Month: August 2010

The First Attack on the Accredited Investor Standard

Many of the provisions in the merely provide for future regulatory framework. That it is in part true for the changing definition of “accredited investor” under the Securities Act. The other part is that the definition changed once President Obama signed the bill into law ten days ago.

The definition of accredited investor now excludes the value of the primary residence from the calculation of net worth. Angel investors who poured too much of their wealth into a new swimming pool and cabana may get excluded from future private placements.

The SEC has also shown that it intends to be aggressive in setting the new accredited investor definition through the rule-making called for in Section 413 of Dodd-Frank. Last week, as part of their regular Compliance and Disclosure Interpretations the SEC gave an opinion on valuing the primary residence.

Question 179.01

Section 413(a) of the Dodd-Frank Act does not define the term “value,” nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of the net worth calculation. As required by Section 413(a) of the Dodd-Frank Act, the Commission will issue amendments to its rules to conform them to the adjustment to the accredited investor net worth standard made by the Act. However, Section 413(a) provides that the adjustment is effective upon enactment of the Act. When determining net worth for purposes of Securities Act Rules 215 and 501(a)(5), the value of the person’s primary residence must be excluded. Pending implementation of the changes to the Commission’s rules required by the Act, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth. [July 23, 2010]

So you get no benefit to your net worth calculation for your home. Even worse, if you are underwater on your home then that excess debt is eating into your net worth calculation.

I think it’s easy to argue with this interpretation. By excluding “value” you can argue that it should exclude positive value as well as negative value. You could also argue that in some states (and some loan documents) the mortgage is non-recourse so the excess of debt over the value of the home should be excluded.

You can make those arguments when the SEC begins its rule-making to create a new definition for “accredited investor.” For now, you need to live by this interpretation while you are privately raising capital.

I expect the SEC is going to continue to be aggressive in establishing the new standards. As I said early this month:

Looking into my crystal ball, I expect the SEC to adjust the income standards based on inflation. That would put them at around $459,000 if single and $688,000 if married. I would also expect the standard to include some sort investment expertise and knowledge standard. Having a big pile of cash or a big paycheck will likely no longer be the only standard.  At least that’s my guess.

Now you will need a bigger pile of cash if your home mortgage is underwater.

Sources:

Snow and Ice in August

It’s August, but here in Massachusetts we need to start thinking about snow and ice. Not because of climate change, but because of the Supreme Judicial Court. They just issued a ruling that changes the standard of liability for snow and ice hazards.

The standard in the Massachusetts had been that a property owner could not be held liable for injuries on the property arising from a natural accumulation of snow and ice. The law was based on old standards for different duties of care owed by a property owner to tenants, licensees, and trespassers. That was further tied to the question of whether the injury was caused by a defect existing on the property (First year of law school and bar exam flashback.)

The “Massachusetts Rule” was that “the law does not regard the natural accumulation of snow and ice as an actionable property defect, if it regards such weather conditions as a defect at all.” That particular statement came from a case where the homeowner had been away, leaving his driveway unshoveled and covered in snow. The injured person walked across the unshoveled driveway, fell down, was injured, and sued the property owner. She apparently left empty-handed.

The result of the Massachusetts was that most wintery slip and fall cases hinged on whether the snow and ice was a natural or unnatural accumulation of snow and ice. If it was natural, the landlord escaped liability and could get the case dismissed at summary judgment without a trial.

I should point out my bias. I have a sidewalk in front of my house (that I dutifully shovel). My employer owns commercial property in Massachusetts.

In Papadopoulos v. Target Corp., the Supreme Judicial Court announced that the state has abandoned the Massachusetts Rule and “discarded the distinction between natural and unnatural accumulations of snow and ice, which had constituted an exception to the general rule of premises liability that a property owner owes a duty to all lawful visitors to use reasonable care to maintain its property in a reasonably safe condition in view of all the circumstances.”

The new standard:

We now will apply to hazards arising from snow and ice the same obligation that a property owner owes to lawful visitors as to all other hazards: a duty to act as a reasonable person under all of the circumstances including the likelihood of injury to others, the probable seriousness of such injuries, and the burden of reducing or avoiding the risk. … If a property owner knows or reasonably should know of a dangerous condition on its property, whether arising from an accumulation of snow or ice, or rust on a railing, or a discarded banana peel, the property owner owes a duty to lawful visitors to make reasonable efforts to protect lawful visitors against the danger.

That means the jury will have to determine what snow and ice removal efforts are reasonable in light of the expense they impose on the landowner and the probability and seriousness of the foreseeable harm to others.

I think the end result is going to be more lawsuits filed against property owners. We can take Mr. Papadopoulos as an example. He had lost his case in summary judgment. Now he gets to go back to court and try again to get some money for his injuries.

Coming back to compliance, this is a rule where you act to avoid getting sued. Many communities have a local ordinance that makes the failure to clear sidewalks subject to a fine. I think most homeowners clear their sidewalks because its the neighborly thing to do. (Of course others, begrudgingly clear their sidewalks. You can get a good sense about them by seeing if they clear their driveway first or their sidewalk first.)

The goal is get property owners to clear their sidewalks and driveways so that people don’t fall down and hurt themselves. It seems there are several different ways to encourage this behavior. I could go a little deeper, but it’s still summer and I’m not ready to give more thought to snow and ice.

Sources:

Image is Austin shoveling snow by oddharmonic.