Investors can choose from a variety of registered investments, including stocks, bonds, mutual funds, and exchange-traded funds. However, certain investments are only available to accredited investors—individuals and legal entities that the federal government believes are knowledgeable or wealthy enough to take on the associated risk.

Accredited investor definition

An accredited investor is defined in Rule 501 of Regulation D as an individual or entity that’s either wealthy or financially knowledgeable, based on the specific criteria described in the rule. 

The Securities Act of 1933 first established the accredited investor definition, but the U.S. Securities and Exchange Commission (SEC) has changed the definition over the years. Most recently, in August 2020, it was expanded to include individuals who can qualify based on their professional knowledge rather than income or net worth. 

As of April 2022, individuals can qualify as accredited investors based on the:

• Income level requirement.

  Earn more than $200,000 in each of the two prior years and expect to earn at least that much during the current year. Someone who is married or has a spousal equivalent can qualify if their combined income is more than $300,000. 

• Net worth requirement.

  Have an individual or household (with a spouse or spousal equivalent) net worth of at least $1 million. Net worth is based on the sum of assets and liabilities, not including home equity from a primary residence or loans against that home. 

• Professional certification or designation requirement.

  Pass an exam and hold in good standing either a general securities representative license (Series 7), investment advisor representative license (Series 65), or private securities offerings representative license (Series 82).

The SEC reports that based on Census Bureau data from 2020, a little over 10% of households could qualify based on their income. But there are a few additional ways an individual can qualify. For example, SEC- and state-registered investment advisors and exempt reporting advisors are also accredited investors. Family clients of a family office that has at least $5 million in assets under management and certain knowledgeable employees of a private fund are also accredited, but only for the purpose of investing in a fund. 

Can entities be accredited investors too?

Accredited investors can be entities (such as businesses and trusts) in addition to individuals (what the SEC refers to as a “natural person”). As with individuals, there are different ways that an entity can qualify as an accredited investor:

• A financial institution, such as a bank, insurance company, or registered investment company.
• Entities that have more than $5 million in assets or investments, including limited liability companies (LLCs), family offices, Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries. However, the entity might not qualify if it’s created specifically to make an investment that’s limited to accredited investors. 
• An entity that’s completely owned by accredited investors. 
• Employee benefit plans that have over $5 million in assets or when a bank, insurance company, or registered investment advisor makes the plan’s investment decisions.

Where can an accredited investor invest?

The SEC generally forbids or limits companies from selling unregistered securities to people who aren’t accredited investors. 

Companies register with the SEC when they have an initial public offering (IPO) and get listed on a stock exchange. Once that happens, the company can raise money by selling shares to the general public. But many companies don’t want to—or aren’t ready to—spend the time and money required to have an IPO.

But there are a variety of exemptions that companies can use to raise money before registering, and many of the popular options allow companies to raise an unlimited amount of money from accredited investors. 

As a result, individuals and entities that qualify can diversify their portfolio by investing in different types of unregistered securities. In some cases, these investment opportunities might be available to both accredited and non-accredited investors. However, the company raising money might only be able to accept a limited number of non-accredited investors, choose not to accept non-accredited investors, and the non-accredited investors might have investment limits that don’t apply to accredited investors.

These opportunities can include:

• Startups and early-stage companies.

  Startup investors are sometimes called angel investors, and they generally need to be accredited investors. The investors may be able to connect directly with founders or join an angel investing group. 

• Real estate crowdfunding.

  There are also online platforms that let accredited investors invest in real estate projects or funds.

• Private funds.

  Private equity funds and hedge funds might raise money from accredited investors and then invest the money on their behalf.  

• Peer-to-peer (P2P) lending platforms.

  Accredited investors might lend money to individuals and small businesses using a P2P platform that connects lenders and borrowers.

• Initial coin offerings (ICOs).

  An ICO is a fundraising model that certain cryptocurrency projects use to raise money when they’re first starting out.

How do accredited investors verify their status?

Once a person or entity meets the criteria for accredited investor status, they can look for the newly available investment opportunities that are available to them. However, it’s up to the issuer of the unregistered securities to confirm an investor’s status.

The specifics will depend on the issuer or platform, but generally a person will need to share:

• Recent tax returns
• Bank and brokerage statements along with recent credit reports
• Professional license documentation

Some accredited investors have their attorney or accountant verify their eligibility on their behalf. 

What can investors do if they aren’t accredited?

While accredited investors may have additional opportunities, non-accredited investors can still choose from a wide range of investments based on their time horizon and risk tolerance.

For example, there’s no income or net worth requirement to purchase most stocks, bonds, mutual funds, and exchange-traded funds. Investment properties aren’t just for accredited investors, either. Individuals may purchase and rent residential and commercial property, or invest in real estate by buying shares of real estate investment trusts (REITs). Others might choose to buy and trade cryptocurrencies as part of their portfolio.

These investments aren’t necessarily better or worse than the options available to accredited investors. While there are stories of people becoming incredibly wealthy after investing in startups, the investments are also considered very risky. Remember, the reason they’re only offered to accredited investors is that the investor may have a better understanding of the risk or be able to afford the loss.

Bottom line

An accredited investor is a person or entity that qualifies based on the SEC’s definition in Regulation D. The distinction is important because accredited investors are able to invest in security offerings that haven’t been registered with the SEC, and other investments that aren’t generally available to other investors. These may be risky, but they can also potentially offer high returns.