What it is
The accredited investor income test is a path to qualification under SEC Rule 501(a) of Regulation D. For an individual, the rule looks at income of more than $200,000 in each of the two most recent years, with a reasonable expectation of reaching the same level in the current year.
Married couples and spousal equivalents have a joint version of the test. Their combined income must be more than $300,000 in each of the two most recent years, again with a reasonable expectation of the same level this year. A spousal equivalent is a cohabitant in a relationship generally equivalent to a spouse.
Income is only one route. Rule 501(a) also includes a net worth test (over $1 million, excluding the primary residence, individually or jointly). Since the August 2020 amendments, it also recognizes holders of certain licenses (Series 7, 65 and 82), knowledgeable employees of a private fund, entities and family offices with over $5 million in investments or assets, and registered investment advisers and exempt reporting advisers.
How it’s traditionally been approached
Traditionally, issuers of private funds have relied on exemptions under Regulation D. Under Rule 506(b), an issuer may not use general solicitation. It may accept investors who are accredited, and in limited cases a small number who are not.
Under Rule 506(c), general solicitation is allowed. In that case, all purchasers must be accredited, and the issuer must take reasonable steps to verify that status. Verification of the income test has often involved reviewing documents such as tax forms or W-2s, or obtaining a written confirmation from a licensed professional.
Many people have simply gathered their own tax returns and pay records and reviewed them against the rule's wording. Others have asked a CPA, attorney or other licensed adviser to help them read the test correctly, since the details, such as how income is counted, can matter.
How the right fund manager may help
The right professional may help you read Rule 501(a) in light of your own situation. A visit with a CPA, securities attorney or other qualified adviser generally starts with a review of your income history for the last two years and what you expect this year, and whether another path might apply.
It may help to ask a few questions. How is income counted for this test? Does joint income or a spousal equivalent apply to me? What documents might an issuer ask for? Would a different category fit better than the income test?
A good professional can also explain what qualifying does and does not mean. Being accredited only opens the door to being offered certain private placements. It does not mean any particular investment is suitable for you. The Hastings Fund is an independent directory and does not give advice, recommend investments or rank managers.
The bigger picture
Questions about qualifying can touch on more than numbers. Some people feel pressure to reach a threshold, while others feel uncertain about sharing financial records. Taking the time to understand the rules calmly may support better peace of mind.
Your financial choices fit into a wider picture of wellbeing, including your goals, comfort with risk and stress levels. If the topic feels heavy, Providers.plus may help you find supportive professionals. No approach is right for everyone, and it is fine to move at your own pace.
Keep in mind
- Private fund investments are speculative and illiquid and can lose all of their value.
- Past performance does not guarantee future results.
- Meeting the income test does not make any investment appropriate for you. Please consult your own licensed legal, tax and investment advisers.
- Nothing here is an offer to sell or a solicitation of an offer to buy any security. Any offering is made only by the issuer through its own offering documents.
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Create an investor account →Frequently asked questions
What is the accredited investor income test?
The accredited investor income test is a way to qualify as an accredited investor under SEC Rule 501(a). An individual generally needs income over $200,000 in each of the last two years, or joint income with a spouse or spousal equivalent over $300,000, and a reasonable expectation of the same level in the current year.
How many years of income does the test look at?
The test looks at the two most recent years. You also need a reasonable expectation of reaching the same income level in the current year.
Can I use my spouse's income to qualify?
Yes, the rule allows joint income for spouses and spousal equivalents. Combined income must be over $300,000 in each of the two most recent years, with a reasonable expectation of the same this year.
Are there ways to qualify other than the income test?
Yes. Rule 501(a) also includes a net worth test of over $1 million excluding the primary residence. Since the August 2020 amendments, it also covers holders of Series 7, 65 or 82 licenses, knowledgeable employees of a private fund, entities and family offices with over $5 million in investments or assets, and registered investment advisers and exempt reporting advisers.
How is the income test verified?
Verification depends on the offering. Under Rule 506(b) the issuer may rely on self-certification, while under Rule 506(c) it must take reasonable steps to verify. These steps have often included reviewing tax documents or obtaining written confirmation from a licensed professional.
Does meeting the income test mean I should invest in a private fund?
No. Qualifying only means you may be eligible to be offered certain private placements. Private fund investments are speculative and illiquid and can lose all of their value, so consider speaking with 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.