Almost every conversation about a private real estate deal or startup raise eventually comes back to one question: who is allowed to invest? Under federal securities law, the answer often turns on whether an investor is an “accredited investor.” The term decides which exemptions a sponsor can use, how the offering can be marketed and how much disclosure the sponsor must provide. Here is a plain-English look at who qualifies, how the tests work and what sponsors are expected to do to confirm an investor’s status.
Why accredited investor status matters
Most private offerings rely on Regulation D, and in particular Rule 506. Rule 506 has two versions, and accredited investor status plays a central role in both:
- Rule 506(b) lets an issuer sell to an unlimited number of accredited investors and up to 35 non-accredited investors, but it does not allow general solicitation or public advertising. Any non-accredited investor must be financially sophisticated, alone or with a purchaser representative, and must receive specified disclosure, including financial statement information.
- Rule 506(c) allows general solicitation, such as public websites and social media, but every purchaser must be accredited, and the issuer must take reasonable steps to verify that status.
Because of the extra disclosure burden that comes with non-accredited investors, many sponsors choose to accept only accredited investors even in a 506(b) offering. Either way, knowing the definition is the starting point.
How individuals qualify
The definition is found in Rule 501(a) of Regulation D. A natural person can qualify through financial tests or professional criteria.
The net worth test
An individual qualifies if his or her net worth, alone or together with a spouse or spousal equivalent, exceeds $1 million. A “spousal equivalent” is defined as a cohabitant in a relationship generally equivalent to that of a spouse. The investor’s primary residence gets special treatment:
- The home itself is not counted as an asset.
- Mortgage debt secured by the home, up to its estimated fair market value, is generally not counted as a liability.
- If the debt secured by the home has increased in the 60 days before the investment (other than from buying the home), the increase counts as a liability. This keeps investors from borrowing against the home just to clear the threshold.
- Debt secured by the home that exceeds its fair market value (being “underwater”) counts as a liability.
The income test
An individual qualifies with income over $200,000 in each of the two most recent years, or joint income with a spouse or spousal equivalent over $300,000 in each of those years, along with a reasonable expectation of reaching the same level in the current year. The investor must meet the same test (individual or joint) across all three years.
Professional and insider criteria
Since amendments adopted in 2020, the definition also recognizes knowledge and position, not just wealth. Individuals can qualify if they are:
- Holders in good standing of a Series 7, Series 65 or Series 82 license.
- Directors, executive officers or general partners of the issuer, or of its general partner.
- “Knowledgeable employees” of a private fund, for investments in that fund.
- “Family clients” of a family office that itself qualifies as an accredited investor.
How entities qualify
Many investors come in through an LLC, trust or retirement vehicle, so the entity tests matter just as much. Under the SEC’s summary of the rule, entities can qualify in several ways, including:
- Corporations, partnerships, LLCs, certain trusts, 501(c)(3) organizations, employee benefit plans and family offices with assets over $5 million (subject to conditions, such as not being formed to acquire the securities being offered).
- Entities that own “investments” over $5 million, which can capture entity types not otherwise listed.
- Entities in which every equity owner is an accredited investor.
- SEC-registered and state-registered investment advisers, exempt reporting advisers and SEC-registered broker-dealers.
- Banks, insurance companies, registered investment companies, business development companies and certain small business investment companies.
Trusts deserve a closer look. Whether a trust qualifies can depend on its assets, how it was formed and, in some cases, who directs its investments, so sponsors should review trust investors individually rather than assume.
Verification: “reasonable belief” vs. “reasonable steps”
In a 506(b) offering
The issuer needs a reasonable belief that an investor is accredited. In practice, this usually comes from a pre-existing relationship and a detailed investor questionnaire. The SEC has noted that simply checking a box, with nothing more, is not enough.
In a 506(c) offering
Because the offering can be advertised, the issuer must take reasonable steps to verify each purchaser’s status. The rule lists non-exclusive methods, such as:
- Reviewing IRS forms that report income, such as W-2s, 1099s, K-1s and tax returns, for the income test.
- Reviewing bank or brokerage statements, tax assessments and a credit report dated within the prior three months, plus a written representation, for the net worth test.
- Obtaining a written confirmation, dated within the prior three months, from a registered broker-dealer, SEC-registered investment adviser, licensed attorney or CPA who has verified the investor’s status.
- For an investor the issuer previously verified, a written representation at the time of sale can suffice for five years, if the issuer has no contrary information.
In March 2025, SEC staff added a simpler route through a no-action letter. Staff indicated that a high minimum investment, combined with written representations, can support verification. The guidance describes minimums of at least $200,000 for individuals and $1 million for legal entities, written representations that the purchaser is accredited and that the investment is not financed by a third party for that purpose, and no actual knowledge of contrary facts. Staff guidance like this is not a rule, and the conditions need to be followed carefully.
Changes on the horizon
The definition continues to evolve. On September 30, 2026, the SEC issued two notices requesting public comment on whether to designate new credentials that would let individuals qualify as accredited investors: passing a new accredited investor exam that FINRA would develop, and holding the Chartered Financial Analyst (CFA) charter in good standing. These are not final, and the existing tests remain in place, but sponsors should watch for updates before relying on any new category.
Common mistakes sponsors make
- Counting the investor’s home equity toward the $1 million net worth test.
- Mixing individual and joint income across the three-year income test.
- Treating an investor questionnaire with a single checkbox as sufficient verification.
- Advertising a 506(b) offering on social media or a public website, which can cost the sponsor its exemption.
- Overlooking state “blue sky” notice filings that accompany a Rule 506 offering.
Getting started
If you are planning a raise, a few steps will make the process smoother:
- Decide early whether the offering will be 506(b) or 506(c), because that choice drives marketing and verification.
- Use a thorough subscription agreement and investor questionnaire that track the current definition.
- Build a consistent verification process and keep records showing what you reviewed and when.
- Have entity and trust investors provide formation documents so their status can be confirmed.
- Calendar Form D and state notice filing deadlines before the first sale.
Vincent Esquire helps real estate sponsors and business owners structure private offerings, prepare offering documents and build compliant investor onboarding. Learn more about our SEC compliance and capital raising services or reach out to talk through your raise.
This article is for general informational purposes only and is not legal advice. Reading it does not create an attorney-client relationship. Laws change and every situation is different, so consult an attorney about your specific circumstances. Attorney advertising.
