Now that the new definition of accredited investor is in effect, questions are coming up on how to implement the new definition (aside from just using the new definition going forward). Two questions that we have become aware of are set forth below.
Question: How does the change in the definition of accredited investor affect ongoing offerings? What if a company is in the middle of an offering and has had a closing and in that closing accepted funds from an investor who was accredited under the old definition but is not accredited under the new definition? Does the company have to return the investor’s money?
Answer: For offerings under Regulation D, accreditation is determined “at the time of the sale of the securities” under Rule 501. If a company has had a closing and accepted funds from an investor in that closing who to the company’s reasonable belief was accredited at that time, we do not believe that the company should have to return the funds from that investor. But companies should be cautious that they have in fact closed on such funds. If, for example, an investor has completed documents but the subscription agreement has not been accepted by the company, or if there was an escrow or a milestone that had to be met before the closing could occur, the company may very well have to return the investor’s funds.
Question: What happens if an investor has a negative value in their primary residence, meaning that an investor has more debt on their primary residence than value? How is that taken into account? We know that we exclude the “value” of the primary residence in determining net worth. But do we include negative value in a primary residence in determining net worth?
Answer: The SEC has indicated orally that negative net value in a primary residence should be taken into account in determining net worth. We expect that the SEC will issue guidance on this in the future.