Underwriting & credit
Accredited Investor: Definition & Example
What Is an Accredited Investor?
An accredited investor is a person or entity that meets SEC income, net worth, or professional criteria and may invest in certain private offerings not registered with the SEC.
What does accredited investor mean?
For individuals, the SEC’s main tests are income of more than $200,000 in each of the last two years ($300,000 jointly with a spouse or spousal equivalent) with a reasonable expectation of the same this year, or net worth over $1 million excluding the primary residence. Holders of certain securities licenses, such as the Series 7, 65, or 82, also qualify.
Private placements under Rule 506(b) can generally accept accredited investors (and a limited number of sophisticated non-accredited investors) based on their representations. Offerings under Rule 506(c), which may be publicly advertised, require the issuer to take reasonable steps to verify accredited status.
Reasonable verification methods include reviewing IRS forms that report income, bank and brokerage statements with a credit report for net worth, or a written confirmation from a registered broker-dealer, investment adviser, attorney, or CPA.
Accredited investor example
A real estate syndicator raising money under Rule 506(c) asks a prospective investor to show accredited status. The investor’s W-2s show $245,000 and $262,000 for the past two years, and he confirms he expects similar income this year. The sponsor documents the review and accepts his $50,000 subscription.
Related terms
- Due DiligenceDue diligence is the investigation a buyer, investor, lender, or partner performs before a transaction to verify facts, uncover risks, and confirm what they are getting.
- Proof of FundsProof of funds is documentation showing that a person or business has enough money available for a purchase or investment, usually a recent bank or brokerage statement or a bank letter.
- Liquid AssetsLiquid assets are cash and other holdings that can be quickly converted to cash without significant loss of value, such as checking, savings, money market accounts, and publicly traded securities.
- KYCKYC (Know Your Customer) is the process financial institutions use to verify a customer’s identity and understand the nature of the relationship, to prevent fraud, money laundering, and terrorist financing.
Accredited investor FAQ
- How much income do you need to be an accredited investor?
- More than $200,000 individually, or $300,000 jointly with a spouse or spousal equivalent, in each of the past two years, with a reasonable expectation of the same in the current year.
- Does home equity count toward the $1 million net worth test?
- No. The value of your primary residence is excluded, and mortgage debt on it generally is too, up to the home’s value.
