FINANCIAL FOOTPRINTS – Newsworthy Notes Regarding the Financial Industry

13 Mar

New SEC Rules May Disqualify Many Individuals From Being Able To Invest In Private Placement Financing

Under the Securities Act of 1933, any business offering to sell securities to raise capital must either be registered with the SEC – an expensive and lengthy process – or meet an exemption.  The exemptions, generally seek to limit securities offerings to individuals who are defined as “accredited investors“.  Accredited investors must meet an income test or a minimum net worth of $1 million. On February 27th of this year, new SEC rules came into effect, which may lead to disqualification of many potential investors eligible to participate in private placement financing.

Prior to the new rules, an individual investor could qualify as an accredited investor by including the value of one’s residence in the net worth calculations.  Under the new rules, an individual investor can no longer include the net equity in one’s residence when calculating net worth.  Furthermore, the new rules provide that a mortgage will not be treated as a liability in calculation of net worth unless the mortgage exceeds the fair market value of the property at the time the securities are sold, in which case the excess will be treated as liability.  In addition, any increase in the amount of mortgage obtained within 60 days prior to the purchase of the securities will be included as a liability in the net worth calculations, unless in connection with the purchase of a primary residence. This is intended to prevent investors from manipulating one’s net worth in order to qualify as an accredited investor by converting home equity into another type of asset.

The SEC adopted the amendments – Rules 215 and 501(a)(5) under the Securities Act – on February 27, 2012.  The amendment was adopted in order to implement Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The full text of the rule may be viewed:

Itai Klein is a corporate attorney representing start-up enterprises, venture-backed companies, family-owned businesses and publicly-traded companies.  He acts as their outside general counsel and advises them in significant transactions such as corporate finance, mergers and acquisitions, securities compliance, joint ventures, licensing, and corporate governance. Itai has particular experience in the manufacturing & distribution, food & beverage, health and beauty, new media and technology industries. Call 310.295.2261 or email



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: