More Hedge Fund Investors? SEC Floats New Accredited Investor Rule

Eliminates ‘primary residence’ from an investor’s net worth; comments due March 11

The Securities and Exchange Commission (SEC) has proposed a “Net Worth Standard for Accredited Investors” rule that would amend the Securities Act of 1933. This amendment is required under Section 413 of the Dodd-Frank Act.

The new rule requires the value of a person’s “primary residence” to be excluded when calculating net worth to see if an investor qualifies as “accredited.”

This new net worth standard was effective when Dodd-Frank became law but had required the SEC to revise the Securities Act to reflect this change. The sixth item below in the SEC definition of accredited investor is what the proposed rule would change. 

From the SEC’s website, “federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

  1. a bank, insurance company, registered investment company, business development company, or small business investment company;
  2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
  4. a director, executive officer, or general partner of the company selling the securities;
  5. a business in which all the equity owners are accredited investors;
  6. 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;
  7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.”

The SEC comment period ends March 11.

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