On December 21, 2011 the SEC issued a final rule amending the individual net worth standard in the definition of an “Accredited Investor.” This rule became effective on February 27, 2012.
Background
When signed into law on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) changed the Accredited Investor definition by excluding the value of a natural person’s primary residence in calculating whether he or she meets the $1 million net worth test for qualifying as an Accredited Investor.
The Dodd-Frank Act further required the SEC to review the appropriateness of the Accredited Investor definition and issue additional changes that best implement Congress’ intent. The SEC has completed its review and issued a final rule that clarifies the calculation of net worth.
Final Rule (effective February 27, 2012)
To qualify as an Accredited Investor on the basis of net worth, a natural person must have an individual net worth, or joint net worth with such individual’s spouse, in excess of $1,000,000. “Net worth” for this purpose means the aggregate fair market value of the individual’s assets minus total liabilities, provided that:
(i) the value of the individual’s primary residence is excluded as an asset;
(ii) the amount of indebtedness secured by the individual’s primary residence, up to the estimated fair market value of the residence, is excluded as a liability;
(iii) the investor must deduct as a liability any debt on the primary residence that exceeds the fair market value of the investor’s primary residence (i.e., the amount by which the mortgage is “underwater”); and
(iv) the investor must deduct as a liability any debt that was incurred in the 60 days prior to the sale of the securities (e.g., a second mortgage or home equity loan), unless such debt was incurred in connection with the purchase of their primary residence.
The definition of an Accredited Investor continues to include any natural person with individual income in excess of $200,000, or joint income with a spouse in excess of $300,000, for each of the last two years, and a reasonable expectation of reaching the same level in the current year (irrespective of their net worth).
UPDATE: SEC Modernizes the Accredited Investor Definition - August 26, 2020
