Friday, July 30, 2010

SEC Staff Clarifies Dodd-Frank Change to Accredited Investor Test

Under Section 413(a) of the Dodd-Frank Act, the net worth standard for an accredited investor, as set forth in Securities Act Rules 215 and 501(a)(5), is adjusted to delete from the calculation of net worth the value of the primary residence” of the investor. Section 413(a) of the Dodd-Frank Act does not define the term value, nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of the net worth calculation. As required by Section 413(a), the SEC will issue amendments to its rules to conform them to the adjustment to the accredited investor net worth standard made by the Act.

However, Section 413(a) provides that the adjustment is effective upon enactment of the Act. The SEC staff advised that, when determining net worth for purposes of Securities Act Rules 215 and 501(a)(5), the value of the person’s primary residence must be excluded. Pending implementation of the changes to the SEC’s rules, the staff advised that the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth. Division of Corporation Finance, Compliance and Disclosure Interpretations, Question 179.01.

1 comment:

William Carleton said...

Jim, I realize the staff is just trying to be helpful and address uncertainty pending rulemaking -- necessary because the change took effect with effectiveness of the Dodd-Frank Act -- but the guidance is overbroad, probably not correct. Whether debt in excess of the value of the home should count against net worth should depend on whether the debt is recourse or non-recourse. This is going to be different for similarly situated persons, state by state, as states have different laws that impact this.