Accredited Investor Requirements: Income, Net Worth, and the 2020 Professional Tests

The term accredited investor is central to many private offerings. For a Rule 506(c) offering, all purchasers must be accredited, and the issuer must take reasonable steps to verify that status. Rule 506(b) permits sales to accredited investors and up to 35 non-accredited purchasers who satisfy its sophistication standard, but sales to any non-accredited purchaser trigger specified information-delivery requirements.

The SEC’s definition, codified in Rule 501(a), contains multiple categories for natural persons and entities. In August 2020 the Commission added credential-based pathways for certain financial professionals, knowledgeable employees of private funds, family offices and clients, and additional entity categories. It also codified the treatment of spousal equivalents.

This guide walks through several frequently used paths to accreditation — income, net worth, entity, and professional — plus the verification standards that apply when a sponsor relies on Rule 506(c) and must take “reasonable steps” to confirm status. It closes with practical mechanics: what an investor questionnaire may collect, which non-exclusive verification methods appear in Rule 506(c), and where qualified third parties may fit.

Why the definition matters

Accredited-investor status is used in several federal offering exemptions as one measure of an investor’s financial resources or sophistication. Under Rule 506(c), all purchasers must be accredited, and the issuer must take reasonable steps to verify that status. Under Rule 506(b), an issuer may sell to up to 35 non-accredited purchasers who meet the rule’s sophistication standard, subject to the information requirements in Rule 502(b). See 506(b) vs 506(c) for the exemption-level decision.

Qualification and verification are separate conditions under Rule 506(c). The issuer must take reasonable steps to verify and must have a reasonable belief, at the time of sale, that each purchaser is accredited. Whether a problem affects reliance on the exemption is fact-specific, so counsel should design and document the process.

The income test

A natural person qualifies as accredited if the person had individual income exceeding $200,000 in each of the two most recent calendar years, or joint income with a spouse or spousal equivalent exceeding $300,000 in each of those years, and has a reasonable expectation of reaching the same threshold in the current year.

The thresholds are not automatically indexed to inflation. The rule refers to “individual income” and “joint income,” and Rule 506(c)’s non-exclusive verification method looks to IRS forms that report income. Because the treatment of particular income items can require tax and legal judgment, investors and issuers should not substitute a casual gross-income calculation for counsel’s or a qualified adviser’s analysis.

One non-exclusive Rule 506(c) method for the income test is to review IRS forms reporting income — such as Forms W-2, 1099, Schedule K-1, or Form 1040 — for the two most recent years and obtain a written representation that the purchaser reasonably expects to reach the required income level in the current year.

The net worth test

A natural person also qualifies as accredited if the person, alone or together with a spouse or spousal equivalent, has a net worth exceeding $1,000,000 — excluding the value of the person’s primary residence. The net worth calculation includes all other assets (bank accounts, brokerage accounts, retirement accounts, investment real estate, business interests, and other property) less liabilities, subject to the rule’s treatment of debt secured by the primary residence.

The value of the primary residence is excluded. Debt secured by that residence is generally excluded up to the home’s estimated fair market value, but any excess is included as a liability. In addition, certain increases in home-secured debt during the 60 days before the sale are treated as liabilities unless incurred to acquire the home.

One non-exclusive Rule 506(c) method for the net-worth test combines asset documentation dated within the prior three months with a consumer report from at least one nationwide consumer reporting agency and a written representation that all liabilities needed for the calculation have been disclosed. The rule also permits a principles-based analysis of reasonable steps; the listed methods are not mandatory or exhaustive.

The entity tests

Entities qualify as accredited under a different set of criteria. The most-used pathways:

• Banks, insurance companies, registered investment companies, and business development companies. Any entity meeting these institutional categories qualifies without reference to size.
• Certain organizations with total assets in excess of $5 million, including qualifying corporations, partnerships, LLCs, specified nonprofit organizations, and certain plans, subject to the conditions in Rule 501(a).
• Any trust with total assets over $5 million, not formed for the specific purpose of acquiring the securities, whose purchase is directed by a sophisticated person.
• Any entity in which all equity owners are themselves accredited investors. This look-through test is available only after identifying every equity owner and confirming that each independently qualifies.
• Certain other entities owning investments in excess of $5 million, provided they were not formed for the specific purpose of acquiring the offered securities. “Investments” has the meaning specified by the applicable Investment Company Act rule; it is not interchangeable with total assets.
• Qualifying family offices and family clients. A family office generally must have more than $5 million in assets under management, must not have been formed to acquire the offered securities, and must have its purchase directed by a person with the required financial and business knowledge.

The 2020 professional tests

The August 2020 expansion added credential-based accreditation for individuals. Holders of Series 7 (general securities representative), Series 65 (investment adviser representative), or Series 82 (private securities offerings representative) licenses qualify as accredited investors while the credential is held in good standing, without separately satisfying the income or net-worth tests.

The SEC also codified a rule for knowledgeable employees of a private fund. A knowledgeable employee — broadly, certain executive officers and employees participating in investment activities — of a Section 3(c)(1) or 3(c)(7) private fund qualifies as accredited with respect to that fund. This allows fund managers to structure deals in which their investment professionals participate as LPs without separately qualifying under income or net worth.

The Commission can designate additional credentials by order. Issuers should check the SEC’s current accredited-investor resources rather than assume the list will remain fixed.

Verification under Rule 506(c)

Rule 506(c) requires the issuer to take “reasonable steps to verify” that each investor is accredited. The SEC has spelled out a non-exclusive, non-mandatory list of verification methods for natural persons:

1. For the income test: review IRS forms (W-2, 1099, Schedule K-1, Form 1040) for the two most recent years, plus a representation of reasonable expectation for the current year.
2. For the net worth test: review of assets (such as bank or brokerage statements, tax assessments, or third-party appraisal reports dated within the prior three months) and liabilities (a report from a nationwide consumer reporting agency), plus a representation that all necessary liabilities have been disclosed.
3. Written confirmation from a qualified third party: a licensed attorney, CPA, SEC-registered investment adviser, or registered broker-dealer who confirms that it took reasonable steps to verify within the prior three months and determined that the purchaser is accredited.
4. For a previously verified purchaser: obtain a current written representation that the person remains accredited, provided the issuer previously took reasonable steps to verify the person and is not aware of contrary information. This method is available for five years from the prior verification.

An issuer may use a qualified third party or another service provider to support its process, but the issuer remains responsible for satisfying Rule 506(c). Vendor practices, evidence, timing, privacy, and retention should be reviewed with counsel rather than assumed.

Build accredited-investor verification into the offering workflow before accepting a Rule 506(c) subscription; it is a separate condition from the requirement that purchasers actually be accredited.

Rule 506(b) does not impose Rule 506(c)’s reasonable-steps verification requirement. The issuer must nevertheless reasonably believe that a purchaser treated as accredited actually qualifies. Questionnaires and representations can support that determination, but whether more diligence is appropriate depends on the facts.

Spousal equivalents and joint ownership

The 2020 rulemaking codified that spousal equivalent (a cohabitant occupying a relationship generally equivalent to spouse) counts the same as a spouse for purposes of the income and net worth tests. Two-earner couples can aggregate income; joint asset holders can aggregate net worth.

The rule allows income and net worth to be evaluated jointly with a spouse or spousal equivalent without requiring the security itself to be purchased jointly. The documentation and representations used for a joint-income or joint-net-worth analysis should be designed with counsel, including the signatures required by a selected 506(c) verification method.

What the questionnaire looks like

An accredited-investor questionnaire often accompanies the offering or subscription materials. It can walk a purchaser through relevant Rule 501 categories and request the facts needed to evaluate one or more qualifying bases. Depending on the offering, sections may include:

• A cover section identifying the purchaser and, for an entity, its organizational form and authorized signer.
• A series of check-box statements covering each accredited test — income, net worth, applicable entity asset or investment tests, entity look-through, Series 7/65/82, knowledgeable employee, and so on. The investor checks any and all that apply.
• For 506(c) offerings, instructions for the issuer’s selected reasonable-steps process. For 506(b) offerings, representations supporting the issuer’s reasonable belief about status.
• Sophistication certification for non-accredited investors participating in a 506(b) — a representation that the investor, alone or with a purchaser representative, has the knowledge and experience in business and financial matters to evaluate the investment.
• Signature blocks with date.

Related reading

• 506(b) vs 506(c) — and why verification matters under 506(c)
• Form D filing — the 15-day SEC notice
• Raising capital — where verification fits in the broader workflow