SEC Proposes Revised Accredited Investor Definition

The SEC recently proposed rules to revise its definition of "Accredited Investor" so that it mirrors the definition adopted by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the proposed rules, a person is no longer permitted to include the value of his or her primary residence in determining whether they meet the $1 million net worth requirement for an Accredited Investor. The proposed rules do not define "primary residence," but do say that, for the most part, the common meaning of "the home where a person lives most of the time" should be used, whereas, in complex cases, the federal income tax rules should be consulted for guidance.

The proposal is seeking comments on issues such as whether the value of the residence should exclude debt secured by it (as proposed) or should be based solely on fair market value; whether the rule should include a definition of the term "primary residence," if so, what it should be; whether the net worth calculation should be made on a specified date to prevent end-arounds by investors; and whether investors who are no longer Accredited Investors as a result of Dodd-Frank should still be able to make add-on investments.

The proposed rules are just the beginning because Dodd-Frank eventually requires the SEC to review the Accredited Investor definition "in its entirety" and make any revisions that it deems appropriate.