Corporate Governance

How the Wall Street Reform Act Impacts Smaller Businesses: Investor Protection and Changes to Regulation D

By J Robert Brown Jr.

Investor Protection – Amendments to the 1933 Act (footnote 11) and the 1934 Act (footnote 12)

Changes to SEC Regulation D The SEC adopted Regulation D in 1982 (footnote 13) to provide a safe harbor exemption from registration for certain securities offerings of securities. The operative provisions of Regulation D are Rules 504 and 505 which were adopted pursuant to the SEC's authority under § 3(b) of the 1933 Act, and Rule 506, adopted under § 4(2) of the 1933 Act. The National Securities Markets Improvement Act of 1996 ('NSMIA') provides that offerings conducted under Rule 506 are
exempt from state review and qualification. (footnote 14)

Among its several sections aimed at SEC Regulation D, § 413 of the Act requires the SEC to adjust the definition of 'accredited investor'(footnote 15) so that (for natural persons) the net worth calculation specifically excludes the value of such persons primary residence. The Section makes that legislative determination effective immediately, notwithstanding the SEC's rule making authority. Additionally, the Act requires the SEC to increase the net worth requirement for natural persons(footnote 16) within four years after the enactment of the Act. The basis for and the amount of the increase is not set forth in the Act, but is left to future SEC rule-making. The Act did not change the income alternative for determining accredited investor status ($200,000 annual income for an individual, $300,000 if joint with spouse). The SEC may make changes to this alternative part of the definition in the future.

Section 926 of the Act requires the SEC to adopt rules that prevent certain ‘bad actors' from being able to use Rule 506 of Regulation D. The current 'bad boy' rules only apply to Rule 505 offerings. The Act requires that the new rules expand upon the existing rules found in Rule 262 of Regulation A,(footnote 17)which are incorporated into Rule 505. The SEC must adopt these new rules within one year.

Herrick K. Lidstone, Jr., Burns Figa & Will, PC

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11 The Securities Act of 1933, found at 15 U.S.C. § 77a, et seq.
12 The Securities Exchange Act of 1934, found at 15 U.S.C. § 78a, et seq.?

13 SEC Rel. No. 33-6389, 24 S.E.C. Docket 1166, 1982 WL 35662 (Mar. 8, 1982). When adopted, Regulation D consolidated and replaced former Rules 146, 240 and 242.
14 NSMIA amended § 18 of the 1933 Act to provide that states no longer have jurisdiction to require registration or qualification of any 'covered security' or securities that 'will be a covered security upon completion of the transaction.' § 18(a)(1). 'Covered securities' include those issued pursuant to Rule 506. §18(b)(4)(D).  NSMIA also prohibits state review and critique of an offering document 'that is prepared by or on behalf of the issuer.' SEC Rule 146 defines the term 'by or on behalf of an issuer.' See discussion in Lidstone, Securities Law Deskbook (Bradford Publishing Co.) at §11.3.
15 See Regulation D, Rule 501(a).
16 Currently $1,000,000, excluding the value of the natural person's primary residence.' Rule 501(a) as amended by § 413 of the Act. Before the Act, the $1,000,000 requirement had not changed since originally enacted in 1982. An early version of the Senate bill would have required the SEC to increase the definitions for inflation since 1982, which would have resulted in net income of up to $459,000 for an individual, $688,000 for a couple, or a net worth requirement of $2,300,000.
17 17 C.F.R. § 230.262.

Full post as published by The Race to the Bottom on July 27, 2010 (boomark / email).