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SEC Changes Accredited Investor Rules

On Behalf of | Jan 3, 2012 | Firm News

Many of you may have companies that want to issue securities to investors in transactions that qualify for exemption from registration requirements under the securities laws.  An important consideration is whether your investors are “accredited” within the meaning of SEC rules. If investors are accredited, various exemptions from registration and other benefits are available.  One key measurement of “accredited” status is the investor’s “net worth.”

The Securities and Exchange Commission (SEC) recently updated its interpretation of the definition of “accredited investor,” as it relates to individuals, to exclude from an individual’s net worth the value of the individual’s primary residence.  The SEC also excluded any debt secured by the residence from the net worth calculation to the extent that the debt was less than or equal to the estimated fair market value of the primary residence.  These changes implement legislation that was passed nearly 1-1/2 years ago.

The new regulations also include as a liability in determining an individual’s net worth any increase in debt secured by the investor’s primary residence occurring within the 60 days prior to the date of the investment (unless the increase was as a result of the acquisition of the primary residence).  The amended rule also “grandfathers” investments in securities pursuant to rights, such as a preemptive right or right of first offer, by persons who held the relevant right on or prior to July 20, 2010, if the holder of the right (i) owned securities issued by the same issuer on or prior to such date and (ii) was an accredited investor on the basis of net worth at the time that he or she acquired the right.

The “net worth” change is significant, in that investors are no longer able to include the value of the primary residence in the calculation of net worth.  It also excludes most liabilities securing the primary residence, thereby increasing the investor’s overall net worth.