The SEC issued a rule proposal designed to incorporate (a) the requirement under the Dodd-Frank Act (effective since July 21, 2010) that in order to qualify as an “accredited investor” under the 1933 Act’s rules, including Regulation D, a natural person must have a net worth in excess of $1 million, excluding the value of the person’s primary residence (as discussed in the July 28, 2010 Special Edition of the Alert) and (b) related SEC guidance regarding the treatment of indebtedness secured by a primary residence (as discussed in the August 3, 2010 Alert), as well as make related technical changes. As proposed to be revised, the affected definition in Rules 215 and 501 under the Securities Act of 1933 would read as follows:
Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of purchase, exceeds $1,000,000, excluding the value of the primary residence of such natural person, calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.
The SEC makes clear in the proposal that it intends for any excess of secured debt on a primary residence over the value of the primary residence (when the property is “under water”) to be subtracted from the value of other assets. The SEC requests comment on a variety of issues, including the timing of the net worth determination, whether to define “primary residence” (a topic on which the release provides guidance) and whether to provide a transition rule to allow subsequent investment, e.g., in a rights offering, by an investor who previously qualified but was disqualified by the Dodd-Frank Act. Comments on the proposal are due by March 11, 2011.