Accredited Investor

An accredited investor is an individual or entity that meets regulatory criteria allowing participation in private, unregistered securities offerings (for example, private placements, venture capital, hedge funds, and pre‑IPO shares). The designation signals sufficient financial sophistication or resources to assume the higher risks and reduced disclosure that accompany these investments.

Key takeaways

• Accredited investors can buy securities not registered with the SEC, including private equity, venture capital, hedge funds, and other complex investments.
• Typical U.S. tests are an income requirement (>$200,000 individual or $300,000 joint for the past two years) or a net worth requirement (>$1,000,000 excluding primary residence).
• Recent rule changes expanded qualification paths to include certain professional credentials, knowledgeable employees of private funds, and registered investment advisors.
• Issuers—not the SEC—verify accredited status, usually by requesting documentation or third‑party confirmation.
• Participation brings access to higher‑return opportunities but also greater risk and less regulatory protection.

Who qualifies (U.S. rules, Regulation D, Rule 501)

Individuals or entities can qualify under several routes:

Individuals
* Income test: Gross income exceeding $200,000 in each of the two most recent years (or $300,000 combined with a spouse/partner) with a reasonable expectation of the same or higher income in the current year.
* Net worth test: Individual or joint net worth over $1,000,000 (primary residence excluded from assets). Net worth = assets − liabilities.

Entities
* Certain entities qualify if they meet asset or ownership tests, for example: private business development companies or entities with total assets exceeding $5,000,000.
* Entities can qualify if all equity owners are accredited or if the entity meets an investments test established by the SEC. Entities formed solely to purchase a single offering generally do not qualify.

Other recognized paths
* Directors, executive officers, or general partners of an issuer in some circumstances.
Financial professionals with certain registrations or credentials (the SEC explicitly recognized holders of certain professional certifications and FINRA registrations such as Series 7, 65, or 82 in practice).
“Knowledgeable employees” of private funds can qualify under the private fund rules.

Recent changes

In 2020 the SEC modernized the accredited investor definition to broaden access beyond income/net worth tests. The amendments allow qualification based on professional knowledge, experience, credentials, or registration (for example, certain certifications and registered investment advisors), and expand entity‑based pathways such as an investments test.

How verification works

Issuers of unregistered securities are responsible for verifying that purchasers are accredited. Common verification methods:
* Questionnaires and attestations from the investor.
Financial documentation: tax returns, W‑2s, bank and brokerage statements, balance sheets, or CPA/attorney letters.
Third‑party verification: account statements from financial institutions, written confirmations from registered broker‑dealers, licensed attorneys, CPAs, or SEC‑registered investment advisers.
* Credit reports or other background checks when appropriate.

Investors do not apply to the SEC for accredited status; verification is handled by the offering issuer.

Privileges and risks

Privileges
* Access to private placements, venture capital, private equity, hedge funds, and other offerings not available to the general public.
* Opportunity for early-stage or higher-return investments.

Risks
* Reduced regulatory disclosure and investor protections compared with registered public offerings.
Investments are often illiquid, complex, and higher risk, sometimes resulting in total loss of capital.
Responsibility falls on the investor to perform due diligence and evaluate risk.

Example

An individual has:
* Primary residence valued at $1,000,000 with a $200,000 mortgage (primary residence excluded from net worth),
Car worth $100,000 with a $50,000 loan,
401(k) balance $500,000,
Savings $450,000,
Annual income $150,000.

Income test: fails (below $200,000).
Net worth test (excluding primary residence): assets $1,050,000 (car + 401(k) + savings) − liabilities $50,000 (car loan) = $1,000,000 → meets the $1,000,000 net worth threshold and therefore qualifies as an accredited investor.

Bottom line

The accredited investor framework aims to balance investor protection with capital formation by reserving higher‑risk, less‑regulated investment opportunities for individuals and entities deemed financially sophisticated or resourced. Meeting the criteria gives access to private markets but also requires accepting greater responsibility for evaluating and assuming investment risk.