What Is an Accredited Investor?

Accredited investors have special status allowing them to make investments in unregulated securities — an early-stage business or certain commercial real estate opportunities, for instance. A popular example of an accredited investor is a so-called angel investor, one who funds a promising startup. A later stage private company or even a smaller public company seeking liquidity might also seek accredited investors, though they do not usually choose to do so.

U.S. laws require individuals or entities to meet certain requirements before allowing them to invest as accredited investors. The term "accredited investor" originates from the Securities Act of 1933, a set of laws protecting investors.

A "private placement" is a security not registered with the Securities and Exchange Commission; private placements are offered by companies directly to accredited investors. Private placements are exempt from federal securities laws, so the SEC adopted Regulation D Rule 501 to define the qualifications of an accredited investor.

Who can be an accredited investor?
There are financial criteria for individual accredited investors. They must have one of the following:

• Net worth over $1 million, including all liquid assets except their primary residence.
• Income over $200,000 individually, or $300,000 with a spouse or partner, in each of the prior two years, plus a reasonable expectation that those numbers will be maintained in the current year.
• A general securities representative license (Series 7), an investment adviser license (Series 65) or a private securities offerings representative license (Series 82).

Accredited investors can be individuals or certain entities. These include:

• Directors, executives or general partners of the company selling the securities.
• Family offices and any clients of those offices.
• Knowledgeable employees in a private fund.
• Entities owning investments of more than $5 million, including corporations, partnerships, limited liability companies, trusts, 501(c)(3) organizations and employee benefit plans.
• Entities where all equity owners are accredited investors, investment advisers (SEC- or state-registered), exempt reporting advisers or SEC-registered broker-dealers.
• Financial entities like banks, savings and loan associations, insurance companies, registered investment companies, business development companies, small-business investment companies and rural business investment companies.

What should accredited investors know?
Accredited investors should have both the knowledge and resources to make a high-risk investment. In other words, they should be individuals or entities with a certain level of financial sophistication.
Because an accredited investor can afford to take more risk and is able to conduct due diligence on investment opportunities, there's less need to register with organizations (like the SEC) designed to protect individual investors.

Generally, these types of investment opportunities have tremendous reward potential but also an above-average probability of losing all their investors' money.

How do you verify accredited investor status?
You should have an individual investor submit the following official documents for net worth and income verification:

• Tax returns.
• Pay stubs.
• Financial statements.
• IRS forms.
• A credit report.
• Brokerage statements.
• Tax assessments.
• A list of liabilities.

An investor can also submit a letter from an accountant, an employer or a registered broker or adviser confirming investor status. A third-party verification letter qualifies an investor's accredited status by certifying that a registered broker, investment adviser, licensed attorney or certified public accountant took steps to confirm the investor's status within the past three months.
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Some companies ask accredited investors to self-certify or use a third-party verification service such as VerifyInvestor.com.

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