On July 21, 2010, President Barack Obama signed into law the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), weighing in at more than 800 pages. The Dodd-Frank Act signals sweeping changes to the financial services industry, including significant alterations to the method of determining the $1 million net worth threshold for accredited investors. In addition, Congress provided a roadmap for possible future adjustments to the definition of “accredited investor.”
Modifications to the Net Worth Standard
Prior to the Dodd-Frank Act, the requirements for a natural person to qualify as an accredited investor had remained the same since their promulgation in 1982: a net worth of more than $1 million (including personal residence) or recent annual income in excess of $200,000 or $300,000 (depending on marital status), with a reasonable expectation of maintaining that income level. In recent years, some observers suspected that more than a quarter century of inflation and real estate appreciation had watered down these thresholds. In response, the Dodd-Frank Act modifies the $1 million net worth standard by excluding the value of the investor’s primary residence. This definitional change is intended to increase investor protection by limiting participation in private securities offerings to investors who are capable of evaluating the risks of such offerings. The Dodd-Frank Act does not affect the accredited investor income levels.
Although the Dodd-Frank Act excludes the value of a person’s home from the net worth standard, it does not provide for how real estate debt should be treated. The U.S. Securities and Exchange Commission (SEC), however, has issued guidance on this point:
-If the related amount of indebtedness secured by the primary residence is less than or equal to the home’s fair market value, then it is not considered in determining net worth.
-If, however, the related amount of indebtedness exceeds the fair market value of the home, then it should be deducted from the person’s net worth.
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