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Important Changes to “Accredited Investor” Definition

August 26th, 2010

By Enrique E. Liberman

Enrique Liberman is the President of the Art Fund Association and a Partner in the Art Law practice group of the law firm of Tannenbaum Helpern Syracuse & Hirschtritt LLP in New York City. Mr. Liberman counsels art investment funds on their formation and governance and has written and spoken on issues affecting the art fund industry. Mr. Liberman is a graduate of Harvard Law School (’99) and Stanford University (’96).

Art fund managers and their placement agents should take note that effective as of July 21, 2010 the definition of “accredited investor” under the rules of the Securities Act of 1933 has changed, effectively increasing the threshold by which individuals can qualify for private offerings of equity in art investment funds and art funds of funds.

Equity interests in art funds in the United States are not offered for sale to the general public in order to meet certain exemptions from registration under U.S. securities laws. Such exemptions require art funds to comply with statutory and regulatory regimes that relate to private offerings, including, but not limited to, limiting their offerings to “accredited investors” with whom the art fund has a pre-existing relationship arising out of other than the art fund offering. Art funds may permit up to 35 investors to be non-accredited; however, to do so requires more significant financial disclosures and presents additional challenges with respect to compliance by the art fund with state “blue sky” filings.

Under the old regulatory regime, a natural person could qualify as an “accredited investor” if his or her net worth, or joint net worth with such person’s spouse, exceeded $1,000,000 at the time of his or her subscription of the privately offered securities. The value of such individual’s primary residence was included in the calculation of his or her “net worth”.

Pursuant to Section 413 of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law by President Obama on July 21, 2010, the value of an individual’s primary residence must be excluded from the calculation of such person’s “net worth”. Similarly, the related debt secured by such primary residence may also be excluded from such calculation; however, if the debt on such residence exceeds the residence’s value (i.e., for an “underwater” mortgage), the amount of such excess liability must be included in the calculation, thereby reducing the prospective investor’s net worth.

As there is no grace period or grandfathering for private offerings that are currently underway, art fund managers and their placement agents should immediately review and revise their offering documentation and subscription documents for ongoing offerings, including for subscriptions that have been signed up but not formally closed. For questions or assistance in finding advisors to assist you in dealing with this change, please contact Art FA at

The opinions set forth in this publication are those of the author and are not attributable to the Art Fund Association or any other organization. This publication is for educational purposes only and is not intended as legal advice. No attorney-client relationship is created as a result of the dissemination of this publication. To the extent this publication is construed as a solicitation for clients, please note the following: Attorney Advertising. Past outcomes are no guarantee of similar results.

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