Yesterday, I wrote about the Compliance & Disclosure Interpretation (“C&DI”) issued last week by the staff of the SEC’s Division of Corporation Finance. In the C&DI, the staff clearly takes the position that the exclusion of an investor’s primary residence from the calculation of net worth takes effect immediately.
My own view is that Section 413(a) is ambiguous. The clause requiring immediate effectiveness is part of the same sentence that requires the SEC to change its rules. Thus, the statute could be read to say “The Commission must adjust the net worth requirement to be greater than $1 million, exclusive of residence, except that it will be $ 1 million, exclusive of residence, for the first four years after enactment.” I believe that some law firms were too quick to issue alerts that categorically state that the change is effective immediately. These unequivocal pronouncements could prove embarassing if they are called upon to defend a client that closed a financing without knowledge of this change. Prospectively, of course, the conservative approach will be to assume that the primary residence must now be excluded.
The Staff’s interpretation is not binding on the California Commissioner of Corporations (for that matter, it is not even binding on the Securities and Exchange Commission). Further, I believe that California’s Administrative Procedure Act prevents the Commissioner from adopting a change without compliance with the notice and comment procedures of that act.