SEC Considering Revising Accredited Investor Standard

Just before the holidays, the SEC released a report detailing a review conducted by the SEC staff of the accredited investor standard. As a quick recap, the accredited investor standard is, for individuals, a net worth of at least $1 million (either alone or in conjunction with one’s spouse) or an annual income of at least $200,000 for the past 2 years with a reasonable expectation of such income in the current year (or $300,000 in conjunction with one’s spouse); for companies, trusts, and other legal entities, the accredited investor standards typically require assets of at least $5 million.

The purpose of the review, conducted pursuant to the Dodd-Frank Act, is to determine whether the accredited investor standard should be modified in order to achieve the securities regulations’ objectives of protection of the investing public. The report published in 2015 is the first report drafted under Dodd-Frank, and is the first meaningful review of the accredited investor standard since its adoption in 1982. In particular, the review looks at whether the financial standards of the accredited investor rule are still effective to protect the investing public, given the changes in the economy, and whether other standards should be adopted in addition to or in place of the financial limitations. The report’s proposed standards include consideration of an investor’s investment history, current investments, professional and educational background, and the use of an “accredited investor” examination to qualify investors. The report addresses many criticisms of the accredited investor rule as being solely focused on an investor’s financial ability to absorb risk of loss, instead of whether the investor is actually capable of evaluating the merits and risks of a potential investment.

The SEC’s report discussing the review of the accredited investor standard, and suggested revisions to the rule, can be read here: http://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf. The SEC is also seeking public comment on the proposals contained in the report, as well as general comments on the accredited investor standard, which can be submitted at the following link: http://www.sec.gov/cgi-bin/ruling-comments?ruling=4692&rule_path=/comments/4-692&file_num=4-692&action=Show_Form&title=Report%20on%20the%20Review%20of%20the%20Definition%20of%20%27Accredited%20Investor%27 

SEC Issues Clarifications on General Solicitation

Earlier in the summer, the SEC issued several statements in response to inquiries about different aspects of general solicitation with respect to Regulation D (particularly Rule 506) offerings. The first statement concerned the ability of angel groups to provide a “preexisting relationship” between issuer and prospective investors for the purpose of the Reg D rules. The SEC clarified that angel investors in a particular group who may have a preexisting relationship with a company can introduce that company to other angels in the group, and rely on the group to have a reasonable belief that its members have the requisite financial sophistication necessary for some of the Reg D rules. The SEC further noted that the greater number of persons in an “angel” group without financial sophistication and the more impersonal, non-selective the methods of introduction in the group are, the more likely the SEC will be to deem such communications general solicitation.

The SEC also provided guidance with respect to demo days. The SEC’s statement clarified that as long as a pitch at a demo day did not involve an offer of a security, then the Securities Act and its regulations were not implicated. However, where any communication at a demo day could be considered to be an offer of a security or alerting persons to the potential offer of securities, the Securities Act could be implicated, and whether or not such communications at a demo day constituted general solicitation depended on the type of invitation to the event — if the event is limited to persons whom the issuer or organizer had a preexisting relationship, then it would not be considered general solicitation, but if members of the general public are invited to the event, then the communications may be deemed general solicitation.

Finally, the SEC also issued a no-action letter where it approved the use of a a password-protected website in order to permit issuers and sophisticated investors to develop a preexisting relationship prior to the offer of any securities, so that the use of a website to make an offer of securities would not constitute general solicitation.

Accept Credit Cards? Make Sure You Know of New Liability Rules

Beginning October 1, EuroPay, Visa, and MasterCard are adopting new rules related to the adoption of chip-and-pin technology in credit cards. The chip-and-pin technology is intended to replace traditional magnetic strip credit cards and the swipe-and-sign process; chip-and-pin technology is reputed to reduce the risk of credit card fraud at point-of-sale systems to nearly zero.

Currently, the credit card issuer bears liability in the event a credit card is used fraudulently at an in-store merchant. Under the new rules coming into effect next month, liability will shift to the party — either the issuer or the merchant — that has not adopted chip-and-pin technology. For businesses that accept credit cards for sales, where a chip-and-pin credit card is used in-store and the merchant has not installed a chip-and-pin point-of-sale reader (i.e., the store is still using magnetic strip swipe readers), liability for fraudulent card use falls on the merchant. If the merchant is using a chip-and-pin reader, the card issuers will continue to assume liability for fraudulent use. Additionally, where an old magnetic strip credit card is used with a merchant still using older magnetic strip readers, card issuers will continue to retain liability, though issuers will have likely phased out all old-style credit cards as they expire in the coming few years.

The liability shift does not apply to card-not-present transactions (such as online transactions or where the merchant keys in the credit card information), or fraud resulting from a lost or stolen card. The liability shift also does not occur for fuel pump or ATM transactions until October 2017. For businesses who accept credit cards for in-person transactions that do not yet have chip-and-pin processing hardware, you should be contacting your payment processor to inquire about how you can obtain up-to-date card processors.

DOL Issues New “Economic Realities” Test In Employee vs. Contractor Debate

The “employee vs. contractor” debate made headlines several weeks ago when a California court ruled that the vast majority of Uber’s drivers in the state were improperly classified as independent contractors, and were in reality employees of Uber.

In the midst of renewed debate over how to properly determine employees from independent contractors, the DOL recently issued an Administrator’s Interpretation. The DOL’s new guidance adopts an “economic realities” test, wherein the primary issue is whether a worker is economically dependent on the employer, and therefore an employee, or the worker is in business for herself or himself and not dependent on the employer to make a living. The DOL’s interpretation includes a multi-factor test based on multiple federal court decisions examining the employee vs. contractor issue. Factors to be considered include:

– the extent to which the work performed is an integral part of the employer’s business

– the worker’s opportunity for profit or loss depending on the worker’s managerial skill

– the extent of the relative investments of the employer and the worker

– whether the work performed requires special skills and initiative

– the permanency of the relationship 

– the degree of control exercised or retained by the employer 

The DOL importantly notes that, under the Fair Labor Standards Act, most workers are employees; therefore, in determining the status of a worker, there should probably be a presumption in favor of classifying the worker as an employee. The DOL stresses that no one factor is determinative, and every factor should be considered in determining whether the worker is truly in business for herself or himself, or is economically dependent on the employer. Moreover, the DOL further stresses that only the economic reality is determinative as to the worker’s status — how the employer and worker have decided to label the relationship is not relevant to the analysis.