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SEC Issues New Rule on Accredited Investors

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Iris K. Linder
Foster Swift Business & Corporate Law Report
May 2012

In July, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) modified the definition of "accredited investor" to establish an exemption from registration under Regulation D.  In connection with the sale of securities (stock and other investments), companies are required to register the securities with the Securities and Exchange Commission (SEC) or qualify for an exemption from registration.  One of the most commonly used exemptions is found in Regulation D.  Regulation D is built, in part, around identifying investors known as "accredited investors," who are presumed not to need the protections of the securities laws.

Since 1982, one way to qualify as an accredited investor was to be a natural person whose combined net worth with that person's spouse exceeds $1,000,000.  Dodd-Frank modified this rule by excluding the value of the person's primary residence from the calculation of net worth.  The SEC was instructed to adopt a new rule making this change.

Over the last year and a half, the SEC has been engaged in a large amount of rule making as required by Dodd-Frank.  On December 21, 2011, the SEC finally adopted a rule addressing the definition of "accredited investor," which became effective on February 27, 2012.  The primary focus of the new rule is to determine how the value of the investor's primary residence impacts the net worth calculation.  Specifically:

  • The asset calculation excludes the value of the primary residence.
  • Any indebtedness secured by the primary residence up to the value of the primary residence is generally excluded as a liability.
  • If the amount of indebtedness secured by the primary residence increased during the 60 days preceding the purchase of the security, the amount of the increase in indebtedness is included as a liability.
  • Any indebtedness secured by the primary residence in excess of the value of the primary residence is included as a liability.

The purpose of the requirement in the third bullet point is to avoid having the investor take out a mortgage loan to pay for the purchase of the security without having the loan impact the investor's net worth calculation.

There are additional details and transition provisions contained in the new rule that should be discussed with a lawyer to accommodate the specifics of your situation.  Please contact Iris Linder (517.371.8127 or email) with any questions.