SmallBiz Essentials: Accredited Investors – What Does My Small Business Need to Know?

Welcome to the SEC Small Business Advocacy Office’s blog where we share some fundamental capital-raising concepts.

The term “accredited investor” comes up a lot in the context of capital raising by small businesses and startups, but many people in the industry may not know exactly what makes an investor accredited. In this post, our Office addresses some common questions we receive on the accredited investor definition.

Is This Even Relevant to Me?

Let’s start with the basics. Businesses may raise capital by selling securities to investors (think stock, membership interests, debt, etc.) —as opposed to getting a loan from the bank or a government grant. Every offer and sale of securities—even to your friends and family—must be registered with the SEC (think IPO) unless it meets the requirements of an exemption from registration.

Many small businesses and early-stage companies that are not ready for a registered offering rely on exempt offerings to raise capital. Many of the offering exemptions under the federal securities laws limit participation to accredited investors or contain restrictions on participation by non-accredited investors, such as how much they can invest or what information the company must provide them.

So, if your company is raising capital, the accredited investor definition may largely determine who is in your pool of potential investors. Similarly, if you’re an investor, it may determine whether you are eligible to invest in many early-stage companies.

How Can Individuals Qualify as Accredited?

Despite what the term might suggest, being an accredited investor is not based on an accreditation granted by the government or an organization. There is no exam or formal process to “become” an accredited investor. Instead, investors qualify as accredited if they meet certain criteria at a given point in time.  

An individual (i.e., natural person) may qualify as an accredited investor if they meet one of the following wealth or income thresholds:

• They have a net worth over $1 million, excluding their primary residence (individually or with spouse or partner); or
• They earned income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years and reasonably expect the same for the current year.

An investor may also qualify if they meet one of the following professional criteria:

• They are an investment professional in good standing holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82);
• They are a director, executive officer, or general partner (GP) of the company selling the securities (or a director, executive officer, or GP of a GP of that company);
• They are the “family client” of a “family office” that qualifies as an accredited investor; or
• For investments in a private fund, they are a “knowledgeable employee” of the fund.

How Can Entities Qualify as Accredited?

Many investors invest through investment vehicles or entities with different legal structures (e.g., LLCs, corporations etc.).

The following entities qualify as accredited investors:

• Entities owning investments in excess of $5 million that are not formed for the specific purpose of acquiring the securities being offered,
• Entities with assets in excess of $5 million that are structured as corporations, partnerships, LLCs, trusts, 501(c)(3) organizations, or employee benefit plans and that are not formed for the specific purpose of acquiring the securities being offered;
• “Family offices” and any “family client” of those offices also qualify;
• Entities where all equity owners are accredited investors;
• Investment advisers (SEC- or state-registered or exempt reporting advisers);
• SEC-registered broker-dealers; and
• Financial entities: a bank, savings and loan association, insurance company, registered investment company, business development company, or small business investment company or rural business investment company.

This resource represents the views of the staff of the Office of the Advocate for Small Business Capital Formation. It is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”).  The Commission has neither approved nor disapproved its content. This resource, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person. This resource does not provide legal advice. 

Have suggestions on additional educational resources? Email smallbusiness@sec.gov.