An accredited investor is someone who meets the SEC’s threshold criteria for participating in private securities offerings, including private fund commitments. The designation exists because the SEC assumes that individuals and entities meeting these thresholds have sufficient financial sophistication and resources to bear the risks of investments that do not carry the full disclosure protections of registered securities. Nearly every private fund limits its investor base to accredited investors, and funds relying on Regulation D 506(c) must verify accredited status for every single LP. This verification step is a core part of the capital raising process.
For individuals, the most common paths to accreditation are income-based or net-worth-based. The income test requires individual income exceeding $200,000 (or $300,000 jointly with a spouse) in each of the two most recent years, with a reasonable expectation of the same in the current year. The net worth test requires a net worth exceeding $1 million, excluding the value of the primary residence. The SEC expanded the definition in 2020 to also include individuals holding certain professional certifications (Series 7, Series 65, Series 82) and “knowledgeable employees” of private funds. This was a meaningful change for fund professionals who may not meet the income or net worth thresholds.
Entities qualify through different routes. Banks, insurance companies, registered investment companies, and employee benefit plans with assets exceeding $5 million are accredited. LLCs and trusts with assets exceeding $5 million also qualify, provided they were not formed specifically to invest in the offering. Family offices with at least $5 million in assets under management and their family clients are also included. For emerging managers, many of your early LPs may be individuals investing through personal LLCs or trusts, so understanding entity-level accreditation is practical, not academic. Maintaining an accurate investor database that tracks accreditation status for each prospect saves time during closing.
Verification is where this gets operational. Under a 506(b) offering, the GP can rely on the investor’s self-certification in the subscription agreement. Under 506(c), the GP must take “reasonable steps” to independently verify accredited status, which typically means reviewing tax returns, bank statements, brokerage statements, or obtaining a written confirmation from a licensed attorney, CPA, or registered broker-dealer. This verification requirement adds time and friction to the closing process, and some prospective LPs find it intrusive. How you handle it (clearly, professionally, and with sensitivity to the LP’s privacy) affects the investor experience.
Frequently Asked Questions
What is the income threshold for accredited investor status?
Individual income exceeding $200,000 (or $300,000 jointly with a spouse) in each of the two most recent years, with a reasonable expectation of the same in the current year. Alternatively, a net worth exceeding $1 million excluding primary residence qualifies. The SEC also added holders of Series 7, 65, and 82 licenses in 2020.
How do you verify accredited investor status?
Under a 506(b) offering, the GP can rely on the investor's self-certification in the subscription agreement. Under 506(c), the GP must take reasonable steps to independently verify, typically by reviewing tax returns, bank or brokerage statements, or obtaining a written confirmation from a licensed attorney, CPA, or registered broker-dealer.
Can an entity be an accredited investor?
Yes. Banks, insurance companies, registered investment companies, and employee benefit plans with assets over $5 million qualify. LLCs and trusts with assets exceeding $5 million also qualify, provided they were not formed specifically to invest in the offering. Family offices with at least $5 million in AUM and their family clients are included as well.
