You will hear this term the moment you decide to raise outside capital. An accredited investor is a person or entity allowed to deal in securities that may not be registered with financial authorities. In the United States, this definition comes from the Securities and Exchange Commission (SEC) under Regulation D.
The concept exists to create a divide between the public markets and private markets. Public markets are heavily regulated to protect everyday retail investors. Private markets, where startups live, are much riskier. The government assumes that if you meet specific criteria, you are sophisticated enough to understand the risks or wealthy enough to withstand the financial loss if the startup fails.
For a founder, understanding this distinction is not optional. Accepting money from non-accredited investors triggers a different set of legal requirements and disclosures that can be burdensome for a young company.
The Financial Criteria
#The most common way an individual qualifies is through financial metrics. The SEC has set specific thresholds that serve as a proxy for financial sophistication.
To be accredited based on income, a person must have an annual income exceeding $200,000 for the last two years. If they are filing jointly with a spouse or spousal equivalent, that number rises to $300,000. They must also have a reasonable expectation of reaching the same income level in the current year.
To be accredited based on net worth, an individual must have a net worth exceeding $1 million. This can be either alone or jointly with a spouse.
There is a crucial caveat here regarding the primary residence. You cannot count the value of a person’s home toward that $1 million net worth. This rule prevents people from leveraging their house to make high-risk bets on private companies.
Professional Certifications
#Wealth is not the only metric anymore. Recent updates to the definition allow for professional knowledge to qualify an investor.
Individuals holding specific licenses in good standing are now considered accredited regardless of their income or net worth. Currently, this applies to holders of Series 7, Series 65, and Series 82 licenses.
This shift acknowledges that financial literacy is distinct from current bank account balance. It allows knowledgeable professionals to participate in the private markets earlier in their careers.
Why It Matters for Fundraising
#When you raise money, you are selling a piece of your company. This is a securities transaction. Generally, you must register securities with the SEC unless you find an exemption. Dealing strictly with accredited investors is the most common path to that exemption.
If you take money from friends and family who do not meet these criteria, you may technically be violating securities laws depending on how you structure the round. Many founders ignore this early on, but it can complicate future funding rounds or an eventual exit if due diligence uncovers irregularities.
You have to decide how you will verify this status. In some fundraising structures, taking the investor’s word for it is allowed. In others, you must take reasonable steps to verify their financials, such as reviewing tax returns or bank statements.
Questions for Founders
#Knowing the definition is the easy part. Implementing it into your strategy requires thought.
Are you willing to pay for legal counsel to structure a round that includes non-accredited investors?
How will you handle the awkward conversation of asking a potential angel investor for proof of their net worth?
Does limiting your pool to only accredited investors restrict your ability to build a diverse cap table?
These are variables you must weigh as you design your capital strategy.