What it is
The accredited investor definition comes from Rule 501(a) of Regulation D, a set of SEC rules. It describes people and entities that regulators presume can evaluate and bear the risks of private offerings, which are not registered with the SEC the way public offerings are.
For individuals, the rule has traditionally pointed to income and net worth. An individual may qualify with income over $200,000 in each of the two most recent years (or $300,000 jointly with a spouse or spousal equivalent), with a reasonable expectation of the same in the current year. An individual may also qualify with a 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 based on knowledge rather than wealth alone. These include holders in good standing of the Series 7, Series 65 or Series 82 licenses, and knowledgeable employees of a private fund for investments in that fund. The amendments also added the spousal equivalent concept. Entities such as certain trusts, corporations and family offices with over $5 million in investments or assets may qualify, as may registered investment advisers and exempt reporting advisers.
How it’s traditionally been approached
Historically, the definition has been used by issuers to decide who may be offered a private placement. Rule 506(b) allows an offering to proceed without general solicitation, and the issuer may sell to accredited investors and, in limited cases, a small number of non-accredited investors who meet other requirements.
Rule 506(c) allows general solicitation, which means an issuer may advertise publicly. In that case all purchasers must be accredited investors, and the issuer must take reasonable steps to verify that status. Verification methods commonly involve reviewing documents or obtaining written confirmation from a licensed professional.
Many people first learn their status when an issuer or its intermediary asks them to complete a questionnaire. Some people check on their own first, often with a licensed accountant, attorney or financial professional, so they understand the criteria before any conversation begins.
How the right fund manager may help
The right independent fund manager may help you understand how the accredited investor definition applies to your situation. A first conversation is generally informational. The manager may walk through the categories, explain what documentation is commonly requested, and describe how private fund offerings are typically structured.
Helpful questions to ask include: Which accredited investor category might apply to me? What type of verification would be needed, and how is my information kept private? Is the offering made under Rule 506(b) or 506(c), and what does that mean for how I was introduced? What are the risks, fees and liquidity limits described in the offering documents?
A manager can also help you prepare questions for your own licensed advisers. Qualifying does not mean an investment is suitable for you, and it does not guarantee any outcome. Any offering is made only by the issuer through its own offering documents.
The bigger picture
Learning where you stand can bring clarity. Some people feel pressure or confusion around terms like accredited, and others feel left out if they do not qualify. Remember that the definition is a regulatory category, not a measure of your worth or financial wisdom.
A calm, unhurried approach supports peace of mind. Consider how any decision fits your wider financial picture, your comfort with uncertainty and the people who depend on you. If you work in healthcare or another demanding field and want support with the broader picture, Providers.plus may be a useful resource.
Keep in mind
- Private fund investments are speculative and illiquid and can lose all of their value.
- Past performance does not guarantee future results.
- Tax treatment, including how items like K-1s or Section 1202 (QSBS) may apply, depends on individual circumstances, so consult your own licensed tax adviser.
- The Hastings Fund is an independent directory, not a broker-dealer, funding portal or investment adviser, and it does not recommend, endorse or rank investments. Nothing here is an offer to sell or a solicitation of an offer to buy any security.
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Create an investor account →Frequently asked questions
What is the accredited investor definition?
The accredited investor definition is the set of criteria in SEC Rule 501(a) that identifies individuals and entities eligible to participate in certain private securities offerings. It covers income, net worth, certain professional licenses and several types of entities. Meeting the definition does not make any investment suitable for you.
What income or net worth qualifies someone as an accredited investor?
An individual may qualify with income over $200,000 in each of the last two years, or $300,000 with a spouse or spousal equivalent, with a reasonable expectation of the same in the current year. Alternatively, a net worth over $1 million, alone or with a spouse or spousal equivalent, excluding the primary residence, may qualify. These are the thresholds in the rule.
Can you be an accredited investor without meeting the income or net worth tests?
Yes. Since the August 2020 amendments, holders in good standing of the Series 7, Series 65 or Series 82 licenses may qualify. Knowledgeable employees of a private fund may qualify for investments in that fund. Certain entities, family offices, registered investment advisers and exempt reporting advisers may also qualify.
What is the difference between Rule 506(b) and 506(c)?
Rule 506(b) does not allow general solicitation, while Rule 506(c) does. Under 506(c), all purchasers must be accredited investors and the issuer must take reasonable steps to verify their status. Under 506(b), the issuer may also sell to a limited number of non-accredited investors who meet other requirements.
How is accredited investor status verified?
Verification depends on the offering. Under Rule 506(c), the issuer must take reasonable steps, which may include reviewing financial documents or obtaining confirmation from a licensed professional. Under Rule 506(b), issuers often rely on a questionnaire or representation. Ask the issuer what it requires.
Are private fund investments risky for accredited investors?
Yes. Private fund investments are speculative and illiquid and can lose all of their value, regardless of investor status. Past performance does not guarantee future results. Review the offering documents carefully and consult your own licensed advisers.
Educational resource. The Hastings Fund shares general information and connects people with independent fund managers. It is not professional advice. Talk with a qualified professional about your own situation.