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August 1, 2019
Accredited Investor Definition and Private Securities Markets
Companies turn to capital markets to raise funding from
In regulating capital markets, the SEC must balance two of
investors, a process referred to as a securities offering.
its statutory mandates: investor protection and capital
Public securities offerings are open to a wide range of
formation. Through the exemptions for private offerings,
investors and must meet comprehensive registration
the SEC allows companies to raise capital without incurring
requirements imposed by the Securities and Exchange
the costs associated with the registration and disclosure
Commission (SEC). By contrast, private securities offerings
requirements governing public offerings, while ensuring
are exempt from certain SEC registration requirements and
that the investors who participate in such private offerings
are generally available only to accredited investors. Hence,
have sufficient sophistication to take care of themselves
the accredited investor definition effectively determines
without the protections afforded by securities law
who can access the private securities markets and invest in
requirements. Capital formation needs may be better met if
privately held companies or offerings by private funds, such
issuers can raise funds without incurring registration costs,
as hedge funds, venture capital, and private equity.
but investor protection challenges potentially increase as
more investors gain access to private offerings.
Private Securities Offerings: Market Size,
Risks, and Trade-offs
The Current Accredited Investor
The scope of the accredited investor definition has taken on
Definition
greater significance in light of recent increases in the
Under the SEC regulations, an individual must meet one of
volume of private securities offerings. In 2018, companies
two criteria to qualify as an accredited investor (Figure 2).
raised roughly $2.9 trillion through private offerings—more
than double the size of public offerings (Figure 1).
Figure 2. Who Is an Accredited Investor?
Figure 1. New Capital Raised in Public and Private
Securities Markets, 2009-2018

Source: Financial Industry Regulatory Authority.
An individual can qualify as an accredited investor if (1) he
Source: Securities Exchange Commission.
or she earned more than $200,000 (or $300,000 together
with a spouse) in annual gross income during each of the
Although private securities offerings are growing in
prior two years and can reasonably be expected to earn a
popularity, they also present investors with greater risks
gross income above that threshold in the current year or (2)
than public offerings. Some of these risks derive from
private offerings’ reduced disclosure relative to public
he or she has a net worth of more than $1 million (either
alone or together with a spouse), excluding the value of the
offerings. Without more comprehensive disclosure,
primary residence. Institutions can also qualify as
investors in private offerings may be less able to make
accredited investors if they own more than $5 million in
informed decisions regarding risks and pricing. In addition,
assets. Moreover, a number of regulated entities, such as
private offerings are generally issued by small, medium-
banks, insurance companies, and registered investment
sized, and start-up companies, which tend to be riskier
companies, automatically qualify as accredited investors.
investments compared with more established publicly
According to the SEC, an estimated 13% of all U.S.
traded companies. Private offerings are also less liquid than
households (16 million in total) qualified as accredited
public offerings, meaning that investors may have more
investors in 2016, up from 10% in 2013, as stated in a
difficulty selling these securities at desired prices and could
separate SEC study.
incur losses if they are forced to sell to meet urgent cash
needs.
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Policy Issues
Accounting for other forms of investment

sophistication. Some commentators have suggested
Retail investor protection. Some commentators worry
that the pool of accredited investors could be expanded
that any potential broadening of the definition could
subject more retail investors to private offerings’ risk
to those who have received financial training or
credentials or could otherwise demonstrate equivalent
exposures, which these investors may not be able to
knowledge and understanding. In the 115th Congress,
tolerate. In addition, other commentators have argued
H.R. 1585, H.R. 3972, and Titles IV and X of S. 488
that the existing accredited investor criteria do not
would have broadened the accredited investor
adequately protect wealthy but unsophisticated investors
definition. The provisions would have changed the
(including many senior citizens who rely on existing net
definition to include those with qualifying license and
worth as their sole source of financial security) from the
education or experience and adjusted the thresholds for
higher risks that often accompany private securities
inflation every five years. The provisions also specified
offerings.
that family offices and family clients be recognized as

accredited investors. Family offices are entities
Access to investment opportunities. Conversely, a
established by wealthy families to manage their wealth
number of observers have argued that well-informed but
and provide other financial services to family
less affluent investors should be allowed to invest in
members. In the 116th Congress, a group of 13 Senators
private offerings. According to these critics, the existing
accredited investor definition amounts to a “privilege for
sent a letter to the SEC on July 18, 2019, encouraging
the rich” and prevents many investors from participating
the SEC to adjust the accredited investor definition to
include family offices and individuals with qualifying
in tech start-ups and other fast-growing companies.
technical expertise.
Portfolio diversification. In recent years, there has been
Allow investors themselves to opt in. Others have
a shift in capital markets fundraising from public to
argued that individuals ought to have the option to self-
private offerings. As the size of the private market
certify after receiving disclosure about the risks of
continues to increase (see Figure 1), some
private securities offerings or to take an accredited
commentators have argued that investors may enjoy
investor examination to qualify as an accredited
diversification benefits from allocating capital across the
investor. For example, SEC Commissioner Hester
whole universe of public and private securities.
Peirce spoke at a forum in June 2019 in support of a

reform to provide options for investors to opt in. She
Inflation adjustments. Inflation adjustments are often
argued that the current system of providing access to
attached to financial thresholds in SEC rules. However,
private offerings through the accredited investor
the current accredited investor income and net-worth
definition is “geographically discriminatory” by
thresholds are not adjusted for inflation. A retrospective
favoring coastal regions and that she saw opening
inflation adjustment could more than double the current
investor choice to be a potential solution.
thresholds. Per a 2015 SEC Report on the Review of the
Definition of “Accredited Investors,” main portions of
Expand the eligible accredited investor base, subject
the threshold have not been adjusted since 1982.
to investment limits. Some observers have suggested
Inflation adjustments from 1983 to 2013 would reduce
that all individuals should be able to invest in private
the percentage of overall U.S. households qualified as
offerings, subject to certain investment limits (e.g.,
accredited investors from 10% to 4%. The same study
capped at a fixed percentage of annual gross income or
shows that around 2% of U.S. households qualified as
net worth). This and other considerations are also
accredited investors in 1983.
discussed in the SEC’s private securities offerings

concept release.
Bright line test for implementation. In many regulatory
contexts, bright line rules may be preferable to more
Related Products
general standards. The current accredited investor
CRS Report R45221, Capital Markets, Securities Offerings,
definition arguably exhibits the key virtue of such bright
and Related Policy Issues, by Eva Su.
line rules insofar as it allows companies and investors to
easily determine who qualifies as an accredited investor.
CRS In Focus IF10747, Private Securities Offerings:
Any new nonquantitative criterion to capture financial
Background and Legislation, by Eva Su.
sophistication could therefore present trade-offs by
CRS In Focus IF11062, Introduction to Financial Services:
blurring the boundaries of the accredited investor
definition, potentially leading to operational delay or
Capital Markets, by Eva Su.
ambiguity.
CRS In Focus IF11256, SEC Securities Disclosure:
Background and Policy Issues, by Eva Su.
Potential Policy Options
For many years, policymakers, regulators, and industry
CRS Report R45308, JOBS and Investor Confidence Act
participants have discussed ways to alter the accredited
(House-Amended S. 488): Capital Markets Provisions,
investor definition. On June 18, 2019, the SEC published a
coordinated by Eva Su.
private securities offerings concept release to solicit public
input on related policy issues prior to potential future
Eva Su, Analyst in Financial Economics
rulemaking. Examples of the proposals include the
IF11278
following:
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Accredited Investor Definition and Private Securities Markets


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