SEC Adopts Regs re “Accredited Investor” Definition

As required by the Dodd-Frank Act of 2011, the SEC has now adopted final rules which confirm what already was official upon passing of the act: if you want to qualify as an “accredited investor” by virtue of having a net worth of more than $1 million, that net worth will have to exclude the value of your primary residence. One thing that wasn’t clear in Dodd-Frank was whether you can ignore the value of any debt that’s on the house so it doesn’t reduce your overall net worth for the calculation. The new rule makes clear that you can. So if you have a $2 million house, and a $1 million mortgage on it, and $1.1 million of other assets and no other debt, you are accredited. That’s because you count neither the $2 million house or the $1 million mortgage in figuring your net worth, only the $1.1 million of other assets. Get it? They also put in a grandfathering provision letting you use the old standard under certain circumstances, and added special possible treatment for new debt on your house incurred within 60 days of investing in securities.

Being accredited is important in many private placement offerings because issuers have very few obligations in offerings to accrediteds. In most cases there are no specific information delivery requirements other than avoiding fraud. A company also typically can sell securities to an unlimited number of accrediteds. In addition to the “net worth” standard, individuals can be accredited if they have a net income of over $200,000, or $300,000 with their spouse. Other accrediteds include banks, broker-dealers, officers of the issuer, certain other institutions and any business entity with assets over $5 million not formed for the purpose of the investment. Also, any entity that has all of its equity owners as accredited is also accredited.

These new rules are somewhat uneventful because they simply further implement what was already implemented by Dodd-Frank, but in their inimitable fashion my friends in the SEC Office of Small Business Policy have polished up the details to make things a bit clearer for us. Of course if you have questions contact you friendly neighborhood securities counsel!

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