Introduction

On December 21, 2011, the U.S. Securities and Exchange Commission (the “SEC”) adopted a final rule under the Securities Act of 1933 (the “Securities Act”) that amends the net worth standard used in the definition of an “accredited investor.” Qualification as an accredited investor enables individuals to take part in certain non-public and limited securities offerings. This rule change conforms the net worth standard under the Securities Act to the standard under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which has been effective since July 21, 2010. This note briefly describes the key features and implications of the new rule.

The Rule

Prior to the rule change, natural persons (individually or jointly with their spouses) qualified as accredited investors if their net worth exceeded $1MM. Under the newly adopted rule, the equity value of a person’s primary residence is excluded from the calculation of net worth. Specifically, the fair market value of a primary residence is not included as an asset in the net worth calculation, nor is debt secured by the residence included as a liability.