As reported in our July 23, 2010 Client Alert and our July 28, 2010 Alert, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) provides that, effective July 21, 2010, the “net worth” threshold for a natural person to qualify as an “accredited investor” pursuant to regulations under the Securities Act of 1933 is $1 million, excluding the value of the person’s primary residence. As the SEC has pointed out: “[T]he Act does not define the term ‘value,’ nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of [this] net worth calculation.”
The SEC issued the following initial guidance on July 23, 2010: “When determining net worth for purposes of [1933 Act] Rules 215 and [Regulation D], the value of the person’s primary residence must be excluded. Pending implementation of the changes to the [SEC]’s rules required by the Act, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. 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.”
Documentation soliciting accredited investor representations (e.g., private fund subscription agreements, transfer agreements and similar documentation) should be updated to reflect the Act’s revisions to the net worth threshold. In addition, individuals making (and those receiving) such representations may take into account this recent SEC guidance when determining such individuals’ liabilities for purposes of meeting that threshold.