SEC Adopts Net Worth Standard for Accredited Investors under Dodd-Frank Act
The SEC adopted a final rule amending the net worth standard in the definition of accredited investor under the Securities Act to conform the definition to the requirements of the Dodd-Frank Act.
On December 21, 2011, the SEC adopted a final rule amending the net worth standard in the definition of "accredited investor" under the Securities Act to conform the definition to the requirements of Section 413(a) of the Dodd-Frank Act.
SEC rules permit certain private and limited offerings to be made without registration under the Securities Act if sales are made only to accredited investors (see Practice Note, Section 4(2) and Regulation D Private Placements). One way that individuals may qualify as accredited investors is by having a net worth, alone or with a spouse, of at least $1 million.
The final rule adopted by the SEC on December 21, 2011:
Excludes the value of an individual's primary residence when calculating net worth.
Clarifies the treatment of indebtedness secured by the primary residence for purposes of the net worth calculation.
Under certain circumstances, permits individuals who qualified as accredited investors under the pre-Dodd-Frank Act net worth standard to use that prior standard for certain follow-on investments.
Under the amended net worth calculation:
Any indebtedness secured by a person's primary residence that exceeds the property's estimated fair market value must be treated as a liability.
Indebtedness secured by a person's primary residence up to the estimated fair market value of the residence is not treated as a liability unless the individual incurred the debt:
in the 60 days before the purchase of securities in the exempt securities offering; and
other than as a result of acquiring the primary residence.
Any indebtedness secured by a person's primary residence that meets these two conditions must be treated as a liability under the new definition. These amendments to the net worth calculation are intended to prevent manipulation of the new net worth standard by eliminating an individual's ability to artificially inflate net worth by borrowing against home equity shortly before participating in an exempt offering.
The changes to the net worth standard have been in effect since July 22, 2010, the date the Dodd-Frank Act became effective, but the final rule implements these changes under the Securities Act. The final rule is consistent with earlier Compliance and Disclosure Interpretation guidance issued by the SEC when the Dodd-Frank Act was adopted (see Question 255.47, Compliance and Disclosure Interpretations: Securities Act Rules).
The final rules take effect 60 days after publication in the Federal Register.
For a description of the definition of accredited investor, including a discussion of the amended net worth standard, see Practice Note, Section 4(2) and Regulation D Private Placements: Accredited Investors.