Money in Entrepreneurship

accredited investor

What is an Accredited Investor?

Accredited investors are high-net-worth individuals with the financial means and/or experience to invest in riskier, private securities.

accredited investor


Accredited Investor Criteria

How Many Accredited Investors are there in the U.S.?

History & Background

How Big is the Private Market?

How Do You Become an Accredited Investor?

Qualified Client & Qualified Purchaser



An accredited investor is an individual or entity that is allowed to invest in riskier, private investments. These riskier, private investments include startups, angel funds, hedge funds, private equity and venture capital.

Accredited Investor Criteria

In order to be considered an accredited investor, an individual must must satisfy at least one of the following criteria:

  • Income – Earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the current year, OR
  • Investment Licenses – Holds in good standing a Series 7, 65 or 82 license, OR

For an entity like a Trust or an LLC to be an accredited investor it must satisfy at least one of the following criteria:

  • Any trust, with total assets in excess of $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person, OR
  • Certain entity (like an LLC) with total investments in excess of $5 million, not formed to specifically purchase the subject securities, OR
  • Any Entity in which all of the equity owners are accredited investors

Source: Investor.gov

So you can invest through a trust or LLC as long as you’re accredited as an individual and everyone else associated with your entity is accredited.

The idea with these accredited investor criteria is that investors with enough financial means or sophistication are able to better sustain a financial loss and fend for themselves in private deals.

The reality is that private investments are more risky than public investments because they don’t require nearly the same amount of disclosure and information.

How Many Accredited Investors are there in the U.S.?

As mentioned previously, there are three ways to be an accredited investor. First, have annual income of $200k or more ($300k for couples). Second, have a valid series 7, 65 or 82 license. Third, have a net worth of over $1mm (not including your house). And, keep in mind, you only need to qualify for one of the three in order to be accredited.

To set a backdrop, according to the U.S. Census Bureau, there are 316.4 million Americans and 120.8 million U.S. households (2.62 people per household).

How Many Based on Income?

The first way to reach accredited investor status is to have over $200k in personal income ($300k for couples) for the least two years and a reasonable chance of the same income in the current year. According to the U.S. Census Bureau, there were 13.3 million American households with income of $200k or greater. So, based on income, roughly 11.0% of American households have achieved accredited investor status.

How Many Based on Investment Licenses?

The second way to achieve accredited investor status is to have a Series 7, 65 or 82 license. According to FINRA, there are 617,549 licensed, registered representatives in the American financial services industry. Now, that is a rough estimate because not all registered representatives have a Series 7, 65 or 82, but it’s a good estimate to determine how many accredited investors there are based on licensing. So, according to these figures, roughly 2.0% of Americans are accredited based on licensing.

How Many Based on Net Worth?

According to a recent study, there are more millionaires in America than ever before. That makes sense considering the federal government spent $6.6 trillion in 2020, which equates to $18 billion per day in stimulus spending!

All of that free money was sloshing around and a lot of it found its way into American’s pockets. Here is a list of American households by net worth (excluding primary residence):

  • $100k – $1mm: 32,300,000 (mass affluent, not accredited)
  • $1mm – $5mm: 11,600,000
  • $5mm – $25mm: 1,800,000
  • Over $25mm: 214,000

And if you add up all of these millionaires there are 13.6 million U.S. households that qualify for accredited investor status based on net worth alone, which equates to roughly 11.3% of all American households.

Calculating Your Net Worth

Net worth is calculated by taking your total assets minus your total liabilities. your assets include your home, investments and other valuables you might own. Your liabilities include mortgage balances, home equity loans, student loans and credit card balances. Another way to look at it is your net worth is basically a balance sheet of your personal wealth.

To illustrate, in the first column (below), we show how you would calculate your standard net worth. This would be your actual net worth (if someone ever asked).

In the second column we show you how you would calculate your accredited net worth.

The only difference between the two is that your accredited net worth excludes the value of your primary residence and any mortgage or other loans you have against your home.

AssetsStandard MethodAccredited Method
Primary Residence$500,000$0
Other Investments$400,000$400,000
Personal Assets$20,000$20,000
Total Assets$1,720,000$1,220,000
Mortgage Loan($200,000)$0
Home Equity Loan($100,000)$0
Student Loans($100,000)($100,000)
Other Liabilities($100,000)($100,000)
Total Liabilities($500,000)($200,000)
Net Worth$1,220,000$1,020,000
Accredited Investor?Yes
Sample Personal Balance Sheet

If your home loan balance is higher than the fair market value of your primary residence (i.e. your mortgage is underwater), then the loan amount that is over the fair market value counts as a liability under the net worth test.

Additionally, any increase in the loan amount (other than for the purchase of the primary residence) in the 60 days prior to your purchase of your securities will count as a liability as well.  The reason for this is to prevent net worth from being artificially inflated for calculating your accredited investor status.

History & Background


The U.S. Securities and Exchange Commission was established after the crash of 1929 to protect American investors. The idea of an accredited investor began shortly thereafter with the passing of the Securities Act of 1933. But it was nearly 50 years later that the rules for an accredited investor were officially established as part of Regulation D (Reg D for short).

The Securities and Exchange Commission (SEC) enforces investment laws in the U.S. for both the private and public markets. Specifically:

“The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC strives to promote a market environment that is worthy of the public’s trust.”


Regulation D

Under the Securities Act of 1933, any securities offered for investment in the U.S. had to be registered with the SEC.

Fast forward to 1982 when the SEC enacted Regulation D (Reg D) in an effort to give small businesses easier access to capital. Reg D essentially removes some of the burden of filing and reporting that is required by larger, public companies. These SEC requirements were excused from filing as long as they meet specific criteria.

Reg D Rule506 (b)506 (c)*504
Raise LimitNoneNone$5mm in 12 mos.
Solicitation & AdvertisingNo solicitation or advertisingGeneral solicitation permittedSolicitation and advertising prohibited
Investor RequirementsUnlimited accredited investors, up to 35 sophisticated investorsIssuer must ensure all investors are accreditedBad actors are prohibited from investing
Filing RequirementsFile Form D within 15 days of first issuanceFile Form D within 15 days of first issuanceFile Form D within 15 days of first issuance
*Added as part of the JOBS Act


The Jumpstart Our Business Startups Act or, JOBS Act, was passed in 2012 under President Barack Obama to make it easier for small, private businesses to raise capital. It was a direct response to the financial crisis of 2008-2009. The JOBS Act was broad in nature and positively impacted equity crowdfunding, private company reporting requirements and modifications to Reg D.

The JOBS Act kept Reg D rule 506 (b) and modified a a new rule, 506 (c), which permits general solicitation and advertising as long as all investors are accredited investors and the company makes a reasonable effort to ensure that all are accredited at the time of investment.

This small change had major, positive implications for small businesses looking to raise capital because they were now allowed to solicit investors and advertise their offering. This broadened and deepened the pool of investors small businesses could reach out to for investment capital.

Learn More: SEC.gov

How Big is the Private Market?

There are two investment markets in the U.S., public and private. Most investors are familiar with the public market, which includes securities like stocks, bonds, mutual funds and index funds. These investments are registered with the SEC and must comply with strict laws and regulations.

Believe it or not, American companies have raised more money in private markets than in public markets in each year since 2009. Private companies raised $3.0 trillion in private markets and $1.5 trillion in public markets in 2017 (source).

How Do You Become an Accredited Investor?

There isn’t any official designation or card you get to prove that you are an accredited investor. You also don’t need to fill out any government forms or pass a test either. In reality, you already either are an accredited investor or you are not based on the criteria listed above.

However, if you invest in a private business, there is a good chance they will ask you to verify that you are an accredited investor. This process can take several forms including a questionnaire prepared by the issuing company’s attorney or check-boxes on a website like AngelList. Here is a real example of an accredited investor questionnaire provided by a startup attorney for a seed round angel investment.

Qualified Client & Qualified Purchaser

There is an old saying that someone will always have a bigger chip stack than you, well, in the case of being an accredited investor, that serves true too. Case in point, there are two levels above accredited investor status and that is a qualified client and qualified purchaser. Unlike accredited investors, qualified clients and purchasers are determined based solely on the amount of investments they have.

Investor StatusAccredited InvestorQualified ClientQualified Purchaser
Income$200k+ or $300k+ for a couplen/an/a
Net Worth$1,000,000+$2,200,000+n/a
Investment Assetsn/a$1,100,000+$5,000,000+

So by definition every qualified purchaser is a qualified client and an accredited investors and all qualified clients are accredited investors.

Qualified Client

In order to be a qualified client you must have $1,100,000 or more of assets under management with the investment adviser after the investment or a net worth of $2,200,000 prior to the investment (excluding the value of your primary residence). Alternatively you qualify if your are an officer or director of the fund manager or an employee who participates in the investment activities of the investment adviser and has been doing so for 12 months. For example, a partner or associate in a venture capital fund.

Qualified Purchaser

Qualified purchasers must have at least $5mm in investments excluding the value of your primary residence or business property. You could also be a qualified purchaser if you are an individual or entity not formed for the specific purpose of acquiring the interest in the fund which owns and invests at least $25,000,000 in investments (or someone who is acting on account of such a person).

The first is focused on personal investment assets and the second allows an investment professional managing assets for others to make those investments. This would be common for a family office, large trust or perhaps charitable organization.


The SEC established the accredited investor status in 1982 for two primary reasons:

  1. Broaden the pool of potential capital sources for private businesses, and
  2. Protect investors from the risks associated with private securities.

Ultimately the SEC, Reg D, JOBS Act and Accredited Investor laws all strike a balance between risk and reward. You want all businesses to have access to the capital they need, but you also want to protect the investors who provide the capital.

As technology continues to democratize investments, there will continue to be changes in the laws. However, there will always be a balance between mass adoption and protecting individuals from financial ruin.

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