Most hedge funds will require investors to be “accredited investors.” In general, a natural person is deemed to be an accredited investor if (1) the natural person has an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase (i.e. investment into the hedge fund) or (2) the natural person has an income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. (See generally Accredited Investor Definition.)
One common question is “does net worth include the equity a person has in their personal residence?” The answer is yes. The SEC specifically addressed this question in their Interpretive Release On Regulation D. Below is the actual text from the release which is applicable to this question:
(21) Question: In calculating net worth for purposes of Rule 501(a)(6), may the investor include the estimated fair market value of his principal residence as an asset?
Answer: Yes. Rule 501(a)(6) does not exclude any of the purchaser’s assets from the net worth needed to qualify as an accredited investor.
Note the difference between accredited investors and qualified purchasers with respect to this issue. Individuals cannot include equity in their personal residence for the purpose of meeting the “qualified purchaser” definition.
Please contact us if you have a question on this issue or if you would like to start a hedge fund. If you would like more information, please see our articles on starting a hedge fund. Other related hedge fund law articles include: