Understanding the Revised Accredited Investor Definition

Which Investors Are Savvy Enough for the Private Market?

“It takes money to make money,” as the saying goes.

Long ago, regulators concluded that high-net-worth individuals and institutions with millions of dollars in assets are financially sophisticated enough to understand the complexity of unregistered securities, such as private equity, venture capital, and hedge funds. Therefore, they limited these securities to  ‘accredited investors.’

The philosophy was based on the desire to protect smaller investors who would be badly hurt if they took a big hit from an investment gone wrong.

Who Qualifies as an Accredited Investor?

According to the SEC, an accredited investor must have:

• A net worth over $1 million, either independently or jointly with a spouse (not including the value of one’s primary residence).
• Previously earned an annual income of $200,000 (or $300,000 including a spouse) for the past two years, with the same expectation for the current year.

Since 2020, the definition of accredited investor has expanded to also include:

• A person who holds in good standing a professional certification, designation, or other credential designated by the SEC, i.e., a Licensed General Securities Representative (Series 7), Licensed Investment Advisor Representative (Series 65), or Licensed Private Securities Offerings Representative (Series 82).
• Knowledgeable employees of certain private funds, as defined in Rule 3c-5(a)(4) under the Investment Company Act of 1940.
• Family clients of family offices within the definition of “family client” in rule 202(a)(11)(G)–1 under the Investment Advisers Act of 1940.
• Various entities, including investment advisors, rural business investment companies, limited liability companies, and family offices.

In the years before the 2020 SEC amendments, only 13% of American households fell under the accredited investor definition, and even fewer actually invested in exempt offerings.

This excluded many individuals from valuable investment opportunities and limited new ventures to smaller investor pools. The narrow definition assumed that winning the lottery or inheriting a family fortune was enough to be a ‘sophisticated’ investor.

Broadening the definition thus expanded the long-held standards regarding which investors could be expected to have enough knowledge and expertise to participate in private capital markets without risking their financial security.

Accumulated Wealth Doesn’t Guarantee Financial Sophistication Especially as We Age

Being wealthy doesn’t make you more financially sophisticated, and this is especially true for older adults.

A recent 2025 study by Wharton found that our financial literacy declines at an “alarming rate” as we age. Across a span of 12 years, study participants experienced a 1% drop in performance for financial literacy every year.

This finding is particularly worrisome when we consider that 73% of the nation’s wealth is currently held by adults over the age of 55.

Many of these individuals also fall into the original accredited investor definition. This reveals the flaw in basing financial savviness on income or net worth alone.

A 2019 report titled “The Unsophisticated Sophisticated: Old Age and the Accredited Investors Definition” set out to measure financial ‘sophistication’ across various ages.

The researchers wanted to know whether older, accredited households with significant accumulated savings are smarter when it comes to assessing potential investments than younger, non-accredited respondents.

They found that accredited households aged 80 and older were more than 80% less likely to have high financial literacy scores than non-accredited investors aged 60-64. In fact, respondents with less than a high school degree were more likely to have a high financial literacy score than older, accredited respondents.

Accredited investors were more financially literate than non-accredited investors within each age group. However, older accredited investors actually had significantly lower financial literacy scores than younger, non-accredited investors.

Can Anyone Be an Accredited Investor?

Data may show that younger, less sophisticated investors can outperform some accredited investors on financial literacy scores. So does that mean private offerings are for everyone?

Expanding the definition has allowed more investors to participate and increased how companies can raise funds. Yet not everyone agrees. Here are some reasons why naysayers are against expanding the accredited investor definition to unsophisticated investors.

1. Exempt Offerings Are Riskier and Less Transparent

Private offerings are not registered or regulated by the SEC.  Funds thus get away with more risky investing methods. Some funds invest in derivatives and distressed debt offerings, which are exceptionally risky. Venture capital funds invest in startups, which statistics show are more likely to fail than not.

An accredited investor with more money in the bank is better equipped to take on this level of risk and withstand a loss. With unregistered securities, there is also less public information available to potential investors. Private equity and other unregistered securities require substantially more research to find a skilled fund sponsor or to gauge fund performance. How these funds report their returns is unregulated, and some fund managers have been known to overstate fund performance in the past. Unsophisticated investors can easily be duped into a poor investment or a scam.

2. Exempt Offerings Are Expensive

As unregistered securities have the potential for higher returns, skilled fund managers are paid very well. This means higher management fees and, often, a distribution waterfall that favors the fund over the investor.

In addition, unregistered securities tend to have higher contribution minimums than registered securities. Hedge funds, for example, may require more than $5 million upfront from each pooled investor. This creates a barrier for the average investor, and the average American, who must look elsewhere (e.g., crowdfunding investments or mutual funds).

3. Exempt Offerings Are Illiquid

Private equity investments are not liquid investments, making them disadvantageous for the average retirement plan. While stocks, bonds, and mutual funds can be bought and sold relatively easily, a private equity investment requires several years of fundraising and management to successfully sell the operating company. In the meantime, that investment is on hold.

Some experts caution against using private equity for 401(k) plans, as retirement investors often have greater reason to count on the daily liquidity of employer-sponsored plans.

What Does the Future Hold for Non-Accredited Investors?

Since the 2020 expansion of the accredited investor definition, a broader pool of investors has become eligible to invest in private capital markets and startups. Congress is currently considering a bill that may further modify the definition to include individuals who qualify through education and testing.

Clearly, this discussion isn’t over. The door is left open for what constitutes an ‘accredited investor’ to evolve and grow.

We think you’ll also like:

1. Alternative Assets and the ‘Average’ Accredited Investor Installment #1
2. Small Business Investing: Taking Stock in Main Street
3. Key Private Equity Considerations for Would-Be Investors

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Purchasing Assets in Bankruptcy
2. Business Borrowing Basics / Basic Concepts Applicable to All Borrowers & Lenders
3. The Nuts and Bolts of a Chapter 11 Plan

This is an updated version of an article published on August 6, 2015 and updated on December 26, 2023. This article was most recently updated by the Financial Poise Editors.]

©2025. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.