Accredited investor
A person or entity that meets SEC tests of income, net worth or professional knowledge and may invest in certain private, less-regulated offerings.
What it means
Many private investments, such as hedge funds, private equity funds and startup offerings, are exempt from full SEC registration and may be sold only to accredited investors. SEC rules define the status using income tests, a net worth test that excludes the value of a primary residence, or certain professional credentials such as specific securities licenses. Some entities, like trusts and companies above set asset levels, can also qualify.
The idea is that these investors can bear losses and evaluate risk without the disclosures public offerings must provide. Qualifying does not make an investment safe or suitable; it only opens access. Sponsors may verify status by reviewing tax returns, statements or a letter from a professional, depending on the offering.
Example
For example, a startup raising money through a private placement may require each investor to confirm accredited status. Someone whose net worth comes mostly from home equity may not qualify, because the primary residence is left out of the net worth test.
How it’s used
- Investing in private funds or private company offerings
- Understanding why some investments are not open to everyone
- Completing paperwork for a private placement
Good to know
- Check the SEC’s current definition, since the tests and thresholds can be updated.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.