Accredited Investor
An accredited investor is an individual or entity that meets specific financial thresholds or professional qualifications established by the SEC under Regulation D, permitting them to participate in private securities offerings that are exempt from the registration requirements of the Securities Act of 1933. The accredited investor framework balances investor access to private markets with the regulatory principle that sophisticated participants can fend for themselves without the full protections of registered offerings.
Key takeaways
- The primary individual thresholds are: net worth exceeding $1 million (excluding primary residence) or income exceeding $200,000 individually ($300,000 jointly) in each of the two preceding years with a reasonable expectation of the same.
- The 2020 SEC amendment expanded the definition to include holders of Series 7, 65, or 82 licenses, and certain 'knowledgeable employees' of private funds regardless of wealth.
- Institutional accredited investors include banks, registered investment advisers, broker-dealers, insurance companies, and entities with total assets above $5 million.
- Hedge funds and private equity funds rely on accredited investor status to sell fund interests under Regulation D Rule 506(b) or 506(c) exemptions.
- Issuers must take reasonable steps to verify accredited status under Rule 506(c); self-certification alone is insufficient for general solicitation offerings.
Explanation
The accredited investor concept emerged from the Securities Act of 1933's recognition that not all investment offerings require the same level of regulatory protection. Private offerings to sophisticated investors can be exempt from SEC registration—a costly and time-consuming process—because the underlying rationale for registration (ensuring retail investors have adequate information) is less compelling when the investor has the financial sophistication or resources to conduct independent due diligence.
The financial thresholds—$200,000 individual income or $1 million net worth—were established in 1982 and not inflation-adjusted until recent amendments expanded the non-financial criteria. Critics note that the income and wealth tests are imperfect proxies for financial sophistication; a wealthy retiree with no investment background may qualify, while a finance PhD without the requisite assets does not. The 2020 amendments attempted to address this by adding professional knowledge as an alternative pathway, though the SEC has stopped short of a full competency-based framework.
For hedge fund managers, the accredited investor standard is foundational to fundraising under Regulation D. Under Rule 506(b), funds can raise from up to 35 non-accredited but sophisticated investors and an unlimited number of accredited investors, provided there is no general solicitation. Rule 506(c) permits general solicitation and advertising but requires all investors to be accredited and requires the issuer to take reasonable steps to verify that status—reviewing tax returns, brokerage statements, or obtaining confirmation from a registered investment adviser or attorney.
Beyond the SEC framework, the 'qualified purchaser' standard under the Investment Company Act creates a higher bar—$5 million in investments for individuals, $25 million for institutional investors—for funds seeking to exclude themselves from registration under that Act. Practitioners must track which standard applies to each fund structure, as the overlap and interaction between accredited investor, qualified purchaser, and qualified eligible person (CFTC) definitions creates a complex eligibility matrix for alternative investment marketing.
Example
A hedge fund manager launches a long/short equity fund and seeks to raise capital under Rule 506(b) of Regulation D. A prospective investor is a software engineer earning $180,000 per year with $1.3 million in a brokerage account and no primary mortgage. While the engineer falls below the $200,000 income threshold, the $1.3 million in invested assets (excluding any home equity) exceeds the $1 million net worth threshold, making him an accredited investor eligible to invest. The fund manager collects tax returns and brokerage statements to document eligibility in the fund's subscription records. A second prospective investor—a graduate student with $50,000 in savings but a Series 7 license—also qualifies under the 2020 amendment, provided the fund verifies the license is current.
Related terms
Aml Anti Money Laundering Equity Fbar Form Adv Hedge Fund Inflation Managed Money Trader Qualified Eligible Person Qualified Purchaser Sec Registration Subscription Volcker Rule