Accredited Investor Defined

Accredited Investor Defined: Who Qualifies and Why It Matters in Private Offerings

In the world of private capital markets, one term you’ll hear often is “accredited investor.” Whether you’re launching a hedge fund, offering private equity, or preparing a Regulation D private placement, understanding who qualifies as an accredited investor is essential to compliance, investor targeting, and fundraising strategy.

For attorneys, entrepreneurs, fund managers, and business owners, a working knowledge of the accredited investor standard can help reduce regulatory risk and unlock access to high-net-worth capital.

What Is an Accredited Investor?

An accredited investor is a person or entity that meets specific financial or professional criteria set forth by the U.S. Securities and Exchange Commission (SEC) under Rule 501 of Regulation D. These standards are designed to ensure that individuals and institutions participating in private, unregistered securities offerings have the financial sophistication and capacity to bear the associated risks.

Unlike the general public, accredited investors can legally invest in private placements, hedge funds, venture capital, and private equity offerings that are exempt from SEC registration.

Current Criteria for Accredited Investor Status (as of 2024)

An individual or entity may qualify as an accredited investor by meeting any of the following requirements:

For Individuals:

1. Income Test:

   • Annual income of $200,000 individually, or

   • $300,000 jointly with a spouse or spousal equivalent

   • Must be consistent over the last two years, with expectation of similar income in the current year.

2. Net Worth Test:

   • Net worth exceeding $1 million, excluding the value of the primary residence.

   • Can be calculated individually or jointly with a spouse.

3. Professional Certification:

   • Holding a Series 7, Series 65, or Series 82 license (financial professional certifications approved by the SEC).

4. Knowledgeable Employees of Private Funds:

   • Employees of a private fund with executive or analytical roles may qualify if investing in that same fund.

For Entities:

1. Assets Test:

   • Any trust, LLC, corporation, or partnership with over $5 million in assets and not formed for the specific purpose of investing in the offering.

2. Institutional Investors:

   • Banks, registered investment companies, insurance companies, or business development companies.

3. Entities Where All Owners Are Accredited:

   • An entity where all equity owners individually meet the accredited investor criteria.

Why Does Accredited Investor Status Matter?

Accredited investor verification is especially important for issuers relying on Regulation D exemptions—namely, Rule 506(b) and Rule 506(c):

• 506(b): You can accept up to 35 non-accredited investors (who must be sophisticated), but most issuers choose to work only with accredited investors to simplify compliance.
• 506(c): You may publicly solicit your offering, but must verify that all investors are accredited through third-party verification, documentation, or direct certification.

Failing to verify accredited investor status correctly can jeopardize the exemption and expose the issuer to significant regulatory, legal, and financial liabilities.

How to Verify Accredited Investor Status

Under Rule 506(c), the SEC requires “reasonable steps” to verify accredited status. Common methods include:

• Third-party verification (CPA, attorney, broker-dealer certification)
• Income verification (W-2s, tax returns, bank statements)
• Net worth calculation (assets minus liabilities)
• Verification platforms and compliance tools (e.g., VerifyInvestor, EarlyIQ)

Attorneys advising issuers should maintain a secure paper trail and ensure that verification standards are met for all 506(c) offerings.

The Legal & Strategic Role of Accredited Investors

For legal professionals and fund managers, identifying and working with accredited investors helps you:

• Streamline offering compliance
• Reduce disclosure obligations
• Limit investor-related legal risk
• Attract higher capital commitments

Issuers who focus on this category of investor often find it easier to raise large amounts of capital while staying within the boundaries of SEC exemptions.

Final Thoughts

Understanding who qualifies as an accredited investor is fundamental for any private securities offering. Whether you’re structuring a Reg D capital raise or preparing client documentation, knowing how to define, verify, and work with accredited investors allows you to navigate the capital markets more efficiently—and more compliantly.

For a ready-to-use PPM template, Subscription Agreement, and Investor Questionnaire designed with accredited investor compliance in mind, explore our offering documents now.