The SEC’s Division of Corporation Finance, in a recent interpretation, advised that issuers must exclude from the determination of net worth in determining “accredited investor” any indebtedness in excess of the fair market value of the underlying primary residence. The recent Dodd-Frank Act requires an exclusion from the calculation of net worth under the accredited investor definition the “value of the primary residence.” However, the Act does not define “value,” leaving such definition to the SEC, which has not yet acted. In addition to classifying debt in excess of the FMV as a liability, the guidance also states that the “the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded.” It is unclear whether this means that issuers should consider deducting both the FMV of the home as well as the debt secured by the home (even below FMV) as an additional liability.
OUR TAKE: The Division of Corporation Finance interpretation reads the Dodd-Frank to require the most exclusion possible. It is unclear why firms should exclude nonrecourse debt in excess of FMV. It is also unclear whether Congress intended a double counting of both the FMV of the home as well as the debt.