What Is an Accredited Investor? A Guide for Startups Raising Capital:
What Is an Accredited Investor? A Guide for Startups Raising Capital:
If you're a startup founder preparing to raise capital, one term you'll encounter early on is “accredited investor.” This designation isn't just legal jargon—it determines who you can legally raise money from without registering your offering with the SEC.
Understanding what it means, and how to work with accredited investors, is essential for structuring a compliant and successful fundraising round.
Why the Term “Accredited Investor” Matters
Under U.S. federal securities laws, every offer or sale of securities (i.e., selling shares or SAFEs in your startup) must be registered with the SEC, unless it qualifies for an exemption. For early-stage companies, the most commonly used exemption comes from Regulation D, particularly Rule 506(b) or Rule 506(c).
Both rules allow you to raise an unlimited amount of money from accredited investors, with far fewer regulatory requirements than a public offering. But they come with one big catch: you must make sure your investors actually qualify.
Who Qualifies as an Accredited Investor?
An accredited investor is essentially someone the SEC believes has the financial sophistication and capacity to bear the economic risk of investing in unregistered securities offerings.
Here’s a breakdown of who qualifies:
1. Individuals Based on Income or Net Worth
Income Test: Anyone who earned $200,000+ individually (or $300,000 jointly with a spouse or spousal equivalent), in each of the last two years, and reasonably expects to do so again this year.
Net worth Test: Anyone with a net worth over $1 million, either alone or jointly with a spouse or spousal equivalent, excluding the value of their primary residence.
2. Individuals with Financial Certifications
Certain licenses qualify someone as an accredited investor, regardless of their income or net worth:
Series 7 (General Securities Representative)
Series 65 (Investment Adviser Representative)
Series 82 (Private Securities Offerings Representative)
These are typically held by financial professionals—think advisors or brokers—who understand complex investments.
3. Entities
Some institutions also qualify, including:
Venture capital firms, banks, insurance companies, and similar financial entities.
Trusts or LLCs with over $5 million in assets, not formed just to invest in your company.
Any entity where all owners are accredited investors.
4. Knowledgeable Employees of Funds
Employees of private investment funds who qualify as “knowledgeable employees,” such as executive officers or investment professionals, may be treated as accredited investors for purposes of investing in that fund.
506(b) vs. 506(c): Which Should You Use?
For issuers, verifying accredited investor status is essential to comply with federal securities laws and avoid potential enforcement actions. Most notably, Rule 506(b) and Rule 506(c) of Regulation D allow companies to raise unlimited capital from accredited investors, with differing requirements around general solicitation and verification.
Under Rule 506(b):
Issuers may not use general solicitation or advertising.
They may sell to up to 35 non-accredited (but sophisticated) investors, and an unlimited number of accredited investors.
Under Rule 506(c):
Issuers can advertise or solicit broadly (think Twitter, podcasts, newsletters), but must take reasonable steps to verify that all purchasers are accredited investors.
Self-certification alone is not sufficient under Rule 506(c); issuers typically require documentation such as tax returns, bank statements, or third-party certifications.
Tips for Startups Working with Accredited Investors
Know your exemption. Work with experienced legal counsel to determine whether 506(b), 506(c), or another exemption is right for your specific situation.
Document everything. Even under 506(b), keep records of how you determined each investor was accredited. Under 506(c), verification must be documented thoroughly.
Use third-party verifiers if needed. For 506(c) raises, outside, third party service providers exist that can help confirm investor status.
Don’t guess. Failing to properly verify accredited status could invalidate your exemption—and expose you to SEC enforcement or rescission claims from investors.
Final Thoughts
Raising capital from accredited investors can unlock vital funding for your startup while avoiding the complexity and cost of SEC registration. But the rules are there for a reason and compliance is not optional – it’s mandatory for operating within the bounds of the U.S. securities regulations.
Disclaimer: This blog post is provided for general informational purposes only and does not constitute legal, tax, or financial advice. Reading this post does not create an attorney-client relationship with me or my law firm. Reach out for a consultation and to obtain advice specific to your individual legal needs.