Companies raising capital by issuing securities often rely on the federal Rule 506 exemption under Regulation D and limit the offering to "accredited investors."  The exemption allows companies to avoid heightened state regulation as well as the burden of providing more detailed written disclosure to non-accredited investors as a condition to a registration exemption.  Although there are several standards to determine whether an investor is accredited, many individuals rely on the $1,000,000 minimum net worth category to establish their status as accredited investors.  Prior to the Dodd-Frank Act, the net worth calculation could include the value of his or her primary residence.  The Dodd-Frank Act modified the definition of accredited investor (as it relates to natural persons) to exclude the value of the investor’s primary residence from the $1,000,000 net worth calculation.

What about the liability of a corresponding mortgage?  According to recent guidance from the Securities and Exchange Commission (SEC), the amount of any mortgage or other debt secured by the primary residence (up to its fair market value) may also be excluded from the net worth calculation.  If, however, the indebtedness secured by the residence exceeds the value of the home, the excess should be considered a liability and deducted in determining the investor’s net worth.

The change to the accredited investor definition effectively increased the net worth requirement for many investors, effective July 21, 2010.  Issuers and investors should pay close attention to the accredited investor provisions in their offering and subscription documents and may need to modify them to reflect this change.
Further changes to the accredited investor definition may be on the horizon.  The Dodd-Frank Act directs the SEC, beginning in 2014, to adjust the net worth standard to "more than $1,000,000," leaving the specific amount to the discretion of the SEC.  The SEC also must undertake a review of the entire definition of accredited investor (as it applies to natural persons) at least once every four years thereafter, and is directed to make adjustments as it deems appropriate for the protection of investors, in the public interest, and in light of the economy.

Should you have any questions about the application of the Dodd-Frank Act to your business, or any other corporate-related matter, please do not hesitate to contact us.

The Riddell Williams Corporate Group advises owners, directors and officers of public and private entities on their legal roles and responsibilities. We help clients raise capital, secure debt and manage and execute transactions. We provide expertise in entity formation, management structures, buy-sell arrangements, negotiation of vendor and supplier arrangements, distribution and franchising agreements and asset and equity transfers, including a broad range of merger and acquisition services.

Riddell Williams P.S.
1001 Fourth Avenue, Suite 4500
Seattle, WA  98154-1192

Telephone:  206.624.3600
Facsimile:  206.389.1708
www.riddellwilliams.com

Office occupancy is forecasted to drop to a cyclical low of 81.9% in 2010 from 87.4% in 2007, which represents a 6.3% decrease and is less severe than the last office cycle. In the 1980 to 1986 cycle, the cyclical low of 80.7% represented a peak to trough drop in occupancy of 13.2%, which was largely driven by excess supply.  Office rents are forecasted to drop to $21.26/sf in 2010 from $24.59/sf in 2007, which is a 20.7% decrease after adjusting for inflation. This is modestly higher than the 19.5% inflation adjusted decrease observed in the 1980 to 1986 period.

Industrial occupancy is forecasted to drop to a cyclical low of 88% in 2010 from 90.5% in 2007, which is a 2.8% decrease and is less severe than the last industrial cycle. In the 1980-1987 cycle, the cyclical low of 89.4% represented a peak to trough drop in occupancy of 3.7%.  Industrial rents are forecasted to drop to $4.33/sf in 2010 from $4.7/sf in 2007, which is a 15.5% decrease after adjusting for inflation. This is greater than the 11.6% inflation adjusted decrease observed in the 1980 to 1987 period.

Retail Occupancy is forecasted to drop to a cyclical low of 87.5% in 2011 from 92.5% in 2007, which represents a 5.4% decrease and is more severe than the previous retail cycle. In the 1980-1987 cycle, the cyclical low of 89.6% represented a peak to trough drop in occupancy of 3.8%  Retail rents are forecasted to drop to a $16.21/sf in 2011 from $18.58/sf in 2007, which is a 15.4% decrease after adjusting for inflation. This is more than the 13.7% inflation adjusted decrease observed in the 1980 to 1987 period.

Hotel Occupancy has declined by 8.6%, which is worse than the 6.5% drop in the 2000-2003 cycle. Occupancy is expected to stabilize in 2010, and should start growing in 2011.  ADR (Average Daily Rate) has dropped by about 9%, and is forecasted to drop slightly further, which is worse than the 5% decrease in the 2000–2003 cycle.  RevPAR (defined as ADR × Occupancy) has declined by 16.7%, which is worse than the 10.3% drop in RevPAR during the 2000–2003 cycle. RevPAR may decline further before stabilizing in 2011. The drop in occupancy has been about the same for Full and Limited Service hotels. However, ADR declines have been much more pronounced in the luxury sector.

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