Tuesday, July 10, 2012

Washington Amends “Accredited Investor” Definition to Include Indebtedness on Investors' Primary Residence

The definition of an accredited investor in Washington State’s Regulation D exemption previously included, among the listed entities and persons, any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of the purchase exceeds $1 million, excluding the value of the primary residence of such natural person.

Effective July 14, 2012, Washington, through expedited rulemaking by the Department of Financial Institutions, is the first state to replace “excluding the value of the primary residence of such natural person” with a more fleshed-out exception to the net worth calculation that factors in the amount of indebtedness on the primary residence up to its estimated fair market value, and sets forth the instances when indebtedness is and is not included as a liability in the net worth calculation.

The person’s primary residence is not included as an asset, and the amount of the person’s indebtedness secured by his or her primary residence, up to the estimated fair market value of the primary residence at the time of sale, is not included as a liability. Any amount of indebtedness at the time of the securities sale that exceeds the amount outstanding 60 days before that time, other than resulting from the acquisition of the primary residence, however, is included as a liability, as does indebtedness secured by the primary residence that exceeds the estimated fair market value of the primary residence. None of the above “included” or “not included” provisions apply to any net worth calculation made in connection with a securities purchase according to a right to purchase the securities, provided that: (1) the right was held by the person on July 20, 2010; (2) the person qualified as an accredited investor on the basis of net worth at the time the person acquired the right; and (3) the person held securities of the same issuer, other than the right, on July 20, 2010.

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