August 2010 -- Many companies raise funds from "accredited investors" to permit them to expand their businesses. Likewise, accredited investors often provide the early capital to get a promising new business idea launched.
SEC rules have traditionally allowed an individual to meet the definition of accredited investor under one of two tests -- a net worth test and an income test. Under the net worth test, the individual, alone or with their spouse, must have a net worth in excess of $1,000,000. Under the income test, an individual may qualify with (1) an income in excess of $200,000 in each of the two most recent years and (2) a reasonable expectation of reaching the same income level in the current year. For married couples, the income level is $300,000.
The passage of the Wall Street Corporate Reform and Consumer Protection Act ("Dodd-Frank") imposed several changes on the accredited investor standard. The most important change involves the net worth test. As of July 21, 2010, the effective date of Dodd-Frank, an individual may no longer include his or her primary residence in the calculation of net worth. Dodd-Frank also permits the SEC to periodically adjust the $1,000,000 threshold.
At this time, no change has been made to the income test. However, Dodd-Frank authorizes the SEC to review the entire definition of accredited investor and adjust all dollar amounts to account for inflation. As a result, more changes to the accredited investor standard are possible in the near future.
Individuals who made investments after qualifying under the old standard will be allowed to retain these investments. However, the new standard is already in effect and all investments based on the accredited investor exemption must meet the new standard.
If you have any questions, please contact Bill McCartan.
The author acknowledges the assistance of Benjamin Roth, a third-year law student at the University of Iowa.