What Is an Accredited Investor? The Tests, and How Verification Works

Many of the most interesting private investments, from a share of a commercial building to a fraction of a painting, are open only to "accredited investors". The term appears on offering pages, in sign-up forms and in the small print, often without explanation. This is a plain-English guide to what it means, who qualifies, and what proving it involves.

Before you read on: this describes US federal rules in general terms. They change, and the details matter. None of this is legal, tax or investment advice.

Why the category exists

Most companies that want to sell securities to the public in the United States have to register the offering with the SEC, which means detailed, standardized disclosure. Registration is expensive and slow, so US law also allows private offerings, which skip registration under exemptions such as Regulation D.

The trade-off is less public disclosure. The law's answer is to limit who can take part. Accredited investors are people and organizations the rules assume can bear the risk of a private investment and get their own advice. Offerings limited to them can be made with fewer formal requirements.

Whether wealth is a good stand-in for sophistication is a fair question, and it is debated regularly in Congress and at the SEC. For now, the tests below are the ones that apply.

The tests for individuals

You are an accredited investor if any one of these is true:

1. Income. You earned more than $200,000 in each of the last two years, or more than $300,000 together with a spouse or spousal equivalent, and you reasonably expect the same this year.
2. Net worth. Your net worth is more than $1 million, alone or together with a spouse or spousal equivalent, not counting your main home.
3. Professional licenses. You hold a Series 7, Series 65 or Series 82 license in good standing.

A few details trip people up:

• The home rule. Your main home is left out of net worth, and so is the mortgage on it, up to the home's value. Mortgage debt above the home's value counts against you, and so does any increase in that mortgage in the 60 days before you invest, unless it was taken on to buy the home.
• Spousal equivalent means a partner in a relationship generally equivalent to marriage. You do not have to be married to combine income or net worth.
• Income must hold up. One very good year is not enough. The income test looks at two consecutive years and a reasonable expectation for the third.

There are narrower routes too. Directors, executive officers and general partners of the company selling the securities count for that company's offerings, and "knowledgeable employees" of a private fund count for that fund.

The tests for entities

Companies, trusts and other organizations can qualify as well. The main routes:

• Assets over $5 million. Corporations, partnerships, LLCs and similar entities with more than $5 million in total assets, as long as they were not formed just to make the investment. Any entity that owns more than $5 million in investments, also not formed for that purpose, qualifies too.
• Trusts. A trust with more than $5 million in assets, not formed for the specific investment, qualifies if the investment is directed by someone with the knowledge and experience to judge its risks.
• Owned by accredited investors. An entity in which every equity owner is an accredited investor.
• Regulated institutions. Banks, broker-dealers, registered investment advisers, insurance companies and certain investment funds.
• Family offices. A family office with more than $5 million in assets under management, and its family clients.

How verification works

Meeting a test and proving it are different steps. How much proof is needed depends on how the offering is made.

Under Rule 506(b), the most common Regulation D route, the offering cannot be advertised to the public. The issuer must reasonably believe each investor is accredited, which is often established with a questionnaire. Up to 35 investors who are not accredited, but have the knowledge and experience to judge the risks, can also take part, with extra disclosure.

Under Rule 506(c), the offering can be advertised, but every investor must be accredited, and the issuer must take reasonable steps to verify it. The rule lists methods that count, including:

• Income: IRS forms, such as W-2s, 1099s or tax returns, for the last two years.
• Net worth: recent bank, brokerage and property statements, together with a credit report to show debts.
• A professional's letter: written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a CPA who has checked your status within the last three months.

Once verified, an investor can often confirm their status in writing for the same issuer's later offerings for up to five years, rather than proving it again from scratch.

If you live outside the US

Offerings to investors outside the United States are usually made under Regulation S, and the rules of your own country apply. Many countries have their own category, such as the European Union's professional clients, the United Kingdom's high-net-worth and sophisticated investors, or Singapore's own accredited investors. Their tests differ from the US ones, and some offerings will not be available where you live at all.

What it does not mean

Being accredited means the law allows you to invest in these offerings. It does not mean any of them suit you. Private investments can be hard to sell, values can fall, and you can lose some or all of what you put in. Read the offering documents, and the risks, every time.

How it works on Arrabon

Arrabon does not issue securities. Offerings on the ACAN marketplace are made by licensed issuers, and each one shows who can invest before you commit. Investors complete identity checks, and accreditation where an offering requires it, as part of joining. Some issuers that use ACAN also offer products open to investors who are not accredited, under their own licenses and rules.

To see where you stand, try the investor pre-check. It takes a minute, and your answers are not saved or sent anywhere. For which offerings are open from where, see where we operate, and read our risks and disclosures before you invest.