Accredited investors

What is an accredited investor?

An accredited investor is an individual or entity that meets certain financial or professional certification requirements established by the U.S. Securities and Exchange Commission (SEC), allowing them to invest in certain private market securities. These private market investments include:

• Private companies, such as startups

• Private equity funds

• Venture capital funds

• Hedge funds, and 

• Private placements—often considered riskier than public market investments due to less regulatory oversight. 

The “accredited investor” designation ensures that individuals investing in unregistered securities have enough financial expertise to assess the risks and benefits of an investment, or sufficient wealth to absorb potential losses.

Federal U.S. securities law restricts most private market investments to two categories of investors: accredited investors and qualified purchasers. 

• Accredited investors have to meet income and wealth thresholds set by the SEC, or hold certain finance-sector certifications. Examples of accredited investors are individuals, institutional investors, family offices, investment advisors, trusts, and other financial entities.

• Qualified purchasers are individuals or entities with at least $5 million in investments. 

Accredited investor requirements

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

Individuals

For an individual (natural person), accredited status 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 (individual or joint net worth with spouse or partner).

• Annual 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).

• Directors, executive officers, or general partners (GPs) of the company selling the securities.

• 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. Examples of accredited institutions include:

• Entities with more than $5 million in total assets, including corporations, partnerships, limited liability companies (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 (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. 

→ Learn more about the accredited investor definition in our 2023 issue brief

How to become an accredited investor

To become an accredited investor, you must meet the individual or institutional eligibility requirements, gather relevant documents, and verify your status before you begin investing in the private market.

1. Meet the accredited investor criteria: Individuals and entities must first meet the financial or professional certification requirements ( see above).
   

2. Gather the required documentation: To prove your status, you will need financial statements or professional records. 

   1. Income qualification: Tax returns, W-2 forms, pay stubs, K-1 statements, and business tax filings.

   2. Net worth qualification: Bank statements, brokerage account statements, retirement account statements, liability statements, and real estate appraisals. 

   3. Professional certification qualification: Financial licenses including Series 7, Series 65, or Series 82 from FINRA, or an employment verification letter if qualifying as a knowledgeable employee at a private fund.
      

3. Verify accredited investor status: After gathering your records, choose one of the following verification methods.

   1. Third-party verification: Verification service providers, Registered Investment Advisers (RIA), licensed attorneys, Certified Public Accountants (CPA).

   2. Investment firm verification: Private funds may have their own due diligence process to verify your accredited status.

Why does accreditation exist?

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 must 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 additional risk to investors who don’t have sufficient cash reserves for unexpected expenses.

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

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 Commissioner 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. 

To stay up to date on matters related to investment policy, including potential changes to the accredited investor rule, subscribe to the Carta Policy Weekly Brief: