Financial reform fallout: the Dodd-Frank Act holds hidden traps for companies.

• Author: Monson, Michael L.
• Position: Legal Brief

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) into law. While most of the Dodd-Frank Act focuses on banking reforms, a few inconspicuous provisions have the potential to significantly impact two important business segments in the state of Utah--startup companies and mining companies.

Startup Companies

Historically, Utah has ranked as one of the top states for entrepreneurial activity. In fact, Forbes magazine just recognized Utah as the No. 1 state in the nation for fostering business growth. Business growth in the Beehive State has resulted to a large extent from startup companies that are able to find the necessary capital and market niche to become profitable.

The Dodd-Frank Act includes a provision that may make the availability of capital for cash-strapped startups harder to find. In order for a company to obtain equity financing through the sale of securities such as stocks or membership interests, the company must either register with the Securities and Exchange Commission (SEC) or find an applicable exemption from registration. Registration with the SEC is not practical for startup companies. Therefore, startup companies need an exemption from registration.

One of the most popular exemptions from registration is Rule 506 under Regulation D. Companies using the Rule 506 exemption can raise an unlimited amount of money. Companies may also sell their securities to an unlimited number of investors under Rule 506, provided the investors qualify as "accredited investors."

Accredited investors are large institutions such as banks, insurance companies and registered investment companies; business entities and trusts with assets exceeding $5 million; and wealthy individuals. Prior to the passage of the Dodd-Frank Act, an individual could qualify as an accredited investor if such person either had individual net worth, or joint net worth with the person's spouse, that exceeded $1 million or income exceeding $200,000 in each of the two most recent years, or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

The Dodd-Frank Act has changed the definition of accredited investor as it applies to individuals. Effective as of July 21, 2010, the value of a primary residence can no longer be included when determining the net worth of an individual for purposes of the $l-million-net-worth...