The Dodd-Frank Act Has Changed The Definition of an "Accredited Investor"

The Dodd-Frank Act has made a significant change to the definition of an "accredited investor." Under SEC rules (particularly Regulation D) an accredited investor is not entitled to the same protections as other investors in private offerings.

Before the enactment of the Dodd-Frank Act a person was considered an accredited investor under Section 501(a)(5) of the Securities Act if:

in each of the two most recent years he had income in excess of $200,000, or in excess of $300,000 jointly with a spouse, and had a reasonable expectation of reaching that same income level in the current year; or

he had a net worth, individually or jointly with a spouse, in excess of $1,000,000.

Section 413(a) of the Dodd-Frank Act adjusts this second standard by requiring that any calculation of net worth exclude the value of a person’s primary residence. Section 413(a) also requires that the person's net worth be reduced by any negative equity in the primary residence. For example, if the potential investor has a home worth $600,000, but with a mortgage on the home of $800,000 that potential investor would subtract $200,000 from his net worth.

Comment: this is an excellent change because it (a) reduces the number of accredited investors and (b) prevents an illiquid asset (a home) from counting in the definition of accredited investor. This is designed to protect investors.