Accredited Investor: Definition, Qualifications, Rules

An accredited investor is an individual or entity that meets specific financial criteria giving them access to private investment opportunities not registered with the U.S. Securities and Exchange Commission (SEC). Typically, individuals qualify as accredited investors by having a net worth exceeding $1 million, excluding their primary residence, or an annual income of at least $200,000 ($300,000 for joint filers) in each of the past two years. Certain financial professionals and entities also qualify based on assets or expertise.

If you’re looking for new investment opportunities or want access to private investments, connect with a financial advisor and see how they can help.

The accredited investor designation serves to identify individuals and entities with the financial sophistication and capacity to engage in private capital markets. By limiting certain investment opportunities to accredited investors, the SEC aims to balance capital formation needs with investor protection.

This framework presumes that accredited investors possess the necessary resources and expertise to evaluate and bear the risks associated with unregistered securities offerings, which often lack the regulatory safeguards present in public markets.

Unlike retail investors, accredited investors are presumed to have the capacity to evaluate complex investments and absorb potential losses. While financial thresholds are the most common qualification, certain professional certifications, such as a Series 7, 65 or 82 licenses , can also grant accredited status.

Achieving accredited investor status involves meeting specific financial criteria or possessing certain professional credentials as defined by the SEC. This designation opens the door to a broader range of investment options, such as private placements, hedge funds and venture capital opportunities.

It’s important to note that issuers of unregistered securities are responsible for taking reasonable steps to verify an investor’s accredited status. This process may involve reviewing documentation such as tax returns, financial statements or professional certifications to ensure compliance with SEC regulations.

The SEC defines accredited investors based on financial criteria, professional credentials and institutional qualifications. Individuals and entities can qualify under different standards.

An individual is considered an accredited investor if they meet any of the following criteria:

Income test: An individual meets the income requirement if their annual earnings surpassed $200,000 in each of the last two years – or $300,000 when combined with a spouse or partner – and they have a reasonable expectation of maintaining that income level in the present year.
Net worth test: Alternatively, an individual qualifies by having a net worth over $1 million, either alone or together with a spouse or spousal equivalent, not including the value of their primary residence.
Professional certifications: Holders in good standing of certain professional certifications or designations, such as the Series 7, Series 65, and Series 82 licenses, are also recognized as accredited investors.

Meanwhile, an entity is considered an accredited investor if any of the following conditions are met:

Asset level: Entities – including corporations, partnerships, limited liability companies and trusts – qualify if they possess assets exceeding $5 million and were not formed specifically to acquire the securities offered.
Ownership status: Any entity whose equity owners are accredited investors qualifies for accredited status.
Family offices: Certainfamily offices with at least $5 million in assets under management, along with their family clients, are also considered accredited investors.
Investment advisors and broker-dealers: Investment advisors (including SEC- and state-registered or exempt reporting advisers) as well as SEC-registered broker-dealers can qualify.
Financial entities: Financial entities such as banks, savings and loan associations, insurance companies, registered investment companies, business development companies and small business or rural business investment companies can also qualify.

A closeup of a dictionary entry for the term “hedge fund.”

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Accredited investors gain access to private investment opportunities. Unlike publicly traded securities, these investments often involve less regulatory oversight, higher potential returns and greater risks. These include:

Private equity funds invest in companies not traded on public exchanges. Venture capital funds, a subset of private equity, focus on early-stage startups with high growth potential. These investments often have long holding periods and limited liquidity.

Hedge funds use complex investment strategies, including leverage, derivatives and short selling. These funds are structured to generate returns independent of traditional market movements, but they can carry significant risk.

Private placements involve the sale of securities to accredited investors without SEC registration. This category includes real estate syndications, direct investments in startups and other alternative assets. Investors must conduct thorough due diligence, as these offerings do not have the same disclosure requirements as publicly traded securities

Accredited investor status grants access to exclusive investment opportunities but comes with notable risks.

Access to private markets: Investors can participate in hedge funds, private equity and venture capital.
Potential for higher returns: Private investments may offer greater growth potential than publicly traded securities.
Diversification opportunities: Alternative assets, such as private real estate and pre-IPO companies, can help broaden an investment portfolio.

Higher investment risk: Private securities lack the same regulatory oversight as public investments.
Limited liquidity: Many accredited investments require long holding periods, making it difficult to exit.
Large capital requirements: Many private investment opportunities have high minimum investment thresholds, restricting accessibility.

A female broker wears a headset and holds a tablet on the floor of a stock exchange.

Accredited investor status expands access to investment opportunities beyond publicly traded markets, offering the potential for higher returns and portfolio diversification. However, these investments often come with greater risk, lower liquidity and less regulatory oversight.

Meeting the SEC’s financial or professional criteria allows individuals and entities to participate in hedge funds, venture capital and private equity, but thorough due diligence is necessary. While some investors seek accreditation for growth opportunities, others may prefer the transparency and protections of public markets.

Consider using factor-based investing for portfolio diversification. Instead of solely relying on traditional asset allocation, consider factor-based investing by tilting toward factors like value, momentum, quality and low volatility. This approach can improve risk-adjusted returns over time.
Whether you’re looking for help accessing private placements or need a comprehensive financial plan built, start by talking over your needs with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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