What it is
An accredited investor is a person or entity that meets at least one category in SEC Rule 501(a) of Regulation D. The idea behind the definition is that certain offerings that are not registered with the SEC may be offered to people the rules treat as better able to evaluate risk or bear a loss.
For individuals, the rule includes a net worth test and an income test. The net worth test is over $1 million, either alone or together with a spouse or spousal equivalent, not counting the primary residence. The income test is more than $200,000 individually, or $300,000 jointly with a spouse or spousal equivalent, in each of the two most recent years, with a reasonable expectation of the same in the current year.
The August 2020 amendments added ways to qualify that do not depend on wealth. These include holding a Series 7, Series 65 or Series 82 license in good standing, and being a knowledgeable employee of a private fund for that fund's offering. The amendments also expanded the entity categories, including entities and family offices with over $5 million in investments or assets, and registered investment advisers and exempt reporting advisers. Several other categories exist, such as certain banks, broker-dealers and trusts, so the rule itself is the best source.
How it’s traditionally been approached
Historically, people have relied on the income and net worth tests to see whether they qualify. Many start by reviewing their own finances, then confirm their understanding with a licensed attorney, CPA or other adviser.
How a person's status is checked depends on the type of offering. Under Rule 506(b), an issuer may not use general solicitation and has traditionally often relied on the investor's own representations, along with a pre-existing relationship. Under Rule 506(c), general solicitation is allowed, but all purchasers must be accredited and the issuer must take reasonable steps to verify that status.
Verification has commonly involved reviewing documents such as tax forms, bank or brokerage statements, or a letter from a licensed professional. Others confirm a professional license instead. Approaches differ between issuers, and each one sets out its own process in its offering documents.
How the right fund manager may help
The right fund manager or qualification professional may help you understand which category, if any, could apply to your situation, and what each category generally involves. A first conversation is often an informational one. It may cover how you might document your status and how the process differs between 506(b) and 506(c) offerings.
Useful questions to ask include: Which Rule 501(a) category would I be relying on? What documents might be requested, and how are they kept private? Is the offering under 506(b) or 506(c), and what does that mean for me? A good professional should answer plainly and not pressure you.
Remember that being accredited only means you may be eligible to look at certain offerings. It does not mean any offering is right for you. Private fund investments are speculative and illiquid and can lose all of their value. Past performance does not guarantee future results. Please consult your own licensed attorney, tax adviser and financial adviser before making decisions.
The bigger picture
Questions about eligibility can touch on how secure you feel about your finances, your goals and your family. It is normal to feel unsure when terms like net worth or verification seem technical. Taking time to learn, and to ask questions without pressure, can support greater peace of mind.
Qualifying does not require you to act, and choosing not to is a valid decision. Many people find it helpful to think about their wider wellbeing alongside their finances, including their need for access to cash, their comfort with uncertainty and their long-term plans. If you are looking for related support, Providers.plus lists professionals who focus on overall wellbeing.
Keep in mind
- Private fund investments are speculative and illiquid and can lose all of their value.
- Past performance does not guarantee future results.
- The Hastings Fund is an independent directory. It is 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.
- Tax treatment depends on individual circumstances, so consult your own licensed legal, tax and investment advisers.
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Create an investor account →Frequently asked questions
What are the accredited investor requirements for individuals?
Under SEC Rule 501(a), an individual may qualify through income, net worth or professional credentials. The income test is more than $200,000 individually, or $300,000 with a spouse or spousal equivalent, in each of the last two years. The net worth test is over $1 million, alone or with a spouse or spousal equivalent, excluding the primary residence. Holding a Series 7, 65 or 82 license in good standing can also qualify a person.
Can I be an accredited investor without a high income or net worth?
Yes, in some cases. Since the August 2020 amendments, people who hold a Series 7, Series 65 or Series 82 license in good standing may qualify. Knowledgeable employees of a private fund may also qualify for that fund's offerings. Each category has specific conditions, so check the rule and ask a licensed professional.
Does a spouse or spousal equivalent count toward the requirements?
Yes. The net worth and joint income tests allow you to combine finances with a spouse or spousal equivalent. The 2020 amendments added the spousal equivalent, meaning a cohabitant in a relationship generally equivalent to marriage. Your own adviser can help you understand how this applies to you.
What are the accredited investor requirements for entities?
Entities can qualify in several ways. Under the rule as amended in August 2020, entities and family offices with over $5 million in investments or assets, which were not formed just to acquire the securities offered, may qualify. Registered investment advisers and exempt reporting advisers also qualify, along with certain banks, broker-dealers, trusts and other organizations listed in the rule.
How is accredited investor status verified?
It depends on the offering. Under Rule 506(b), issuers may not use general solicitation and often rely on the investor's own representations. Under Rule 506(c), the issuer must take reasonable steps to verify accredited status, which may involve reviewing financial documents or a letter from a licensed professional. The issuer's offering documents describe its process.
What is the difference between Rule 506(b) and Rule 506(c)?
Rule 506(b) does not permit general solicitation, while Rule 506(c) does. Under 506(c), all purchasers must be accredited and the issuer must take reasonable steps to verify that status. The two rules differ in how an offering may be marketed and how eligibility is confirmed. Private fund investments under either rule are speculative and illiquid and can lose all of their value.
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.