The short answer
An accredited investor is a person or entity that meets the SEC's wealth, income or professional criteria to invest in many private offerings. Individuals qualify with over $1 million in net worth excluding their primary residence, or over $200,000 in income ($300,000 with a spouse or partner) in each of the prior two years, or by holding certain securities licenses.
- Net worth test: over $1M, excluding primary residence.
- Income test: over $200k individually or $300k jointly in each of the last two years, with the same expected this year.
- Series 7, 65 or 82 license holders in good standing qualify.
- Entities, including family offices, can qualify with over $5M in assets.
- Rule 506(b) allows up to 35 non-accredited investors in any 90-day period, with extra disclosure.
How it works
Most startup rounds are private offerings that rely on exemptions under the federal securities laws, and many of those exemptions limit who can invest. According to the SEC, individuals qualify as accredited investors if they have:
- Net worth over $1 million, excluding their primary residence (alone or with a spouse or partner), or
- Income over $200,000 individually, or $300,000 with a spouse or partner, in each of the prior two years, with a reasonable expectation of the same this year, or
- A Series 7, 65 or 82 license in good standing, or certain roles such as a director or executive officer of the company raising money.
Entities such as corporations, LLCs, trusts and family offices can qualify with assets over $5 million, among other routes. Under Rule 506(b), a company can raise unlimited money from accredited investors but may not sell to more than 35 non-accredited investors in any 90-day period, must not use general solicitation, and must give non-accredited investors extra disclosure.
Example (hypothetical)
A former colleague earning $180,000 a year with $400,000 in savings and a paid-off home wants to invest $25,000 in your SAFE. On the income and net worth tests alone, they wouldn't qualify, so talk to your lawyer before accepting.
A simple checklist
- Ask each investor to confirm their status in writing, in the form your lawyer recommends.
- Know which exemption your raise relies on before you talk about it publicly, since some exemptions bar general solicitation.
- Keep records of who invested, how much and on what basis.
Why it matters to a pre-seed founder
Founders without networks often raise from friends, family and local professionals, and not all of them will be accredited. Know the rules before you take the money, and ask your lawyer which exemption you're using. See angel investors.
Frequently asked questions
What's the income requirement for an accredited investor?
Over $200,000 individually or $300,000 with a spouse or partner in each of the prior two years, with a reasonable expectation of the same in the current year, per the SEC.
Does my home count toward the $1 million net worth test?
No. The SEC's net worth test excludes the investor's primary residence.
Can non-accredited investors invest in my startup?
In some offerings, yes. Rule 506(b) allows up to 35 non-accredited investors in a 90-day period, with added disclosure requirements. Ask your lawyer which exemption fits.