As soon as President Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act“) (link to here), companies raising funds are going to have to adjust their definition of “accredited investor” to exclude from the net worth standard for individual investors the value of their primary residences in determining whether they qualify as accredited investors. See Section 413 of the Act, quoted below.
As far as Section 926 goes, which is quoted below, no immediate action is required. We have to wait until the SEC issues rules.
For individual investors to qualify as accredited investors, they will now have to meet one of the three following categories.
- A director, executive officer, or general partner of the issuer of the securities being offered or sold, or a director, executive officer, or general partner of a general partner of that issuer.
- A natural person whose individual net worth, or joint net worth with spouse, is at least $1,000,000, excluding the value of such investor’s primary residence.
- A natural person who had individual income in excess of $200,000 in each of the two most recent years or joint income with spouse in excess of $300,000 in each of those years and a reasonable expectation of reaching the same income level in the current year.
For your convenience, I’ve attached a post Dodd-Frank Individual Investor Accredited Investor Certification.
How badly will this change in the law crimp the availability of capital for startups? It is unknown. Some people believe it could knock out a significant percentage of the angel investment community. I don’t know. If you have data to share on this point, I would very much appreciate your sharing it.
SEC. 413. ADJUSTING THE ACCREDITED INVESTOR STANDARD.
- (a) In General- 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.
SEC. 926. DISQUALIFYING FELONS AND OTHER `BAD ACTORS’ FROM REGULATION D OFFERINGS.
- Not later than 1 year after the date of enactment of this Act, the Commission shall issue rules for the disqualification of offerings and sales of securities made under section 230.506 of title 17, Code of Federal Regulations, that–
- (1) are substantially similar to the provisions of section 230.262 of title 17, Code of Federal Regulations, or any successor thereto; and
- 2) disqualify any offering or sale of securities by a person that–
A) is subject to a final order of a State securities commission (or an agency or officer of a State performing like functions), a State authority that supervises or examines banks, savings associations, or credit unions, a State insurance commission (or an agency or officer of a State performing like functions), an appropriate Federal banking agency, or the National Credit Union Administration, that–
(i) bars the person from–
(I) association with an entity regulated by such commission, authority, agency, or officer;
(II) engaging in the business of securities, insurance, or banking; or
(III) engaging in savings association or credit union activities; or
(ii) constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct within the 10-year period ending on the date of the filing of the offer or sale; or
(B) has been convicted of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the Commission.