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SEC Changes Net Worth Definition of Accredited Investor

Published April 22, 2012

The Securities and Exchange Commission recently changed policies to exclude home value from net worth as it determines whether an individual can invest in some securities offerings that are unregistered. SEC rules allow some people to qualify for limited and private offerings without registration or specific disclosures if the sales are only to “accredited investors”. These “accredited investors” can qualify for these opportunities by having a net worth of at least $1 million, amongst other qualification factors.

The new rule means the value of the primary residence does not count toward the net worth. Another new wrinkle in the rules penalizes investors for being “upside down” in their primary residence. Any debt secured by the main residence that is above the value of the home in a fair market will now be treated as a liability against net worth.

The move was made in an attempt to prevent rule manipulation as some investors could artificially inflate their net worth by borrowing against their home just before an investment opportunity, according to the SEC. The SEC will have to revisit the “accredited investor” definition in 2014 and every four years after that to make sure they remain fair, according to requirements by the Dodd-Frank Act.

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