Buried deep in the (literally) thousands of pages in The Dodd-Frank Wall Street Reform and Consumer Protection Act are changes to Regulation D and the accredited investor definition.

Currently, individuals are accredited investors if either:

• their net income exceeded $200,000, or joint net income with their spouse exceeded $300,000, in the two most recent years (and there is a reasonable expectation of reaching the same income level in the current year), or
• their net worth, or joint net worth with their spouse, exceeds $1 million.

Although Dodd-Frank does not currently change these dollar thresholds, the value of an individual’s primary residence must now be excluded in determining whether his or her net worth exceeds $1 million; until now, the value of home was allowed to be included in determination of net worth.  This change will be effective immediately upon President Obama’s signing the bill into law and will remain in effect for at least four years thereafter.

We recommend that our investment banking and broker-dealer clients review and update their subscription documents and offering materials to reflect this new definition of accredited investor.  In addition, careful attention should be paid to updating the files of current investors to ensure they meet the new standard.

Furthermore, under Dodd-Frank, the SEC has been ordered to review and adjust any other accredited investor standards applying to individuals during the four-year period after the law’s enactment.