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Primary Residence No Longer Includable in Net Worth of Natural Person
What is the change: To determine whether an individual is an "accredited investor" for private offering purposes, the $1 million net worth test now excludes the value of the investor's primary residence.
Who will this impact: Anyone raising capital in a private offering and anyone investing in a private offering.
The U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Act") on July 15, 2010. President Obama signed the Act into law on July 21, 2010. One provision of the Act that takes immediate effect is a change in the definition of an accredited investor as applied to the net worth of natural persons. A natural person will qualify as an accredited investor if the individual has a net worth (alone or with that person's spouse) of more than $1 million. Prior to the Act, an individual could include the value of the individual's primary residence in calculating net worth. The Act revises the accredited investor definition to specifically exclude the value of a primary residence in calculating net worth.
The Act does not change the income qualification test for a natural person. That test still requires income of more than $200,000 in the two most recent years or, for a married couple a joint income of $300,000 in the two most recent years, so long as the individual or married couple have a reasonable expectation they will meet the standard in the current year.
The Act directs the SEC to study and consider the amendment of all aspects of the individual accredited investor standard not sooner than four years after the enactment of the Act and to study the standard in four-year intervals thereafter.
TIP: Do not close a pending offering if the exemption you are relying on depends on a natural person qualifying as an accredited investor without evaluating whether that individual meets the new standard. In addition, consider whether you should revise the subscription documents to note that the value of a primary residence may not be included in the net worth calculation.
For further information on the details of the final bill or for assistance answering a particular question regarding the new rules, contact the Schwabe attorney with whom you work or Lorie Harris Hancock at 541-749-4060 or lhancock@schwabe.com, Carmen Calzacorta at 503-796-2994 or ccalzacorta@schwabe.com, Kimberly Medford at 541-749-4059 or kmedford@schwabe.com, Tom Tongue at 503-796-3747 or ttongue@schwabe.com, or Greg Mallory at 503-796-2494 or gmallory@schwabe.com.
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