Accredited Investor

Why do accredited investors matter?

Private funds of any type must keenly understand what qualifies an investor as accredited or not, and when the concept matters, in order to presciently plan their fund creation process and to stay in compliance with securities laws.  A key concept under the Securities Act of 1933, which is relevant to any fund taking on third-party capital – as the act of bringing an investor on is to sell them a security – and to any ponteital investor into a fund, accreditation is generally the absolute minimum standard that investors must meet in any fund.  It is only possible to bring non-accredited investors into private investment opportunities (hedge funds, digital asset funds, venture funds, or otherwise) in extraordinarily limited, generally impractical, cases.

How can a natural person be accredited?

There are two common ways for a two-legged, natural person to meet the definition of being accredited, which are inherent (in other words, there is no regulatory body or entity that certifies natural persons as such in any official capacity), and a few less common, situational ways.

• Common way 1 – Income Test: The most common way to qualify as an accredited investor is to have had an income of $200,000 or greater for the last two years, with an expectation that such income shall persist in the current year and onwards.  In the case of someone who has a spouse or spousal equivalent, their joint income can be considered, in which case the threshold is $300,000 per year considered jointly.
• Common way 2 – Net Worth Test: Alternatively, if a person, either individually or considered jointly with a spouse, has investable assets of at least $1 million, they can also qualify, regardless of income.  The value of any owned primary residence cannot be counted.

Less commonly, there are also:

• Uncommon way 1 – Professional Certifications: Anyone who holds any of the Series 7, 65, or 82 in active standing is considered accredited, income and net worth notwithstanding.  While there are many other Series exams, only the aforementioned three count for this purpose.
• Uncommon way 2 – Knowledgeable Employee of the Fund: An employee of a fund can be considered accredited only for the limited purposes of investing in that fund.

How can an entity be accredited?

In contrast to natural person accreditation criteria, there are a wider array of categories of entity that qualify as accredited.  This article won’t cover them all, but most commonly, they are:

• An entity with investments in excess of $5 million;
• An LLC with investable assets (including cash) in excess of $5 million;
• Investment advisers, registered or exempt
• Certain family offices and family clients

Other related financial statuses:

Alongside being accredited, there other investment statuses “higher” and “lower” than being accredited.  At a general level, with simple explanations, those are:

The term “non-accredited” is generally taken to mean any natural person or entity who does not meet the aforementioned criteria.

The term “qualified client” is an Investment Advisers Act related term which is a natural person or entity which has investable assets in excess of $2.2 million.

The term “qualified purchaser” is an Investment Company Act related term which for a natural person, means someone with investable assets in excess of $5m.  For eligible entities, it means investable assets in excess of $25m.

Wrap-up:

The concept of an accredited investor and its related peer terms are critical concepts for any fund and fund manager to understand, as they are used throughout various securities acts which may impact the fund.  In general, it’s rare for funds to be able to take on non-accredited investors, but in many cases, for regulatory reasons, funds may not be able to take on even accredited investors either unless they are also qualified clients or qualified purchasers.