Net Worth Standard

Another common criteria to qualify as an accredited investor is through the net worth standard.

Understanding the Net Worth Standard

To meet the SEC’s net worth standard for accredited investors, individuals must satisfy both of the following conditions:

1. Individual Net Worth: The individual must have a net worth, or joint net worth with their spouse or domestic partner, exceeding $1 million at the time of the investment.

2. Exclusion of Primary Residence: The value of the individual’s primary residence must be excluded from the net worth calculation. Any mortgage debt on the primary residence that exceeds its value must be included as a liability in the net worth calculation.*

Detailed Criteria

Net worth is calculated by subtracting an individual(s)' liabilities from their assets. Net Worth = Assets - Liabilities.

1. Net Worth exceeding $1 Million:

   • Net worth can include assets such as cash, stocks, bonds, real estate (excluding primary residence), private securities, loans, and other investments.
   • Liabilities include debts such as credit card balances, car loans, real estate loans, and primary mortgage debt exceeding the value of the primary residence.
   • The net worth threshold must be met individually or jointly with a spouse or domestic partner.

2. Exclusion of Primary Residence:

   • The primary residence’s value is excluded from the asset side of the net worth calculation. This is defined explicitly by the SEC.

   • If the fair market value on the primary residence exceeds its mortgage balance, the loan may be omitted from the liabilities side of the net worth calculation.

   Excluding Primary Residence Debt

   Net Worth calculation example when excluding primary residence mortgage:

   • Assets: $1.2M

   • Regulat Debts: $100k

   • Primary Resident Mortgage: $300k excluded because the home has equity

   • Net Worth = $1.1M ($1.2M - $100k)

   Note: The primary residence's value must exceed its mortgage balance.

Documenting Net Worth

Investors should be prepared to provide documentation to verify their net worth. Acceptable documentation includes:

• Recent bank statements
• Brokerage account statements
• Property appraisals (excluding primary residence)
• Mortgage statements
• Statements of other assets (e.g., ownership of businesses)
• Proof of liabilities (e.g., credit card statements, car loan statements)
• Financial statements prepared by an accountant

Including a Credit Report

A credit report is also a valuable document when verifying net worth. It provides a comprehensive overview of an individual's outstanding debts and liabilities. The credit report is crucial for the following reasons:

• Verification of Liabilities: It helps in confirming the accuracy of declared liabilities such as credit card debt, personal loans, and other financial obligations.
• Assessment of Financial Health: A credit report provides insight into the individual's overall financial health and responsibility in managing debts.

By including a credit report in the documentation, investors ensure a more accurate and transparent calculation of their net worth, aligning with SEC requirements.

This verification process ensures compliance with SEC regulations and safeguards against potential legal issues.

Conclusion

Meeting the SEC's net worth standard is a clear path for individual investors and their domestic partners or spouses to qualify as accredited investors. By maintaining a net worth exceeding $1 million, excluding the value of the primary residence, investors can access exclusive investment opportunities that offer potentially higher returns.

For more detailed information and guidance, consult with a financial advisor or legal professional to ensure compliance with all SEC regulations and make the most of your investment potential.