The SEC has adopted a final rule that revises the net worth standard for “accredited investors.” Although the modified definition went into effect once the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, the SEC still had to adjust its rules to this modification. Per the Dodd-Frank Act’s Section 413(a), the Securities Act of 1933's definition of “accredited investors” cannot include the value of a primary person’s residence for purposes of determining whether he/she qualifies as one based on possessing a net worth of over $1 million.
The Securities Act states that all sales and offers of securities in the US must be registered unless they are exempt from the criteria. The point of the concept of “accredited investors” is to be able to ID people that can stand the economic risk of investing in a security that is unregistered for an indefinite time frame and, should it come to it, be able to afford losing their entire investment. Because “accredited investors” are usually the only ones that are given the opportunity to invest in private offerings, the opportunity for certain people to invest and the pool of available investors is influenced by whether an investor can be considered an accredited investor.
Before Dodd-Frank, one’s main residence and its fair market value, as well as the indebtedness obtained by the residence, were factored in when calculating net worth to figure out whether or not the individual fulfilled the $1 million threshold. The Act’s Section 413(a), however, took this property out of the equation but only up to the residence’s fair market value when the securities’ sale takes place. This means that if one’s primary residence is “underwater,” it will lower the individual’s net worth according to the amount of indebtedness that goes beyond the fair market value of that person’s primary residence for purposes of determining whether or not that person is an accredited investor. The final rules also include a limited grandfathering provision letting investors that no longer qualify as “accredited investors” because of changes put into effect by Dodd-Frank to be treated as accredited for certain “follow-on” investments.
The final rule will go into effect 60 days after it is published in the Federal register.
Read the final rule (PDF)
SEC Adopts Net Worth Standard for Accredited Investors Under Dodd-Frank Act, SEC, December 21, 2011
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