On December 21, 2011, the SEC amended several rules, including those under the private offering safe harbor of Regulation D (the “Rule Amendments”), to conform the SEC’s definition of “accredited investor” to the requirements of the Dodd-Frank Act. Among other things, the Dodd-Frank Act prohibits the inclusion of the value of an individual’s primary residence as an asset when calculating an investor’s net worth to determine whether the investor is an accredited investor.The Rule Amendments add a couple of new provisions affecting the net worth calculation used to determine whether an investor’s net worth exceeds $1,000,000 for purposes of accredited investor status. The first provision provides that “indebtedness secured by the investor’s primary residence, up to the estimated fair market value of the primary residence, is not treated as a liability,” unless (1) the borrowing occurs in the 60 days preceding the purchase of securities in the private offering, or (2) is not in connection with the purchase of the primary residence. This is intended to prevent investors from artificially inflating their net worth by borrowing money against their primary residence to make investments in private offerings. The second new provision provides that the new accredited investor rules do not apply to an investor who (1) acquired the right to purchase privately offered securities on or before July 20, 2010, and (2) qualified as an accredited investor under the definition in effect at the time. Accordingly, even if such investors not qualify as accredited investors under the new rules, they may continue to exercise certain pre-existing rights to acquire privately offered securities, such as a preemptive rights purchase or the making an investment related to a previous capital commitment. The SEC’s amended accredited investor rules have an effective date of February 27, 2012. The Rule Amendments are available here.
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