The Change to the Accredited Investor Definition - Exclusion of Primary Residence from Calculation of Net Worth

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law.  Among the slew of provisions contained in the legislation, is a change to what constitutes an accredited investor under the Securities Act of 1933.  

As I have blogged about in the past, one way to qualify as an accredited investor under Rule 501 of Regulation D is to be:

a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase

Section 413 of the Dodd Frank Act changes that, by requiring the SEC to adjust the definition of “accredited investor” under Regulation D to exclude the value of a natural person’s primary residence when calculating that person’s net worth (emphasis added):

The Commission shall adjust any net worth standard for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, so that the individual net worth of any natural person, or joint net worth with the spouse of that person, at the time of purchase, is more than $1,000,000 (as such amount is adjusted periodically by rule of the Commission), excluding the value of the primary residence of such natural person, except that during the 4-year period that begins on the date of enactment of this Act, any net worth standard shall be $1,000,000, excluding the value of the primary residence of such natural person

This is obviously an important change for anyone out there with a private placement of securities - who should seek legal counsel to make sure they are obtaining the appropriate representations from individual investors.

It will be interesting to see exactly how the SEC implements this, and how it will treat, for example, a mortgage on a primary residence in the determination of person's net worth.  There are a lot of people out west with upside down mortgages - so this change may actually help some people qualify as accredited investors depending on how the SEC interprets and acts on this.