Accredited & Qualified Investors
Securities regulations recognize different categories of sophisticated investors who may access investments not available to the general public. Understanding these classifications is essential for recommending appropriate investments.
Accredited Investors (Regulation D)
Regulation D provides exemptions from SEC registration for private placements. To participate in most Reg D offerings, investors must be "accredited."
Individual Qualification Methods
Method 1: Income Test
- Individual income exceeding $200,000 in EACH of the past 2 years, OR
- Joint income with spouse/partner exceeding $300,000 in EACH of the past 2 years
- AND reasonable expectation of same level in current year
Important: Must use the same method (individual OR joint) for all years. Cannot mix individual income one year with joint income another year.
Method 2: Net Worth Test
- Net worth exceeding $1 million
- Excluding the value of primary residence
- Can be individual OR joint with spouse/partner
Primary Residence Calculation:
- Home value is completely excluded from net worth
- Mortgage debt up to home's fair market value is also excluded
- "Underwater" mortgage: Amount exceeding home value counts as liability
- New debt in past 60 days (cash-out refi) counts as liability
Method 3: Professional Credentials (Added 2020)
- Holders of Series 7, Series 65, or Series 82 licenses in good standing
- Based on demonstrated financial sophistication
- No income or net worth requirement
Entity Qualification
| Entity Type | Threshold |
|---|---|
| Banks, insurance companies, registered investment companies | Automatic |
| Employee benefit plans | $5 million+ in assets OR fiduciary is accredited |
| Charitable organizations, corporations, partnerships | $5 million+ in assets |
| Trusts | $5 million+ assets, sophisticated director |
| Entity with ALL equity owners accredited | Automatic (look-through) |
Qualified Purchasers (Investment Company Act)
Qualified purchaser is a higher standard than accredited investor, required for certain private funds.
Individual Threshold
- Owns $5 million or more in investments
- Note: Based on INVESTMENTS, not net worth
Family Company
- Owns $5 million+ in investments
- Owned entirely by two or more related individuals
Trusts
- Not formed for specific investment purpose
- Trustee AND each contributor is a qualified purchaser
Institutional/Entity
- Owns and invests $25 million or more
Qualified Clients (Investment Advisers Act Rule 205-3)
Required for advisers to charge performance-based fees (incentive fees, carried interest).
Current Thresholds (2021, adjusted for inflation)
| Test | Threshold |
|---|---|
| Assets Under Management | $1.1 million immediately after entering contract |
| Net Worth | $2.2 million (excluding primary residence) |
Other Qualified Clients:
- Qualified purchasers
- Knowledgeable employees of the adviser
Note: Thresholds are adjusted for inflation every 5 years. Next adjustment expected 2026.
Comparison of Investor Classifications
| Criteria | Accredited Investor | Qualified Client | Qualified Purchaser |
|---|---|---|---|
| Individual Financial Test | $1M net worth OR $200K/$300K income | $2.2M net worth OR $1.1M AUM | $5M in investments |
| Entity Threshold | $5M assets | — | $25M investments |
| Governing Regulation | Regulation D (1933 Act) | Rule 205-3 (Advisers Act) | Investment Company Act |
| Primary Purpose | Private placements | Performance fees | 3(c)(7) fund access |
Relationship Between Categories
- ALL qualified purchasers are likely accredited investors (higher threshold)
- NOT all accredited investors are qualified purchasers
- Qualified client is between accredited and qualified purchaser
Why Classifications Matter
Investment Access
Accredited Investors Can Access:
- Private placements (Reg D offerings)
- 3(c)(1) private funds (limited to 100 investors)
- Hedge funds, private equity, venture capital
- Pre-IPO stock offerings
Qualified Purchasers Can Additionally Access:
- 3(c)(7) funds (up to 2,000 investors)
- Larger institutional-grade private funds
- More exclusive investment opportunities
Reduced Protections
With these classifications come FEWER regulatory protections:
- Reduced disclosure requirements
- Presumed sophisticated enough to evaluate risks
- Investments may be illiquid and high-risk
- Limited recourse if investments fail
In Practice
When determining investor status:
- Document how the client qualifies (which test)
- Verify qualification periodically
- Note that holding a Series 65 makes the representative automatically accredited
- Remember income/net worth thresholds have not changed since 1982 (except qualified client)
On the Exam
Common Series 65 questions test:
- The specific dollar thresholds ($1M/$200K/$300K for accredited)
- That primary residence is EXCLUDED from net worth calculations
- That Series 65 holders automatically qualify as accredited investors
- The difference between qualified purchaser ($5M investments) and accredited investor
Key Takeaways
- Accredited investor: $1M net worth (excluding home) OR $200K/$300K income
- Primary residence is EXCLUDED from net worth calculation
- Series 7, 65, or 82 license holders are automatically accredited
- Qualified purchaser requires $5M in INVESTMENTS (not net worth)
- Qualified client ($2.2M net worth/$1.1M AUM) allows performance fees
- Higher classifications = more investment access but fewer protections
To qualify as an accredited investor under the net worth test, an individual must have:
Which of the following automatically qualifies an individual as an accredited investor regardless of income or net worth?
The primary difference between an accredited investor and a qualified purchaser is:
8.5 Suitability & Know Your Customer
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