Accredited Investor Definition
The concept of an "accredited investor" is central to Regulation D private placements. Understanding who qualifies (and the specific thresholds involved) is frequently tested.
Why Accredited Investors Matter
Federal securities law provides less regulatory protection for accredited investors because they are presumed to be financially sophisticated enough to evaluate investment risks on their own.
Think of it this way: The SEC requires extensive disclosures for public offerings to protect everyday investors. Accredited investors are wealthy or knowledgeable enough that they can assess risks without those protections, so issuers can skip much of the registration process when selling only to them.
This status unlocks access to:
- Private placements under Rule 506(b) and 506(c)
- Hedge funds and private equity funds
- Venture capital investments
- Other offerings not available to the general public
Qualifying as an Accredited Investor (SEC Rule 501)
There are several ways a natural person (individual) can qualify:
Income Test
- Individual income exceeding $200,000 in each of the last 2 years, with a reasonable expectation of the same in the current year
- Joint income with spouse exceeding $300,000 in each of the last 2 years, with a reasonable expectation of the same in the current year
Net Worth Test
- Individual or joint net worth with spouse exceeding $1 million
- Primary residence is excluded from the net worth calculation (it is not counted as an asset)
- Mortgage on the primary residence is generally excluded as a liability, unless the mortgage exceeds the home's fair market value (the excess counts as a liability)
Exam Tip: Gotchas
- Primary residence is EXCLUDED from the net worth calculation. Students often forget this exclusion when calculating whether someone qualifies.
- The income test requires $200,000/$300,000 for the last 2 years (not 1 year, not 3 years), plus a reasonable expectation for the current year.
Memory Aid: "200/300/1M": $200K individual income / $300K joint income / $1M net worth (excluding primary residence)
Professional Credentials (Added in 2020)
Holders of certain FINRA-administered licenses automatically qualify:
| License | Name |
|---|---|
| Series 7 | General Securities Representative |
| Series 65 | Investment Adviser Representative |
| Series 82 | Private Securities Offerings Representative |
- The SEC may designate additional qualifying credentials in the future
- This category was added to recognize financial sophistication beyond just wealth
Exam Tip: Gotchas
- Series 7, 65, and 82 holders qualify as accredited investors based on professional credentials, regardless of their income or net worth.
Insider Status
- Directors, executive officers, or general partners of the issuer offering the securities
- These individuals have inside knowledge of the company and its risks
Entity Qualifications
Organizations can also qualify as accredited investors:
| Entity Type | Requirement |
|---|---|
| Banks, insurance companies, registered investment companies | Qualify automatically |
| Employee benefit plans | Total assets exceeding $5 million |
| Business entities (corporations, partnerships, LLCs, trusts) | Total assets exceeding $5 million (must NOT be formed specifically to acquire the securities) |
| 501(c)(3) organizations | Total assets exceeding $5 million |
| Family offices | With at least $5 million in assets under management |
| Entities where ALL equity owners are accredited | Qualify based on owner status |
| "Knowledgeable employees" of private funds | Qualify based on role |
| SEC-registered investment advisers and broker-dealers | Qualify automatically |
Exam Tip: Gotchas
- An entity with over $5 million in assets does NOT qualify if it was formed for the specific purpose of acquiring the securities being offered. This prevents investors from pooling money into a shell entity to circumvent the accredited investor rules.
Verification Under Rule 506(c)
Under Rule 506(c), issuers must take reasonable steps to verify accredited investor status. Acceptable verification methods include:
- Reviewing tax returns (W-2s, 1099s, K-1s) for the prior 2 years (income test)
- Obtaining a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed CPA, or attorney that has verified the investor's status within the prior 3 months
- Reviewing bank statements, brokerage statements, or appraisal reports (net worth test)
- For existing investors who previously qualified, obtaining a written representation that they remain accredited
Exam Tip: Gotchas
- Under Rule 506(b), self-certification is acceptable (the investor simply checks a box). Under Rule 506(c), self-certification alone is NOT sufficient; the issuer must take reasonable steps to verify.