The Rule 501(a)(5) net worth test worked line by line for one investor, with the primary residence, the mortgage and the 60-day look-back that onboarding files most often get wrong.
Net worth for accredited investor status is total assets minus total liabilities, alone or jointly with a spouse or spousal equivalent, with the primary residence left out: the home is not an asset, and the debt secured on it is not a liability up to its value, except any increase in the 60 days before the investment. An illustrative couple with 990,000 of other assets and 40,000 of other debts has 950,000 of net worth and is not accredited, although counting 300,000 of home equity would show 1,250,000.
Worked in full in The Private Fund Compliance Officer by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Under Rule 501(a)(5) of Regulation D, a natural person is an accredited investor if their individual net worth, or joint net worth with a spouse or spousal equivalent, exceeds 1,000,000, excluding the primary residence. The exclusion has three parts, and the third is the one most onboarding checklists omit.
Net worth = all assets except the primary residence − all liabilities, where for debt secured by the primary residence:
(i) debt up to the home's fair market value is left out, except
(ii) any increase in that debt in the 60 days before the sale, unless incurred to acquire the residence, which counts as a liability, and
(iii) any debt above the home's fair market value, which counts as a liability.
Test: net worth > 1,000,000. Exactly 1,000,000 fails.
The case is illustrative and simplified, not legal advice; the fund's counsel and subscription documents govern how the test is applied to a given investor.
A fictional married couple subscribing jointly to a private equity fund's US feeder. All figures are as at the subscription date.
| Item | Amount | Counted? |
|---|---|---|
| Brokerage account | 520,000 | Yes |
| Retirement accounts (IRA, 401(k)) | 380,000 | Yes |
| Cash and deposits | 60,000 | Yes |
| Car | 30,000 | Yes |
| Primary residence, fair market value | 900,000 | No |
| Mortgage on the residence, unchanged for years | 600,000 | No, below the home's value |
| Car loan | 25,000 | Yes |
| Credit cards | 15,000 | Yes |
Step 1, assets without the home. 520,000 + 380,000 + 60,000 + 30,000 = 990,000.
Step 2, liabilities without the mortgage. The 600,000 mortgage is below the 900,000 value and has not increased in 60 days, so it is left out. 25,000 + 15,000 = 40,000.
Step 3, net worth. 990,000 − 40,000 = 950,000, which does not exceed 1,000,000. The couple are 50,000 short on the net worth test, and the subscription can proceed only if they qualify another way: the income test (200,000 individually or 300,000 jointly in each of the last two years, with the same expected this year) or, for an individual, a Series 7, 65 or 82 licence in good standing.
| Scenario | Net worth | Accredited? |
|---|---|---|
| Base case | 950,000 | No |
| Home equity wrongly counted | 1,250,000 | Wrongly yes |
| 150,000 home equity line drawn 35 days ago, cash held | 950,000 | No |
| Same draw, 60-day rule ignored | 1,100,000 | Wrongly yes |
| Same draw 75 days ago, cash still held | 1,100,000 | Yes |
| Home worth 560,000, mortgage 600,000 | 910,000 | No |
| Brokerage account 50,001 higher | 1,000,001 | Yes |
The home equity draw is the case the 60-day look-back exists for. Drawn 35 days before the subscription, the 150,000 of cash is an asset, but the 150,000 increase in debt secured on the home is a liability, and net worth stays at 950,000. Ignore the rule and the same couple shows 1,100,000. Drawn 75 days before, the increase falls outside the window and the test is literally met: the compliance officer should still ask why the investor borrowed against the home shortly before investing, because a file that passes on the letter of the rule but documents a borrowing to qualify is not a file anyone wants to defend.
The underwater case runs the other way. If the home were worth 560,000 against a 600,000 mortgage, the 40,000 excess would count as a liability, and net worth would fall to 910,000.
In a Rule 506(b) offering the fund may rely on a reasonable belief, usually a completed questionnaire; in a 506(c) offering, where general solicitation is used, it must take reasonable steps to verify. For net worth, the rule's non-exclusive methods include bank and brokerage statements and a consumer credit report, each dated within the prior three months, and the investor's written statement that all liabilities have been disclosed. A 2025 SEC staff no-action letter added that a high minimum investment, 200,000 for a natural person and 1,000,000 for an entity, not financed by a third party for the purpose of the investment, can support verification together with written representations to that effect, provided the issuer has no actual knowledge to the contrary. Whichever route is used, the file should show the arithmetic, not only the checked box, so that the examiner can follow it, as with the testing described in how many expense allocations to test.
The investor onboarding, beneficial owner and sanctions page is among the working documents that come with the free workbook for this book.
Yes. Retirement accounts are assets at their current value, as are brokerage accounts, cash and other property. Only the primary residence is excluded. In the worked case 380,000 of retirement savings is part of the 990,000 of assets that, less 40,000 of debts, gives a net worth of 950,000.
Not within 60 days of the investment. Any increase in debt secured by the primary residence in the 60 days before the sale, unless it was taken to acquire the residence, counts as a liability, offsetting the cash it produced. A 150,000 draw 35 days earlier leaves the illustrative couple at 950,000. Drawn 75 days earlier and still held as cash, the cash would count but the debt would not, lifting them to 1,100,000.
The part of the mortgage above the home's fair market value is a liability in the net worth test. If the illustrative couple's 600,000 mortgage sat on a home now worth 560,000, the 40,000 excess would be deducted and their net worth would fall from 950,000 to 910,000.
This article is one calculation from The Private Fund Compliance Officer. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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