United States

SEC adopts new net worth standard for accredited investors


On Jan. 25, 2011, the Securities and Exchange Commission (SEC) proposed amendments to the accredited investor standards in order to comply with the requirements of Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Nearly a year later, on Dec. 21, 2011, the SEC adopted the final rules in an amendment to the accredited investor standards.

The Accredited Investor Definition

Regulation D of the Securities Act of 1933 set forth rules that govern the limited offer and sale of securities without registration. One of those rules, Rule 501, clearly defines the characteristics of an accredited investor. Under the new amendment, these characteristics now are defined as:

  • a bank, insurance company, registered investment company, business development company or small business investment company;
  • an employment benefit plan, within the meaning of ERISA, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  • a charitable organization, corporation or partnership with assets exceeding $5 million
  • a director, executive officer or general partner of the company selling the securities;
  • a business in which all the equity owners are accredited investors;
  • a natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence;
  • a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  • a trust with assets in excess of $5 million, not formed to acquire the securities, whose purchases a sophisticated person makes.

Exclude the value of the primary residence

Dodd-Frank, under Section 413(a), required the SEC to revise the net worth standard for accredited investors that applies to natural persons either as individuals or jointly with their spouse. The new standard keeps the minimum net worth level of more than $1 million, but excludes the value of an individual's primary residence. Prior to the amendment, the value of an individual's primary residence was permitted to be included in the calculation of net worth.

Since the value of the primary residence is excluded from the net worth calculation, any borrowing secured by that primary residence is also excluded as a liability in the net worth calculation, except when the borrowing is greater than the estimated fair market value of the primary residence. If the indebtedness is higher than the estimated fair market value of the primary residence, then the amount that exceeds the value of the primary residence is to be included as a liability in the net worth calculation.

There is also a new 60-day rule, which stipulates that, if an individual borrows against a primary residence within the 60-day period preceding the purchase of securities in an exempt offering, then this indebtedness must be included as a liability in the net worth calculation even if the total indebtedness is less than the fair market value of the primary residence. This rule is intended to prevent potential investors from satisfying the new net worth requirement through the use of new borrowings shortly before the purchase.

Grandfathering provision

The final rules provide for limited transition relief, which allow investors to apply the former accredited investor net worth test to follow-on purchases of securities pursuant to rights to purchase such securities, provided that:

  • such right was held by the person on July 20, 2010 (the day before the enactment of the Dodd-Frank);
  • the person qualified as an accredited investor on the basis of net worth at the time the person acquired such right; and
  • the person held securities of the same issuer, other than the right, on July 20, 2010.

The new net worth standards are effective Feb. 27, 2012. Beginning in 2014, and every four years thereafter, Dodd-Frank requires the SEC to review the accredited investor definition in its entirety and to engage in further rulemaking to the extent it deems necessary.

For more information

If you have any questions about these issues, please contact Todd E. Rosen, CPA at 212.372.1715 or your local RSM financial services representative.



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