The SEC recently adopted rules to conform the definition of "accredited investor" to the change implemented by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act revised the definition of "accredited investor" under federal securities laws as it relates to natural persons to exclude primary residences from the calculation of net worth. This change was effective upon enactment of the Dodd-Frank Act.
Under SEC rules, individuals and entities that fall within the definition of "accredited investor" may participate in certain private offerings that are exempt from the registration requirements of the Securities Act of 1933. One way for an individual to qualify as an accredited investor is to have a net worth of at least $1 million, either alone or together with his or her spouse.
The adopted changes formally amend the definition to implement the Dodd-Frank Act's requirement to exclude the value of a person's primary residence from the calculation of net worth. In addition, the adopted rules clarify the treatment of any indebtedness securing a person's primary residence. Specifically, "the value of the primary residence" is determined by subtracting from the estimated fair market value of the residence the amount of debt secured by the residence, up to the estimated fair market value of the residence. This "value of the primary residence" would then be excluded from a person's net worth. However, indebtedness secured by the residence and incurred within 60 days of the sale of securities, other the as a result of acquiring the primary residence, and any indebtedness secured by the residence that exceeds the estimated fair market value of the residence are included as a liability and reduce a person's net worth.
In a welcome change from the proposed rules, the adopted rules grandfather certain existing investors who hold rights to acquire an issuer's securities and were "accredited investors" under the old definition but would not be construed as "accredited investors" under the revised definition, provided that such rights were acquired on or before July 20, 2010 (the day before the enactment date of the Dodd-Frank Act) and the investor held securities of the issuer other than such rights as of July 20, 2010. This provision grandfathers pre-emptive rights arising under state law, rights arising under an issuer's constituent documents or contractual rights, such as preemptive rights, and rights to acquire securities upon exercise or conversion of outstanding securities.
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