SEC Redefines ‘Accredited Investors’ Under Dodd-Frank

Taking another step toward meeting the requirements of Dodd-Frank, the Securities and Exchange Commission on Wednesday redefined its $1 million-in-net-worth “accredited investor” rule to exclude the value of an individual’s primary home from its net worth calculations. Only accredited investors are allowed to purchase Reg D securities under three rules of the Securities Act of 1933. 

In addition, the SEC’s redefinition clarifies treatment of borrowing secured by an individual’s primary residence in calculating that individual’s net worth. Specifically, that indebtedness is not treated as a liability unless the borrowing occurs in the 60 days preceding the purchase of securities in an exempt offering in which only accredited investors can participate. If that debt is incurred in connection with the individual’s acquisition of a primary residence, the debt secured by the primary residence must be treated as a liability in the net worth calculation. 

Furthermore, the redefinition allows, in certain circumstance, for an individual who previously qualified as an accredited investor pre-Dodd-Frank to use that prior net worth standard for certain follow-on investments.

In May of this year, the SEC proposed a rule under Dodd-Frank Section 418 to amend Rule 205-3 of the Investment Advisers Act that would raise the dollar amount thresholds for investment advisors to charge performance fees to $1 million in assets under management and $2 million in net worth. Those thresholds are what makes a prospective investor a “qualified investor” for many private investment vehicles.