July 28th, 2010

Accredited Investor Requirement Changes

This revised standard for an Accredited Investor went into effect on the date the Act was enacted, July 21, 2010. Since private placement financing agreements require each of your investors to represent and warrant that they are Accredited Investors, it is important that from and after such date, your investors determine that they qualify as Accredited Investors based on their net worth exclusive of the value of a primary residence.

You should notify your investors making investments in your offering on or after the above date that they will not qualify as an Accredited Investor based on a net worth calculation that includes the value of their primary residence. Before making their investment they must determine whether their net worth (excluding the value of their primary residence) exceeds the $1 million threshold (individually, or jointly with the investor’s spouse) without including the value of their principal residence. The value of any real property (net of indebtedness), if any, other than a principal residence may still be included in the net worth calculation.

Pending implementation of the changes to the SEC’s rules required by the Act, the SEC has indicated that the related amount of indebtedness secured by a primary residence up to its fair market value may also be excluded from the net worth calculation. Indebtedness secured by any residence (including a primary residence) in excess of the value of the home should be considered a liability and deducted from the investor’s net worth.

You may wish to remind your investors that there are other ways to qualify as an Accredited Investor. Most notably, an individual with an income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and who has a reasonable expectation of reaching the same income level in the current year, would qualify as an Accredited Investor on that basis, irrespective of his or her net worth.

To the extent we have assisted in the preparation of offering documents or subscription agreements that identify the Accredited Investor requirements, please contact us to discuss revising those agreements in light of the revised standards as soon as possible. Also, if you have any questions or concerns about this change, please do not hesitate to contact us.

If you have any questions about this recent change, contact any member of the Frankfurt Kurnit Corporate and Finance Group.

Disclaimer. This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.