Alert January 10, 2012

SEC Adopts Rule Amendments to Reflect Dodd-Frank Act Accredited Investor Standards

The SEC adopted final rule amendments designed primarily to incorporate (a) the existing requirement under the Dodd-Frank Act (effective since July 21, 2010) that in order to qualify as an “accredited investor” for the purpose of certain registration exemptions under the Securities Act of 1933 (the “1933 Act”) for private and other limited offerings, 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 Financial Services Alert) and (b) related SEC guidance regarding the treatment of indebtedness secured by a primary residence (as discussed in the August 3, 2010 Financial Services Alert).  Under these existing requirements, a natural person is an accredited investor if that natural person’s individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000 at the time the natural person purchases the security being offering in reliance on the applicable 1933 Act exemption, excluding the value of that person’s primary residence; the value of the primary residence is 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 amendments substantially track the existing requirements, but also include a new sixty-day lookback with respect to debt, as follows:

  • if the indebtedness securing a natural person’s primary residence at the time the security is acquired in reliance on the applicable exemption exceeds the amount of such indebtedness outstanding 60 days prior to such time (other than as a result of the acquisition of the primary residence), such excess is included as a liability when determining a natural person’s net worth. 

This additional requirement is intended to prevent an investor from using equity in the investor’s primary residence to purchase securities, with the ultimate goal of preventing unregistered securities from being sold to investors with limited assets other than their homes.  The amendments are effective February 27, 2012.