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Legal Issues

SEC Adopts Net Worth Standard for Accredited Investors - December 22, 2011

On December 21, 2011 the SEC revised its rules to exclude the value of a person's home from net worth calculations in determining "accredited investor" status. The revision has been made to comply with requirements of the Dodd-Frank Act.


The determination of "accredited investor" status is important because issuers may make certain private and limited offerings of securities without registration 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 a spouse, of at least $1 million.


Under the amended rule, when determining "accredited investor" status any positive equity in the person's primary residence is excluded from net worth. The amended rule provides that the indebtedness secured by the primary residence, up to the estimated fair market value of the residence, is generally not considered a liability for purposes of determining "accredited investor" status based on net worth. Any increase in the amount of debt secured by a primary residence within the 60-day period before the purchase of the securities, other than as a result of the acquisition of the primary residence, will be included as a liability, even if the estimated value of the residence exceeds the aggregate amount of debt secured by the residence.


Under certain circumstances, individuals who qualified as accredited investors under the pre-Dodd-Frank Act definition of net worth may use that prior net worth standard for certain follow-on investments.


The amended net worth standard will take effect 60 days after publication. Beginning in 2014, and every four years thereafter, the Dodd-Frank Act requires the Commission to review the "accredited investor" definition.