Who is an accredited investor?
It is a person or entity that meets one of the tests in SEC Rule 501(a), most often an income, net worth or professional license test, judged at the time each investor buys.
Key points
- Individuals usually qualify on income, on net worth, or by holding certain securities licenses in good standing.
- Your home does not count toward net worth, and neither does the mortgage on it, with two exceptions.
- A spouse or spousal equivalent can be combined with the investor for the income and net worth tests.
- Entities have their own tests, and a vehicle formed just to make your investment usually has to look through to its owners.
- Status is measured when the investor buys, so last year's answer may not hold today.
Alejandro Davila, founder of Mownt, Updated
The short version
A common site-wide definition reads: "Accredited: Individuals and certain entities that meet an SEC test, such as an income or net worth threshold or certain professional licenses." The tests live in Rule 501(a) of Regulation D. Each one is a separate path, and an investor needs to meet only one of them.
Why it matters to you as the operator: under 506(c), every investor must be accredited and you must take reasonable steps to verify it. Under 506(b), accredited status changes what you must disclose and who counts toward the limits. You decide which test an investor relies on, and you document it.
The tests for individuals
Income: the investor earned more than $200,000 in each of the two most recent years, or more than $300,000 together with a spouse or spousal equivalent in each of those years. They must also reasonably expect to reach the same level this year. "More than" is literal: exactly the threshold does not qualify. Use one test (individual or joint) consistently across both years.
Net worth: the investor's net worth, alone or together with a spouse or spousal equivalent, is more than $1,000,000. How that number is calculated is where most errors happen, so it has its own section below.
Licenses: the SEC can designate professional credentials by order. So far the designated ones are the Series 7, Series 65 and Series 82 licenses, held in good standing. A CPA, CFA, law degree or MBA does not qualify on its own.
Insiders: directors, executive officers and general partners of the issuer, or of the issuer's general partner, are accredited for that issuer's offering. A title handed out without a real policy-making role is a weak basis.
Net worth: the home, the mortgage and the 60-day look-back
The investor's primary residence is not counted as an asset. Debt secured by that home is also left out, up to the home's estimated fair market value at the time of the sale.
There are two exceptions. First, if the home debt at the time of sale is higher than it was 60 days earlier, the increase counts as a liability, unless the increase came from buying the home. This stops someone from drawing on a new home equity line just before investing to look wealthier. Second, any home debt above the home's fair market value (an underwater mortgage) counts as a liability.
Retirement accounts, brokerage accounts, cash and investment property usually count. Unused credit does not. A second home is an ordinary asset, and its mortgage an ordinary liability.
Spousal equivalent: the rule defines it as a cohabitant in a relationship generally equivalent to that of a spouse. Marriage is not required. For joint net worth, the assets do not need to be held jointly, and the investor can buy alone while relying on the joint figure. Roommates and business partners do not qualify.
Entities, trusts and other categories
Entities qualify in three broad ways: by being a listed institution (a bank, a registered broker-dealer, an investment adviser registered with the SEC or a state, an exempt reporting adviser and similar), by holding more than $5,000,000 in total assets or investments without having been formed for the specific purpose of buying your securities, or by having only accredited equity owners. Family offices that meet the rule's conditions, and their family clients, have their own categories.
The "not formed for the specific purpose" condition is the common trap. A new LLC that pools friends into one deal usually has to qualify by looking through to its owners, every one of whom must be accredited. A revocable trust usually looks through to its grantors. An IRA is generally treated as accredited when its owner is.
The SEC definition has other categories, such as certain entities and knowledgeable employees of private funds, that this article does not cover in full. The knowledgeable employee category applies only to certain employees of a private fund that relies on Section 3(c)(1) or 3(c)(7) of the Investment Company Act, and only for that fund. It does not usually help a single-property syndication.
Where to go next
Which test an investor relies on, and how you document it, is a decision for you and your own securities attorney. This article is education, not legal advice. The rule text is at 17 CFR 230.501, https://www.law.cornell.edu/cfr/text/17/230.501.
How Mownt helps with this
- Mownt records key steps in an activity log. You decide what goes into your own records.
- Mownt keeps your contacts, investors, interactions and cap tables. You decide when to export them.
- Mownt includes the Capital Raiser Playbook in your account. You decide how to use it for your raise.
Written by Alejandro Davila, founder of Mownt. Mownt sells the software described here.
The full checklist is inside Mownt. Read "Verifying accredited investors, including entity, trust and IRA investors" in the Capital Raiser Playbook when you join. Apply for early access
Frequently asked questions
Can someone who is not accredited invest at all?
In a 506(c) offering, no. Both exemptions are mainly used to raise from accredited investors. 506(b) also allows a limited number of non-accredited investors, with added requirements. Each must be sophisticated, alone or with a purchaser representative, and Rule 502(b) disclosure applies, including financial statements. Counting follows Rule 501(e), and other offerings can be integrated (counted together). Many sponsors avoid non-accredited purchasers entirely.
Is a checked box enough?
For 506(b), you need a reasonable belief, which usually means a questionnaire plus what you know about the person, with no red flags ignored. For 506(c), a checkbox alone is not reasonable steps to verify. A separate article covers how verification works.
Does home equity count toward the net worth test?
No. The home is left out as an asset. The mortgage is left out too, except for debt added in the 60 days before the sale (other than to buy the home) and any debt above the home's value.
Are the thresholds adjusted for inflation?
No. The income and net worth figures in the rule are fixed until the SEC changes them. Check the current text before you rely on any number, including the ones here.
When is status measured?
At the time of the sale to that investor. A large loss, a divorce or a job change can move someone across the line in either direction, so check again before a later investment.
Keep reading
The rules, in plain English
What is the difference between a 506(b) and a 506(c) offering?
Both are Rule 506 exemptions under Regulation D. They differ in whether you may promote the offering publicly, who may invest, and what the issuer must do to confirm each investor's status.
Updated
The rules, in plain English
How does 506(c) verification work?
Before accepting money in a 506(c) offering, the issuer takes reasonable steps to confirm each investor is accredited, judged on the facts, using listed methods, other reasonable methods, or a high minimum investment.
Updated
Getting past friends and family
What do I do after friends and family?
Keep going through three routes: deepen your wider network under 506(b), promote openly under 506(c), or meet people in person, knowing that each route carries its own rules.
Updated