SEC Amendments Change Net Worth Calculation for “Accredited Investors”

December 22, 2011

The value of a person’s home will not count as an asset when calculating net worth to determine whether that person may invest in certain unregistered securities offerings, according to SEC rules amendments released Wednesday.

Final Rule Release No. 33-9287 explains changes made to conform the SEC’s definition of an “accredited investor” in its regulations to Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The amendments also clarify how borrowing secured by a primary residence should be treated in the net worth calculation.

The amendments in some circumstances permit individuals who qualified as accredited investors under the pre-Dodd-Frank definition of net worth to use that prior standard for certain follow-on investments.

SEC rules allow certain private and limited offerings to be made without registration and without requiring specific disclosures, if sales are made only to “accredited investors.” One way individuals can qualify as accredited investors is by having a net worth, alone or together with a spouse, of at least $1 million.

The value of the person’s primary residence is required to be excluded from the net worth calculation, according to Section 413(a) of the Dodd-Frank Act. Previously, the standard allowed the value of a person’s home to be included in determining net worth.

According to the amended rules, indebtedness secured by the individual’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 an exempt offering and is not in connection with the acquisition of the primary residence. In those cases, the debt secured by the primary residence must be treated as a liability in the net worth calculation.

This amendment prevents individuals from borrowing against home equity to inflate their net worth shortly before participating in an exempt securities offering. Indebtedness secured by a person’s primary residence that exceeds the property’s fair market value is treated as a liability under the new regulation.

The amended net worth requirement will take effect in the SEC rules 60 days after publication in the Federal Register, but the exclusion of the primary residence from net worth calculation has been in effect since the Dodd-Frank Act became law in July 2010.

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