Change to Net Worth Test Makes Regulation D Accredited Investor Status More Difficult

March 16, 2011

For individuals who invest in exempt offerings of securities under Regulation D promulgated by the United States Securities and Exchange Commission (SEC), there are two alternative tests in order to determine whether the individual will be considered to be an "accredited investor" (which generally facilitates the offering by eliminating the need for specific disclosure in the offering documents, as well as allowing an unlimited number of investors to participate, assuming the other conditions of the Regulation are satisfied). These tests are (i) an income test, whereby the investor alone must have an annual income of at least $200,000 (or, together with spouse, an annual income of at least $300,000), or (ii) a net worth test, whereby the investor either alone or together with spouse, must have a net worth of more than $1 million.

Section 413(a) of The Dodd-Frank Act, which became law on July 21, 2010, changed the net worth test such that the value of the investor's primary residence must be excluded when computing whether the investor has a net worth in excess of $1 million. Previously, for purposes of computing the net worth test, the value of the investor's primary residence could be included.

The SEC recently issued proposed amendments to Regulation D to conform the language in the Regulation to the law as changed by the Dodd-Frank Act and to clarify that for purposes of calculating an investor's net worth, any mortgage indebtedness secured by the primary residence, up to the estimated fair value of the property, can also be excluded. These amendments were proposed in Release No. 33-9177 dated January 25, 2011. In this Release, the Commission also noted that while Section 413(b) of the Dodd-Frank Act authorized the Commission to review the definition of "accredited investor" as it applies to natural persons every four years and to engage in rulemaking to make adjustments to the definition after such review, it was declining to make any adjustments to the definition beyond what was required by the Dodd-Frank Act.

The change to the net worth test obviously makes it more difficult for individuals to qualify as accredited investors in exempt offerings. For more information concerning this amendment, or exempt offerings in general, please contact:

John R. Orrick, Jr. at 301.961.5213 or, or Demetri M. Datch at 301.961.5164 or