What it is
Under SEC Rule 501(a) of Regulation D, an "accredited investor" is a person or entity the SEC considers able to participate in certain private offerings that are not registered with the SEC. The rule lists several categories, and an entity may qualify under more than one of them.
One well-known category covers certain entities, such as corporations, partnerships, limited liability companies, and business trusts, that were not formed for the specific purpose of acquiring the securities offered and that own investments in excess of $5 million. Trusts with total assets above $5 million can also qualify if they were not formed for that purpose and their purchase is directed by a person with the knowledge and experience to evaluate the risks. Other entity categories include entities whose equity owners are all accredited investors.
The August 2020 amendments broadened the definition. Among other changes, they added family offices with assets under management above $5 million (and their family clients, in certain cases), as well as registered investment advisers and exempt reporting advisers. The amendments also added individuals who hold Series 7, 65 or 82 licenses in good standing, knowledgeable employees of a private fund, and spousal equivalents for the individual tests. Entities such as banks and registered broker-dealers are separately listed in the rule.
How it’s traditionally been approached
Traditionally, an issuer or its counsel decides whether a prospective investor meets one of the Rule 501(a) categories. Entities often provide a questionnaire or representations about their assets, how they were formed, and who owns them.
How much checking is needed depends on the type of offering. Under Rule 506(b), an issuer may not use general solicitation, and it may sell to accredited investors and a limited number of other purchasers who meet certain sophistication requirements. Under Rule 506(c), general solicitation is allowed, but every purchaser must be accredited and the issuer must take reasonable steps to verify that status.
For entities, verification has often involved reviewing financial statements, account records or letters from a licensed professional such as an attorney, CPA, registered investment adviser or broker-dealer. The documents requested vary by issuer and situation, and an entity's own attorney or accountant is usually the best source for how its status is analyzed.
How the right fund manager may help
The right fund manager or qualification-focused provider may help you understand which Rule 501(a) category could apply to your entity, and what documents are commonly requested. This does not guarantee that you qualify or that any offering would be available to you.
A first conversation is usually informational. You might be asked how the entity was formed, what it holds, who owns it, and whether it was created to buy a particular investment. Bring formation documents and recent statements, if you have them, so the discussion is clearer.
Good questions to ask include: Which accredited-investor category are you relying on? Is this a 506(b) or 506(c) offering, and what verification do you require? How is the $5 million measured? What happens to my information? Please also confirm everything with your own licensed attorney, accountant or adviser.
The bigger picture
Questions about qualification can feel technical, and it is natural to feel uncertain when an entity, a family, and real savings are involved. Taking time to understand the rules may bring some peace of mind and help you make decisions at your own pace, without pressure.
Financial choices connect with sleep, relationships and day-to-day stress. If the process feels heavy, it can help to talk it through with trusted advisers, loved ones or, if relevant, a wellness professional through Providers.plus. No one approach is right for everyone, and each person's situation differs.
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 accredited investor definition does not mean an investment is suitable for you, and it does not entitle you to any offering.
- Tax treatment, including how K-1s or QSBS under Section 1202 may apply, depends on individual circumstances; consult your own tax adviser.
- The Hastings Fund is an independent directory. It is not a broker-dealer, funding portal or investment adviser, does not recommend, endorse or rank investments, and nothing here is an offer to sell or a solicitation to buy any security.
Not sure where to start? Answer a few gentle questions and choose who you’d like to hear from.
Create an investor account →Frequently asked questions
Can an entity be an accredited investor with $5 million?
Yes, an entity may qualify as an accredited investor if it meets a Rule 501(a) category, including owning investments in excess of $5 million and not being formed for the specific purpose of acquiring the securities offered. Certain trusts with total assets above $5 million may also qualify under their own test. Whether a specific entity qualifies depends on its facts, so consult your own legal adviser.
Is the $5 million measured as assets or investments?
It depends on the type of entity. For many corporations, partnerships, LLCs and business trusts, the rule refers to owning investments in excess of $5 million, while trusts use a total assets test and family offices use assets under management. Check the exact wording of Rule 501(a) with your attorney or accountant.
Does a family office qualify as an accredited investor?
A family office may qualify if it has assets under management above $5 million, was not formed for the specific purpose of acquiring the securities offered, and its investment is directed by a person with the knowledge and experience to evaluate the risks. The August 2020 amendments added this category. Certain family clients of a qualifying family office may also be covered.
What if my entity does not have $5 million?
An entity may still qualify under another Rule 501(a) category, such as when all of its equity owners are accredited investors, or if it is a type of entity listed in the rule, such as a registered investment adviser. Each path has its own conditions. A licensed attorney can help you see whether any apply.
Do entities have to verify accredited status?
It depends on the offering. In a Rule 506(c) offering, the issuer must take reasonable steps to verify that every purchaser is accredited. In a Rule 506(b) offering, no general solicitation is allowed, and issuers commonly rely on questionnaires or representations from the investor.
Does being an accredited investor mean a private fund is a good fit?
No, qualifying only addresses eligibility under the securities rules and says nothing about suitability. Private fund investments are speculative and illiquid and can lose all of their value, and past performance does not guarantee future results. Review any offering documents 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.