Accredited Investors: What That Means and Why It Matters
You’ve got a great pitch and a friend who wants to invest. Sounds simple. It isn’t.
Whether you can actually take their check — and how much paperwork comes with it — depends on whether they’re an “accredited investor.” That term is buried in securities law, but it shapes almost every early financing decision a founder makes. Get it wrong and you create a cleanup project that follows you into your next round, your next audit, and sometimes your next deal.
Here’s what the term actually means, why it matters for your raise, and where founders most often trip.
The Definition (And Why It Exists)
“Accredited investor” is an SEC concept. The idea: some investors are sophisticated enough — or wealthy enough — to fend for themselves without the protection of full SEC registration. So when a company sells securities to accredited investors only, it can rely on exemptions (Regulation D, mainly Rule 506(b) or 506(c)) and skip the months and millions a public registration would cost.
To qualify as accredited, an individual generally needs to meet one of these:
- Income test: Earned income over $200,000 individually (or $300,000 with a spouse) in each of the last two years, with a reasonable expectation of the same this year.
- Net worth test: Net worth over $1 million, individually or with a spouse, excluding the value of a primary residence.
- Credential test: Holds a Series 7, 65, or 82 license in good standing. (The SEC added this in 2020 — it matters more than people realize, because it’s the only test that doesn’t depend on someone’s bank account.)
Entities have their own rules — funds, trusts, and most companies with over $5 million in assets typically qualify, and any entity in which all equity owners are themselves accredited also qualifies. There are nuances; talk to us if you’re trying to figure out where a particular entity lands.
Why It Matters For Your Raise
Three reasons, in order of how often they bite founders:
- It determines what exemption you can use. Most early-stage rounds are sold under Rule 506(b) — which lets you raise from accredited investors plus up to 35 “sophisticated” non-accredited investors, but prohibits general solicitation (no posting your raise on Twitter). Rule 506(c) lets you advertise the raise publicly, but every investor must be accredited and you have to take “reasonable steps” to verify it (more on that below). If you mix these up, you blow the exemption.
- It changes your disclosure obligations. Sell to even one non-accredited investor under 506(b) and you owe them a much heavier disclosure package — financial statements, risk factors, the works. Most founders aren’t prepared to produce that, which is why we usually recommend going accredited-only, even if it means turning some people away.
- It affects your next round. Your Series A lead will diligence your prior financings. If they find you sold to non-accredited investors without proper documentation — or relied on an exemption you weren’t actually qualified for — you’ve got a rep-and-warranty problem at best, and a rescission risk at worst. The cleanup costs are not small.
The Verification Question
In a 506(b) deal, you can rely on the investor’s own representation that they’re accredited — typically captured in the purchase documents. That’s the friendly version. It’s why most seed rounds run on 506(b).
In a 506(c) deal, self-certification isn’t enough. You need to take “reasonable steps” to verify accreditation, which usually means reviewing tax returns, brokerage statements, or a written confirmation from a CPA, attorney, broker-dealer, or registered investment adviser. Most founders use third-party verification services to handle this — they’re cheap and they create a clean paper trail.
The decision between 506(b) and 506(c) usually comes down to a single question: do you need to advertise the raise, or do you have enough relationships to fill it quietly? If you can fill it quietly, 506(b) is almost always the lighter lift.
Where Founders Get Tripped Up
The friend who isn’t accredited. Your buddy from college wants to put in $25,000. Great instinct, terrible structure if he doesn’t qualify. You have a few options: don’t take him on, or else don’t take him on. It’s just not worth it to produce the heavier disclosures, structure the round as a different exemption, and your future investors or acquirers may flip out. That all said, if you don’t know (or have good reason to know) that your investor isn’t accredited, you can typically rely on a representation in the documents saying he/she is.
Mixing accredited and non-accredited without realizing it. This happens with friends-and-family rounds especially. The paperwork is light, the conversations are casual, and nobody actually verifies anything. Six months later, you’re trying to remember whether Aunt Linda met the net worth test.
Talking publicly about the raise under 506(b). A LinkedIn post or TikTok ad mentioning that you’re “raising your seed” can be construed as general solicitation, which is incompatible with 506(b). The line between “networking” and “solicitation” is genuinely fuzzy, and we counsel clients on it constantly. When in doubt, don’t post.
If You’re About to Raise — Talk to Us First
We represent both companies and investors, which means we see this from both sides. The cap table mistakes founders make at the seed stage are the same mistakes investors flag in diligence at the Series A. We can structure your raise so the next lead doesn’t find anything to flag.
If you’re in early conversations with potential investors and want a quick read on whether your structure works, get in touch.