The Restoring American Financial Stability Act of 2010, originally introduced into the U.S. Senate by Senator Chris Dodd (the Dodd Bill), contained several provisions that could have drastically altered the current landscape for private investments by high net-worth, wealthy individuals. Many companies rely on Regulation D of the Securities Act of 1933 for registration exemptions of private securities offerings. One of the purposes of Regulation D was to enable smaller companies to raise significant capital without incurring the cost and delay typically associated with securities offerings registered with the Securities and Exchange Commission and applicable states.

Of significant importance is Rule 506 of Regulation D, which permits a company to raise capital from an unlimited number of "accredited investors," but only 35 nonaccredited investors, subject to other restrictions. An individual's accredited status under Rule 506 is determined by reference to the amount of his financial net worth or annual income. The original Dodd Bill would have required the SEC to adjust those financial thresholds by an amount appropriate in light of price inflation since those figures were originally determined. It is estimated that these figures would have been adjusted from $200,000 to approximately $450,000 for the individual annual income threshold, and from $1 million to $2.3 million for the individual net worth threshold. Such significant increases in these thresholds would likely have dramatically reduced the eligible pool of investors for private offerings.

The U.S. Senate, however, adopted an amendment to the original Dodd Bill that would only initially change the accredited investor thresholds by excluding the value of an investor's primary residence in the determination of whether he satisfies the current $1 million net worth standard. It would then require the SEC to review, not earlier than four years after the enactment of such legislation and at least once every four years thereafter, the applicable accredited investor definitions for natural persons and, in its discretion, make adjustments appropriate in light of the economy and in the public interest.

The original Dodd Bill would have also implemented a 120-day review period for all Regulation D investments, which would have seriously impeded a business' ability to privately raise capital in a timely manner. It would have also jeopardized the current uniform national regulation of Rule 506 private offerings, thereby resulting in increased costs and decreased efficiency and certainty. However, at the urging of small business supporters, this proposed drastic Regulation D overhaul was deleted in favor of inclusion of a so-called "bad boy" provision, which would disqualify certain persons from offering securities pursuant to Rule 506 that have been convicted of certain crimes or are subject to certain orders of a state agency prohibiting them from engaging in certain securities and financial activities.

Although this amendment could result in higher accredited investor financial thresholds in the long-term, it better protects smaller businesses' ability to privately raise capital under Regulation D in the short-term, which is especially significant in light of the current state of the U.S. economy. However, it remains to be seen how many investors could be excluded as accredited investors if their personal residences are excluded from their net worth calculation.

These reforms to the current Regulation D framework are only proposed at this time. The Dodd Bill was passed by the U.S. Senate on May 20. The U.S. House of Representatives' version of this bill must be reconciled with the Dodd Bill before any final legislation may be proposed for enactment.

Ashley Fuhrmeister is an attorney with BrownWinick, a Des Moines, Iowa-based law firm serving the renewable fuels industry. Reach her at (515) 248-6621 or fuhrmeister@brownwinick.com.