“SEC Amends Net Worth Standard For “Accredited Investors”
SEC rules exempt the registration of private securities offerings when sales are made to a limited number of “accredited investors.” One way investors qualify as accredited is by meeting a net worth threshold, alone or together with their spouse, of $1 million. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) excludes the value of an investor’s primary residence from the net worth calculation. On December 21, 2011, the SEC amended its definition of an accredited investor to conform with Dodd-Frank. Under the SEC’s amended rule, the value of an individual’s primary residence no longer counts as an asset when calculating net worth for accredited investor status. Individuals who qualified as accredited investors under the pre-Dodd-Frank definition, however, may under certain circumstances use the prior net worth standard, which included the value of the primary residence as a component of net worth, when making follow-up investments. The amended rules also protect against manipulation of the accredited investor standard by precluding investors from artificially inflating their net worth. If investors borrow money against their home equity within sixty days preceding the participation in an exempt offering, the debt secured by the primary residence is treated as a liability in the net worth calculation. Stated otherwise, investors may not qualify as accredited by including in their net worth calculation money obtained by leveraging their home shortly before participating in the exempt offering. This may not be the last of the SEC’s changes to the accredited investor standard. Starting in 2014, and every four years thereafter, Dodd-Frank requires the SEC to revisit the definition of an “accredited investor” and amend its rules as necessary.
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