The available pool of equity investors may have decreased for developers and other parties in the hospitality industry looking to raise equity.  Section 413 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, among a myraid of other things too numerous to list, modified the definition of an "accredited investor" to exclude the value of a person's primary residence for purposes of determining whether a potential investor qualifies as an "accredited investor" by virtue of having a personal net worth in excess of $1,000,000.  The modification took immediate effect upon adoption of the Act; however, the SEC has only just recently published proposed revisions to Securities Act rules to further effectuate the Act's mandate. 

What does this mean?  Most equity financings are done privately and not by way of an expensive and time-consuming publicly registered offering, especially in the hospitality industry.  Equity raises which are limited to "accredited investors" and meet other requirements are exempt from such registration requirements and, therefore, are much less expensive to conduct.  One definition of an "accredited investor" is an individual who has a net worth in excess of $1,000,000.  By excluding the primary residence of a potential investor from the net worth calculation, the total pool of potential investors necessarily shrinks.

Is this important?  While the shrinking of the pool of potential investors is not an ideal scenario for those conducting private placements - especially in this climate of scarce funding in the hospitality industry - the practical impact should be minimal.  Even disregarding SEC rules, it is never advisable to accept funds from those who cannot afford to lose their entire investment - these are the types of people that sue when projects go bad.  Companies looking for start-up or project funding should target only those investors who have the business acumen and wherewithall to understand the industry, the company, the company's business and, most importantly, that things don't always go according to plan.  The $1 million threshold set by the SEC, and this new method of calculating it, are reasonable objective measures for finding such informed investors. 

What does the future hold?  An interesting aspect of Section 413 of the Dodd-Frank Act is that the Act requires the SEC to undertake a review of the definition of "accredited investor" every four years, beginning four years after the enactment of the Act.   Therefore, in four years the SEC could, by rule rather than by law, adjust the $1,000,000 threshold.   So, while the impact today may be minimal, the SEC, not Congress, could later raise the $1,000,000 threshold or otherwise adjust the definition of accredited investor in such a way that does materially affect the availability of potential investors.