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SEC Adopts Amendments to Definition of “Accredited Investor” in Rule 501(a) of Regulation D and Rule 215 to Exclude the Value of an Individual’s Primary Residence for Individuals Relying on the More Than $1 million Net Worth Standard


January 11, 2012


On December 21, 2011, the SEC adopted amendments to the definition of “accredited investor” in Rule 501(a) of Regulation D and Rule 215 under the Securities Act of 1933, as amended (the “Securities Act”), to provide that a natural person relying upon the more than $1 million net worth standard (or joint net worth with that person’s spouse) is required to exclude the “value of the primary residence” of such person.  This change may significantly reduce the number of investors eligible to rely upon the rule.  The accredited investor net income standards remain unchanged.  The amendments become effective February 27, 2012.  The amendments implement the requirements of Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which became effective July 21, 2010. 


The amended rule provides that, in determining the more than $1 million net worth standard for an accredited investor under Rule 501(a) and Rule 215:

  1. a person’s primary residence shall be excluded as an asset;

  2. indebtedness that is secured by the person’s primary residence, up to the estimated fair market value of the primary residence at the time of the sale of securities, is not included as a liability (except that if the indebtedness outstanding at the time of the sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess shall be included as a liability); and

  3. indebtedness secured by the primary residence in excess of the estimated fair market value of the primary residence at the time of the sale of securities is included as a liability.


Accordingly, the rule allows an investor to exclude the value of mortgage debt secured by his or her primary residence from the net worth calculation unless the debt exceeds the value of the residence, in which case the excess liability reduces his or her net worth.


Also, any increase in the amount of debt secured by a primary residence in the 60 days before the time of sale of securities to an individual will be included as a liability, even if the estimated value of the primary residence exceeds the aggregate amount of debt secured by such primary residence.  The SEC stated in the adopting release that this change is designed “to make it more difficult for individuals to manipulate their net worth as calculated under our rules by borrowing against their primary residence shortly before seeking to qualify as an accredited investor, to take advantage of any positive equity in the primary residence.”


The SEC has revised the original rule proposal to provide certain transition relief with regard to the exercise of rights to purchase an issuer’s securities (such as warrants, options or convertible securities) that were owned prior to July 20, 2010, the day prior to the enactment of the Dodd-Frank Act. Under the amendments, the prior accredited investor net worth test will apply in connection with the exercise of rights to acquire securities, so long as (a) the rights were in existence on July 20, 2010, (b) the investor qualified as an accredited investor on the basis of net worth at the time the rights were acquired, and (c) the investor held securities of the same issuer, other than the rights, on July 20, 2010.


For more information, please contact:


Neil R.E. Carr
Direct Dial: +1 202 587 2983


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