boltKey takeaways
- Individuals qualify with more than $1M of net worth excluding their primary residence, with $200K individual or $300K joint income in each of the last two years, or by holding a Series 7, 65 or 82 license.
- Mortgage debt taken out on the home in the 60 days before the investment counts against net worth unless it was used to buy the home. Build that check into your questionnaire.
- Most entities qualify with more than $5M of assets or investments that were not formed to make the investment, or when every equity owner is accredited.
- Rule 506(b) funds can rely on a reasoned self-certification. Rule 506(c) funds must take reasonable steps to verify, and 2025 SEC staff guidance accepts high minimum investments as one way to do it.
- Accredited status is only the floor. 3(c)(7) funds need qualified purchasers, and funds that charge carry need qualified clients, whose thresholds rose in 2026.
An accredited investor is a person or entity that the SEC treats as able to invest in unregistered securities offerings without the protections of a registered offering. For individuals, the main tests are more than $1 million of net worth excluding a primary residence, or income above $200,000 ($300,000 jointly with a spouse or spousal equivalent) in each of the past two years with the same expected this year. Certain licensed professionals and fund insiders also qualify, and most entities qualify at $5 million of assets.
The definition lives in Rule 501(a) of Regulation D. Nearly every private fund limits itself to accredited investors, so knowing the categories well, and recording them correctly, is part of every close.
Why the definition matters to a fund#
Rule 506 lets an issuer raise unlimited capital without registering the offering, provided purchasers fit certain profiles. Under Rule 506(b), up to 35 non-accredited but sophisticated purchasers are technically allowed. Including even one triggers disclosure requirements close to those of a registered offering, so funds almost always admit accredited investors only. Under Rule 506(c), which permits general solicitation, every purchaser must be accredited, and the issuer must verify it.
Accredited status is the minimum standard. A fund relying on Section 3(c)(7) also needs every investor to be a qualified purchaser. A manager that charges performance-based compensation, such as carried interest, generally needs each investor in a 3(c)(1) fund to be a "qualified client" as well.
The categories for individuals#
| Category | Rule 501(a) | Test |
|---|---|---|
| Net worth | (a)(5) | Net worth over $1,000,000, alone or with a spouse or spousal equivalent, excluding the primary residence |
| Income | (a)(6) | Income over $200,000 in each of the two most recent years, or joint income over $300,000, with a reasonable expectation of the same in the current year |
| Professional credential | (a)(10) | Holds a credential the SEC has designated by order. Currently these are the Series 7, Series 65 and Series 82 licenses, in good standing |
| Knowledgeable employee | (a)(11) | A "knowledgeable employee" of the private fund, as defined in Investment Company Act Rule 3c-5, investing in that fund |
| Insider | (a)(4) | Director, executive officer or general partner of the issuer, or of its general partner |
| Family client | (a)(13) | Family client of a qualifying family office, with the investment directed by that office |
A few points that come up often:
- Spousal equivalent means a cohabitant in a relationship generally equivalent to marriage. Assets do not need to be held jointly to count toward joint net worth.
- The income test is all-or-nothing on the basis. An investor cannot use individual income for one year and joint income for the other.
- Knowledgeable employees qualify only for the 3(c)(1) or 3(c)(7) funds covered by the Rule 3c-5 definition, which turns on their role. Executive officers, directors and employees who take part in investment activities qualify. An employee with purely clerical or administrative duties generally does not.
Getting the net worth math right#
Net worth is the most common basis and the one most often miscalculated. The rule:
- Exclude the primary residence as an asset.
- Exclude mortgage debt on that residence as a liability, up to its estimated fair market value.
- Count as a liability any residence debt that exceeds fair market value (being underwater).
- Count as a liability any increase in residence debt over the 60 days before the purchase, unless the increase came from buying the residence. This stops investors from pulling equity out of their home to qualify.
Worked example (hypothetical)#
Assume an investor subscribes on June 30 with the following balance sheet:
| Item | Amount |
|---|---|
| Brokerage and retirement accounts | $780,000 |
| Rental property (equity after its mortgage) | $310,000 |
| Primary residence, fair market value | $1,200,000 |
| Mortgage on residence, 90 days ago | $700,000 |
| Mortgage on residence today, after a $150,000 cash-out refinance in May | $850,000 |
| Credit lines and other debt | $60,000 |
Calculation: $780,000 + $310,000 − $60,000 = $1,030,000 before the residence adjustment. The residence and its debt drop out, except the $150,000 cash-out, which happened inside the 60-day window and was not used to buy the home. So: $1,030,000 − $150,000 = $880,000.
The investor is not accredited on net worth, even though the brokerage statement alone might suggest otherwise. If the refinance had closed 61 days before the subscription, the result would be $1,030,000, which clears the $1M test. Your questionnaire should ask about recent borrowing against the home.
The categories for entities#
| Entity type | Rule 501(a) | Test |
|---|---|---|
| Banks, broker-dealers, insurers, registered funds, BDCs, SBICs, investment advisers (registered or exempt reporting) | (a)(1) | Qualify by status, with no asset test |
| Corporations, partnerships, LLCs, business trusts, 501(c)(3) organizations | (a)(3) | Total assets over $5M, not formed to acquire the securities offered |
| Trusts | (a)(7) | Total assets over $5M, not formed to acquire the securities, directed by a sophisticated person |
| Any entity whose owners all qualify | (a)(8) | Every equity owner is accredited (look-through to individuals permitted) |
| Other entities, such as tribes and government bodies | (a)(9) | Investments, as defined in Rule 2a51-1(b), over $5M, not formed to acquire the securities |
| Family offices | (a)(12) | Assets under management over $5M, not formed to acquire the securities, investment directed by a knowledgeable person |
| Certain benefit plans and state plans | (a)(1) | Specific asset or fiduciary conditions |
The phrase "not formed for the specific purpose" matters most when an investor uses a newly formed LLC. If the vehicle exists only to invest in your fund, look through to its owners under (a)(8).
Verification: 506(b) versus 506(c)#
Rule 506(b)#
The issuer needs a reasonable belief that each purchaser is accredited. Funds usually rely on a detailed investor questionnaire in the subscription agreement. The investor ticks the specific category and gives the facts behind it. A bare statement such as "I am accredited" is weaker than a category-level answer. Red flags, such as an investor who says they are a student, require follow-up.
Rule 506(c)#
The issuer must take reasonable steps to verify. Rule 506(c) lists non-exclusive safe harbors:
- reviewing IRS forms for the past two years, plus a statement of expected current-year income
- reviewing asset and liability documents, plus a credit report, dated within the prior three months
- a written confirmation from a registered broker-dealer, SEC-registered adviser, licensed attorney or CPA
In March 2025, SEC Corporation Finance staff issued a no-action letter on a principles-based route. An issuer may reasonably conclude it has verified status where:
- the minimum investment is at least $200,000 for individuals or $1 million for entities
- the purchaser represents in writing that it is accredited and that the minimum is not financed by a third party for that purpose
- the issuer has no actual knowledge to the contrary
This is staff guidance rather than a rule, but it has made 506(c) more usable for funds with institutional-size tickets.
What may change next#
On September 30, 2026, the SEC requested public comment on new ways for individuals to qualify. The options are passing an accredited investor exam developed by FINRA, or holding certain credentials in good standing. The credentials under consideration are a U.S. CPA license, the CFA charter, the CFP certification, and the Series 79, 86 and 87 licenses. As of late 2026 these are requests for comment, not adopted changes. The dollar thresholds in (a)(5) and (a)(6) are not indexed for inflation and have not changed.
Separately, the SEC's inflation order raised the qualified client thresholds effective June 29, 2026. They are now $1.4 million under management with the adviser or $2.7 million of net worth, excluding the primary residence. Arrangements entered into before that date are generally grandfathered. If you charge carry in a 3(c)(1) fund, update your questionnaire.
Building eligibility into your process#
A sound process:
- Use a questionnaire that asks for the specific Rule 501(a) category and the supporting facts. Include the 60-day residence debt question.
- For 506(c), collect verification evidence, or the minimum-investment representations, before accepting the subscription.
- Check qualified purchaser and qualified client status in the same step if your fund needs them.
- Store the completed questionnaire and evidence with the investor record, together with the KYC file. See AML and KYC.
- Re-confirm eligibility on transfers and on new subscriptions into later funds. Status is tested at the time of each purchase.
How Privatis helps#
Privatis runs investor onboarding with KYC/AML checks and risk scoring. It keeps subscription documents and eligibility records in each LP's file in the data room, and logs every change in an audit trail. When an auditor or examiner asks how a particular investor qualified, the questionnaire, the supporting evidence and the onboarding date are in one place.
Eligibility rules are technical and can change. Confirm your fund's approach with securities counsel.