On December 21, 2011, the Securities and Exchange Commission has codified the Dodd-Frank Act’s change to the net worth test for “accredited investors,” a definition used in SEC rules adopted under the Securities Act of 1933, as amended. The accredited investor test is set forth in Securities Act Rule 501(a) and can be met by a natural person with a net worth in excess of $1,000,000. Since its enactment on July 21, 2010, Section 413(a) of the Dodd-Frank Act has excluded primary residences from “accredited investor” net worth calculations. The new SEC amendment clarifies that mortgage debt on an investor’s primary residence generally will not be treated as a liability for the purposes of the net worth qualification, except to the extent that the debt is higher than the estimated fair market value of the residence, thus avoiding double deduction of the residence and the mortgage debt. However, any increase in the amount of mortgage debt secured by a primary residence in the 60 days prior to a sale of securities will count as a liability in an investor’s net worth calculation when the increase is not related to the purchase of that primary residence. The SEC intends this to prevent investors from borrowing against their primary residence and using the proceeds of the newly incurred debt to inflate net worth calculations in order to qualify as an “accredited investor,” while not penalizing individuals who purchase a primary residence prior to the purchase of a security. The revised rule also includes a grandfathering clause providing that the old net worth test will apply to a securityholder’s right to purchase additional securities of the issuer, if such right existed prior to July 20, 2010 and the individual qualified as an accredited investor on the basis of net worth as of the time such right was acquired.
The amendment will be effective 60 days after publication in the Federal Register.
The SEC’s press release on this amendment can be found at http://www.sec.gov/news/press/2011/2011-274.htm and the final rule release can be accessed at www.sec.gov/rules/final/2011/33-9287.pdf.