What Makes an Accredited Investor? A Breakdown of Legal and Practical Qualifications
In the world of private investments—like startup equity, venture capital, hedge funds, and private placements—access is often limited to a special class of participants: accredited investors.
But what exactly does that mean? Is it just about income, or are there other criteria? And more importantly, why should entrepreneurs and investors alike understand this designation?
Let’s break it down in plain English.
What Is an Accredited Investor?
An accredited investor is a person or entity allowed by law to invest in certain high-risk, high-reward private securities that aren’t registered with the SEC. These investments are considered too risky or complex for the general public.
The term was created under Regulation D of the U.S. Securities Act of 1933, and the rules governing it are maintained by the U.S. Securities and Exchange Commission (SEC).
Who Qualifies? — SEC Criteria (As of 2024)
💼 Individuals:
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Income Test: $200,000 annual income (or $300,000 with a spouse/partner) for the past 2 years, with a reasonable expectation of the same this year.
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Net Worth Test: Net worth over $1 million, excluding the value of their primary residence.
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Professional Certifications: Holders of specific licenses (e.g., Series 7, Series 65, or Series 82) also qualify—even if they don’t meet income/net worth thresholds.
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Knowledgeable Employees of certain private investment funds may qualify if investing in that fund.
🏢 Entities:
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Assets: Must have over $5 million in assets.
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Ownership: If all equity owners are accredited investors, the entity itself is considered accredited.
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Banks, insurance companies, VC funds, and similar regulated institutions are automatically accredited.
Why Does Accreditation Matter?
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Access: Accredited investors can participate in exclusive deals like venture rounds, hedge funds, and pre-IPO opportunities.
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Fewer Disclosures: Companies raising capital from accredited investors have fewer regulatory burdens.
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Risk Assumption: The law assumes accredited investors can “fend for themselves” and understand the risks.
Updates from the SEC (2020–2024)
In recent years, the SEC expanded the definition to include:
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Individuals with FINRA certifications
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“Knowledgeable employees” of private funds
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Spousal income pooling
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Trusts and LLCs with high assets and investment knowledge
These changes have increased inclusivity while maintaining investor protection.
Benefits for Startups & Founders
If you’re raising capital:
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You must verify whether an investor is accredited to comply with SEC rules.
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Verification can be done through 3rd-party services like:
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Using accredited investors allows you to raise funds under Rule 506(b) or 506(c) of Regulation D, which permits larger and faster raises with fewer compliance hurdles.
Global Perspective:
Other countries use similar classifications:
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UK: “High Net Worth Individual” or “Sophisticated Investor”
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Canada: “Accredited Investor” under NI 45-106
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Australia: “Wholesale Investor”
Each has different thresholds and rules, but the idea is similar—protect the general public from complex or risky investment products.
Risks & Considerations
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Being accredited doesn’t guarantee expertise—just financial capacity.
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Private investments are often illiquid, high-risk, and lack transparency.
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Due diligence is still vital.
Conclusion
Whether you’re an investor looking to expand your horizons or a founder seeking funding, understanding the accredited investor landscape is essential.
At Global Capital Network, we regularly match startups with accredited investors and assist founders in preparing the right documentation, pitch materials, and compliance structures to close deals efficiently.