Franchise Act Interpretive Statement FIS-07

RE: – Accredited Investor Definition - Indebtedness Secured By Primary Residence

WAC 460-80-108

Questions Presented:

For purposes of determining whether a natural person meets the net worth standard to be considered an “accredited investor,” may the value of indebtedness secured by the investor’s primary residence be excluded from the calculation of the investor’s net worth?

Rules:

WAC 460-80-108, as amended on January 21, 2011, defines “accredited investor” to include, among others:

Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000 excluding the value of the primary residence of such natural person.

Discussion:

Where appropriate and in the public interest, the Securities Division has sought to follow interpretations of similar federal laws. The Securities Division recently amended the definition of “accredited investor” as it pertains to natural persons in WAC 460-80-108 to exclude the value of the primary residence of a natural person for purposes of determining a natural person’s net worth. This amendment followed the same revision to the federal definition of “accredited investor” contained in Regulation D and Rule 215 under the Securities Act of 1933 effected by the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law No. 111-203 (“Dodd-Frank Act”).

Following the enactment of the Dodd-Frank Act, the staff of the SEC published a statement on its website that for purposes of determining a natural person’s net worth, “the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded.” The staff indicated further that “[i]ndebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth.” See Compliance and Disclosure Interpretations: Securities Act Rules, Questions 179.01 and 255.47, at http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm (July 23, 2010).

Conclusion:

In the interest of maintaining the uniformity of the definition of “accredited investor” under state law with the definition under federal law, the Securities Administrator interprets the definition of “accredited investor” as it pertains to natural persons in WAC 460-80-108 to allow the exclusion of the amount of indebtedness secured by the primary residence up to its fair market value. Any indebtedness secured by a natural person’s primary residence that is in excess of the fair market value of the residence shall be considered a liability and deducted from the person’s net worth.

Adopted: January 21, 2011
William M. Beatty, Securities Administrator
Prepared by: Faith L. Anderson, Acting Chief of Registration & General Counsel