Dodd-Frank Act: Changes to Definition of “Accredited Investor”
August 5, 2010 
5 Comments
The Dodd-Frank Act pertains to mortgages and credit and reorganizes our regulatory authorities. The definition of “accredited investor” has also been changed so that you may no longer include include the $1 million net worth equity in your principal residence as part of the calculation of your net worth. What this means is fewer investors will now qualify under the “accredited investors” definition. This is the first time since 1982 that a material change in the definition has been made. The Dodd-Frank Act also gives the SEC authority over the next four years to look at the definition of “accredited investor” relating to individuals and also to make revisions. Beginning in 2014, the SEC can revise the definition of “accredited investors” every 4 years, including the $1 million net worth rule. The new law goes into effect immediately.
Under the new Act, if the amount of debt exceeds the fair market value of an investor’s residence and the lender has the ability to obtain a deficiency judgment, investors are now required to deduct the excess liability from their net worth calculation. With current housing prices in decline, this is a material change because many investors are going to have to deduct the liability from their net worth, which may disqualify them under the new definition. Under the old law, a private natural person could qualify under the definition of “accredited investors” by meeting at least one of the following rules:
- “Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;
- Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000; or
- Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.”
This is no longer the case so the new law is sure to have a big impact on the number of people that meet the new definition.
Thanks for your post.
Curious to know — I couldn’t tell from your posting what the specific current guidelines for the definition of “accredited investor” are. You mostly talked about the negative equity being deducted from the net worth calculation. What, if anything, has changed about the following specifically?
“Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;
Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000; or
Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.”
In a nutshell no more using the equity in your primary home as an equation. And further you have to deduct negative equity if you’re upside down.
Good post. Keep it up. Cheers
Great article!
Keep posting
wao! nice