An accredited investor is an individual or organisation that meets financial or professional tests set by securities regulators and is therefore allowed to invest in private securities offerings that are not registered with the regulator. In the United States the definition sits in Rule 501 of Regulation D, issued by the Securities and Exchange Commission. Accredited status opens access to investments such as private equity funds, hedge funds, venture capital deals and private placements.
The rationale is that people with substantial wealth, income or expertise can assess risky investments and absorb losses without the protections of a full prospectus and registration. Similar concepts exist elsewhere under different names, such as "professional investor" in Hong Kong, "accredited investor" in Singapore and "sophisticated" or "high net worth" investor in the United Kingdom.
Accredited investor in plain terms
Some investments are like rides at a theme park with a height limit. Regulators let anyone buy publicly listed shares, because those companies must publish detailed information. Private deals publish much less, so the rules restrict who can join, on the theory that wealthier or more experienced investors can judge the risks and can afford to lose money.
Meeting the test does not mean an investment is safe or that the regulator has checked it. It only means the investor is allowed in the queue. The responsibility for judging the deal moves almost entirely onto the investor.
The US definition
Under Regulation D, an individual generally qualifies if they meet one of these tests:
- Income. Earned income above $200,000 in each of the past two years, or $300,000 jointly with a spouse or partner, with a reasonable expectation of the same this year.
- Net worth. Net worth above $1 million, alone or jointly, excluding the value of the primary residence.
- Professional credentials. Holding certain securities licences in good standing, namely the Series 7, Series 65 or Series 82, added by SEC amendments in 2020.
- Insiders. Directors, executive officers and certain "knowledgeable employees" of the issuer or fund.
Entities can qualify through assets of more than $5 million, or because they are regulated institutions such as banks, registered advisers and insurance companies, or because all their owners are accredited. The income and net worth thresholds are not indexed to inflation, so the share of US households that qualifies has grown over time.
How accreditation is checked
Issuers relying on Rule 506(b) may sell to accredited investors, and to a limited number of non-accredited but sophisticated investors, without general advertising, and can often rely on investor self-certification. Rule 506(c), introduced in 2013, allows public advertising but requires issuers to take reasonable steps to verify that every buyer is accredited, for example by reviewing tax returns, bank statements or a letter from a lawyer, accountant or registered adviser. Online platforms often combine this with know your customer checks. Separately, Regulation Crowdfunding and Regulation A allow non-accredited investors to take part in some private-company offerings within set limits, a route widely used for equity crowdfunding.
Accredited investors and crypto
Many token projects have sold to accredited investors to stay within securities law. During and after the ICO era, developers used Simple Agreements for Future Tokens, modelled on the SAFE, to raise money from accredited buyers under Regulation D. Where tokens are likely to be securities under the Howey test, security token offerings and private sales of governance tokens commonly restrict US buyers to accredited investors. Some crypto lending and yield products have also limited US access to this group.
Criticism and debate
Critics argue that wealth is a poor proxy for financial knowledge, since many wealthy people lack investment expertise while many knowledgeable people do not meet the thresholds. Others say the rules lock ordinary savers out of private markets, where much company growth now happens before any public listing. Investor advocates respond that private deals carry higher risks of fraud, illiquidity and poor disclosure, and that the thresholds should be raised or indexed to inflation. The SEC has reviewed the definition several times, and Congress has considered bills to add knowledge-based tests, so the rules may continue to change. Outside the United States, the European Union's MiFID II framework uses a related but different idea, letting clients be treated as "professional" if they meet tests on trading activity, portfolio size and experience, which reduces some of the protections they receive.