Dodd-Frank Wall Street Reform Act: Affect on “Accredited Investor” Requirements and Seed Financing
The recently passed Dodd–Frank Wall Street Reform and Consumer Protection Act changes the requirements for investors to qualify as “accredited investors” under the Security and Exchange Commission’s (“SEC’s”) Regulation D.
The SEC established Regulation D to serve as a “Safe Harbor” for certain private offerings, by exempting Companies from costly registration requirements when offering securities only to accredited investors (those who meet certain net worth and other criteria). These changes will affect early stage companies seeking seed funding from “angel” investors, “friends and family,” or other individual investors.
What is Changing?
For many Americans, their primary residence is a major asset on their personal balance sheet, especially in real estate markets like California. Under the new law, the value of a “primary residence” must be excluded in calculating a potential investor’s net worth for purposes of determining whether the investor qualifies as an accredited investor. Any related indebtedness secured by the residence must also be deducted from the market value and any indebtedness in excess of the market value must be considered a liability and deducted from the net worth.
Currently, investors qualify as accredited if their net worth exceeds $1 Million. A potential investor who does not meet this criterion may still otherwise qualify as accredited if the investor meets the applicable annual income threshold requirements (currently $200,000 per year for single investors or $300,000 per year joint income for married investors).
How Does This Affect Start-up Funding?
Many friends and family who may have qualified as accredited investors in the past may not qualify under the new rules. A company’s failure to properly qualify private investors at the time of an offering can create compliance issues down the road, which can delay or even derail an initial public offering or other transaction. Start-ups raising seed funding from individuals should consult with legal counsel to ensure that subscription documents reflect the new legal requirements.
If you have any questions about how the new rules may affect you or your business, please contact Brian Kreischer at [email protected].