Regulatory and Case Law Developments Relating to Private Equity Fund Documents


Regulatory authorities (including the Securities and Exchange Commission (the “SEC”) and the United States Internal Revenue Service (the “IRS”)) have recently proposed and adopted amendments to rules that may affect a private equity fund’s subscription documents and other organization documents. This alert highlights several recent regulatory and case law developments affecting private equity fund documents.

Revised “Accredited Investor” Definition

Last month, the SEC adopted an amendment to the “accredited investor” standards to reflect the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Safe harbor rules provided by Regulation D under the Securities Act of 1933 allow private placement of interests in private equity funds to “accredited investors.” Under the previous rules, with respect to a natural person, an accredited investor is “any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year” or “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.”

Under the amended rule, the net worth threshold remains at $1,000,000; however, calculation of net worth for purposes of the threshold excludes the equity value of the primary residence of such natural person as an asset (calculated by subtracting from the estimated fair market value of the property, the amount of debt secured by the property). Therefore, any equity of an investor in his or her primary residence must now be excluded from such investor’s net worth calculation.

Please see full alert below for more information.

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