The Dodd-Frank Wall Street Reform and Consumer Protection Act and later SEC rulemaking changed how the accredited investor definition works in a few important ways. Two updates that commonly show up in startup fundraising paperwork are the exclusion of primary residence from the net worth test and the SEC’s 2020 expansion of additional accredited investor categories.
Dodd-Frank update: primary residence excluded from net worth for accredited investor status
In 2010, Dodd-Frank directed the SEC to exclude the value of a person’s primary residence from the $1,000,000 net worth test. Here is the statutory language.
SEC. 413. ADJUSTING THE ACCREDITED INVESTOR STANDARD. (a) IN GENERAL.—The Commission shall adjust any net worth standard for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, so that the individual net worth of any natural person, or joint net worth with the spouse of that person, at the time of purchase, is more than $1,000,000 (as such amount is adjusted periodically by rule of the Commission), excluding the value of the primary residence of such natural person, except that during the 4-year period that begins on the date of enactment of this Act, any net worth standard shall be $1,000,000, excluding the value of the primary residence of such natural person.
Translation: Your primary residence does not count toward the $1,000,000 net worth test. It can also reduce net worth if the mortgage debt on the home exceeds the home’s value.
Example 1: You own a $500,000 house free and clear. $0 is added to your net worth for the $1,000,000 test.
Example 2: You own a $500,000 house with a $300,000 mortgage. $0 is added to your net worth for the $1,000,000 test.
Example 3: You own a $500,000 house with a $600,000 mortgage. $100,000 is subtracted from your net worth for the $1,000,000 test.
SEC 2020 update: expanded categories of accredited investors
In 2020, the SEC amended Rule 501(a) to expand who can qualify as an accredited investor, largely by adding categories tied to financial sophistication rather than wealth alone. The income and net worth thresholds did not change, but the set of people and entities who can qualify did.
Individuals with certain professional certifications designated by the SEC (initially including FINRA Series 7, Series 65, and Series 82), if held in good standing.
Knowledgeable employees of private funds, but generally only for investments in their own fund.
Spousal equivalent status, allowing individuals to pool finances with a partner equivalent to a spouse for the joint tests.
Family offices and family clients meeting specific requirements, including at least $5M in assets under management for the family office.
Certain entities such as SEC-registered investment advisers, state-registered advisers, exempt reporting advisers, and entities owning more than $5M in investments, if not formed for the specific purpose of buying the offered securities.
Ryan RobertsStartup Lawyer
Ryan Roberts is a startup lawyer at Roberts Zimmerman PLLC with more than two decades of experience advising startups and venture capital investors. He is the author of “Acceleration” and StartupLawyer.com.
