Accredited Investor Definition

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.

Individual Accredited Investor Categories

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

Net Worth: The Primary-Residence Exclusion

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. Debt secured by the residence, up to the home's fair market value, is also excluded as a liability, with two exceptions: (1) debt secured by the residence in excess of the home's fair market value (an underwater mortgage) IS counted as a liability, and (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.

Income: Two-Year Look-Back Plus Reasonable Expectation

• 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.

Entity Accredited Investor Categories

Anti-Abuse Rules

• 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.

The 2020 Expansion: What Changed

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.