Who Qualifies as an Accredited Investor?

The accredited investor definition is the single most-tested concept in Reg D. Bankers must know every category cold because each qualifying path drives a different disclosure and verification consequence.

What Are the Individual Accredited Investor Categories?

An individual qualifies as accredited if they meet any one of the following.

How Does the Primary-Residence Exclusion Affect the Net-Worth Test?

Since the Dodd-Frank Act of 2010, the $1 million net-worth threshold excludes the value of the primary residence.

• A retiree with a $2 million paid-off house and $500,000 in liquid net worth is NOT accredited under the net-worth path.
• The residence's asset value is excluded outright, and debt secured by the residence is also excluded as a liability, up to the home's fair market value.
• Exception 1: debt secured by the residence in excess of the home's fair market value (an underwater mortgage) IS counted as a liability.
• Exception 2: if residence-secured debt grew in the 60 days before the sale for a reason other than buying the residence, that increase IS also counted as a liability.
• The exclusion does NOT apply to vacation homes, investment properties, or rental properties.

How Does the Two-Year Look-Back and Reasonable-Expectation Test Work for Income?

• Income must hit the threshold for each of the two most recent years, not the average.
• The investor must have a reasonable expectation of meeting the same level in the current year.
• "Income" for this test is generally pre-tax income reported for federal income-tax purposes.

Exam Tip: Gotchas

• The $1M net-worth threshold EXCLUDES the value of the primary residence (since Dodd-Frank, 2010). A retiree with a $2M paid-off house and $500K in liquid net worth is NOT accredited under the net-worth path. They might still qualify via income or a professional license.
• The income test is a 2-year look-back, not an average. An investor with one $400K year and one $150K year does NOT meet the $200K individual income threshold.
• The professional-license path does NOT require active industry employment. A Series 65-holding investment-adviser principal who left the industry can still qualify for their personal investments as accredited, as long as the license remains in good standing.

What Are the Entity Accredited Investor Categories?

What Are the Anti-Abuse Rules for Entity Accreditation?

• Entities relying on the $5 million assets or investments path (or the trust path) cannot be formed for the specific purpose of acquiring the securities.
• This limitation does NOT apply to the all-equity-owners-accredited path: a newly formed entity still qualifies there as long as every equity owner is individually accredited.
• The exam tests this distinction whenever a fact pattern describes a newly created entity buying into a Reg D offering.
• Trusts must have at least $5 million in assets, NOT have been formed for the specific purpose of acquiring the securities, AND have their investment directed by a sophisticated person.

What Changed in the 2020 Expansion of the Accredited Investor Definition?

The accredited investor definition was substantially expanded effective December 2020. The expansion added knowledge-and-license paths and codified family-office practice.

• Added Series 7, Series 65, and Series 82 license holders as accredited individuals
• Added knowledgeable employees of private funds (for investments in that fund)
• Added family offices with at least $5M assets under management (AUM) and family clients
• Added LLCs over $5M assets (codified what was already common practice)
• Recognized "spousal equivalent" cohabitants for joint-net-worth and joint-income calculations

Exam Tip: Gotchas

• Anti-abuse rule: entities relying on a $5M asset, $5M investments, family-office, or trust path cannot be formed specifically to acquire the securities. This blocks "club deal" entities pooled together solely to clear a threshold. The rule does NOT reach the all-equity-owners-accredited path: a newly formed entity qualifies there as long as every equity owner is individually accredited.
• Trusts have a triple test: $5M assets AND not formed for the specific purpose AND sophisticated investment direction. Missing any one prong fails the entity-trust path.
• Insiders of the issuer are AUTOMATICALLY accredited regardless of personal wealth. A first-year director with $50K to her name is accredited for purposes of buying into the issuer's Reg D offering.

What Should You Check on Exam Day?

• Confirm the income test uses each of the two most recent years, not an average, and check for the reasonable-expectation-of-continuation language.
• Remember the primary-residence exclusion only strips the home's value from the net-worth path; it does not disqualify a vacation home or rental property from counting.
• Watch for a newly formed entity: it fails the $5M-assets, $5M-investments, family-office, and trust paths if formed to acquire the securities, but a newly formed all-accredited-owners entity still qualifies.
• Treat a director or executive officer as automatically accredited regardless of net worth, income, or license status; this is a natural-person path, not an entity path.
• Do not confuse the accredited investor definition with the Qualified Institutional Buyer test; the two have different thresholds and serve different safe harbors.