In late January, the SEC proposed a new rule to formerly change the definition of “accredited investor” to exclude the value of a person’s primary residence for purposes of determining whether the person qualifies as an “accredited investor” on the basis of having a net worth in excess of $1 million. Previously, the value of the personal residence could be included. The new rule formalizes a change that occurred when the Dodd-Frank Wall Street Reform and Consumer Protection Act became effective on July 21, 2010. The proposed rule clarifies that when excluding the value of the primary residence as an asset, the amount of debt secured by the property, up to the fair market value of the property, should also be disregarded as a liability. 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.
Whether an investor qualifies as accredited determines whether the issuer may sell securities in specified private and other limited offerings without registration of the offering under the Securities Act. In the future, changes to the criteria for determining accredited investor status will depend on a report of the Comptroller General of the United States that is due three years after enactment of the Dodd-Frank statute.
