do not take effect immediately. However, a provision that requires the exclusion of the value of an individual's or couple's primary residence in determining whether they meet the definition of "accredited investor" becomes effective "on the date of enactment of this Act" (See Section 413 of Title IV of the Act). Under the U.S. Securities and Exchange Commission's (SEC’s) Rule 501(a) of Regulation D under the Securities Act of 1933 as currently in effect, an individual or couple may meet the accredited investor standard if they have a net worth of more than $1 million. Many individuals and couples meet this standard partially, or even primarily, by taking into account the value of their primary residence. Therefore, many individuals and couples who are currently accredited investors in reliance on the net worth test will not meet the definition once the Act takes effect.
As soon as the Act takes effect—that is, when President Obama signs it—issuers who are conducting a not-yet-closed Regulation D offering (or a continuous Regulation D offering) that includes individuals should not close a sale unless they ascertain that those individuals who are relying on their net worth to qualify as accredited investors meet the revised definition. The consequences of making sales to unaccredited investors can be grave—including rescission—since offerings to unaccredited investors must contain significantly enhanced disclosures and Regulation D does not permit sales to more than 35 unaccredited investors. In view of the clear statutory specification that the SEC cannot permit the value of a primary residence to be counted in meeting the net worth test, it is doubtful that the SEC will take action to remit the potentially harsh consequences of such a Regulation D violation.
The Act does not affect the income test for individual qualification as an accredited investor, under which an individual can qualify if he or she had an income of more than $200,000 in the two most recently completed years, and a couple can qualify if they jointly had an income of more than $300,000 in the two most recently completed years, in each case so long as the person to be qualified has a reasonable belief that he or she will meet the same standard in the current year. However, the Act directs the SEC, beginning no sooner than four years after enactment, to study and to consider the amendment of all aspects of the individual accredited investor standard and to conduct renewed studies on four-year intervals thereafter.