Co-authored by James B. Anderson.

On December 21, the Securities and Exchange Commission adopted an amendment to the accredited investor net worth standard under Regulation D of the Securities Act of 1933, as amended, to exclude the value of an individual’s primary residence from the $1 million net worth calculations used to determine whether such individual is an “accredited investor” qualified to invest in certain unregistered securities offerings. The amendment conforms the SEC’s definition of an “accredited investor” to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).

Under the revised net worth standard, indebtedness secured by the individual’s primary residence, up to the estimated fair market value of the primary residence, is not treated as a liability in the net worth calculation, unless the borrowing occurs in the 60 days preceding the purchase of securities in the exempt offering and is not in connection with the acquisition of the primary residence, in which case the debt secured by the primary residence must be treated as a liability. This exception is intended to prevent manipulation of the net worth standard, by eliminating the ability of an individual to artificially inflate net worth under the new definition by borrowing against home equity shortly before participating in an exempt securities offering. In addition, any indebtedness secured by an individual’s primary residence in excess of the property’s estimated fair market value is treated as a liability under the revised net worth calculation.

In response to comments received by the SEC, the amendment contains a provision under which the former accredited investor net worth test will apply to follow-on investments in accordance with a right to purchase such securities, so long as (1) the right was held by the individual on July 20, 2010 (the day before enactment of the Dodd-Frank Act); (2) the individual qualified as an accredited investor on the basis of net worth at the time the right was acquired; and (3) the individual held securities of the issuer, other than the right, on July 20, 2010.

Beginning in 2014, and every four years thereafter, the Dodd-Frank Act requires the SEC to review the “accredited investor” definition in its entirety and to engage in further rulemaking to the extent deemed appropriate by the SEC.

Click here for the complete text of the SEC’s adopting release.