Funds & Advisers
On January 25, 2011, the SEC proposed rules to change the accredited investor standard for natural persons, as required by section 413 of the Dodd-Frank Act (the “Act”). The accredited investor definition establishes, among other things, a minimum net worth a natural person must meet to be eligible for participation in certain investments, such as a Regulation D private placement.
The new accredited investor standard
The Act requires the SEC to adjust the required net worth of an accredited investor in a private fund to $1,000,000, excluding the value of the investor’s primary residence. Prior to this change, investors were allowed to include the value of their residence when determining “accredited investor” status.
However, in the case where the amount of debt exceeds the value of the home, only a portion of the debt up to the value of the home may be excluded. For example, where an investor has a primary residence valued at $600,000 and a mortgage of $800,000, eliminating the entire $800,000 would increase the net worth by $200,000. Therefore, only $600,000 of debt will be subtracted from the net worth calculation.
This new definition applies to new investors in a private fund, as well as existing investors who wish to make additional capital contributions. Therefore, private funds should consider updating their investor questionnaires to ensure any existing investors who no longer are eligible to invest do not violate this new requirement.
In addition to immediately amending the accredited investor standard, the Dodd-Frank Act also requires the SEC to review the definition of accredited investor, as it applies to natural persons, every four years, beginning four years from enactment. Also, the SEC is authorized to revise the definition after each review. Section 415 of the Dodd-Frank Act requires the Comptroller General to conduct a study on accredited investors, examining the criteria. This study, due three years from enactment, will help guide future rulemaking.
Comments are due to the SEC by March 11, 2011.