The U.S. Securities and Exchange Commission (“SEC”) has modified the rules used to determine whether an individual is qualified to invest in certain unregistered securities offerings. The amendments were adopted as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).
To invest in unregistered securities offerings, an investor must meet the “accredited investor” standards. Typically, to qualify as an “accredited investor” an investor must have a net worth, alone or with a spouse, greater than or equal to $1 million. The new rule modified the $1 million threshold to exclude the value of a person’s home. The rule also excludes from the $1 million net worth calculation, any liabilities secured by the individual’s primary residence with certain limitations. If secured liabilities exceed the fair market value of the residence, then the indebtedness that is greater than the value of the residence is applied against the individual’s net worth. In addition, secured loans must have originated more than 60 days prior to the purchase of the unregistered security to prevent individuals from taking out a second line of equity on their home in order to invest in unregistered securities. Individuals who qualified as “accredited investors” under the prior Securities Act of 1933 standards (pre-adoption of the SEC’s Dodd-Frank Act standards) may use the prior net worth standard for certain “follow-on investments.”
This new rule will go into effect 60 days after it has been published in the Federal Register. To view the full rule release, click here.