What It Really Means to Be an Accredited Investor
If you’ve ever tried to invest in a private real estate deal, a hedge fund, or a pre-IPO startup, you’ve probably been asked one question before seeing the pitch deck:
“Are you an accredited investor?”
It sounds like a fancy club, and in a way, it is. Being “accredited” is the regulatory key that unlocks access to investments the general public never sees. But what does it actually take to qualify?
Why the Rule Exists
The SEC views private investments (Regulation D offerings) as riskier than buying stocks on the NYSE because there is less regulatory oversight.
To protect the public, the government restricts these deals to people who are either:
- Financially stable enough to absorb a loss.
- Sophisticated enough to understand the risks.
The Checklist: Do You Qualify?
You don’t need to apply for a certificate to become accredited. You just need to meet one of the following criteria:
1. The Income Test You earned $200,000+ annually for the last two years (or $300,000+ combined with a spouse/spousal equivalent) and expect to make the same this year.
2. The Net Worth Test You have a net worth exceeding $1 million, either alone or with a spouse.
- Crucial Detail: You cannot include the equity in your primary residence. It’s your assets minus your liabilities, ignoring your home.
3. The “Smart Person” Test (Professional Certifications) Even if you don’t meet the financial requirements, you qualify if you hold certain active financial licenses in good standing. Currently, this includes the Series 7, Series 65, or Series 82 licenses.
Why It Matters for Fund Managers
If you are raising capital under Rule 506(c), you can’t just take an investor’s word for it. You are required by law to verify their status (reviewing tax returns, bank statements, or CPA letters). Accepting non-accredited investors when you aren’t supposed to is a fast track to regulatory trouble.
Need help verifying your investors? Whether you are an investor trying to prove your status, or a founder trying to ensure your fund remains compliant, we can help.
Contact May Law Group today to ensure your next capital raise is built on a solid legal foundation.
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