SEC Amends Net Worth Standard under Dodd-Frank Act

The value of a person's home will be excluded from net worth calculations used to determine whether an individual may invest in certain unregistered securities offerings, the Securities and Exchange Commission said Wednesday as it moved to adopt new standards under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

SEC rules permit certain private and limited offerings to be made without registration, and without requiring specified disclosures, if sales are made only to "accredited investors."

One way individuals may qualify as "accredited investors" is by having a net worth, alone or together with their spouse, of at least $1 million. The Dodd-Frank Act requires that the value of a person's primary residence be excluded from the net worth calculation used to determine the person's "accredited investor" status.

Under the amended net worth calculation, indebtedness secured by the person's primary residence, up to the estimated fair market value of the primary residence, is not treated as a liability, 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 such cases, the debt secured by the primary residence must be treated as a liability in the net worth calculation.

This is intended to prevent manipulation of the net worth standard, by eliminating the ability of individuals 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 a person's primary residence in excess of the property's estimated fair market value is treated as a liability under the new definition.

The amended net worth standard will take effect 60 days after publication in the Federal Register. Beginning in 2014, and every four years thereafter, SEC is required by the Dodd-Frank Act to revisit the "accredited investor" definition.