Accredited investors include high-net-worth individuals, banks, financial institutions and other large corporations, who have access to complex and higher-risk investments such as venture capital, hedge funds and angel investments.
Within the United States, an individual is not considered an accredited investor unless he/she has a net worth of 1 million excluding primary place of residence and/or $300k in household income consecutively for the past two years, and expect to make it in the coming year.
U.S. Securities and Exchange Commission
On December 21, 2011, the Securities and Exchange Commission adopted amendments to the accredited investor standards in its rules under the Securities Act of 1933 to implement the requirements of Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as the Dodd-Frank Act). Section 413(a) requires that the value of a person’s primary residence be excluded when determining whether the person qualifies as an “accredited investor” on the basis of having a net worth in excess of $1 million.
The accredited investor standards are used in determining the availability of certain exemptions from Securities Act registration for nonpublic and limited offerings, including most offerings under Regulation D. The accredited investor concept identifies investors who are eligible to participate in those offerings of unregistered and illiquid securities. In order to rely on investor status as an “accredited investor,” issuers must know or have a reasonable basis to believe that the investor falls within one of eight categories.[2] The individual net worth standard is one such category.
The former accredited investor net worth test, under which the primary residence and indebtedness secured by it are included in the net worth calculation, applies to purchases of securities in accordance with a right to purchase such securities, if:
Assume an investor holds the following assets and liabilities as of the date of purchase in a securities offering:
| Assets | Liabilities | ||
|---|---|---|---|
| Primary residence: | $1,200,000 | Mortgage/HELOC: | $800,000 |
| Other assets: | 850,000 | Other debt: | 20,000 |
(a) Basic net worth calculation with positive home equity:
| Assets | Liabilities | ||
|---|---|---|---|
| Primary residence: | $ | Mortgage/HELOC: | $ |
| Other assets: | 850,000 | Other debt: | 20,000 |
| Total assets: | $ 850,000 | Total liabilities: | $ 20,000 |
| Individual’s net worth: $850,000 – $20,000 = $830,000 | |||
(b) Net worth calculation with a recent debt increase: If the amount of the mortgage/home equity line of credit indebtedness has increased within 60 days of the purchase of securities (for example, because of a $10,000 drawdown under the HELOC), then the amount of that increase would be included as a liability in the person’s net worth calculation:
| Assets | Liabilities | ||
|---|---|---|---|
| Primary residence: | $ | 60-day increase: | $ 10,000 |
| Other assets: | 850,000 | Other debt: | 20,000 |
| Total assets: | $ 850,000 | Total liabilities: | $ 30,000 |
| Individual’s net worth: $850,000 – $30,000 = $820,000 | |||
(c) Net worth calculation with negative home equity: If the fair market value of the person’s primary residence fell to $600,000, but the value of the mortgage remained at $800,000, the net worth calculation would be:
| Assets | Liabilities | ||
|---|---|---|---|
| Primary residence: | $ | Mortgage >$600,000: | $ 200,000 |
| Other assets: | 850,000 | Other debt: | 20,000 |
| Total assets: | $ 850,000 | Total liabilities: | $ 220,000 |
| Individual’s net worth: $850,000 – $220,000 = $630,000 | |||
