Accredited Investor Definition: Who Qualifies Under SEC Rule 501(a)

An accredited investor is a person or entity that meets at least one category in SEC Rule 501(a) of Regulation D. Many private fund offerings are limited to accredited investors, so the definition often decides whether someone is eligible to be considered at all.

For individuals, the classic paths are an income test and a net worth test. The income test is individual income over $200,000, or joint income with a spouse or spousal equivalent over $300,000, in each of the two most recent years, with a reasonable expectation of the same in the current year. The net worth test is net worth over $1 million, alone or together with a spouse or spousal equivalent, excluding the value of the primary residence.

The August 2020 amendments added ways to qualify that do not depend on wealth. Holders of certain licenses in good standing (Series 7, Series 65 and Series 82) can qualify, as can knowledgeable employees of a private fund for investments in that fund. The amendments also added spousal equivalents and widened the entity categories, including entities and family offices with over $5 million in investments or assets, as well as registered investment advisers (RIAs) and exempt reporting advisers.

Traditionally, many people looked at the income and net worth tests first, because these were the original paths. Readers often ask how the primary residence is treated. Under the rule it is excluded from the net worth calculation, and there are specific rules about how mortgage debt on the home is counted.

Entities have their own paths. Certain entities, such as corporations, partnerships, LLCs and trusts, can qualify with over $5 million in assets if they were not formed for the specific purpose of investing in the offering. An entity can also qualify if all of its equity owners are accredited. Family offices with over $5 million in assets under management, and their family clients, have a separate category.

Verification depends on how the offering is conducted. Under Rule 506(b), the issuer may not use general solicitation and generally relies on the investor's representation of status. Under Rule 506(c), general solicitation is allowed, but all purchasers must be accredited and the issuer must take reasonable steps to verify. Those steps can include reviewing tax documents or financial statements, or getting written confirmation from a registered broker-dealer, an RIA, a licensed attorney or a CPA.

The right fund manager may help you understand which accredited investor category could apply to your situation and which documents are commonly used to show it. A first conversation is usually about your circumstances, your goals and how the manager's offering process handles eligibility. It is not a sales pitch.

Good questions to ask include: Is this offering under Rule 506(b) or Rule 506(c)? What verification do you require, and how is my information kept private? Do you accept a professional license, entity status or another non-income path? Asking these early may save time and avoid surprises.

A fund manager can explain how a private fund works, including its strategy, fees, risks, reporting and the lock-up or limited ability to withdraw. They do not decide whether it suits you, and they cannot guarantee any outcome. Your own licensed attorney, CPA and financial adviser should review the offering documents with you.