Corporate & Securities Law

Update to Accredited Investor Definition

By Ryan Roberts

The Dodd-Frank Wall Street Reform and Consumer Protection Act probably won’t fix or prevent anything, but it was successful at modifying a portion of the definition of an accredited investor.

Official Language in the Dodd-Frank Act:

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SEC. 413. ADJUSTING THE ACCREDITED INVESTOR STANDARD.

(a) IN GENERAL.?The Commission shall adjust any net worth standard for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, so that the individual net worth of any natural person, or joint net worth with the spouse of that person, at the time of purchase, is more than $1,000,000 (as such amount is adjusted periodically by rule of the Commission), excluding the value of the primary residence of such natural person, except that during the 4-year period that begins on the date of enactment of this Act, any net worth standard shall be $1,000,000, excluding the value of the primary residence of such natural person.
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Transalation: Now, your house (primary residence) can only hurt your status as an accredited investor under the “net worth” test:

Example 1 — if you own a $500,000 house free an clear, $0 is added to your net worth for the $1,000,000 test.

Example 2 — if you own a $500,000 house with a $300,000 mortgage, $0 is added to your net worth for the $1,000,000 test

Example 3 — if you own a $500,000 house with a $600,000 mortgage, $100,000 is subtracted from your net worth for the $1,000,000 test.

I’ve seen a few subscription docs floating around that don’t account for this recent modification to the accredited investor definition. Thus, it’s a good idea to take a look at what your subscription docs and/or accredited investor questionnaire say regarding the $1,000,000 net worth test for individuals.

Full post as published by The Startup Lawyer on August 20, 2010 (boomark / email).