The Securities and Exchange Commission amended its rules, establishing new criteria for determining who qualifies as an "accredited investor" and who does not.   Those individuals who qualify may invest in certain unregistered securities offerings.  The changes, which conform the SEC's definition of an "accredited investor" to requirements mandated by the 2010 Dodd-Frank Reform Act, excludes the value of a person's home from net worth calculations. Effective Date. The amended net worth standard will go into effect 60 days after publication in the Federal Register.  Also, starting in 2014, and every 4 years thereafter, the Dodd-Frank Act requires the SEC to review the definition of "accredited investor" in its entirety, to consider whether circumstances have changed to warrant a revision in the formula.

[Note: For further details on 'accredited investor standards', go to the end of this posting - immediately following links to SEC press release and SEC final rule filing.]

As amended, the rule now will exclude ... (the value of) one's primary residence from assets when calculating net worth  - to determine "accredited investor" status.  The SEC also clarified the treatment of borrowing secured by a primary residence for purposes of the net worth calculation.  Under certain circumstances, they also permit individuals who qualified as accredited investors under the pre-Dodd-Frank Act definition of net worth to use that prior net worth standard for certain follow-on investments.

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.  Dodd-Frank requires that the value of a person's primary residence be excluded from the net worth calculation - i.e., becoming homeless.

[C-I Note: Congress, in its wisdom, included this provision in Dodd-Frank, so as to eliminate the risk that, in the event unregistered securities become, say, worthless or illiquid, might force or prompt an investor to sell off a most valuable and critically important asset.]

As amended, the net worth calculation also would exclude indebtedness secured by the person's primary residence - but only up to the estimated FMV (fair market value) of the primary residence.

[C-I Note: Houses that are under water, common these days, and much more common in 2009 and 2010 when Dodd-Frank was drafted, then adopted, refers to the situation where the FMV (fair market value) of the house falls below the outstanding balance of the house's underlying mortgage.]

An exception is made when and if such mortgage borrowing occurred 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 - which reduces the individual's net worth. This provision 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 FMV is treated as a liability under the new definition. For further details, go to:    [SEC PR 11-274, 12/21/11]    and [SEC Final Rule Release No. 33-9287, 12/21/11]. ^{___________________________________________________________} Further Details on Accredited Investor Standards. Standards used for determining one's status as an "Accredited Investor" are governed in Rules 215 and 501 under the Securities Act.  Private and other limited offerings that seek an exemption from Securities Act registration, typically will limit investments to accredited investors. Section 4(5) of the Securities Act exempts transactions involving offers or sales by an issuer solely to one or more accredited investors, if the aggregate offering price does not exceed $5,000,000, there is no advertising or public solicitation in connection with the transaction, and the issuer files a notice with the Commission. Pursuant to Regulation D under the Securities Act, an issuer conducting a limited offering of securities pursuant to the safe harbor of Rule 505 or 506 does not have to comply with the information requirements of Rule 502(b) if sales are made only to accredited investors;  and sales to accredited investors do not count towards the 35-purchaser limits under Rules 505 and 506.  Moreover, accredited investor status obviates the sophistication requirement that Rule 506 imposes on non-accredited investors. One purpose of the accredited investor concept is to identify persons who can bear the economic risk of an investment in unregistered securities, including the ability to hold unregistered (and therefore less liquid) securities for an indefinite period and, if necessary, to afford a complete loss of such investment. To continue reading about provisions related to different types of private offerings and accredited investors, click on the above link for:  SEC FINAL Rule Release, then proceed to page 4 of  the filing.