The Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in 2010 modified the definition of accredited investor under Regulation D under the Securities Act of 1933 (Securities Act), effective immediately. Since its adoption, Regulation D has been one of the primary means by which companies have raised capital through the sale of securities in the United States absent registration with the Securities and Exchange Commission (SEC).
Although Regulation D originated as an effort to assist small business capital formation and continues to play an important role in that arena, all sizes of companies use the registration exemptions in Regulation D.1 According to the SEC, for the 12 month period ended Sept. 30, 2010, the SEC received 17,292 initial filings for offerings under Regulation D, of which 16,027 claimed a Rule 506 exemption.2 Rule 506 of Regulation D permits companies to sell securities to an unlimited number of accredited investors and allows the companies to decide the type and amount of information to provide the accredited investors in the transaction as long as the information does not violate the antifraud prohibitions of the federal securities laws.
However, Rule 506 limits the number of non-accredited investors in a transaction to 35 and requires that companies provide this group of investors with detailed disclosure documents that are generally the same as those used in offerings registered with the SEC. Given the cost and expense incurred in preparing disclosure for non-accredited investors, companies seeking to raise capital in private placement transactions will often limit participation solely to accredited investors. The amendment to the definition of accredited investor pursuant to the Dodd-Frank Act is likely to reduce the number of persons who qualify as accredited investors under the federal securities laws and consequently change the landscape for private placement financings.