Accredited Investors – Has the Definition Change Affected Private Placements?

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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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Accredited Investors – Has the Definition Change Affected Private Placements?

  1. 1. http://biztaxbuzz.com/accredited-investors-has-the-definition-change-affected-private-placements/ May 21, 2013Accredited Investors - Has the Definition Change AffectedPrivate Placements? | BizTaxBuzz by Trevor Crow23rdAprilAccredited Investors – Has theDefinition Change Affected Private Placements?Posted by Trevor CrowThe securities laws were originally enacted in 1933 and 1934 during the Great Depression toprotect consumers from fraud in the sale of securities. In general, under the securities laws, tooffer or sell securities the issuer must either publicly register the securities or the offering mustqualify for an exemption from registration. Qualifying for an exemption allows a company toconduct limited offerings of securities to certain purchasers. Certain exemptions have fewerdisclosure requirements if the issuer sells only to “accredited investors.” The SEC’s reasoning forlimiting the disclosure requirements is that accredited investors are presumed to be “sophisticated”and able to make more educated investment decisions.Since 1982 the definition 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 expectation of continuing to earn this level of income (the “Income Test”).The Dodd-Frank Act, enacted in 2012, changed the definition of “accredited investor.” UnderDodd-Frank, the Net Worth Test now excludes the value of an investor’s primary residence. Inaddition, the SEC has the obligation 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 definition of “accredited investor” is meant to counteract theaffect of inflation, which allowed many more people to qualify as an accredited investor as theyears passed. The logic behind the change is to protect potential investors that meet therequirements of an accredited investor but are actually unsophisticated investors. On the otherhand, the change reduces the pool of potential investors for businesses when they attempt toraise money through a private placement. Given the recent down economy and difficultenvironment for raising money, it is hard to calculate whether this 2012 definitional change hashad a significant impact on raising capital since it was implemented.I welcome any comments regarding your experience raising money and whether this definitionalchange has actually made it more difficult.

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