Accredited Investor Definition and Private Securities Markets

Accredited Investor Definition and Private Securities Markets

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Updated February 3, 2023
Accredited Investor Definition and Private Securities Markets
Companies turn to capital markets to raise funding from
incur losses if they are forced to sell to meet urgent cash
investors, a process referred to as a securities offering.
needs.
Public securities offerings are open to a wide range of
investors and must meet comprehensive registration
In regulating capital markets, the SEC must balance two of
requirements imposed by the Securities and Exchange
its statutory mandates: investor protection and capital
Commission (SEC). By contrast, private securities offerings
formation. Through the exemptions for private offerings,
are exempt from certain SEC registration requirements and
the SEC allows companies to raise capital without incurring
are generally available only to accredited investors. Hence,
the costs associated with the registration and disclosure
the accredited investor definition effectively determines
requirements governing public offerings, while ensuring
who can access the private securities markets and invest in
that the investors who participate in such private offerings
privately held companies or offerings by private funds, such
have sufficient sophistication to take care of themselves
as hedge funds, venture capital, and private equity.
without the protections afforded by certain securities law
requirements. Capital formation needs may be better met if
Private Securities Offerings: Market Size, issuers can raise funds without incurring registration costs,
Risks, and Trade-offs
but investor protection challenges potentially increase as
The scope of the accredited investor definition has taken on
more investors gain access to private offerings.
greater significance in light of increases in the volume of
private securities offerings. Between July 1, 2021, and June
The Accredited Investor Definition
30, 2022 (FY2022), companies raised roughly $4.5 trillion
Under the SEC regulations, an individual must meet one of
through private offerings—several times the size of public
two financial criteria to qualify as an accredited investor
offerings (Figure 1).
(Figure 2).
Figure 1. New Capital Raised in Public and Private
Figure 2. Who Is an Accredited Investor as Measured
Securities Offerings ($trillions)
by Income and Net Worth?

Source: CRS using data from SEC Office of the Advocate for Smal

Business Capital Formation annual reports.
Source: Financial Industry Regulatory Authority.
Note: FY = fiscal year ends on June 30. T = $tril ions.
An individual can qualify as an accredited investor if (1) he
or she earned more than $200,000 (or $300,000 together
Although private securities offerings are growing in
with a spouse) in annual gross income during each of the
popularity, they also present investors with greater risks
prior two years and can reasonably be expected to earn a
than public offerings. Some of these risks derive from
private offerings’ reduced disclosure relative to public
gross income above that threshold in the current year or (2)
he or she has a net worth of more than $1 million (either
offerings. Without more comprehensive disclosure,
alone or together with a spouse), excluding the value of the
investors in private offerings may be less able to make
primary residence. Effective December 8, 2020, the SEC
informed decisions regarding risks and pricing. In addition,
expanded the accredited investor definition to include some
private offerings are generally issued by small, medium-
natural persons with financial expertise, such as (1)
sized, and start-up companies, which tend to be riskier
individuals with certain financial credentials (e.g., Series 7,
investments compared with more established publicly
Series 65, or Series 82 licenses); (2) “knowledgeable
traded companies. Private offerings are also less liquid than
employees” as defined in Rule 3c–5(a)(4) of the Investment
public offerings, meaning that investors may have more
Company Act of 1940 (P.L. 76-768), which includes the
difficulty selling these securities at desired prices and could
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Accredited Investor Definition and Private Securities Markets
funds’ directors and certain employees involved in
general standards. The current accredited investor
investments; and (3) “family clients” of a family office as
definition arguably exhibits the key virtue of such bright
defined in SEC Rule 202(a)(11)(G). Family offices are
line rules insofar as it allows companies and investors to
entities established by wealthy families to manage their
easily determine who qualifies as an accredited investor.
assets and provide other financial services to family
Any new nonquantitative criterion to capture financial
members. (For more on family offices, see CRS IF11825.)
sophistication could therefore present trade-offs by
blurring the boundaries of the accredited investor
Any institutions can qualify as accredited investors if they
definition, potentially leading to operational delay or
own more than $5 million in investments. Corporations,
ambiguity.
partnerships, trusts, nonprofits, employee benefit plans, and
family offices holding more than $5 million in assets could
 Financial Stability. Some observers believe that with
also qualify. Moreover, a number of entities—such as
the growth of private securities markets, a significant
banks, insurance companies, SEC-registered broker-dealers,
portion of the overall equity market has become non-
SEC-registered investment companies, and business
transparent to investors and the public. As a result,
development companies—automatically qualify as
policymakers and the public have reduced ability to
accredited investors.
assess the impact of the related activities, potentially
affecting policymakers’ ability to monitor systemic risk
Policy Issues
and prevent misallocation of capital.
 Retail investor protection. Some commentators worry
Proposals to Alter the Accredited
that any potential broadening of the definition could
Investor Definition
subject more retail investors to private offerings’ risk
For many years, policymakers, regulators, and industry
exposures, which these investors may not be able to
participants have discussed different ways to change the
tolerate. In addition, other commentators have argued
accredited investor definition, mostly focusing on
that the existing accredited investor criteria do not
expanding the definition. Examples of the proposals include
adequately protect wealthy but unsophisticated investors
the following:
(including many senior citizens who rely on existing net
worth as their sole source of financial security) from the
 Accounting for other forms of investment
higher risks that often accompany private securities.
sophistication. Some commentators have suggested

that the pool of accredited investors could be expanded
Access to investment opportunities. Conversely, a
to those who have received financial training or
number of observers have argued that well-informed but
credentials or could otherwise demonstrate equivalent
less affluent investors should be allowed to invest in
knowledge and understanding. The SEC amendments
private offerings. According to these critics, the existing
accredited investor definition amounts to a “privilege for
implemented in 2020 reflected several of these
the rich” an
proposals.
d prevents many investors from participating
in tech start-ups and other fast-growing companies.
 Allow investors themselves to opt in. Others have

argued that individuals ought to have the option to self-
Portfolio diversification. In recent years, there has been
certify after receiving disclosure about the risks of
a shift in capital markets fundraising from public to
private securities offerings or to take an accredited
private offerings. As the size of the private market
investor examination to qualify as an accredited
continues to increase, some commentators have argued
investor. For example, SEC Commissioner Hester
that investors may enjoy diversification benefits from
Peirce spoke at a forum in June 2019 in support of a
allocating capital across the whole universe of public
reform to provide options for investors to opt in. She
and private securities.
argued that the current system of providing access to

private offerings through the accredited investor
Inflation adjustments. Inflation adjustments are often
definition is “geographically discriminatory” by
attached to financial thresholds in SEC rules. However,
favoring coastal regions and that she saw opening
the current accredited investor income and net-worth
investor choice to be a potential solution.
thresholds are not adjusted for inflation. A retrospective
inflation adjustment could more than double the current
 Expand the eligible accredited investor base, subject
thresholds. Per a 2015 SEC Report on the Review of the
Definition of “Accredited Investors
to investment limits. Some observers have suggested
,” main portions of
that all individuals should be able to invest in private
the threshold have not been adjusted since 1982.
offerings, subject to certain investment limits (e.g.,
Inflation adjustments from 1983 to 2013 would reduce
capped at a fixed percentage of annual gross income or
the percentage of overall U.S. households qualified as
net worth).
accredited investors from 10% to 4%. The same study
shows that around 2% of U.S. households qualified as
Related Products
accredited investors in 1983. The percentage of
CRS In Focus IF11062, Introduction to Financial Services:
qualifying households had increased to 13% by 2016,
Capital Markets, by Eva Su.
according to a separate SEC study.
 Bright line test for implementation. In many regulatory
Eva Su, Analyst in Financial Economics
contexts, bright line rules may be preferable to more
IF11278
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Accredited Investor Definition and Private Securities Markets

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