What is an accredited investor?

What is an accredited investor?

Author: The Carta Policy Team
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Read time:  5 minutes
Published date:  July 28, 2023
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Updated date:  March 14, 2024
Learn what an accredited investor is, requirements and qualifications, why the requirement exists, and how the accredited investor rules may change.

An accredited investor is an individual or entity that meets certain wealth or annual income thresholds, or holds relevant professional certifications. 

Federal U.S. securities law restricts most private-market investments to two categories of investors: accredited investors and qualified purchasers. A  qualified purchaser is an individual or entity with at least $5 million in investments. Accredited investors have to meet income and wealth thresholds set by the U.S. Securities and Exchange Commission (SEC), or hold certain finance-sector certifications. 

Learn more → Issue brief: The accredited investor definition

Why does accreditation exist?

The accreditation requirement is meant to make sure that investors in private securities have either enough financial sophistication to evaluate the risks and merits of an investment, or sufficient wealth to bear the economic consequences of a loss. Private market investments include shares of private companies (such as startups) and private funds (such as private equity funds, hedge funds, and venture capital funds).

Private vs. public investments

Investing in a public company in the U.S. is a simple, straightforward process. You identify a business, buy shares through a brokerage account, and sell them back into the market whenever it suits your needs. Virtually everyone is eligible to buy public company shares. In exchange for this broad access to investors, public companies have to go through a rigorous registration process and regularly provide robust disclosures to the public. As an investor, you can use these disclosures to inform your decisions. In other words, public markets are transparent and liquid.

Private companies aren’t required to make the same disclosures as their public counterparts. This means investors lack the same level of visibility into their finances and business practices. For investors who don’t have special insight into a company or industry, this can be a disadvantage. In addition, private investments are illiquid, which means that investors can’t easily sell them to cover other liabilities. Illiquidity may pose extra risk to investors who don’t have large reserves of cash to cover unexpected expenses.

For these reasons, the SEC restricts investment in certain private securities to accredited investors.

Accredited investor definition

The SEC defines individual and institutional accredited investors differently under Rule 501 of Regulation D.

Individual people

For an individual, accreditation is based on wealth, income qualifications, or financial expertise demonstrated through specific credentials or certifications. To be accredited, individual people must meet one of the following criteria:

  • Net worth over $1 million, not including primary residence (individually or jointly with spouse or partner)

  • Income over $200,000 (individually) or $300,000 (joint income with spouse or spousal equivalent) for at least the past two years, including the current year

  • Financial professionals who hold in good standing a securities representative license (Series 7), an investment adviser representative license (Series 65), or private securities offerings representative license (Series 82)

  • For investments in private funds, “knowledgeable employees” of the fund count as accredited investors in that fund

Institutions

For an institution, accreditation is determined by institution type and the amount of assets the institution has under management. A few examples of accredited institutions include:

  • Entities with more than $5 million in total assets, including corporations, partnerships, LLCs, trusts, charitable organizations, family offices, and employee benefit plans

  • Certain financial entities, including banks, insurance companies, registered investment companies, and business development companies

  • SEC-registered broker-dealers, investment advisers that are registered with the SEC or a state, and exempt reporting advisers

  • An entity owned by accredited investors

The rest of the required accredited investor status qualifications for individuals and institutions can be found on the SEC’s website.

Non-accredited investor

A non-accredited investor (or unaccredited investor) is anyone who doesn’t meet the definition of an accredited investor described above. Non-accredited investors can invest in public company stock (those traded on public stock exchanges), as well as other publicly available assets like bonds, real estate, and art. 

Non-accredited investors are also able to invest in private businesses, but these opportunities are limited and subject to other requirements, such as additional disclosures related to the investment. 

How have the accredited investor rules changed?

The SEC originally established the accreditation criteria as a response to the Great Depression, and the concept dates back to the Securities Act of 1933. The last substantial refresh of those rules occurred in 1982, when private funds were relatively new types of assets and represented a much smaller fraction of the U.S. economy than they do today.

For nearly four decades, the SEC used only two criteria to determine who qualifies as an accredited investor: either income level or net worth. Those financial thresholds have remained unchanged despite inflation. With the exception of a provision in the 2010 Dodd-Frank Act that excludes an investor’s primary residence from their net worth, not much has changed since 1982—until recently.

In 2020, the SEC broadened access to private investments by recognizing criteria based on financial experience and sophistication.

What’s next for the accredited investor rule?

Changes to the accredited investor definition are likely on the horizon. 

The SEC

The SEC has the authority to set the definition for accredited investors.

In 2021, the SEC announced that it may be reconsidering the financial thresholds for individual investors. Many expect the Commission to raise the net worth thresholds set in 1982 to account for inflation. Doing so would reduce the number of accredited investors.

The announcement drew a rebuke from Republican SEC Commissioners Hester Peirce and former Commissioner Elad Roisman. The SEC’s Small Business Advisory Committee has recommended leaving the current thresholds in place. It claims that higher thresholds would have a disproportionate impact on communities with lower median household incomes and costs of living—which could lead to fewer investment opportunities and reduced access to capital for emerging funds and entrepreneurs in those regions, as well as raise new barriers to capital for entrepreneurs from underrepresented populations.

Congress

Congress ultimately has the power to override any decision by the SEC. For example, Congress could codify the existing wealth and income thresholds in a federal statute. 

The House of Representatives has taken a step in this direction. In May and June 2023, the House passed the Accredited Investor Definition Review Act, the Fair Investment Opportunities for Professional Experts Act, and the Equal Opportunity for All Investors Act. Together, these laws would codify existing wealth and net-worth thresholds for accreditation, expand onramps for knowledge-based accreditation, and require the SEC to develop a new test to measure investor sophistication. People who pass the test would then qualify as accredited investors and be able to invest in private assets. 

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