With Congress' passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DF Act"), lawyers across the nation are struggling to come to grips with the act's impact on their clients. Lawyers representing businesses in need of capital, venture capital companies and hedge funds are noting that Section 413 of the act will change the definition of "accredited investor" under the rules of the SEC adopted under the Securities Act. Notably, the DF Act appears to require the immediate exclusion of an individual's primary residence in determining whether that person is an accredited investor.
For those issuers relying on preemption pursuant to Section 18(b)(4)(D) of the Securities Act, this will mean that the bar has been raised at both the federal and state levels. However, some issuers may choose to rely on a state level exemption, such as Corporations Code § 25102(f), in lieu of reliance on Rule 506 under Regulation D. The § 25102(f) exemption is conditioned upon, among other things, the issuer not making sales to more than 35 persons, including persons in California. The Commissioner has adopted a rule, 10 CCR 260.102.13, that excludes certain persons from the count. Among other things, the rule excludes any person who comes within one of the categories of an "accredited investor" in Rule 501(a) of Regulation D. Although Section 413 of the DF Act requires the SEC to adjust the net worth standard for an accredited investor in its Securities Act rules, the SEC has not yet amended Rule 501(a). Thus, it might be argued that until the SEC has amended Rule 501(a), the lower net worth standard continues to be available under Rule 260.102.13(g). Additionally, these investors would not be included in the phrase "all purchasers" in § 25102(f)(2) of the Code.
Although it appears that many law firms are concluding that the DF Act changes the net worth calculation immediately upon enactment, I think that the act is less than clear. The relevant language from Section 413 of the DF Act is quoted below:
The Commission shall adjust any net worth standard for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, so that the individual net worth of any natural person, or joint net worth with the spouse of that person, at the time of purchase, is more than $1,000,000 (as such amount is adjusted periodically by rule of the Commission), excluding the value of the primary residence of such natural person, except that during the 4-year period that begins on the date of enactment of this Act, any net worth standard shall be $1,000,000, excluding the value of the primary residence of such natural person.
Arguably, the language can be interpreted to mean that the SEC must adjust the net worth standard so that it is > $1 million (as adjusted periodically by the SEC) excluding the value of the investor's primary residence. Then Congress provided a temporary 4-year exception so that the net worth standard must be $1 million (exclusive of primary residence) for that period. Thus, the statute could be read to say that the SEC must adopt rule changes that fix the net worth at the lower standard for the next four years. However, the standard doesn't change until the SEC actually changes its rules. Perhaps there is some legislative history that sheds some light on Congress' intent in this regard.