What is an Accredited Investor? (And The Arbitrary SEC Rules That Hurt Young Investors)

by | BiggerPockets.com

It takes money to make money.

It’s a saying that many of us have heard before, and in a lot of cases it can be used as an excuse to victimize oneself or blame the unfairness of the system. That type of mindset can be dangerous and misleading. Here on BiggerPockets, we know that there is always opportunity for the enterprising investor regardless of his or her current level of wealth.

But there is one category of investments where the statement “it takes money to make money” rings particularly true. These types of investments are available only to the already established wealthy elite and in my opinion unfairly exclude younger investors who have yet to meet the somewhat arbitrary qualifications required to get exposure to this asset class.

I’m referring to those investments that are only open to “Accredited Investors,” placements that can offer enterprising investors some of the best returns around. These investments are for the most part not open to those of us who are just getting started with our investing portfolios. In fact, they aren’t even open to some of us who are well on our way.

Here, I want to delve into what an Accredited Investor is, how they are qualified, and then make an argument about some of the disadvantages of certain rules that disadvantage younger investors — and society as a whole.

What is an Accredited Investor?

Boiled down simply, as an individual you must meet one of the two following criteria to be considered accredited:

  1. You earn more than $200,000 per year singly ($300,000 per year for married couples) and expect to do so again in the following year.
  2. You have more than $1,00,000 in assets outside the value of your primary residence.

You can refer to Rule 501 of Regulation D to get a more thorough understanding of the criteria behind the government’s definition of an “Accredited Investor.” The details are likely not meaningful for most.

Why that specific salary level and/or that level of accumulated wealth? You tell me.

These qualifications — and the rules surrounding them — exist to prevent the vast majority of “unqualified” investors from investing in placements that are not registered with the SEC. Investments that are not regulated by the SEC and subject to their regulations, such as having an audit by a qualified third party, can have misleading or inaccurate financials and other information that has the potential to cost unwary investors big. The goal of this legislation is to give the distinction of “Accredited Investor” only to those individuals who are “sophisticated” enough to invest in non-public investments intelligently.

If you ask me, I believe that this is a somewhat less than optimal way of qualifying investors, as there are many ways that one can come into possession of $1 million (or a salary of $200,000 annually, for that matter) that are not reflective of sophisticated investing — a large inheritance from Uncle Jimmy, for example. On the other hand, a younger investor like myself who is willing to put time into researching and qualifying off market investments is disadvantaged in not being able to access these investments because of regulations that incentivize business owners to seek capital from Accredited Investors first.

What Function Do Accredited Investors Serve?

When companies want to raise money, they have several options, among the most intuitive of which are:

  1. Apply for a loan (debt financing) from an individual or lending institution.
  2. Register with the SEC and allow the public to buy equity in their company.
  3. Find an individual investor or investors, and privately offer them shares in the company.

The Accredited Investor really comes into play in the third case.

Let’s suppose that tomorrow you wanted to go start a Real Estate enterprise and purchase your first property. You could always go to Dad or Uncle Jim for some money, but if you wanted to raise a significant amount of money on the order of a couple hundred thousand to a couple million dollars, you’d need either a really rich Uncle Jimmy or equivalent, or you’ll need to go to individuals outside your immediate network of family and business partners.

Enter Accredited Investors.

These are the folks that will give you the $100,000 to $1,000,000 (or more) you need to purchase your next flip or to renovate and rent out that mixed-use property. These are the folks with the money, the time, and the inclination to give you a shot.

Related: 8 of the Best Ways to Raise Capital for Your Investments

The SEC regulates the offer and sale of securities in the United States. If you wish to make shares in your company available to the general public, you are required to go through a number of expensive steps that can have negative consequences: filing annual reports, making financial data available to the public, and paying for audits are examples of some of these hurdles.

If your company is of a smaller nature, you may opt instead to find an “exemption” to these rules — a way to raise money without having to file expensive and time-consuming paperwork with the SEC. Among the most commonly used exemptions is Rule 506. Under this rule, you can solicit an unlimited number of Accredited Investors and up to 35 non-accredited investors, which on the surface might seem like a very reasonable solution, but there are two major caveats to this type of offering:

  1. The company offering securities may “not use general solicitation” in seeking funding. This limits the reach of the offering, which disadvantages the company looking to raise capital.
  2. The offering company must provide all non-accredited investors documentation that is generally the same as that made available in public offerings.

Instead of adhering to these requirements, many companies choose to offer their securities only to Accredited Investors by taking advantage of a subsection of Rule 506(c). Simply put, if you offer your company’s securities only to Accredited Investors (and take reasonable steps to ensure that they are accredited), you don’t have to file all that paperwork, and you can more easily market your offering to a larger group of potential investors.

On the other hand, truly enormous capital raises or investments — on the order of tens or hundreds of millions of dollars — can require extensive financial auditing, paperwork, and authentication. It makes sense to pay tens of thousands of dollars  (or even larger sums) to ensure accuracy and quality in the financial statements for these larger institutions and investments. Once that paperwork and audit is complete, why not offer it to anyone and everyone to see who will pay the largest possible amount of money (price per share) to own part of your company?

Simple economics shows us that increasing the availability of securities will lower companies’ cost of capital, while simultaneously opening up more opportunities to individual investors.

What’s the Impact on “Non-Accredited” Investors?

By making it harder for smaller companies to offer their securities to the general public, the SEC seeks to protect those of us who haven’t yet accumulated a large net worth from investing with unrelated third parties that do not have audited financials. To give you a straw man example, it might be easy to convince 93-year-old Grandma Betty to part with her last $100,000 and put it into a shady-but-technically-legal investment if it isn’t registered by the SEC. It’s a little harder to do that (unless Grandma Betty happens to be a millionaire) due to the regulations imposed by the SEC.

I’m sure that many victims have been protected from bad investments because of these regulations. But I’d be willing to bet that an equal or greater number of would-be investors have missed out on great opportunities with wonderful companies  — companies that might have gotten access to needed capital sooner and with better terms than under the current system.

Like any type of investment, security purchases in mid-sized companies can have mixed results. That startup you put $20,000 into could be the next Facebook and make you a millionaire overnight… or it might be something that is totally mismanaged and about to plunge into bankruptcy.

As previously stated, the biggest risk with these types of investments is the fact that these companies are often unaudited by professional, trusted firms in accordance with GAAP (Generally Accepted Accounting Principles). It’s on you to read, ensure accuracy, and understand the financials and other risk factors surrounding the business and to invest intelligently.

What’s My Take?

At the end of the day, what these rules do is prevent those of us who do not have the distinction of being accredited investors the opportunity to invest in a certain class of investments. Is that a game changer? Is that something that will prevent you from long-term success?


It’s not a game changer, and it won’t hold you back if you are motivated to succeed. But if you consider increased access to opportunity  — good or bad — an advantage, then I’d argue that this is a law that disadvantages the 99% of the population who can’t call themselves “Accredited Investors.”

I may not be a millionaire or earn a six figure salary, but I do take pains to ensure that I practice sound finance with the money I do have. I work hard to earn a decent living, I live frugally and save as much as possible, and I put a lot of time and thought into my investments.

Why shouldn’t I be allowed to assume the risk and possible rewards of private investments? Why should the government make it harder for me to access these types of securities? My money is mine. By the time I become an Accredited Investor, I will have come across perhaps hundreds of small businesses, many of whom offer promising futures. And my money is just as good as the millionaire next door’s! I earned it. I saved it. I believe I should get to invest it at my discretion.

The rules that serve to “safeguard” the public from large private placements may well prevent some individuals from losing their shirts. I can’t argue that most of the investing public is able to intelligently invest in off-market investments — it sometimes seems like getting them to invest intelligently in the regulated marketplace of publicly traded companies is hard enough.

Related: The (Totally Unfair) Secret Advantage of the 1% — and How to Level the Field

But to me as an individual, these rules represent a barrier. As a young and ambitious investor, I am edged out of this particularly interesting and lucrative category of investments and instead must invest with businesses that are either very, very small (like my landlording business or a family member or friend’s enterprise) or with corporations that are very, very large that go to the appropriate lengths to register and file the correct paperwork with the SEC.

I believe that this system operates in a manner that is unfair to younger investors. I attribute at least some of my inability to meet the requirements of the “Accredited Investor” described by the SEC as simply due to my age. I just haven’t had enough time in the workforce to command a salary of $200,000 per year or more, and I haven’t lived long enough to have accumulated $1,000,000 in assets. Does that make me “unsophisticated” when it comes to investing? I don’t believe so, and shouldn’t it be my right to determine myself capable or incapable of handling my own investments?

Instead, I see a system that prevents me — and countless other ambitious young investors — from taking advantage of the opportunities in this asset class. Instead, these rules and exemptions advantage the already established wealthy elite by funneling great investments in smaller companies to their review first.


The purpose of this article was to define what an accredited investor is, how that title is assigned, what role they serve in the economy, and my perception on the kind of impact the existence of SEC regulations and rules surrounding the issuance of securities have on the overall investing landscape for young investors.

I’d love to hear your thoughts on my article:

  • Do you believe that the regulations surrounding private investments make sense? 
  • Do you think that they have an impact, positive or negative, on the opportunities you have access to? 
  • Do you agree with me that these types of investments should be opened up to the general public — or at least those that are seriously interested in pursuing them?

Let’s have a conversation in the comments section below!

About Author

Scott Trench

Scott Trench is a perpetual student of personal finance, real estate investing, sales, business, and personal development. He is CEO of BiggerPockets.com, a real estate investor, and author of the best-selling book Set for Life. He hopes to now share the knowledge he has acquired with others so that they will have the tools they need to repeat his results in just 3-5 years, giving them the option to go anywhere they want in the world, work any job, start any business, or finish out the journey to financial independence and retire young. Scott lives in Denver, Colorado and enjoys skiing, rugby, craft beers, and terrible punny jokes. Find out more about Scott’s story at JoeFairless.com, MadFientist, and ChooseFI.


    • Scott Trench

      Brian – thanks for the comment. I agree that it is good to be a young investor. I was trying to argue here that in the specific case of investing in mid-sized companies that are not publicly traded, we younger investors experience a disadvantage.

  1. Sorry, I disagree with your premise. Here are a few points to chew on:
    1. This site relates to real estate, not securities, and RE limited partnerships are not regulated by the SEC. Nor, obviously, is your ability to purchase real estate covered by any of the rags you are talking about.
    2. The 200k/300k mad 1M levels have been in place for many many years. So, in effect, inflation has lowered the threshold over the years. You could certainly argue they should be raised, not lowered.
    3. While they are arbitrary, and don’t prevent a fool and his money from being separated, you have to draw a line somewhere on less transparent investments (these are not covered by third party analysts and aren’t liquid).

    • Scott Trench

      John – thank you for commenting on my article. I’m sorry that you disagree with the premise. You are quite right that I didn’t talk about real estate investing and the impact of these rules. I planned to, and will in my follow up article next week, but to effectively set the premise, I felt that I had to limit this post to 2,000 words.

      These rules absolutely limit younger investors from investors from taking part in Real Estate. If I had the option, I would love to invest in young companies that are developing small to mid size land parcels in the Denver area. I’m buying my own real estate, but it would be great to take part in the mid-sized apartment complex going up downtown. It’s much tougher to take part in that as a young investor because of the rules I talked about above.

  2. Gregory Hiban

    The income & net worth cutoffs certainly are arbitrary, but just about all cutoffs are arbitrary, so arguing about the level is kind of useless. I think the cutoffs are there more to prove that the person has the ability to lose some money than that the person is a savvy investor.

    A great example of this is doctors. While within the investing world doctors tend to have the reputation of being terrible investors due to their high intellect but lack of financial knowledge, they also tend to be very high earners with the ability (and tendency) to take a 50K-100K hit on a bad investment without going on food stamps.

    There are plenty of ways for someone interested in real estate to make a killing without buying into small private offerings. If general solicitation were allowed without a certain threshold on investors income/wealth, you would quickly have tons of people losing large percentages of their net worth to slick salesmen. The real estate industry as a whole would take a big reputation hit and start being compared to the timeshare industry.

    Now, I think a better way might be to add a third way to qualify as an “accredited investor.” An industry group could work in coordination with the SEC to design a licensing exam. Just like the Series 7 & Series 63 exams allow you to sell securities, the “accredited investor” exam would allow you to buy all types of securities. This would allow savvy investors such as yourself the ability to invest in any type of security you want while also preventing idiots from losing their shirts on incredibly risky investments.

    • Greg Carr

      That was exactly what I was going to write! Have a course and an exam to qualify an individual to be an accredited investor.

      Let’s raise money to lobby the government about this! Oh, bummer…that’s going to be difficult…

    • Scott Trench

      Greg – thank you for your comment. I really love the doctor example because I think that (stereotypically) they are great examples of high income earners who have terrible financial defense. It’s a great case study because there are many examples of doctors that are inarguably brilliant, but financially clueless.

      Of course all cutoffs are arbitrary – and I believe that you are right about the reasoning behind them. I just feel that because they are arbitrary and because they funnel great investments to the wealthy first, that they have a negative impact on the rest of us by limiting our exposure to opportunity.

      I’d definitely love to see an option like a test or application to become an “accredited investor”!

  3. Chris Kelly

    In my opinion, the reason that the SEC requires that these investments have accredited investors is because if the company/investment fails the accredited investor has the financial means to survive losing all of the invested money, whereas a young, or middle income, investor would likely not be able to.

    I don’t think these rules are harmful to young investors. I don’t think most people have the financial knowledge to invest in these types of companies, although I will admit that there are probably exemptions. Determining who has the financial knowledge, and who doesn’t, would be an almost impossible task though. You have to think, that if everyone were able to invest in these companies, and then some failed and the investors lost all their money, most would probably run straight to the government regulators and ask why they let this happen to them. While I don’t know exact numbers about these investments, I would have to guess that more of them end up failing than being successful.

    I’m not saying the regulations around these investments are perfect, and I don’t think there is a perfect set of regulations to be had, I think they do a pretty good job of protecting the public, as a whole.

    • Scott Trench

      Chris – I appreciate your comment. When you say that an investor cannot afford to lose on an investment, I have to disagree. In my opinion, anyone investing in anything should understand and bear responsibility for their loss. The problem is not with the potential for loss – it is with the scale of the investment.

      Most private offerings are of a scale that most Americans would consider “significant”… Right now it is extraordinarily difficult to invest “significant” amounts of money ($10,000 – $50,000 for this example for a typical family) in investments that are not in small startups with close friends or family, or very large companies that are able and willing to go through the hurdles of the SEC to register publicly. The reason Americans can’t afford to lose (in my opinion) on these types of investments, is because the regulations of the SEC prevent or disadvantage reasonable raises of smaller amounts from many investors.

  4. Michael Williams

    I think that this rule does protect little old ladies from being taken advantage of but at the same time I think there can easily be rules put into place that could give eager minds like yours and mine a chance. They can simply create a waiver test to test your investment knowledge. Or simply look at what you have done as an investor in the last 2-3 years. There numerous ways to implement such a waiver, but then again I believe it is more about not allowing the one percent to grow any larger than 1%.

    Me and a group of tech people are working on something that will change the face of the internet and will possibly attract a buyout from YouTube, Netflix, twitter, or Skype- and possibly all four. That’s if Google doesn’t get wind of it first. So is this going to stop us from raising capital to implement the software? program?

    • Scott Trench

      Michael – thanks for the comment.

      I would love the option to take a test or fill out a waiver to invest in non public securities. I prefer the waiver option because I’m fairly extreme and don’t think the government should be testing me on my financial knowledge.

      I would love, on the other hand, to sign something to the effect of “I understand the risks of my off market investment and understand that I have limited recourse should the investment go to zero”. I think that would open up the marketplace to many more enterprising investors.

  5. I like and agree with your assessment on a kind of a fundamental basis – but I think in the way you are expressing it; it is based on a false-premise. The goal of most regulation of this sort may be summed up most easily with the ‘let’s have someone beside ourselves that we can blame’ mindset.

    Politicians have to create the appearance that they are helping their constituents – and . . . . do it without actually offending their campaign financiers. So laws get passed under the guise of “protecting the people” while the laws actually serve primarily to safeguard the ‘major players’ who contribute substantially to the election campaigns of the politicians. Creating a category of “savvy investors” in this way (the way you point out) sidesteps the necessity of actual fiduciary obligation.

    • Scott Trench

      Thanks for your comment Stephen! I think that the purpose of the legislation isn’t so much to place the blame on someone else – it’s in place to PREVENT people putting the blame for their bad investments on the government. When you lose your $20,000 in that hot tech startup, you are going to sue someone. The company you invested in has nothing, so who do you turn to? – The government.

      This legislation, in my view, exists to prevent angry and foolish investors from going after the government when their investments go awry. In pursuing that objective, SEC regulations are very effective! They prevent most of the people that might do the complaining from even hearing about investment opportunities in the first place!

  6. Paul Wurster

    I totally agree. The government should not protect me from myself.

    If someone is soliciting a scam, there are ways to prosecute them for actual crimes. If someone is pitching an investment, it is my problem to unpack and discover if it is a good opportunity or not. The SEC is one of the most ineffective organizations in the government, and there is some pretty stiff competition.

    Middle class investors cannot participate in many of the great booms of the last decade. Just try to directly buy into a fracking operation.

  7. Scott Stevens

    This goes to show that once you get to the big leagues, you must keep the little guy down and use the government under the disguise of protecting the little guy to keep others from playing on the same field. It’s why we must stop playing angry birds, candy crush, and looking on Facebook all day and start learning the rules and loopholes.

    • Scott Trench

      Thanks for the reply Scott. Personally, I prefer to take the view that this is less of a wealthy trying to stifle the poor thing and more of an “I-don’t-want-to-deal-with-financially-illiterate-people” thing.

      It is perfectly reasonable to make it harder for people who don’t know what they are doing from taking part in a category of investing – I just think that those of us who know what they are doing (or in my case, are willing to eat significant losses in the process of learning the game) should be enabled to take part.

  8. Lynn Harrison

    Are you talking about the EB-5/foreign investment category? That’s where SEC oversight is being expanded. Mostly because there have been a boatload of scams in the past few years. If you are, maybe you’ll be glad you didn’t get into it. The US and China may be in negotiations/investigations to confiscate some of those dollars/investments. If so any policies may carry over to Russia and Iran etc. There is some talk in the media but nothing is clear. Canada has already made an agreement.

    • Scott Trench

      Lynn, thanks for the comment. I think that the EB-5 visa process could have a whole other article dedicated just to it!

      I guess what my argument boils down to is this – I don’t even know what I don’t know about investing in small companies.

      As an “investor”, I can put my money into any public company I want. But I will only ever be presented with the opportunity to invest in small companies when they are truly desperate and unable to raise money from accredited investors. I think that the rules should be designed to funnel those types of investments to EVERYONE that is interested.

  9. Jeff S.

    Haven’t seen enough that would warrant investment IMO. If you think about it you are unlikely to become accredited doing this kind of investing. The profits are not intended for the “investor”.

    So Scott are you saying if you could beg, borrow and steal a 100k the best thing you could think of is to go into this type of deal? How many millionaires do you know that got that way by going for this opportunity? There are lots that have by doing their own deals.

  10. So does this make it illegal for new investor X to ask experienced investor Y to fully fund project Z without first going through the same hoops needed to take a company public? (Seems like that would hinder the value of BP’s market place.)

    Perhaps your next post will make it clearer for me.

    • Scott Trench

      David thanks for the comment.

      I believe that the legislation I discussed in my article does one thing effectively:

      It creates a scenario where the fastest growing small businesses reach out to millionaires FIRST when they are looking to raise capital.

      It doesn’t prevent me (investor X) from getting funded by the expert (investor Y)… it just makes life a little more difficult for me if investor Y doesn’t happen to be a millionaire.

  11. Scott Trench

    Jeff – If I could beg, borrow and steal $100K, then my goal would be to … go into the best type of deal I could find.

    Right now that is probably a commercial property. That’s because of the rules that make Real Estate such a great way to invest compared to investing in other businesses. I believe that the fact that there are so few great opportunities to invest in smaller companies is sort of chicken-or-egg – I think that there are no good deals in this type of investing space because there are no good deals (egg?) ! If it was a good deal, it wouldn’t have taken 6 months and $50,000 to get to my inbox – the millionaire investor down the block would have jumped on it already.

  12. Chris Needham

    This is a question of individual freedom, plain and simple. How much an investor knows is irrelevant to this. My opinion: Give everyone every freedom that doesn’t take away from anyone else’s. Giving up rights is a slippery slope we’ve gone way too far down in America.

    A government truly looking out for the common folk would close down all title loan, payday loan, and rent to own stores before this garbage.

    • Scott Trench

      Chris – wow I couldn’t agree more. I spent some time looking at the payday loan industry just now and while I think everyone knows that it’s a horrible business, I was shocked at the depravity that I saw in certain cases. A truly horrible industry intent on keeping the lower economic classes in poverty.

      Compare that to the potential losses for investors in smaller placements, and you have a clearly ridiculous hypocrisy in laws claiming to protect unsophisticated investors.

      Thanks for the comment!

  13. Daniel Ryu

    Great informative article, Scott. I learned a lot from it. I’m a big fan of your articles ^^

    I was wondering:
    “2. The offering company must provide all non-accredited investors documentation that is generally the same as that made available in public offerings.”

    I looked up Rule 506 but was having a hard time identifying what the documentation was?

    Is the documentation similar to what is gathered in a Prospectus? And does this also mean that the offering company must be audited and provide that paperwork to it’s investors?

    Anyways, if you have some insight on these issues, I’d love to hear it.

    And for John (near the top) or anyone else that could answer:
    John mentions that “RE limited partnerships” are not regulated by the SEC. But in a RE Limited partnership, if someone was a ‘silent partner’, wouldn’t that put that back in the area of syndicated deal and therefore potentially require documentation for the SEC?

    Thanks guys!

    • Scott Trench


      Thanks for the comment. The source of this quote:

      “Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well;”

      Can be found here:


      Basically, you are correct in your inference that the issuing company needs to offer a “prospectus” to potential investors. Perhaps unprofessionally, I’ll link you to a wikipedia article on what a prospectus is:


      The bottom line is that this documentation requires a large amount of time, attention to detail, and usually expensive CPA and legal review.

      There are plenty of ways around this, but the point of this article was to show that because the SEC encourages small companies and unregistered investments to seek accredited investor capital first, quality companies and projects are often funded by the wealthy and are never even seen by the general investing public.

      • What is the easiest way around this? Form an LLC so a non-accredited investor can invest with an accredited investor through LLC? That won’t work right, both need to be accredited? Through a Trust?- only if over 5 million in value? Is there another way, say if you give an accredited investor capital, and they give you a note, then they can invest non-accredited investors capital in there name?? Is there a way??

      • What is the easiest way around this? Form an LLC so a non-accredited investor can invest with an accredited investor through LLC? That won’t work right, both need to be accredited? Through a Trust?- only if over 5 million in value? Is there another way, say if you give an accredited investor capital, and they give you a note, then they can invest non-accredited investors capital in there name?? Is there a way??

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