SEC Announces New Net Worth Standard for Accredited Investors

The U.S. Securities and Exchange Commission adopted[1] amendments to the accredited investor net worth test under Regulation D of the Securities Act of 1933, as amended (the "Securities Act") which take effect on February 27, 2012.   

Private investment funds (such as hedge funds and private equity funds) are generally offered and sold pursuant to Regulation D under the Securities Act. Under Regulation D, purchasers of securities in such offerings generally must be "accredited investors". An individual investor may meet the definition of accredited investor by satisfying either a net worth test or income test under Regulation D.  The income test under Regulation D has not changed as of the date of this Alert.   For purposes of the net worth test, Regulation D defines an accredited investor as "any individual whose individual net worth, or joint net worth with that person's spouse, exceeds $1,000,000 at the time of purchase."  

Prior to the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), net worth meant the excess of total assets over total liabilities, including the investor's primary residence. Post Dodd-Frank, Regulation D excludes from net worth an investor's primary residence and debt that is secured by the investor's primary residence up to the fair market value of the primary residence.  In addition, Regulation D now includes a provision that requires an investor to include as a liability any increase in the amount of debt secured by the investor's primary residence incurred within 60 days before the investor enters into the purchase transaction for which it is making the accredited investor representation. For example, an individual investor may not include in his net worth any amounts which such investor borrowed or withdrew against his primary residence (such as drawing down on a home equity line of credit) within 60 days prior to making an investment in a private investment fund. 

The amended Rule 501 also includes a "grandfather" provision that allows an investor to use the pre-Dodd-Frank net worth test if the investor (i) purchases securities in accordance with a right to purchase such securities that was held by such investor on July 20, 2010; (ii) qualified as an accredited investor on the basis of net worth at the time such investor acquired such right; and (iii) held securities of the same issuer on July 20, 2010.

  

Investors making new or additional subscriptions for interests in private investment funds after February 27, 2012 must certify that they are accredited investors under the new standard.  Private investment funds will need to update their subscription documents accordingly. Private investment funds do not need to obtain new certifications from existing investors unless the existing investor is making an additional subscription. 

 

If you have any questions concerning this Alert, please contact Lance Friedler at 212.573.8030 or lfriedler@sglawyers.com. 


[1] See Net Worth Standard for Accredited Investors, Release No.33-9287 (Dec. 21, 2011) at http://www.sec.gov/rules/final/2011/33-9287.pdf.  

 

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Cheryl Spratt