The SEC recently proposed amending its rules to reflect the definition of “Accredited Investor” adopted by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was signed into law on July 21, 2010, and, among other things, revised the legal requirements governing private and other limited offerings of securities without registration under the Securities Act. The Dodd-Frank Act requires that to qualify as an Accredited Investor, the net worth of an individual (or the joint net worth of that person and his or her spouse) must be equal to or greater than the statutory threshold (currently, $1 million) excluding the value of his or her primary residence.
Under the proposed rules, net worth under Rule 501 of Regulation D and Rule 215 means the excess of total assets at fair market value (excluding the value of the primary residence) over total liabilities (excluding indebtedness secured by the primary residence), provided that if the primary residence is underwater (i.e., the debt secured under the mortgage is greater than the fair market value of the primary residence), then the excess debt should be considered a liability and deducted from the net worth of the individual and his or her spouse, if any.
The proposing release does not define “primary residence,” but notes that issuers and investors should be able to use the commonly understood meaning of the term, being “the home where a person lives most of the time,” and refers to federal income tax rules for additional guidance if needed under complex or unusual circumstances.
Beginning on July 21, 2014, four years after enactment of the Dodd-Frank Act, the SEC is required to review the Accredited Investor definition “in its entirety” and make any revisions to the rule that it deems appropriate. Future rulemaking likely will reflect recommendations proposed by the Comptroller General, and may then adjust the income and net worth standards for inflation. Under the Dodd-Frank Act, the Comptroller General must conduct a study every three years to evaluate the Accredited Investor criteria.
The SEC is soliciting comments on any matters that may affect the proposal as well as the following specific items:
- whether the value of the residence should be calculated by netting out the debt secured by the residence, as proposed, or whether it would be more appropriate to exclude the entire fair market value of the residence from net worth, without netting out any associated debt;
- whether it would be more appropriate to use the word “equity” instead of the word “value” when referring to the primary residence in Accredited Investor net worth standards;
- whether the rule should include a definition of the term “primary residence,” whether the definition should also be incorporated into the federal income tax code, and what that definition should include;
- whether securities purchased with the proceeds of debt, secured by a primary residence, should be excluded from the calculation of net worth;
- whether the calculation of net worth should be made on a specified date, such as 30, 60, or 90 days before the sale of securities under Regulation D, to prevent investors from inflating their net worth by using the proceeds of home equity loans to purchase other assets; and
- whether a rule should be adopted to enable an investor, who previously qualified as accredited but was disqualified by the change effected by the Dodd-Frank Act, to make subsequent or “add-on” investments.
The SEC is seeking public comments on the proposed rules on or before March 11, 2011.
- See SEC Release No. 33-9177 (January 25, 2011) (the “Proposing Release”). [Back to reference]
- See Proposing Release at notes 35-36. [Back to reference]