Accredited investor

An accredited investor is someone who meets specific wealth requirements that allow them to invest in hedge funds and other unregistered investments. The Securities Act of 1933 created this category to identify investors who can handle complex investments without the extensive protections that regular public stock offerings must provide.

The government assumes that wealthy investors understand investment risks better than average investors. This assumption allows hedge funds to skip the costly and time-consuming process of registering their investments with the SEC. Instead, hedge funds can raise money privately from accredited investors.

Individual investors can qualify as accredited investors through three main paths. The income test requires earning more than $200,000 individually or $300,000 with a spouse for each of the past two years. The investor must also reasonably expect to earn the same amount in the current year. The wealth test requires individual or joint net worth exceeding $1,000,000 when making the investment.

The SEC added a third qualification path in 2020 based on professional credentials. Individuals who hold certain licenses or certifications from self-regulatory organizationsNon-governmental organizations that have the power to create and enforce industry regulations and standards for their members. can now qualify as accredited investors. The SEC looks for credentials that demonstrate deep knowledge of securities and investing, not just general business expertise. Currently, holders of Series 7 (General Securities Representative), Series 65 (Investment Adviser Representative), or Series 82 (Private Securities Offerings Representative) licenses in good standing automatically qualify as accredited investors.

Organizations can also qualify as accredited investors if they meet certain size requirements. Nonprofits, corporations, business trusts, partnerships, and limited liability companies qualify if they own at least $5,000,000 in total assets. These organizations cannot be formed specifically to make the particular investment they are considering.

Employee benefit plans qualify if their investment decisions are made by qualified fiduciariesProfessional trustees who must act in the best interests of plan participants and meet specific regulatory qualifications. or if the plan itself owns more than $5,000,000. Other qualifying entities include private business development companies, certain Small Business AdministrationFederal agency that provides support to entrepreneurs and small businesses through loan programs, contracting opportunities, and business development resources. licensees, and government employee benefit plans with assets exceeding $5,000,000.

The wealth test includes specific rules that can significantly affect whether someone qualifies. The calculation excludes the value of an investor's primary home as an asset. It also excludes mortgage debt secured by that home, but only up to the home's current market value. If someone owes more on their mortgage than their home is worth, that excess debt still counts against their net worth.

These rules mean that someone with a $2,000,000 home and a $1,500,000 mortgage would not count either the home's value or the mortgage in their net worth calculation. However, if they owed $2,200,000 on that same home, the extra $200,000 would reduce their qualifying net worth.

Hedge fund managers must verify that their investors actually meet accredited investor requirements, but the verification intensity depends on how they raise money. Funds using Rule 506(b) must have a "reasonable belief" that investors qualify. They typically satisfy this requirement through investor questionnaires and signed statements in subscription agreements.

Rule 506(c) funds face much stricter verification requirements because they can advertise publicly. These funds must take "reasonable steps" to verify investor status, which means the fund manager must actively confirm qualifications rather than simply trust investor statements. In March 2025, the SEC staff issued guidance that allows issuers to rely on minimum investment amounts as a verification method, provided the minimums are at least $200,000 for individuals and $1,000,000 for entities, combined with written representations and confirmation that the issuer has no actual knowledge contradicting investor qualifications.

Traditional verification methods include reviewing tax returns, bank statements, brokerage statementsFinancial documents showing an investor's account holdings, transactions, and balances maintained by a brokerage firm., or getting written confirmation from attorneys, CPAs, or registered investment advisers. For existing investors, funds can obtain updated certifications of continued qualification.

The accredited investor definition has evolved over time as regulators balance investor protection with allowing efficient capital formation. The recent expansion to include professional certifications reflects recognition that investment sophistication comes from professional expertise, not just wealth accumulation.

The SEC periodically reviews these thresholds to ensure they remain relevant as economic conditions change. Currently, Congress is considering legislation that would further expand access through testing mechanisms, though no changes to existing law have been enacted as of September 2025.

The accredited investor standard represents the entry level in a hierarchy of investor qualifications. Higher categories unlock access to different types of investments and fee structures. Qualified purchasers Qualified purchaser Qualified purchasers are investors who meet specific wealth thresholds under the Investment Company Act of 1940. These investors are required for participation in Section 3(c)(7) funds. Generally, individuals must own at least $5 million in investments, while institutions must own at least $25 million in investments. must own at least $5,000,000 in investments and can invest in Section 3(c)(7) funds that accept unlimited numbers of these ultra-wealthy investors. Qualified clients must have either $1,100,000 under management with their investment adviser or $2,200,000 in net worth (effective August 2021), and they can participate in performance fee arrangements.

This tiered system allows regulators to match investor protections with investor sophistication levels. As investors demonstrate greater wealth or expertise, they gain access to more investment options but receive fewer regulatory protections.

The accredited investor requirement shapes fundamental aspects of hedge fund operations. Funds using Rule 506(b) can accept some non-accredited investors but cannot advertise publicly. Those choosing Rule 506(c) can market broadly but must verify every investor's accredited status, which creates administrative costs and may discourage some investors due to documentation requirements.

Changes in accredited investor standards may require hedge funds to obtain updated documentation from existing investors before they make additional investments. This creates ongoing compliance obligations that extend beyond initial investor qualification. Fund managers must carefully balance marketing flexibility against verification costs when choosing their regulatory strategy.