Accredited Investor: Definition, Criteria & Fundraising

An accredited investor is a person or entity the U.S. Securities and Exchange Commission (SEC) deems sophisticated enough to invest in unregistered securities, which include most startup equity offerings. Understanding this classification is non-negotiable for founders because it dictates who you can legally raise money from in private capital markets, unlocking access to the vast majority of angel and venture capital.

An Accredited Investor is a person or business entity who is allowed to deal in securities that may not be registered with financial authorities. The SEC's rationale is that these individuals and entities have the financial sophistication and capacity to bear the risk of loss from these investments, and therefore require less protection than retail investors.

This distinction is the bedrock of most startup fundraising in the United States. To avoid the costly and complex process of a public offering (like an IPO), startups raise capital through exempt offerings. These are private sales of securities that are exempt from the SEC's standard registration requirements. Most of these exemptions, particularly those used for seed and venture rounds, are only available if you sell exclusively, or primarily, to accredited investors.

The SEC sets specific financial and professional criteria to determine who qualifies. These rules were updated in 2020 to expand the definition beyond just wealth. Founders must understand these thresholds to identify and verify potential investors.

| Criteria Type | Individual Investors | Entity Investors | | :--- | :--- | :--- | | Financial Thresholds | Income > $200k ($300k joint) OR Net Worth > $1M (excluding primary residence) | Total Assets > $5M (for most corps, partnerships, trusts) OR All equity owners are accredited investors | | Professional Status | Holds Series 7, 65, or 82 license | Banks, registered investment companies, VCs, etc. | | Position/Role | "Knowledgeable employee" of a private fund | N/A |

Income Test: An annual income over $200,000 (or $300,000 in joint income with a spouse) for the last two years, with a reasonable expectation of meeting that level in the current year. For example, a software engineer who earned $210,000 in 2022 and $220,000 in 2023, and expects to earn the same in 2024, would qualify.

Net Worth Test: A Net Worth of over $1 million, either individually or jointly with a spouse. The value of your primary residence is excluded from this calculation. For example, an individual with $800,000 in stocks, a $400,000 vacation home, and a $100,000 mortgage on the vacation home has a net worth of $1.1 million and qualifies.

Professional Test: Holding certain professional certifications in good standing, such as a Series 7, Series 65, or Series 82 license.

Knowledgeable Employee Test: Being a "knowledgeable employee" of a private fund, such as an executive officer or director.

Banks, insurance companies, registered investment companies, business development companies, or Small Business Investment Companies.

Charitable organizations, corporations, or partnerships with assets exceeding $5 million. For example, a C-corporation with $6 million in assets on its balance sheet would qualify.

Entities in which all equity owners are themselves accredited investors.

Investment advisers (SEC or state-registered) and exempt reporting advisers.

The SEC's 2020 amendment to the accredited investor definition was significant. It added new categories based on professional knowledge and experience, not just wealth. This includes the professional certifications (Series 7, 65, 82), the "knowledgeable employee" provision for private funds, and also added family offices with at least $5 million in assets under management.

Targeting accredited investors isn't just a preference; it's a strategic necessity that enables faster, more efficient fundraising while maintaining regulatory compliance.

The main reason founders seek accredited investors is to comply with the rules of exempt offerings. Selling securities to the general public requires registering the offering with the SEC—a process that is prohibitively expensive and time-consuming for an early-stage startup. By limiting your offering to accredited investors, you can use exemptions like Regulation D to bypass this registration.

The accredited investor pool includes the most active participants in early-stage investing: angel investors, venture capital funds, and family offices. While our proprietary data does not show the specific distribution of these investor types, they represent the primary source of capital for startups moving beyond friends and family. Gaining access to this group is essential for raising significant seed or Series A rounds.

When you sell securities only to accredited investors, the SEC assumes they can fend for themselves and conduct their own due diligence. This means your disclosure requirements are less burdensome. While you must still provide accurate information and not commit fraud, you don't need to prepare the extensive, audited financial statements and legal disclosures required for a public offering.

Several SEC exemptions facilitate startup fundraising. The most common is Regulation D, a set of rules that allows companies to raise capital without registering their securities.

This is the most popular fundraising exemption for startups. Our proprietary data on funding rounds is not granular enough to specify the exact percentage of early-stage rounds that use Regulation D, but it is widely understood to be the most common path for venture-backed companies. Regulation D contains two key rules:

Rule 506(b): This is the traditional private placement. You can't use general solicitation or advertising (no public posts, no demo day pitches open to the public). You can raise an unlimited amount of money and include up to 35 non-accredited (but still "sophisticated") investors, though doing so triggers stricter disclosure requirements. In practice, most 506(b) rounds are limited to accredited investors to keep things simple.

Rule 506(c): This rule, created under the JOBS Act, permits general solicitation and advertising. You can tweet about your fundraise, post it on your website, and pitch at public demo days. However, you can only accept funds from accredited investors, and you must take "reasonable steps" to verify their status. You cannot accept any non-accredited investors in a 506(c) offering.

| Feature | Rule 506(b) | Rule 506(c) | | :--- | :--- | :--- | | General Solicitation | Prohibited | Permitted | | Investor Type | Unlimited accredited investors; up to 35 non-accredited | Accredited investors ONLY | | Verification Standard | Can rely on investor self-certification | Must take "reasonable steps" to verify status | | Amount Raised | Unlimited | Unlimited |

Rule 504 of Regulation D: Allows you to raise up to $10 million in a 12-month period. It has fewer restrictions and may allow you to sell to non-accredited investors, but it's subject to state-level "Blue Sky" laws and is less commonly used for VC-track startups.

Regulation A (Reg A+): An exemption that allows for a "mini-IPO," letting you raise up to $75 million from the general public (both accredited and non-accredited investors). It requires more significant legal work and SEC qualification than a Reg D offering, but less than a full IPO.

Qualified Purchaser: It's also useful to know the term Qualified Purchaser, which represents an even higher tier of financial sophistication than an accredited investor. Generally, this is an individual with at least $5 million in investments or an entity with at least $25 million in investments. This designation is primarily relevant for investing in certain private funds (like venture capital and hedge funds) and is less of a direct concern for founders raising a typical seed or Series A round.

The responsibility for ensuring your investors are accredited falls on you, the founder. The level of diligence required depends on the exemption you use.

For Rule 506(b): You can generally rely on a questionnaire where the investor self-certifies their status. You must have a reasonable belief that they are accredited. If you have a pre-existing, substantive relationship with the investor, this is often sufficient.

For Rule 506(c): You must take "reasonable steps" to verify. The SEC provides a non-exclusive list of methods:

Reviewing bank statements, brokerage statements, or a credit report for the net worth test.

Obtaining written confirmation from a registered broker-dealer, investment adviser, licensed attorney, or certified public accountant. This is often the most practical and reliable method.

Failing to properly verify investor status is a serious compliance failure. For 506(c) offerings, simply accepting a checked box on a form is not enough. You must maintain records of the steps you took to verify each investor. This diligence protects you and the validity of your fundraising exemption.

The rules around accredited investors exist to protect the public, and the penalties for ignoring them are severe.

If you fail to comply with the terms of your exemption (e.g., by selling to a non-accredited investor in a 506(c) round), you could face:

SEC Enforcement: Fines, sanctions, and public disclosure of your violations.

Rescission Rights: Investors could have the right to demand their investment back, potentially for up to a year or more, regardless of the company's performance. This could bankrupt your startup.

Disqualification: You could be barred from using fundraising exemptions in the future, effectively ending your ability to raise private capital.

Proper compliance demonstrates professionalism and competence. Future investors, especially institutional VCs, will conduct due diligence on your prior rounds. If they discover compliance issues, they will see it as a major red flag. It can kill a deal and damage your reputation within the investment community.