Accredited investor standards are applied to determine the accessibility of particular exemptions for limited and nonpublic offerings through the Securities Act. These types of offerings include the majority of offerings under Regulation D. The concept of investor accreditation involves the identification of investors who have eligibility to participate in non-liquid and unregistered security offerings. Issuers must have a reasonable basis to believe that an investor falls under a category that deems them accredited. One of these categories is “net worth.”
Individual Investor Accreditation Qualification Based on Net Worth
Either individually or jointly with a spouse, net worth must exceed $1 million. Except for particular provisions mentioned below, net worth should include all assets and all liabilities.
A primary residence may not be counted as an asset when calculating net worth. A common understanding of primary residence is the home in which an individual lives the majority of the time.
Generally, if the estimated fair market value of the residence exceeds the amount of debt secured by the residence, then the debt may not be counted as a liability in the net worth calculation. Such debt may involve a home equity line of credit for a mortgage.
An exception to the above is when the debt on primary residence has be incurred in the 60 days prior to the sale of securities to the investor. In this case, the increase in debt is to be included as a liability for purposes of net worth. This exception does not include debt secured due to the acquisition of the primary residence.
If the estimated fair market value of the residence is less than the amount of debt secured by the primary residence, the difference is to be included as liability for purposes of net worth. This is true regardless of the borrower’s legal liability for the excess amount.
As is obvious, investor accreditation through net worth is governed by a range of conditions and exceptions of which the issuer and investor must be aware.
