Regulation D

The SEC’s Proposed Rules and Amendments to Allow General Solicitation and General Advertising in Private Offerings

by Vanessa Schoenthaler on September 3, 2012

In an open meeting last Wednesday the Securities and Exchange Commission voted to propose rules and amendments to implement Section 201(a) of the JOBS Act, which is responsible for eliminating the prohibition on general solicitation and general advertising in private offerings conducted pursuant to Rule 506 of Regulation D and private resales conducted pursuant to Rule 144A of the Securities Act of 1933; provided that, in the case of Rule 506, all purchasers are accredited investors and reasonable steps have been take to verify their status as such, and, in the case of Rule 144A, all purchasers are qualified institutional buyers.

In 2011 issuer’s raised an estimated $895 billion in offerings using Rule 506 and an estimated $168 billion in offerings using Rule 144A. In 2010 those numbers were even higher, with an estimated $902 billion raised in offerings using Rule 506 and an estimated $233 billion raised in offerings using Rule 144A. In reality the Rule 506 numbers may be higher still, as even the Commission acknowledges that not everyone who uses the exemption files a Form D (which is a requirement, but not a condition to the availability, of the exemption).

Offers and Sales that Involve General Solicitation and General Advertising Under Rule 506

Under the proposed rules and amendments a new subsection (c) would be added to Rule 506 which would permit general solicitation and general advertising in offers and sales of securities provided that:

  • the issuer of the securities–whether a company or a private investment fund, such as a hedge fund, venture capital fund or private equity fund–takes “reasonable steps to verify” that the purchasers are accredited investors;
  • all of the purchasers are accredited investors because at the time of the sale of the securities they either came within the definition of an accredited investor, as set forth in Rule 501(a) of Regulation D, or the issuer reasonably believed that they came within the definition; and
  • all of the terms and conditions of Rules 501 (Definitions), 502(a) (Integration) and 502(d) (Limitations on resale) of Regulation D are met.

Note: offers and sales of securities made pursuant new Rule 506(c) would not be subject to the information disclosure requirements of Rule 502(b), because all of the purchasers in such an offering would be accredited investors.

Reasonable Steps to Verify Accredited Investor Status

In an effort to provide flexibility to accommodate the various types of issuers, investors and methods of verification, the Commission declined to define what constitutes taking “reasonable steps to verify” that a purchaser is an accredited investor. Instead the proposing release indicates that reasonableness should be an objective determination, based on the facts and circumstances surrounding a given transaction. The proposing release also goes on to discuss in some detail three factors that an issuer might consider, among others, when assessing the reasonable likelihood that a purchaser is an accredited investor and the reasonable steps that would be necessary to verify a purchaser’s status as such.

The Nature of the Purchaser

The first factor to consider is the nature of the purchaser and the type of accredited investor that the purchaser claims to be. For example, verifying that a broker-dealer is an accredited investor by virtue of being registered under Section 15 of the Securities Exchange Act of 1934, can be accomplished by simply conducting a FINRA BrokerCheck search. Whereas verifying that an individual purchaser is an accredited investor under the annual income or net worth standards may require several steps and raise additional issues, such as privacy concerns regarding the type of personal financial information that a purchaser may need to provide to verify their status as an accredited investor.

Information About the Purchaser

The second factor to consider is the amount and type of information that an issuer has about a purchaser. For example, certain verifying information may already be in the public domain, such as information about a purchaser’s annual income garnered from a proxy statement or information found in a Form 990 about a non-profit organization’s total assets. Other third-party information that is not available publicly may also provide reasonably reliable evidence of a purchaser’s accredited investor status, such as copies of an individual’s Forms W-2 or 1099 to verify annual income. Additionally, a purchaser’s status as an accredited investor might be verified by a third-party service provider, such as a broker-dealer, attorney, accountant or other reasonably reliable third-party that offers verification services.

The Nature and the Terms of the Offering

The third factor to consider is really twofold: the nature of the offering and the terms of the offering. For example, the manner in which a purchaser is solicited, such as through a website accessible to the general public, a widely disseminated email or by social media, as compared to from a database of pre-screened accredited investors maintained by a reasonably reliable third-party, will require a greater or lesser number of steps to verify that the purchaser is an accredited investor. Likewise, the terms of the offering itself may bear on the number of steps required to verify that a purchaser is an accredited investor. For example, in the release the Commission notes that it tends to agree with the view that a purchaser’s ability to meet a high minimum investment amount could be relevant to an issuer’s evaluation of the steps necessary to verify the purchaser’s status as an accredited investor.

A Note on the Importance of Adequate Record Keeping

The proposing release also stresses the importance of an issuer retaining adequate records that document the steps taken to verify a purchaser’s status as an accredited investor because, in the event that a question should ever arise, the burden of demonstrating entitlement to an exemption from registration falls entirely on the issuer.

Offers and Sales that Do Not Involve General Solicitation and General Advertising Under Rule 506

In its current form, Rule 506 permits offers and sales of securities to an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors, provided that when non-accredited investors participate in an offering the information disclosure requirements of Rule 502(b) are met. As proposed the rules and amendments would preserve Rule 506 in its existing form in amended subsection (b), maintaining the rule’s availability for those issuers who do not wish to engage in general solicitation and general advertising, and thus avoid becoming subject to the requirement that they take reasonable steps to verify purchasers’ accredited investor status, as well as those issuers who would like the option to include sophisticated non-accredited investors in their offerings.

General Solicitation and General Advertising Under Rule 144A

Under the proposed rules and amendments Rule 144A of the Securities Act would also be revised to permit offers of securities to persons other than qualified institutional buyers (QIBS), including by means of general solicitation and general advertising, provided that the securities are sold only to persons that the seller, or anyone acting on the seller’s behalf, reasonably believe to be a QIB.

Proposed Changes to Form D

Finally, the Commission is also proposing to revise Form D to add a separate box to be checked when an issuer uses general solicitation or general advertising in a Rule 506(c) offering. Such information would allow the Commission to get a general sense of the size of the market for offerings that use general solicitation and general advertising.

Comment Period

The Commission is soliciting comments on a number of aspects of the proposed rules and amendments, most notably on a variety of issues related to verification of accredited investor status. Comments are due 30 days from publication of the proposed rules and amendments in the Federal Register.

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The JOBS Act in a Nutshell – Part III General Solicitation and Private Offering Platforms

by Vanessa Schoenthaler on April 30, 2012

Jumpstart Our Business StartupsThe JOBS Act makes several significant changes to the rules surrounding private capital formation. One such change being the much-discussed elimination of the prohibition on general solicitation and general advertising in certain private securities offerings. Another being the addition of an exemption from broker-dealer registration for platforms that, to a certain extent, facilitate offers and sales of unregistered securities.

General Solicitation and General Advertising in Private Offerings

Section 201 of the JOBS Act requires that within 90 days of its enactment, or by July 4, 2012, the Securities and Exchange Commission revise Regulation D to eliminate the prohibition on general solicitation and general advertising in private offerings made in reliance on the safe harbor afforded by Rule 506, provided that only accredited investors participate in the offerings.

In its current form, Rule 506 allows an unlimited amount of capital to be raised from an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors, provided, however, that whenever non-accredited investors participate in an offering certain information disclosure requirements must be met. In its current form Rule 506 also explicitly prohibits general solicitation and general advertising, regardless of whether participating investors are accredited or non-accredited.

Section 201 of the JOBS Act also requires that the Commission, again by July 4, 2012, revise Rule 144A to provide that securities sold thereunder may be offered to persons other than qualified institutional buyers (QIBs), including by means of general solicitation or general advertising, provided that the securities are ultimately sold only to persons that the seller or anyone acting on the seller’s behalf reasonably believe to be QIBs.

Like Rule 506, Rule 144A is a safe harbor for sales of unregistered securities. Where they differ is that Rule 506 addresses sales of securities by an issuer (akin to a primary offering), whereas Rule 144A addresses resales by persons other than an issuer (akin to a secondary offering). Very generally, the safe harbor afforded by Rule 144A allows for resales of a limited category of qualifying securities to QIBs. Rule 144A resales often follow in close proximity to the private offering in which the securities being resold were originally issued.

So how are these changes going to impact the market for private securities offerings?

Insofar as Rule 506 offerings are concerned, over time we may see a shift from other types of Regulation D offerings to Rule 506 offerings, but lifting the ban on general solicitation and general advertising is not likely to have a significant impact on the type of investors participating in Rule 506 offerings.

Based on a recent report by the Commission’s Division of Risk, Strategy and Financial Innovation (FSHI), Rule 506 is already by far the most popular private offering exemption; used in over half of all the private offerings examined in FSHI’s report. And, even though Rule 506 allows for participation by up to 35 non-accredited investor, almost 90% of all Regulation D offerings (Rules 504, 505 and 506 combined) are made up entirely of accredited investors. So, while we may ultimately see even more Rule 506 offerings, there’s not much room for a shift in the ratio of non-accredited to accredited investors.

As for transactions set up to take advantage of the Rule 144A resale exemption, they only make up a small number of the private offerings conducted each year and they generally involve larger companies that already are, or immediately become, subject to the Exchange Act’s reporting requirements. Compared to Rule 506 offerings, Rule 144A transactions are fairly niche and, while I don’t have anything in the way of stats to back it up, I don’t think that we’re going to see any great shift toward Rule 144A offerings just because general solicitation and general advertising is permitted.

Where lifting the ban on general solicitation and general advertising will undoubtedly have the greatest impact is in the amount of information about private offerings that becomes publicly available. Hopefully this will result in a better understanding of how private capital formation works, as opposed to an overload of information that is of diminishing value or quality.

One other item of note here is that, despite the JOBS Act having taken effect, the current prohibition on general solicitation and general advertising remains in place until the Commission adopts amended or new implementing rules and those rules themselves take effect.

The Platform Exemption to Broker-Dealer Registration

Finally, Section 201 the JOBS Act creates an entirely new exemption from the broker-dealer registration requirements for anyone that maintains a platform or other mechanism that permits offers, sales, purchases or negotiations of securities, or permits general solicitation, general advertising or related activities by an issuer that is offering securities, regardless of whether those activities take place online, in person or by some other means.

What’s more, the exemption is available even if the person maintaining the platform invests in or provides “ancillary services” related to the securities that are made available through the platform. Ancillary services are defined to include due diligence services, provided no compensated investment advice is given, and the provision of standardized documents, provided there is no involvement in the negotiation process and the parties are free to use their own transaction documents if they choose to.

Lastly, the exemption is contingent on there being no transaction related compensation, no possession of securities or customer funds and no involvement by persons subject to statutory disqualification under Section 3(a)(39) of the Exchange Act.

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The SEC Releases the Division of RSFI’s Report on Regulation D Offerings

by Vanessa Schoenthaler on April 11, 2012

Yesterday the Securities and Exchange Commission’s Division of Risk, Strategy and Financial Innovation released a report analyzing information extracted from all Form D filings made with the Commission between January 2009 and March 2011. The report, entitled Capital Raising in the US: The Significance of Unregistered Offerings Using the Regulation D Exemption, coincides with a slide presentation given before the Advisory Committee on Small and Emerging Companies in October 2011. The report looks at the amount of capital raised using the Regulation D exemptions (Rules 504, 505 and 506) as compared to the amount of capital raised using other methods, public and private, and gives us a bit of insight into common Regulation D offering characteristics and the companies that most frequently avail themselves of the Regulation D exemptions.

Common Regulation D Offering Characteristics

Using information reported in response Item 13 of Form D, the report begins by estimating the total amount of capital raised in Regulation D offerings for the 2009 and 2010 calendar years (take a look at the report’s appendix for some of its methodologies and assumptions, including the treatment of Form D amendments). Item 13 of Form D requires that a company specify:

  • the total amount of securities to be offered (Item 13(a)), expressed as a dollar value or as an “Indefinite” amount (indicating that the total offering amount is undetermined or cannot be determined at the time of the Form D filing);
  • the total amount of securities that have been sold as of the time of the Form D filing (Item 13(b)); and
  • the total amount of securities that remain to be sold (Item 13(c)).

Based on a review of these figures the report estimates that, for the 2009 and 2010 calendar years, capital raised through Regulation D offerings ranged from a minimum (calculated using Item 13(b)) of approximately $587 and $905 billion, respectively, to a maximum (calculated using Item 13(a)) of approximately $1.5 and $1.2 trillion, respectively. With the average offering size being approximately $30 million, but the median offering size only being approximately $1 million, suggesting that a large number of smaller offerings took place.

Among the available Regulation D exemptions, Rule 506 was by far the most popular one to be claimed during the period examined. Rule 506 allows you to raise an unlimited amount of capital from an unlimited number of accredited investors, and up to 35 non-accredited investors, provided certain information and other requirements are met.

The data also reveals that during the 2009 and 2010 calendar years the total amount of capital raised in Regulation D offerings was more than twice the total amount of capital raised in public equity offerings. There are, however, other factors that might be influencing these findings, not the least of which being the state of the capital markets during the period in question. It’ll be interesting to see if this trend continues as the environment for public equity improves.

Another interesting bit of information revealed by the data is the number and type of investors that typically participate in a Regulation D offering. Only approximately 10% of investors that participated in offerings during the period examined were non-accredited investors. With approximately 90% of offerings being made up of entirely accredited investors. In addition almost 90% of offerings involved approximately 30 investors or less.

Common Company Characteristics

The report also gives us some insight into the type of companies that most frequently avail themselves of the Regulation D offering exemptions. For example, Item 4 of Form D requires that a company identify its industry group and Item 5 asks that it disclose its revenue range (though companies have the option to “Decline to Disclose”).

Based on a review of the responses to Item 4, nearly one-third, or 29%, of the Form D filers in 2009 and 2010 identified themselves as pooled investments funds (of which approximately half, or 55%, further identified themselves as hedge funds). Of the remaining companies, approximately 15% identified themselves as being in the technology industry, approximately 10% in the health care industry and approximately 8% in the real estate industry.

While approximately half of all companies declined to disclose their revenues, of the companies that did make the disclosure nearly 20% had no revenues at all and another approximately 20% had revenues of $25 million dollars or less (the chart below accounts for a $1.00 – $5 million revenue range and a $1 million – $5 million revenue range, but Form D calls for disclosure in the $1.00 – $1 million and $1 million – $5 million revenue ranges, so it’s unclear to me as to whether there’s overlap in the chart or a typo, though I assume the latter). Finally, less than 4% of all companies raising capital in a Regulation D offering reported revenues in excess of $25 million.

Additionally, during the period examined approximately 25% of all companies that raised capital in a Regulation D offering were foreign companies.

And, of the universe of public companies, approximately 10% raised capital in a Regulation D offering, with those relying on Regulation D tending to be smaller and less profitable then their peers.

A complete copy of the report is embedded below, it’s brief and there are plenty of additional charts to flip through:

(Download File)

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The SEC Proposes Rules for Disqualification of Felons and Other Bad Actors from Rule 506 Offerings

by Vanessa Schoenthaler on May 26, 2011

In addition to final rules and forms implementing the whistleblower program, yesterday the Securities and Exchange Commission also voted, by a margin of 3-2, to propose a series of rule amendments designed to implement Section 926 of the Dodd-Frank Act.

Section 926 requires the adoption of rules disqualifying an offering from reliance on Rule 506 of Regulation D when certain felons or other “bad actors” are involved in the offering. Rule 506 is by far the most widely claimed exemption under Regulation D. For the 12 month period ended September 30, 2010 the Commission received 17,292 initial filings for offerings under Regulation D, of those 16,027 claimed a Rule 506 exemption.

The Actors

As proposed the rule amendments would add a new subsection (c) to Rule 506 entitled “Bad Actor Disqualification”, and would apply to bad acts committed by:

  • the company or any predecessor or affiliated company;
  • the company’s officers, directors, general partners or managing members;
  • beneficial owners of 10% or more of a company’s equity securities;
  • any promoter connected to the company in any capacity at the time of sale;
  • any person that has been or will be paid, directly or indirectly, for the solicitation of purchasers in connection with an offering; and
  • any officers, directors, general partners or managing members of a compensated solicitor.

The Bad Acts

The bad acts triggering disqualification would include:

  • criminal convictions in connection with: the purchase or sale of securities; the making of false filings with the Commission; or the business of an underwriter, broker-dealer, municipal securities advisor or paid solicitor of securities, that have occurred within 10 years of the offering (or 5 years in the case of the company, or a predecessor or affiliated company);
  • being subject to a court injunction or restraining order within 5 years of the offering that, at the time of the offering, prohibits a person from engaging in: conduct in connection with the purchase or sale of securities; the making of false filings with the Commission; or the business of an underwriter, broker-dealer, municipal securities advisor or paid solicitor of securities;
  • being subject to a final order by certain state or federal regulators that, at the time of the offering, bars a person from: association with an entity regulated by the Commission; engaging in the business of securities, insurance or banking; engaging in savings association or credit union activities; or is based on a violation of law or regulation that prohibits fraudulent, manipulative or deceptive conduct entered within 10 years of the offering;
  • certain Commission disciplinary orders related to broker-dealers, municipal securities dealers, investment advisers and investment companies and their associated persons;
  • suspension or expulsion from membership in, or suspension or bar from associating with, a member of a securities self-regulatory organization;
  • being subject to a refusal order, stop order or order suspending a Regulation A exemption within 5 years of the offering; and
  • being subject to a U.S. Postal Service false representation order within 5 years of the offering.

One Exception

The proposed rule amendments contain a reasonable care exception which provides that a company would not lose the benefit of the Rule 506 exemption, regardless of the existence of a disqualifying bad act, if the company can show that it did not know and, in the exercise of reasonable care, could not have know of the disqualification. Establishing reasonable care requires doing your diligence, i.e., conducting a factual inquiry into whether any disqualification exists; the nature and scope of the inquiry will depend on the facts and circumstances of the offering.

The Controversial Provision

At the Commission’s open meeting, one of the more controversial aspects of the proposed rule amendments was the inclusion of disqualifying events that pre-date enactment of the Dodd-Frank Act in the look-back period for bad acts under the rule.

In other words, as currently proposed, if an actor covered by the new rule amendments entered into a negotiated settlement agreement with a federal or state regulator prior to enactment of the Dodd-Frank Act that settlement agreement will still disqualify the actor from participating in Rule 506 offerings, even if they might not have settled had they known at the time that it would have resulted in disqualification.  For a complete discussion of the issue take a look at pages 44-49 of the Commission’s proposing release.

Both Commissioners Casey and Paredes took issue with this provision and ultimately voted against the proposed rules and amendments.

The Commission is soliciting public comments on the proposed rules and amendments, which are due on or before July 14, 2011.

 

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The Proposed Amendments to the Definition of Accredited Investor and Other Odds and Ends

by Vanessa Schoenthaler on February 1, 2011

Last week the Securities and Exchange Commission issued proposed amendments to conform the definition of accredited investor to the requirements of Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As amended, the definition would read:

Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of purchase, exceeds $1,000,000, excluding the value of the primary residence of such natural person, calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.

An interesting tidbit from the footnotes of the proposing release: in fiscal year 2010 the Commission received 17,593 initial Form D filings, of those 16,856, or 96%, claimed an exemption that relies on the definition of an accredited investor.

The Commission is soliciting comments on a number of aspects of the new definition, which are due on or before March 11, 2011. Of particular note, at the Commission’s January 25, 2011 open meeting, both Commissioners Casey and Paredes expressed interested in hearing comments on whether the amended definition should “grandfather” existing investors who were accredited at the time of their initial investment, but who may no longer be accredited under the new definition, to allow those investors to make follow-on investments.

An Extension of Comment Periods

On Friday the Commission announced that it was extending the comment period for its proposed rules on disclosures related to conflict minerals, mine safety and payments made in connection with resource extractions through March 2, 2011. The original comment period was set to expire on January 31, 2011. The extension is being issued in response to several requests for additional time to “allow for the collection of information and improve the quality of responses” by interested persons. Each of the extending releases, available here, here and here, references a representative sample of letters that have made a request for additional time.

The Cost of Implementing Dodd-Frank

Also on Friday Representatives Randy Neugebauer, Chairman of the Subcommittee on Oversight and Investigations, and Spencer Bachus, Chairman of the House Financial Services Committee, issued a joint letter to the Commission, and several other federal agencies, seeking information regarding the estimated costs associated with implementing and executing the Dodd-Frank Act. The Commission has until February 10, 2011 to respond.

(Download File)

The Commission continues to suffer from budgetary constraints and is currently operating on the basis of a continuing resolution that temporarily extends its fiscal year 2010 budget through March 4, 2011. As a result, the Commission has been forced to scale back or delay a number of Dodd-Frank initiatives, among other things.

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Dodd-Frank Act Amends the Definition of Accredited Investor

by Vanessa Schoenthaler on August 2, 2010

On July 21, 2010 President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law.  The Dodd-Frank Act focuses primarily on financial institutions; however, there are several provisions that affect non-financial institutions, like Section 413(a)’s adjustment to the definition of “accredited investor”.

Prior to enactment of the Dodd-Frank Act a person was considered an accredited investor under both Rules 215 and 501(a)(5) of the Securities Act if:

  • in each of the two most recent years they had income in excess of $200,000, or in excess of $300,000 jointly with a spouse, and had a reasonable expectation of reaching that same income level in the current year; or
  • they had a net worth, individually or jointly with a spouse, in excess of $1,000,000.

Section 413(a) adjusts this second standard by requiring that any calculation of net worth exclude the value of a person’s primary residence.  This adjustment is effective immediately.

The Securities and Exchange Commission, in responding to inquiries on how to determine the value of a primary residence, has updated its Compliance and Disclosure Interpretations (here and here) with the following guidance:

Section 413(a) of the Dodd-Frank Act does not define the term “value,” nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of the net worth calculation. As required by Section 413(a) of the Dodd-Frank Act, the Commission will issue amendments to its rules to conform them to the adjustment to the accredited investor net worth standard made by the Act. However, Section 413(a) provides that the adjustment is effective upon enactment of the Act. When determining net worth for purposes of Securities Act Rules 215 and 501(a)(5), the value of the person’s primary residence must be excluded. Pending implementation of the changes to the Commission’s rules required by the Act, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth.

So, until the Commission completes its rulemaking process and amends Rules 215 and 501(a)(5) of the Securities Act (which you can comment on here):

  • If you’re an investor trying to determine whether you’re accredited under the new net worth standard you have to exclude the value of your primary residence from the calculation and, if you have any negative equity (if you’re underwater on your mortgage), you have to further reduce your net worth by that amount of negative equity.
  • If you’re a company or fund trying to raise money you should revise your subscription documents to include language that reflects the adjusted net worth standard for individual accredited investors.

(h/t to Kevin for some of the research on this first post)

On July 21, 2010 President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. The Dodd-Frank Act focuses primarily on financial institutions; however, there are several provisions that affect non-financial institutions, like Section 413(a)’s adjustment to the definition of “accredited investor”.

Prior to enactment of the Dodd-Frank Act a person was considered an accredited investor under both Rules 215 and 501(a)(5) of the Securities Act if:

· in each of the two most recent years they had income in excess of $200,000, or in excess of $300,000 jointly with a spouse, and had a reasonable expectation of reaching that same income level in the current year; or

· they had a net worth, individually or jointly with a spouse, in excess of $1,000,000.

Section 413(a) adjusts the latter category by requiring that any calculation of net worth exclude the value of a person’s primary residence. This adjustment is effective immediately.

The SEC, in responding to inquiries on how to determine the value of a primary residence, has updated its Compliance and Disclosure Interpretations (here and here) with the following guidance:

Section 413(a) of the Dodd-Frank Act does not define the term “value,” nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of the net worth calculation. As required by Section 413(a) of the Dodd-Frank Act, the Commission will issue amendments to its rules to conform them to the adjustment to the accredited investor net worth standard made by the Act. However, Section 413(a) provides that the adjustment is effective upon enactment of the Act. When determining net worth for purposes of Securities Act Rules 215 and 501(a)(5), the value of the person’s primary residence must be excluded. Pending implementation of the changes to the Commission’s rules required by the Act, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth.

So, until the SEC completes its rulemaking process and amends Rules 215 and 501(a)(5) of the Securities Act:

· if you’re an investor trying to determine whether you’re accredited under the net worth category then you have to exclude the value of your primary residence from your calculation, and if you have any negative equity (if you’re underwater on your mortgage) then you also have to reduce your net worth by an equal amount.

· if you’re a company or a fund trying to raise money then you have to revise your offering documents

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