It will soon be harder to raise funds using a Reg D Private Placement

Now that the Dodd-Frank Bill is in final form, businesses and investors need to be aware of the final language used in Section 413. The Dodd-Frank Bill require the Securities and Exchange Commission (www.sec.gov) to modify its regulations (Reg. D) to increase the standard for an accredited investor. Section 413 provides:

“(a)… 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.” [Emphasis added]

Now an accredited investor must have a net worth of $1,000,000.00 excluding his primary residence. The SEC is taking the position that this requirement is effective upon enactment. In addition, the SEC is also taking the position that the amount of any mortgage indebtedness secured by the personal needs to be reviewed in considering the investors net worth. If the indebtedness is less than the value of the property then the indebtedness does not need to reduce the investors net worth. If the indebtedness is more than the value of the personal residence, the indebtedness may need to be factored into the investors net worth.

What does this mean for start up business?

This will likely reduce the number of angel and other investors that are able to invest in start-up and small businesses. The pool of accredited investors will now be smaller.

What steps do I need to take if I am raising capital?

Companies seeking capital will need to review their suitability questionnaires in light of the new requirements.The investors will now need to give a representation regarding their net worth excluding their personal residence and may also need to to give a representation that any mortgage indebtedness does not exceed the value of their personal residence.

Thank you to Alan M. Parness (www.cadwalader.com) for writing about the SEC’s interpretation.

The image is used under the creative commons license from pbarnhart

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