An accredited investor is an individual or entity that meets specific financial criteria established by the Securities and Exchange Commission (SEC), allowing them to participate in private securities offerings that are not available to the general public. Under Regulation D of the Securities Act of 1933, individuals qualify by earning at least $200,000 annually ($300,000 jointly with a spouse) for the past two years with expectation of the same income level, or by maintaining a net worth exceeding $1 million, excluding the value of their primary residence.
The SEC expanded the definition in 2020 to include individuals holding Series 7, Series 65, or Series 82 licenses, as well as "knowledgeable employees" of private funds and family offices with at least $5 million in assets under management. Entities such as banks, insurance companies, registered investment companies, and business development companies automatically qualify, as do any entity with total assets exceeding $5 million.
Why It Matters
Accredited investor status opens doors to investment opportunities that generate substantial returns but carry higher risk profiles. Startups, venture capital funds, hedge funds, and private equity firms typically restrict their offerings to accredited investors, operating under the assumption that these individuals possess the financial sophistication and resources to absorb potential losses. Without accredited status, investors miss access to early-stage companies, alternative assets, and private placements that often deliver outsized returns compared to public markets.
Example
Sarah, a software executive earning $250,000 annually, qualifies as an accredited investor based on her income. This status allows her to invest $25,000 in a Series A round for a promising fintech startup through an angel investing group. Her colleague Tom, who earns $150,000 but inherited property worth $900,000, does not qualify because his net worth (excluding his $400,000 home) falls below the $1 million threshold. Tom must wait until the company goes public or seek alternative investment vehicles available to non-accredited investors, potentially missing the early growth phase where Sarah's investment could multiply five to ten times.