What Is The Net Worth Requirement For Accredited Investors?

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Investing in certain private securities and offerings often requires individuals to meet specific financial criteria, one of which is being an accredited investor.

An accredited investor is defined by the U.S. Securities and Exchange Commission (SEC) as an individual who meets certain income or net worth thresholds.

In this article, we will focus on the net worth requirement for accredited investors and the factors that come into play when calculating net worth.

Net Worth Criteria

To qualify as an accredited investor based on net worth, an individual must have a net worth greater than $1 million.

This can be determined either individually or jointly with their spouse.

It's important to note that this threshold is excluding of the value of the individual's primary residence.

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Primary Residence and Net Worth Calculation

The term “primary residence” refers to the home where a person lives the majority of the time.

When calculating net worth, individuals do not include the value of their primary residence as part of their assets for accreditation.

Liabilities and Net Worth Calculation

When calculating net worth, individuals should include all their liabilities.

However, there are specific provisions regarding the treatment of debt secured by the primary residence.

Generally, debt secured by the primary residence, such as a mortgage or a home equity line of credit, is not counted as a liability if the estimated fair market value of the residence exceeds the amount of debt secured by it.

In other words, if the home's value exceeds the outstanding debt, the debt is not factored into the net worth calculation.

Debt Increase Provisions

There is an exception to the general rule mentioned above.

If the amount of debt secured by the primary residence has increased within the 60 days preceding the sale of securities to the investor (excluding debt related to acquiring the primary residence), the increase is included as a liability in the net worth calculation.

This provision aims to discourage individuals from intentionally incurring debt on their primary residence to inflate their net worth to qualify as accredited investors artificially.

Liability Exceeding Fair Market Value

In cases where the amount of debt secured by the primary residence is greater than the estimated fair market value of the residence, the excess amount is included as a liability in the net worth calculation.

This holds true even if the borrower may not be personally liable for the excess amount due to contractual terms or state anti-deficiency statutes.

If the mortgage is “underwater,” with the debt exceeding the home's value, the excess debt is considered a liability when calculating net worth.

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