Accredited Investor

An individual qualifies as an accredited investor by meeting one of the following financial thresholds:

• Income Test: Earned income exceeding $200,000 (or $300,000 jointly with a spouse) in each of the last two years, with a reasonable expectation of the same in the current year.
• Net Worth Test: A net worth exceeding $1 million, either individually or jointly with a spouse, excluding the value of a primary residence. These thresholds are adjusted periodically for inflation.

Certain entities are automatically considered accredited investors, including:

• Banks, Insurance Companies, and Registered Investment Companies.
• Employee Benefit Plans with total assets over $5 million.
• Any entity in which all equity owners are themselves accredited investors.
• Any entity (e.g., LLC, trust, corporation) with total assets exceeding $5 million, not formed for the specific purpose of acquiring the securities offered.

The SEC rules allow knowledgeable employees of a private fund (e.g., a hedge fund or venture capital fund) to invest in their employer's funds as accredited investors, regardless of their personal wealth. This category includes:

• Executive Officers, Directors, Trustees, General Partners, or Advisory Board Members of the fund.
• Employees (other than clerical roles) who participate in the fund's investment activities.

Since 2020, the SEC has expanded the definition to include individuals holding certain professional certifications, designations, or credentials. Holders of these credentials are deemed to have the financial sophistication of an accredited investor. Qualifying credentials are designated by the SEC and currently include:

• Series 7 (General Securities Representative)
• Series 65 (Investment Adviser Representative)
• Series 82 (Private Securities Offerings Representative) This allows qualification based on demonstrated knowledge, not just wealth.

The accredited investor framework exists to regulate private placements under Regulation D (Reg D). The core regulatory rationale is that these investors:

• Possess the financial sophistication and experience to evaluate the risks.
• Have the financial resilience to withstand potential losses.
• Have access to information typically provided in a public offering. This creates a regulatory exemption, allowing companies to raise capital without the cost and disclosure burdens of a public offering.

The current wealth-based criteria face criticism for being a proxy for sophistication that may not always be accurate. Key debates include:

• Wealth vs. Knowledge: A high net worth does not guarantee investment acumen.
• Access Inequality: The rules can limit access to high-growth private markets to a wealthier demographic.
• Inflation Erosion: Fixed monetary thresholds lose value over time unless adjusted. These criticisms drive ongoing discussion about adding more nuanced measures of financial sophistication.

In the United States, defined by the SEC under Regulation D. Common criteria include:

• Income Test: Individual income >$200k (or $300k joint) for the last two years.
• Net Worth Test: Individual net worth >$1 million, excluding primary residence.
• Entity Test: Entities with >$5 million in assets or where all equity owners are accredited. Other jurisdictions have similar but distinct financial sophistication thresholds.

Accreditation is a key gate for participating in private sale rounds of token offerings before public launch. This allows projects to:

• Raise capital from sophisticated investors under regulatory exemptions (e.g., Reg D 506(c)).
• Avoid public registration requirements with the SEC by selling only to accredited investors.
• Often results in lower token prices and longer vesting schedules compared to public sales.

The accredited investor rule faces criticism in the Web3 context for being:

• Exclusionary: Limits access to early-stage wealth generation based on existing wealth.
• Arbitrary: Financial thresholds may not accurately measure sophistication or risk tolerance.
• Evolving: Regulators like the SEC have debated expanding the definition to include measures of financial knowledge, not just wealth.

Contrast with Regulation Crowdfunding (Reg CF), which allows non-accredited investors to participate in early-stage fundraising but with strict limits (e.g., investment caps based on income). In Web3:

• Some platforms use Reg CF for token offerings to a broader audience.
• This creates a hybrid model where accredited investors access private rounds, and the public can join later via Reg CF or public exchanges.

An accredited investor is a classification defined by the U.S. Securities and Exchange Commission (SEC) under Regulation D. The primary purpose is to identify investors who are financially sophisticated and have a reduced need for the protection provided by regulatory filings, allowing them access to private placements, hedge funds, and venture capital deals.

To qualify as an individual, one must meet at least one of the following criteria:

• Income Test: Earned income exceeding $200,000 (or $300,000 joint with a spouse) in each of the last two years, with a reasonable expectation of the same.
• Net Worth Test: Have a net worth exceeding $1 million, either individually or jointly with a spouse, excluding the value of a primary residence.
• Professional Credentials: Hold certain professional certifications, such as the Series 7, Series 65, or Series 82 licenses.

Entities can also qualify as accredited investors. Key categories include:

• Banks, Insurance Companies, and Registered Investment Companies.
• Employee Benefit Plans with assets over $5 million.
• Any entity in which all equity owners are accredited investors.
• Certain entities with total assets in excess of $5 million not formed for the specific purpose of acquiring the securities offered.

This status is a critical gateway to private capital markets. In the crypto and blockchain space, it determines who can participate in certain token sales (ICOs/STOs) and invest in private crypto funds or venture rounds before a public listing. Platforms often require self-certification of this status to comply with securities regulations.

Issuers of private securities must take reasonable steps to verify an investor's accredited status. Common methods include:

• Reviewing tax returns, W-2s, or bank/brokerage statements.
• Obtaining written confirmation from a registered broker-dealer, investment adviser, or attorney.
• For entities, reviewing financial statements, articles of incorporation, or trust documents.

The definition is often criticized for using wealth as a proxy for sophistication, potentially excluding knowledgeable but less wealthy investors. Recent SEC amendments have expanded the definition to include individuals with certain professional certifications and knowledgeable employees of private funds, aiming to modernize the criteria beyond pure financial thresholds.

Under SEC Regulation D, an Accredited Investor is defined by specific financial thresholds. An individual must have an annual income exceeding $200,000 (or $300,000 with a spouse) for the last two years, or a net worth over $1 million (excluding primary residence). Entities like banks and certain trusts can also qualify based on assets. This gatekeeping aims to ensure investors can bear the risk of unregistered securities.

The accredited investor rule is central to Regulation D, which provides exemptions from SEC registration for private securities offerings. Rules 506(b) and 506(c) allow companies to raise capital from accredited investors without a public offering. 506(c) permits general solicitation but requires verified accreditation, a model often mirrored in crypto token sales to comply with securities laws.

The Howey Test is the Supreme Court-derived framework used by the SEC to determine if an asset is an investment contract and therefore a security. It evaluates if there is (1) an investment of money (2) in a common enterprise (3) with an expectation of profits (4) derived from the efforts of others. Many initial coin offerings (ICOs) and token sales are analyzed under this test to see if they trigger securities regulations and accredited investor rules.

A Qualified Purchaser is a stricter, higher-net-worth classification under the Investment Company Act of 1940. Individuals must own at least $5 million in investments; for entities, the threshold is $25 million. This status allows access to private investment funds (like 3(c)(7) funds) that are even less regulated than those available to accredited investors. It represents another tier of sophistication in U.S. private capital markets.

Regulation A+ is an exemption that allows smaller public offerings with reduced reporting requirements. It has two tiers: Tier 1 (up to $20M) and Tier 2 (up to $75M). While not limited to accredited investors, Tier 2 has investment limits for non-accredited individuals. Some crypto projects have used Reg A+ to conduct security token offerings (STOs), creating a more compliant bridge between private and public capital.

Other jurisdictions have similar concepts for sophisticated investors. In the EU, the Professional Client or Eligible Counterparty under MiFID II serves a comparable role. In the UK, it's a High Net Worth or Sophisticated Investor. Singapore uses the Accredited Investor definition under its Securities and Futures Act. These classifications globally gatekeep access to complex financial products, including many regulated digital asset funds.