The impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act is far reaching and in many respects unknowable until regulatory rule making fleshes out the particulars of the new law. One item that is clear is that it just got a lot harder to qualify as an "accredited investor" for the purposes of a so-called Reg D private placement.
A quick background on the term "accredited investor" is probably in order. Those are folks that federal securities regulators (the SEC) have determined are sophisticated enough to make their own financial decisions. Usually a person's accredited investor status is based upon such person's financial net worth. Sales of securities to accredited investors are often exempt from the strict disclosure obligations and registration otherwise applicable to securities sales.
There are several types of accredited investors, such as banks, insurance companies, investment companies and high net worth individuals. It is this final category of accredited investors that has received the most attention from securities regulators. Previously, "any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000." That definition may have made perfect sense at the time such definition was originally adopted, but with inflation and sky-rocketing home values in the last decade, many people who met the technical definition of accredited investor were no longer especially sophisticated.
The Dodd-Frank Act attempts to deal with this issue by excluding the value of a natural person's home from the calculation of the $1,000,000 threshold for accredited investor status. The act also empowers the SEC to further adjust the definition of accredited investor to reflect the impact of inflation or other factors that the SEC determines relevant.
I expect this change in the law will have a profound impact on private companies' access to capital as many former accredited investors will no longer meet the definition and will thus be unlikely participants in private placement transactions.
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