An accredited investor is an individual or business permitted to trade unregistered securities. Defined by the SEC under Regulation D, Accredited Investors meet specific income, net worth, asset size, governance status, or professional experience criteria. Examples include high-net-worth individuals, banks, insurance companies, brokers, and trusts.
To comply with SEC rules for 506(b) and 506(c) offerings, companies must verify that investors and accredited by reviewing documents such as tax returns, bank statements, or credit reports.
The most common ways for an individual becoming accredited are the following, but not limited to:
Any natural person whose individual net worth, or joint net worth with that person's spouse or spousal equivalent, exceeds $1,000,000 (must be able to verify with financial statements)
Note: Equity in the person's primary residence is excluded
Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse or spousal equivalent in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year (supporting documentation for the last two years W2s or Tax Returns)
The most common ways for an entity becoming accredited are the following, but not limited to:
Any entity in which all of the equity owners are accredited investors (accreditation letters from each person of the entity, dated within the last 90 days)
Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person (must be able to verify with financial statements)
Any natural person holding in good standing one or more professional certifications or designations or credentials from an accredited educational institution that the Commission has designated as qualifying an individual for accredited investor status (must be able to provide current certifications)
To learn more about Accredited Investors and to see where your investor(s) may fit, click this article linking you to the Code of Federal Regulations.