CONTRIBUTED BY
Andrew Ledbetter
andrew.ledbetter@dlapiper.com
As expected, the SEC has adopted final rules regarding the exclusion of a person’s primary residence, and related debt securing the residence, from the “net worth” standard for accredited investors. The final rules are substantially similar to those the SEC previously proposed, which we summarized in this earlier post.
Under the new rules, in calculating “net worth” for purposes of determining if a person’s individual net worth, or joint net worth with the person’s spouse exceeds $1,000,000:
- Do not include as an asset the person’s primary residence.
- Do not include as a liability indebtedness that is secured by the person’s primary residence up to the estimated fair market value of the primary residence at the time of the sale of securities, unless:
- The amount of such indebtedness outstanding at the time of sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, in which case do include as a liability the amount of such excess. This exception addresses the risk that investors may obtain cash (which is counted as an asset for purposes of the net worth calculation) for equity in their primary residence (which is not counted as an asset per step 1 above) and thereby sidestep the limitation in step 1.
- Do include as a liability indebtedness that is secured by the person’s primary residence in excess of the estimated fair market value of the primary residence at the time of the sale of securities.
The “accredited investor” determination matters mostly for offerings conducted under Regulation D. The concept is also used for “Section 4(5)” offerings, which exempt 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 Form D with the SEC.
Limited Relief for Preemptive Rights. The SEC declined to offer broad transitional relief. However, the new rules summarized above do not apply (and the prior rules apply) if:
- a person’s purchase of securities is in accordance with a right to purchase such securities (such as preemptive rights or rights of first offer) that the person held on July 20, 2010;
- the person was accredited at the time they acquired the right; and
- the person holds other securities of the same issuer.
Not Much Is New. These rules do not add too much to currently effective law. Section 413 of the Dodd-Frank Act already removed the value of the primary residence from the net worth calculation effective upon enactment of the Dodd-Frank Act, so as a practical matter we have been dealing with the exclusion of primary residence from the “net worth” standard since the middle of 2010.
But More is Expected, Later. The SEC repeated a hint it has previously made that it may propose rules regarding other financial thresholds and criteria needed to qualify for “accredited investor” status and eligibility to invest in private funds, following its receipt of a report required under the Dodd-Frank Act from the Comptroller General, which is not required until July 2013.