Accredited Investor

An accredited investor is an individual or entity meeting SEC thresholds for income, net worth, or professional knowledge to participate in unregistered private securities offerings. For individuals: $200,000+ in annual income (or $300,000 with spouse) for the past 2 years with reasonable expectation of continuing, OR net worth exceeding $1 million excluding primary residence, OR specific professional certifications like Series 7, 65, or 82 added under the 2020 SEC rule expansion. The qualification covers most startup financings under Regulation D Rule 506(b) and 506(c). It is the SEC's regulatory gate that determines who can legally participate in Startup Investment through private securities, and one of the most-important pieces of fundraising compliance that founders consistently misunderstand.

The thresholds and recent expansions: income test: $200,000 individual income (or $300,000 joint with spouse) for each of the prior two years, with reasonable expectation of the same in the current year. Net worth test: total net worth exceeding $1 million, excluding the value of the investor's primary residence. Knowledge-based qualifications: added by the SEC in August 2020, the rule expanded accreditation to include individuals holding certain professional licenses (Series 7 general securities representative, Series 65 investment advisor representative, Series 82 private securities offerings representative) and "knowledgeable employees" of private funds. Entity accreditation: entities qualify with $5M+ in investments (qualified institutional buyers), or being entirely composed of accredited investors, or being a regulated entity like a bank, insurance company, or registered investment advisor. The compliance mechanics: Reg D Rule 506(b) allows accredited investors plus up to 35 non-accredited investors but no general solicitation; Rule 506(c) allows general solicitation (marketing the round publicly) but requires the issuer to verify accreditation, typically through CPA letters, financial statements, or services like Verifyinvestor or Parallel Markets. The 2020s reality: the financial thresholds haven't been indexed to inflation since their 1982 establishment, which means roughly 13-15% of US households now qualify as accredited (up from ~2% when the rule was written); various proposals to reform the standards have been introduced but no major changes since 2020.

Ryan's Take

Accredited investor is the SEC's answer to "who's sophisticated enough to invest in startups without prospectus protection," and the answer has been frozen since 1982 while inflation has run. The result: a far higher percentage of Americans qualify today than was originally intended, and the rule increasingly looks like a wealth gate rather than a sophistication gate. The 2020 knowledge-based qualifications were a partial fix. The practical implication for founders: verify accreditation properly for any Reg D 506(c) offering and use a verification service rather than relying on self-attestation; the SEC enforcement actions on failed verification are real and the cost of getting it wrong can include rescinding the entire offering.

What founders get wrong: Relying on investor self-attestation for Reg D 506(c) offerings (the version that allows general solicitation) instead of verifying accreditation properly. The SEC requires the issuer to take reasonable steps to verify accreditation, and self-attestation alone doesn't meet that standard. Use verification services (Verifyinvestor, Parallel Markets) or collect CPA letters; the cost is rounding error compared to enforcement risk.

FAQ

Who is an accredited investor?
An individual meeting SEC thresholds: $200,000+ annual income ($300,000 with spouse) for the past 2 years, OR net worth over $1 million excluding primary residence, OR holding specific professional certifications (Series 7, 65, or 82) added in the 2020 SEC rule expansion. Qualifies them to participate in private securities offerings.

Did accredited investor rules change recently?
Yes, in August 2020. The SEC added knowledge-based qualifications allowing individuals with certain professional licenses (Series 7, 65, 82) and knowledgeable employees of private funds to qualify regardless of income or net worth. The financial thresholds themselves have not been changed since 1982, leading to a much higher percentage of Americans qualifying due to inflation.

Do startups need to verify accreditation?
Yes for Reg D 506(c) offerings (which allow general solicitation). Reasonable verification steps include CPA letters, financial statements, or third-party verification services (Verifyinvestor, Parallel Markets). Self-attestation alone doesn't meet the SEC's verification standard for 506(c).

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