What Is an Accredited Investor?
An accredited investor is someone the SEC deems capable of bearing the risks of unregistered securities, the private placements through which hedge funds, private equity funds, venture funds, and startups raise money. Because these offerings skip the disclosure requirements of a public registration, federal securities law under Regulation D limits most of them to investors presumed able to evaluate the risks and absorb potential losses.
For individuals, accreditation requires income above $200,000 in each of the two most recent years, or $300,000 combined with a spouse or spousal equivalent, with a reasonable expectation of the same in the current year. Alternatively, an individual qualifies with net worth over $1 million, alone or with a spouse, excluding the value of a primary residence. Since a 2020 SEC amendment, holders of certain licenses, including the Series 7, Series 65, and Series 82, also qualify regardless of wealth.
How Accreditation Works in Practice
Entities can be accredited too. Banks, insurance companies, registered investment companies, and most institutional investors qualify automatically, as do entities with over $5 million in assets that were not formed specifically to make the investment, and entities whose owners are all themselves accredited. Knowledgeable employees of a private fund are accredited for investments in that fund, a provision that lets junior fund staff invest in their own firm's vehicles.
Verification depends on the offering type. In the most common structure, Rule 506(b), issuers can rely on investors self-certifying through a questionnaire. In offerings that use general solicitation under Rule 506(c), the issuer must take reasonable steps to verify status, typically by reviewing tax returns, brokerage statements, or a letter from an accountant or attorney. Related but distinct categories include the qualified purchaser, which requires $5 million in investments and gates 3(c)(7) funds, and the qualified client threshold that governs performance fees.
Why It Matters
Accredited investor rules define who can participate in private markets, which is why the concept appears constantly in fund formation, capital raising, and wealth management. Anyone working at a hedge fund, venture firm, or placement agent deals with subscription documents built around these definitions, and startups raising angel rounds must confirm their backers qualify. Getting it wrong can jeopardize an offering's exemption from registration.
The rules are also at the center of an ongoing policy debate. Critics argue that wealth is a crude proxy for sophistication and that the thresholds, unchanged in dollar terms since 1982 aside from the residence exclusion, now sweep in a growing share of households while still excluding financially literate people of modest means. Proposals to index the thresholds to inflation or expand qualification by examination surface regularly, so expect the definition to keep evolving.
