Yesterday, a new law went into effect that immediately changes the definition of “accredited investor” under the federal securities laws, having a potentially dramatic effect on the real estate investment market and the economy. President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Section 413 of the Dodd-Frank Act changes the definition of “accredited investor” under the Securities Act of 1933.

Specifically, the definition of “accredited investor” contained in Rule 215 and Regulation D previously included, among other categories, “Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000”. That calculation of net worth included the value of an investor’s primary residence…until yeseterday.

The Dodd-Frank Act revises the accredited investor definition as it relates to natural persons to exclude the value of a person’s primary residence from the $1 million net worth test.

The revision to the accredited investor definition as it applies to natural persons is effective immediately, with no transition period or grandfathering for private offerings that are already in progress but have not yet been completed.

This new law could have a significant negative impact on the commercial real estate investment market and, consequently, on the broader economy. The new law effectively requires all accredited investors to have a higher net worth requirement, which will mean there will be fewer accredited investors, and fewer large investments getting the funding they need to close.

With the already-challenging debt markets, this new development presents investors with an untimely double-whammy in getting the money they need to take advantage of this buyer’s market.

This new development will have its most immediate impact on private syndicators and other issuers relying on the accredited investor definition in connection with ongoing private offerings that involve investors who are natural persons. Those syndicators should immediately revise their disclosure and subscription documents to reflect this modification of the net worth test. To the extent subscription materials have already been received from investors who are natural persons, private funds and other issuers should obtain new accredited investor representations are required to ensure the availability of an exemption from the registration requirements of the Securities Act.

Our law firm can help you with these new documents. Please contact me at [email protected]

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