Changes to Private Placement Regulation D under the Dodd-Frank Wall Street Reform and Consumer Protection Act

Client Advisory

July 22, 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted on July 21, 2010, includes revisions affecting private placements under “Regulation D” of the Securities Act of 1933, as amended (the “1933 Act”) that must be put in place immediately.

Under Regulation D of the Securities Act, certain issuances of securities are exempt from the registration requirement of the 1933 Act. In particular, under Rule 506, companies may issue securities in private placements to “accredited investors,” if the issuer complies with certain conditions, such as disclosing certain financial information to investors and abstaining from general solicitation or advertising.  

Changes to the Definition of “Accredited Investor”

Currently, the definition of an “accredited investor” in Rule 506 includes individuals who have a net worth (individually or jointly with a spouse) in excess of $1 million or have had income of more than $200,000 ($300,000 including a spouse’s income) in each of the most recent two years and a reasonable expectation of similar income in the current year. For purposes of the net worth requirement, investors currently may include the value of their primary residence in the calculation.

Section 413 of the Dodd-Frank Act modifies the net worth requirement to specifically exclude the value of the investor’s primary residence. The Office of Small Business Policy of the Securities and Exchange Commission’s (“SEC”) Division of Corporation Finance has confirmed that it is the SEC staff’s view that the exclusion of a primary residence from an investor’s net worth will be effective immediately.  There is no transition period or grandfathering under Section 413, and, accordingly, issuers relying on the definition of “accredited investor” in Regulation D to make sales to accredited investors should revise their disclosure and subscription documents immediately.  Furthermore, the staff has informally stated that the amount of any mortgage or other indebtedness secured by an investor’s primary residence should be netted against the value of the residence to the extent the amount of the indebtedness is less than or equal to the fair market value of the residence. To the extent the amount of the debt exceeds the fair market value of the residence and the mortgagee or other lender has recourse to the investor personally for any deficiency, that excess liability should be deducted from the investor’s net worth. 

The Dodd-Frank Act maintains the $1 million net worth threshold for the four-year period following its adoption. During that four-year period the SEC may review the definition of “accredited investor” for individuals and make changes (except for the net worth test) through its rule-making process. Thereafter, at least once every four years thereafter, the SEC is must review the definition of “accredited investor” and make any necessary changes to the definition.

Bad Actors

Within one year of enactment of the Dodd-Frank Act, the SEC must issue rules to disqualify offerings and sales of securities made under Regulation D by a person that:

(a) is subject to a final order of a state securities commission, a state authority that supervises or examines banks, savings associations, or credit unions, a state insurance commission, an appropriate federal banking agency, or the National Credit Union Administration, that

  • bars the person from (i) an association with an entity regulated by such commission, authority, agency, or office; (ii) engaging in the business of securities, insurance, or banking; or (iii) engaging in savings association or credit union activities; or
  • constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct within the 10-year period ending on the date of the filing of the offer or sale; or

(b) has been convicted of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the SEC.

Questions regarding this advisory should be addressed to Guy P. Lander (212-238-8619, or Peter Flägel (212-238-8649,

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2020 Carter Ledyard & Milburn LLP.
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