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The change to the definition of “accredited investor” is meant to counteract the affect of inflation, which allowed many more people to qualify as an accredited investor as the years passed. The logic behind the change is to protect potential investors that meet the requirements of an accredited investor but are actually unsophisticated investors. On the other hand, the change reduces the pool of potential investors for businesses when they attempt to raise money through a private placement. Given the recent down economy and difficult environment for raising money, it is hard to calculate whether this 2012 definitional change has had a significant impact on raising capital since it was implemented.
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http://biz taxbuz z .com/accredited- investors-has- the-definition-change-affected-private-placements/ May 21, 2013
Accredited Investors - Has the Definition Change AffectedPrivate Placements? | BizTaxBuzz by Trevor Crow
23rdAprilAccredited Investors – Has theDefinition Change Affected Private Placements?Posted by Trevor Crow
The securit ies laws were originally enacted in 1933 and 1934 during the Great Depression toprotect consumers f rom fraud in the sale of securit ies. In general, under the securit ies laws, toof fer or sell securit ies the issuer must either publicly register the securit ies or the of fering mustqualify for an exemption from registrat ion. Qualifying for an exemption allows a company toconduct limited of ferings of securit ies to certain purchasers. Certain exemptions have fewerdisclosure requirements if the issuer sells only to “accredited investors.” The SEC’s reasoning forlimit ing the disclosure requirements is that accredited investors are presumed to be “sophist icated”and able to make more educated investment decisions.
Since 1982 the def init ion of an accredited investor included, among others, any individual (i) with anet worth of $1 million or more (which included the value of a primary residence) (the “Net WorthTest”) or (ii) who earned $200,000 in the past two years ($300,000 if married) and with areasonable expectat ion of cont inuing to earn this level of income (the “Income Test”).
The Dodd-Frank Act, enacted in 2012, changed the def init ion of “accredited investor.” UnderDodd-Frank, the Net Worth Test now excludes the value of an investor’s primary residence. Inaddit ion, the SEC has the obligat ion to consider the accredited investor amounts periodically in thefuture. However, the Income Test (i.e., $200,00 or $300,000 if you’re married) remains the same,for now.
Bottom Line: The change to the def init ion of “accredited investor” is meant to counteract theaffect of inf lat ion, which allowed many more people to qualify as an accredited investor as theyears passed. The logic behind the change is to protect potent ial investors that meet therequirements of an accredited investor but are actually unsophist icated investors. On the otherhand, the change reduces the pool of potent ial investors for businesses when they at tempt toraise money through a private placement. Given the recent down economy and dif f icultenvironment for raising money, it is hard to calculate whether this 2012 def init ional change hashad a signif icant impact on raising capital since it was implemented.
I welcome any comments regarding your experience raising money and whether this def init ionalchange has actually made it more dif f icult .
