VC Deal Lawyer

On July 15, 2010, the U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act“).  On July 21st, President Obama signed this legislation into law.  As you may recall from my previous post on this issue, much concern surrounded this Act because of the proposed changes to the “accredited investor” qualifiers for individuals.  In the end, the Act did not go as far as earlier versions, however a few of the provisions did make it through the process and into law (albeit watered down).

Considering that most companies completing venture or angel financings seek transactional exemptions from federal and state securities laws under Rule 506 of Regulation D, and considering that selling only to “accredited investors” under Rule 506 gives the issuing companies the broadest reach (e.g., no limit on number of accredited investors, no dollar limit, minimal disclosures), one can surmise that how we define “accredited investor” is an important concept.  As an individual, you can qualify as an accredited investor by satisfying either net worth or income level tests.  The income level test has not changed as a result of the Act, however, Congress has directed the SEC to, no sooner than 4 years from now and then every 4 years thereafter, study and consider amending all aspects of the individual accredited investor qualifiers.  Therefore, the income level test may change in the not-too-distant future.

The net worth test has changed as a result of the Act, and the change takes effect immediately.  Going forward, the value of the investor’s residence cannot be factored into that individual’s net worth for purposes of meeting the net worth qualifier.  This will certainly reduce the number of individual accredited investors, although probably not as much as the earlier versions of this Act would have done (see the link the my earlier post above for estimates on the effect). 

Start-up and emerging growth lawyers would be advised to change their accredited investor qualifier questionnaires they use with individuals to properly reflect the new definition of net worth.  They would also be advised to start monitoring the SEC’s process in the next 4 years for further changes to both the net worth and income level tests.

Chris McDemus is founder of VC Deal Lawyer, a blog devoted to providing insights on start-up and emerging growth companies.  Chris is also founder and owner of MCD Law Partners, LLC, a boutique corporate law firm serving start-ups,  early-stage and emerging growth and middle market companies