SEC adopts net worth standard for accredited investors

Washington, D.C., December 21, 2011 — The Securities and Exchange Commission has amended its rules to exclude the value of a person’s home from net worth calculations used to determine whether an individual may invest in certain unregistered securities offerings. The changes were made to conform the SEC’s definition of an “accredited investor” to the requirements of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under the amended rule, the value of an individual’s primary residence will not count as an asset when calculating net worth to determine “accredited investor” status. The amendments also clarify the treatment of borrowing secured by a primary residence for purposes of the net worth calculation. Under certain circumstances, they also permit individuals who qualified as accredited investors under the pre-Dodd-Frank Act definition of net worth to use that prior net worth standard for certain follow-on investments.

SEC rules permit certain private and limited offerings to be made without registration, and without requiring specified disclosures, if sales are made only to “accredited investors.” One way individuals may qualify as “accredited investors” is by having a net worth, alone or together with their spouse, of at least $1 million. The Dodd-Frank Act requires that the value of a person’s primary residence be excluded from the net worth calculation used to determine the person’s “accredited investor” status.

Under the amended net worth calculation, indebtedness secured by the person’s primary residence, up to the estimated fair market value of the primary residence, is not treated as a liability, unless the borrowing occurs in the 60 days preceding the purchase of securities in the exempt offering and is not in connection with the acquisition of the primary residence. In such cases, the debt secured by the primary residence must be treated as a liability in the net worth calculation. This is intended to prevent manipulation of the net worth standard, by eliminating the ability of individuals to artificially inflate net worth under the new definition by borrowing against home equity shortly before participating in an exempt securities offering. In addition, any indebtedness secured by a person’s primary residence in excess of the property’s estimated fair market value is treated as a liability under the new definition.

The amended net worth standard will take effect 60 days after publication in the Federal Register. Beginning in 2014, and every four years thereafter, the Dodd-Frank Act requires the Commission to review the “accredited investor” definition in its entirety and to engage in further rulemaking to the extent it deems appropriate.

SEC has now proposed or adopted more than three-quarters of the rules that the Dodd-Frank Act required the agency to write.

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