Ledbetter, Andrew D._photo_3659.jpgCONTRIBUTED BY
Andrew Ledbetter

The SEC yesterday proposed rules on the “accredited investor” net worth standard, to implement Section 413(a) of the Dodd-Frank Act. Not much “new” here, but the proposed definition is:

Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of purchase, exceeds $1,000,000, excluding the value of the primary residence of such natural person, calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.

The “excluding the value of” clause tracks Section 413(a) of Dodd-Frank (and should already be in forms at this stage). The “calculated by subtracting” clause is intended to clarify that you only exclude the net equity (e.g., include the net debt), which is consistent with the SEC C&DI issued on this topic following Dodd-Frank. Essentially, this means if you have net equity in your home, you can’t count any of that net equity in determining whether you meet the $1M net worth standard. And if you have any debt in excess of the value of the home, that net debt would count against your net worth.

The SEC indicated that it is not proposing any other changes to the definition of “accredited investor,” hinting that it would wait to do so for the report required under Dodd-Frank on this topic, which the Comptroller General is not required to provide until July 2013.

** UPDATED January 29, 2011 **

The Washington State Division of Securities previously adopted rules to change the accredited investor “net worth” standard to exclude the value of a person’s primary residence, mirroring the Dodd-Frank language in place at the federal level. As expected, the Division has now issued an Interpretive Statement confirming that it will maintain uniformity with the SEC’s approach in calculating “net worth” – that is, you can ignore indebtedness secured by a primary residence up to its fair market value, but indebtedness in excess of fair market value of the residence is deducted from net worth. Hopefully states across the country are taking similar positions.