What is an accredited investor? Under SEC rules, an accredited investor is a person or entity that meets at least one financial, professional, or status-based qualification in Rule 501(a) of Regulation D. Accredited status can determine whether someone is eligible to participate in certain private securities offerings.
Accredited Investor Requirements at a Glance
- Income: More than $200,000 individually, or more than $300,000 with a spouse or spousal equivalent, in each of the two prior years, with a reasonable expectation of reaching the same level in the current year.
- Net worth: More than $1 million individually or jointly with a spouse or spousal equivalent, excluding the value of the primary residence.
- Professional credentials: A Series 7, Series 65, or Series 82 license held in good standing.
Meeting any one of these tests may qualify an individual. Additional categories apply to certain directors, executive officers, knowledgeable employees, family clients, and entities. Verify the current definition directly on the SEC’s accredited investor resource page.
How Can an Individual Qualify as an Accredited Investor?
1. The Income Test
An individual may qualify if earned income exceeded $200,000 in each of the two most recent years. The individual reasonably expects to reach the same income level in the current year. The threshold is more than $300,000 when income is combined with a spouse or spousal equivalent.
The test applies to each prior year separately. Combining an individual income test in one year with a joint income test in another generally does not satisfy the same two-year method unless the applicable joint threshold is met for both years. Review the SEC’s Accredited Investors Investor Bulletin for the SEC’s explanation and examples.
2. The Net-Worth Test
An individual may qualify with a net worth greater than $1 million, either alone or together with a spouse or spousal equivalent. The value of the individual’s primary residence is excluded.
Net worth generally means total assets minus total liabilities. A mortgage or other debt secured by the primary residence generally is not treated as a liability up to the residence’s estimated fair-market value. In addition, any amount by which that debt exceeds the residence’s value generally counts as a liability.
Certain increases in debt secured by the residence during the 60 days before the investment may also require special treatment. Investors should review the SEC bulletin and consult their own legal or financial advisers when applying these rules.
3. Professional Certifications and Other Status-Based Categories
An individual can also qualify by holding a Series 7, Series 65, or Series 82 license in good standing. The SEC may designate additional credentials in the future.
Other individual categories include certain directors, executive officers, or general partners of the issuer; knowledgeable employees investing in certain private funds; and qualifying family clients of qualifying family offices. These categories are fact-specific. The SEC’s guide to the amended accredited investor definition provides additional detail.
Can a Company, Trust, or Other Entity Be Accredited?
Yes. Rule 501(a) includes multiple entity categories. Depending on the entity and the applicable provision, qualification may be based on entity type, registration status, total assets, investments owned, or whether every equity owner is accredited.
- Certain corporations, partnerships, limited liability companies, trusts, charitable organizations, employee benefit plans, and family offices with more than $5 million in assets, subject to the applicable conditions;
- Entities that own more than $5 million in investments and were not formed for the specific purpose of acquiring the offered securities;
- Entities in which all equity owners are accredited investors;
- Certain banks, insurance companies, registered investment companies, business development companies, investment advisers, broker-dealers, and other qualifying financial entities.
Because entity qualification depends on the precise rule and facts, investors should review the SEC’s complete list of accredited investor categories.
Why Does Accredited Investor Status Matter?
Federal securities laws generally require securities offerings to be registered with the SEC unless an exemption is available. Some exemptions, particularly certain offerings under Regulation D, limit who may invest or impose additional conditions when non-accredited investors participate.
Private offerings can involve less prescribed disclosure than registered public offerings. They may also involve illiquidity, transfer restrictions, limited operating history, valuation uncertainty, and the possibility of losing the entire investment. Accredited status establishes eligibility for certain offerings. It does not establish that an investment is appropriate, safe, or suitable for a particular investor.
How Is Accredited Investor Status Verified in a Rule 506(c) Offering?
Qualifying and being verified are different. Qualification means meeting an accredited investor category. Verification is the process an issuer uses to confirm that status. Rule 506(c) permits general solicitation when all purchasers are accredited investors, the issuer takes reasonable steps to verify their status, and other applicable conditions are met. A simple check-the-box representation by itself may not be sufficient.
Verification is principles-based and depends on the facts and circumstances. The SEC also identifies non-exclusive methods that may include reviewing tax forms for income, reviewing specified financial records for net worth, or obtaining written confirmation from certain qualified professionals. Learn more from the SEC’s pages on assessing accredited investors and Rule 506(c) offerings.
Accredited Investors and PassiveInvesting.com Offerings
Certain offerings made available by affiliates of PassiveInvesting.com, LLC may rely on Rule 506(c) and therefore may be available only to verified accredited investors. Other offerings may rely on different exemptions and have different eligibility requirements. The applicable offering documents, not this article, control the terms, investor qualifications, risks, fees, and expenses of each offering.
If you are uncertain whether you qualify, consult your own securities attorney, accountant, or financial adviser. Our team can explain the verification process used for a specific offering, but cannot provide personal legal, tax, or investment advice.
Frequently Asked Questions
Does my primary residence count toward the $1 million net-worth requirement?
No. The value of a primary residence is excluded. Debt secured by the residence can affect the calculation in certain circumstances, including when the debt exceeds the residence’s fair-market value.
Do I need to satisfy both the income and net-worth tests?
No. An individual generally needs to satisfy one applicable qualification category, not every category.
Can professional credentials qualify me as accredited?
Yes. Individuals holding a Series 7, Series 65, or Series 82 license in good standing may qualify. Consult the SEC’s current guidance because qualifying credentials may change.
Does being accredited mean an investment is approved by the SEC?
No. Accredited status does not mean the SEC has approved an investor or endorsed an offering. Investors must still review the official offering documents and evaluate the risks independently.
Continue learning about private real estate investing
Eligibility is one part of evaluating an investment. Explore our real estate debt fund education to learn about lending structures and risk. For our fund’s current terms and verification process, review the Real Estate Debt Fund offering page.