The SEC recently proposed rules to conform the definition of “accredited investor” to the change implemented by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank revised the definition of “accredited investor” under federal securities laws as it relates to natural persons to exclude primary residences from the calculation of net worth. This change was effective upon passage of the Dodd-Frank Act.

Under SEC rules, individuals and entities that fall within the definition of “accredited investor” may participate in certain private offerings that are exempt from the registration requirements of the Securities Act of 1933. One way for an individual to qualify as an accredited investor is to have a net worth of at least $1 million, either alone or together with their spouse.

The proposed changes formally amend the definition to implement the Dodd-Frank Act’s requirement to exclude the value of a person’s primary residence from the calculation of net worth. In addition, the proposed changes clarify the treatment of any indebtedness securing a person’s primary residence. Specifically, “the value of the primary residence” is determined by subtracting from the estimated fair market value of the residence the amount of debt secured by the residence, up to the estimated fair market value of the residence. This “value of the primary residence” would then be excluded from a person’s net worth.

The proposal does not grandfather existing investors who were “accredited investors” under the old definition but would not be construed as “accredited investors” under the revised definition. Two commissioners questioned whether such investors should be grandfathered, particularly those with existing contract rights. The period for public comment on these proposed changes ends on March 11, 2011.