Am I Still An Accredited Investor?

You may or may not be aware, but the Dodd-Frank financial reform bill effected an immediate change in the definition of accredited investor. Now, if you are relying on the $1M net worth standard (as described by the SEC, “Net worth is simply the excess of assets over liabilities.“) to qualify as an accredited investor, you can no longer count the value of your primary residence towards the $1M threshold. In addition, if your primary residence is underwater, you must count against your net worth the amount by which indebtedness secured by such residence exceeds the value of the residence. Which means that owning a primary residence can only count against you in determining whether you are an accredited investor.

The individual income thresholds have not changed and remain at individual income in excess of $200,00 in the last two years (or $300,000 joint income with spouse) with the reasonable expectation of reaching the same in the current year.

 

 Guidance from the SEC:

Question 179.01

Question: Under Section 413(a) of the Dodd-Frank Act, the net worth standard for an accredited investor, as set forth in Securities Act Rules 215 and 501(a)(5), is adjusted to delete from the calculation of net worth the “value of the primary residence” of the investor. How should the “value of the primary residence” be determined for purposes of calculating an investor’s net worth?

Answer: Section 413(a) of the Dodd-Frank Act does not define the term “value,” nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of the net worth calculation. As required by Section 413(a) of the Dodd-Frank Act, the Commission will issue amendments to its rules to conform them to the adjustment to the accredited investor net worth standard made by the Act. However, Section 413(a) provides that the adjustment is effective upon enactment of the Act. When determining net worth for purposes of Securities Act Rules 215 and 501(a)(5), the value of the person’s primary residence must be excluded. Pending implementation of the changes to the Commission’s rules required by the Act, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth. [July 23, 2010]

 

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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