Income, Net Worth, Licenses and Entities: How Accredited Investor Status Works and What the Exam Tests

An accredited investor is a person or entity that the SEC treats as able to invest in private, unregistered offerings without the protections of full SEC registration. For individuals, the main tests are income of more than $200,000 in each of the last two years, or $300,000 together with a spouse or spousal equivalent, or a net worth of more than $1 million excluding the primary residence.

Since 2020, holding certain professional licenses in good standing also qualifies an individual, and the Series 65 is one of them. That makes this topic unusual: passing the exam you are studying for can, on its own, make you an accredited investor.

This guide covers who qualifies, how the tests work, why the definition exists, how issuers verify status, worked examples, the exam traps and five practice questions with explanations. Preparing for your exam? Watch FRC’s Series 65 playlist on YouTube, with exam traps called out in every topic.

Why the Definition Exists

Securities offered to the public must generally be registered with the SEC, which requires detailed disclosure. Private offerings under Regulation D are exempt from registration, so investors in them receive far less information and have fewer protections.

The accredited investor definition identifies investors the SEC considers able to bear that risk. The idea is that people with enough income, wealth or expertise can evaluate a private investment, or afford professional advice, without relying on registration.

The definition sits in Rule 501(a) of Regulation D. It controls who can invest in many private funds, hedge funds, venture capital deals and private company share sales.

Where This Topic Appears on the Exams

Accredited investors appear in the investment vehicles and laws sections of the Series 65, and in the SIE and Series 7. Questions usually test the income and net worth thresholds, the primary residence exclusion and how the definition links to Regulation D offerings.

FRC’s Series 65 Exam Preparation course covers private placements, Regulation D and the investors who can take part, and the exam requires no sponsor. The SIE Examination Preparation course introduces exempt offerings, and the Series 7 Exam Preparation course tests them for registered representatives.

Every FRC course can be spread across interest-free monthly payments, so cost is no reason to delay. The thresholds are fixed numbers, which makes this one of the easier topics to turn into marks.

The Income Test

An individual qualifies under the income test if they had income of more than $200,000 in each of the two most recent years. They must also reasonably expect to reach the same level in the current year.

Alternatively, joint income with a spouse or spousal equivalent of more than $300,000 in each of the two most recent years qualifies, again with a reasonable expectation for the current year. A spousal equivalent is a cohabitant in a relationship generally equivalent to a spouse.

The trap is the two-year requirement. A single year of high income, such as from a one-off bonus, does not qualify.

The Net Worth Test

An individual also qualifies with a net worth of more than $1 million, alone or together with a spouse or spousal equivalent. The value of the person’s primary residence is excluded from the calculation.

Mortgage debt on the primary residence is also excluded, up to the home’s value. If the mortgage is larger than the home’s value, the excess counts as a liability, and debt added to the home in the 60 days before the investment generally counts too, unless it was used to buy the home.

The primary residence exclusion is one of the most tested points on the exams. Any answer that includes the value of the client’s home in the net worth test is wrong.

Professional Licenses and Knowledgeable Employees

In 2020, the SEC expanded the definition to include individuals holding certain professional certifications in good standing, regardless of income or wealth. The qualifying licenses are the Series 7, the Series 65 and the Series 82.

The SEC reasoned that people who have passed these exams have shown the knowledge needed to evaluate private investments. The license must be in good standing, so a lapsed registration does not qualify.

The 2020 changes also added “knowledgeable employees” of private funds, such as investment professionals at a hedge fund, for investments in that fund. Directors, executive officers and general partners of the issuer selling the securities were already accredited for that issuer’s offerings.

Which Entities Qualify

Many institutions qualify automatically, including banks, broker-dealers, registered investment advisers, insurance companies, registered investment companies and business development companies. State-registered advisers were added in 2020.

Corporations, partnerships, limited liability companies, trusts and nonprofit organizations generally qualify if they have total assets of more than $5 million and were not formed to acquire the securities being offered. Family offices with more than $5 million in assets under management, and their family clients, also qualify.

An entity in which every equity owner is an accredited investor qualifies as well. That lets small investment vehicles owned entirely by accredited investors take part.

How the Definition Links to Regulation D

Regulation D offers three main exemptions. Rule 504 allows offerings of up to $10 million in a 12-month period with no accredited investor requirement, subject to state law.

Rule 506(b) allows unlimited amounts, sold to any number of accredited investors and up to 35 non-accredited investors who are financially sophisticated, but without general solicitation. If any non-accredited investors take part, the issuer must give them disclosure similar to a registered offering.

Rule 506(c) allows general solicitation, such as advertising, but every buyer must be accredited and the issuer must take reasonable steps to verify their status. FRC’s guide to Regulation D Rule 504 vs Rule 506 covers each exemption in full.

How Issuers Verify Accredited Status

In a Rule 506(b) offering, an issuer can generally rely on a reasonable belief that an investor is accredited, often based on a questionnaire. In a Rule 506(c) offering, it must take reasonable steps to verify.

The SEC’s rule lists methods that count as reasonable steps, such as reviewing tax returns for the income test, bank and brokerage statements plus a credit report for the net worth test, or a written confirmation from a registered broker-dealer, registered investment adviser, attorney or certified public accountant. Issuers can also use other reasonable methods.

In 2025, SEC staff said that a high minimum investment, such as $200,000 for individuals, together with written representations from the investor, can also be a reasonable verification step. The aim is to confirm status without demanding excessive personal documents.

Accredited Investor, Qualified Client and Qualified Purchaser

Three similar-sounding terms come up on the exams, and each has a different purpose. An accredited investor can invest in many private offerings under Regulation D.

A qualified client can be charged a performance-based fee by an investment adviser, and the thresholds are higher, set by asset or net worth levels that the SEC adjusts for inflation every five years. A qualified purchaser can invest in private funds relying on Section 3(c)(7) of the Investment Company Act, and an individual generally needs at least $5 million in investments.

The trap is mixing up which status unlocks which product. Accredited investor status alone does not allow an adviser to charge a performance fee, and it does not qualify an individual for a 3(c)(7) fund.

How the Thresholds Have Changed

The income and net worth thresholds were set when Regulation D was adopted in 1982 and have never been adjusted for inflation. As incomes and asset values have risen, a much larger share of households now qualifies than when the rule was written.

The main change to the net worth test came from the Dodd-Frank Act in 2010, which removed the primary residence from the calculation. The 2020 amendments then added the professional license route, knowledgeable employees, spousal equivalents and new types of entity.

What Accredited Status Does Not Mean

Accredited status is a legal gateway, not a suitability judgment. It decides who may invest in certain private offerings, not whether a particular investment fits a particular client.

Private offerings remain subject to the antifraud rules, so an issuer that misleads accredited investors can still face liability. FRC’s guide to what Rule 10b-5 is explains how that rule reaches every securities transaction.

Worked Example: The Income Test

A married couple earned $320,000 and $310,000 in joint income over the last two years and expect a similar amount this year. Individually, each spouse earned less than $200,000.

Neither spouse qualifies alone under the $200,000 individual test. Together, however, their joint income exceeds $300,000 in both years, so they qualify under the joint income test.

If their joint income had been $350,000 last year but only $250,000 the year before, they would not qualify on income, because the test must be met in each of the two most recent years.

Worked Example: The Net Worth Test

A client has total assets of $1.6 million, including a primary residence worth $700,000 with a $400,000 mortgage. She also has $50,000 of other debts.

The home and the mortgage are both excluded, because the mortgage is less than the home’s value. Her net worth for the test is $1.6 million minus $700,000, minus $50,000, which is $850,000.

She is not an accredited investor under the net worth test, even though her net worth including the home would be $1.15 million. That is the primary residence exclusion at work, and it is the classic exam trap.

Worked Example: The License Test

A 28-year-old investment adviser representative earns $90,000 a year and has a net worth of $150,000. He holds the Series 65 in good standing.

He does not meet the income or net worth tests. He is still an accredited investor, because the Series 65 is one of the professional licenses that qualify on their own.

If he left the industry and his registration lapsed, he would no longer qualify under the license test. He would then need to meet the income or net worth tests instead.

Client Scenario: A Private Placement Opportunity

An investment adviser representative’s client, a retired teacher with a $900,000 portfolio and a paid-off $500,000 home, wants to invest in a private real estate fund offered under Rule 506(c). Her pension income is $70,000 a year.

Her net worth excluding the home is $900,000, so she is not accredited, and a Rule 506(c) offering can only be sold to accredited investors. The representative cannot help her invest in it.

Even if she were accredited, the representative would still need to consider whether an illiquid private fund was suitable for a retiree living on a fixed income. Accredited status determines who may invest, not whether the investment is right for them.

The Exam Traps

The first trap is including the primary residence in the net worth test. The home’s value is always excluded.

The second trap is the income test’s two-year requirement, and the third is forgetting that the Series 7, 65 and 82 licenses qualify on their own. The fourth is confusing accredited investors with qualified clients and qualified purchasers.

For more traps like these, see FRC’s guide to Series 65 exam traps and common mistakes. The Series 65 investment vehicles questions guide covers private funds and other products in more depth.

A Memory Aid

Remember “200, 300, 1 million, minus the home.” That covers the individual income, joint income and net worth tests, with the primary residence excluded.

For the license route, remember “7, 65, 82.” Any of those three, in good standing, qualifies an individual on its own.

Practice Questions

Question one: a single investor earned $210,000 last year and $190,000 the year before. Is she accredited under the income test? No, because she did not exceed $200,000 in each of the last two years.

Question two: a client has a net worth of $1.3 million, including a home worth $500,000 with no mortgage. Is he accredited under the net worth test? No, because his net worth excluding the home is $800,000.

Question three: which three professional licenses qualify an individual as an accredited investor? The Series 7, the Series 65 and the Series 82, held in good standing.

Question four: in a Rule 506(c) offering, can the issuer sell to non-accredited investors? No, every buyer must be accredited and the issuer must take reasonable steps to verify.

Question five: does accredited investor status allow an adviser to charge the client a performance-based fee? No, that requires qualified client status, which has higher thresholds.

Related Questions

Accredited investors connect closely to the rules on private placements and restricted stock. FRC’s guide to control stock vs restricted stock covers how securities bought in private offerings can later be resold.

Get Exam-Ready

Accredited investor questions are among the most dependable marks on the exam once the thresholds and the primary residence exclusion are clear. The FRC Series 65 playlist linked at the top of this guide covers every exam section, with the traps to look out for in each one.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes covering the FINRA and SEC rules you are tested on, so you can open any term and go deeper whenever a question catches you out.

Study With FRC

FRC’s programs and memberships are open to everyone. Whether you are preparing for the Series 65, the SIE, the Series 7 or all three, structured exam preparation turns topics like accredited investors into marks you can rely on.

FRC’s Professional Membership adds verified progress and a Digital Profile, so when you apply for roles, employers can see your exam progress and the knowledge you are building, not just read about it on a resume.

Your Next Step

An accredited investor is a person or entity the SEC allows to invest in private offerings, based on income of more than $200,000, or $300,000 jointly, a net worth of more than $1 million excluding the primary residence, a Series 7, 65 or 82 license, or entity tests such as $5 million in assets.

Remember “200, 300, 1 million, minus the home” and “7, 65, 82,” and you will be ready for every version of this question the exam can ask.