What impact will this have on issuers?
This change, and any subsequent changes, will have a significant impact on issuers conducting private offerings in reliance on Rule 506 under Regulation D, including issuers who accept additional subscriptions from existing investors. Issuers should consider whether it will be necessary to revise their subscription materials or obtain new representations from prospective investors in connection with offerings that have not yet been completed or current investors making new contributions pursuant to additional subscriptions.
The Act also permits, but does not require, the SEC to undertake a review of the definition of accredited investor as it relates to individuals and make changes ‘for the protection of investors, in the public interest, and in light of the economy.’ It also requires the SEC to undertake a review every four years of the definition to determine whether it should be modified on the same grounds. Additionally, within three years of enactment, the U.S. Government Accountability Office must deliver a report to Congress regarding the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status.
What other potential changes the SEC may seek to make is uncertain, but income and net worth thresholds for individuals have not been altered since 1982, and it seems reasonable to expect some adjustment. If adjusted to account for inflation, the annual income thresholds could be in excess of $400,000 individually and $600,000 jointly, and the net worth standard could exceed $2 million. Changes that drastic would significantly reduce the number of persons who qualify as accredited investors, which would significantly impact the ability of issuers to raise capital through private placements.
What other changes are expected?
The SEC, within one year of enactment of the Act, must issue rules disqualifying any offer and sale of securities under Regulation D by certain ‘bad actors.’ This would bar reliance on Rule 506 by an issuer if, among others, the issuer (and its predecessors or affiliated issuers) as well as its officers, directors, 10 percent or greater stockholders, promoters and underwriters (and affiliates of underwriters) have been convicted of certain crimes or subject to certain legal and other proceedings stemming from activities in the securities, banking or insurance industries.
These changes will require issuers to undertake additional due diligence of their own affiliates and others associated with the offering before relying on Rule 506.
Edward Quinlisk is chair of the Securities Practice at McDonald Hopkins LLC. Reach him at [email protected] or (312) 642-4087.
