Under US securities law, being an accredited investor has long been a prerequisite for accessing certain asset classes such as hedge funds, venture capital, or real estate syndicates. Brought into being with the Securities Act of 1933, this designation was established to ostensibly protect inexperienced investors from buying into excessively risky projects.
In 2020, the SEC updated its definition of an accredited investor. The expanded definition now requires meeting one condition in a set including:
- an individual or joint (with spouse) net worth of over $1 million;
- individual income that exceeded $200,000 for the past two years and the expectation of exceeding that sum in the current year;
- joint income exceeding $300,000 for the past two years and the expectation of exceeding that sum in the current year;
- holding certain professional certificates and designations, namely Series 7, Series 65 and Series 82 licenses;
- representing an LLC with over $5 million in assets;
- being a “knowledgeable employee” of the issuer of the securities being sold. In this case, the individual is considered as “accredited” only for offerings by the issuer and/or other private funds managed by their employer;
- being a private business entity or organization with assets exceeding $5 million. Do note, though, that the entity cannot be formed exclusively for the purpose of purchasing specific securities. Additionally, if an entity’s equity owners are all accredited investors, the entity is also considered to be an accredited investor.
In 2020, there were an estimated 13.5 million US households that qualify for accredited investor status. For a full list of potential ways to qualify as an accredited investor, refer to the SEC page linked both here and above.
While the SEC does not involve itself in any accreditation process, there are third-party providers such as registered broker-dealers, registered investment advisors, and CPAs that will verify an individual’s qualifications and issue a letter confirming accredited investor status.
In terms of offerings, the need for investors to have accredited status is typically required with regards to companies raising money under the Regulation D exemption rules. Other exemptions, such as Regulation S, Regulation A, and Regulation CF, don’t have this requirement (but do come with other constraints).
