Accredited Investor Rules: What Startup Employees Should Know

Startup equity is already confusing. But throw in “accredited investor” rules, and suddenly you're navigating SEC regulations just to understand whether you can buy or sell shares in your own company.

Let’s make this simple. If you’re working at a high-growth startup, planning for a liquidity event, or evaluating a secondary sale, you’ll want to know exactly what accredited investor status means, how it works, and whether it applies to you.

Here’s the full breakdown.

What is an accredited investor?

An accredited investor is a person or entity who is allowed to buy and sell securities that aren’t registered with the SEC, like shares in private companies, hedge funds, or venture capital funds.

That status isn’t about prestige. It’s a legal classification that determines whether someone is financially sophisticated or wealthy enough to participate in higher-risk, less-regulated investments and bear the downside if things go south.

You don’t get a certificate. You’re either accredited based on the SEC’s financial or professional criteria, or you’re not. And if you're not, you may be legally excluded from investing in certain opportunities, even if you're otherwise involved in the startup ecosystem.

Why do these rules exist?

In the public markets, companies are required to disclose a ton of information. You can dig into 10-Ks, earnings calls, and analyst reports before buying a single share. Public companies are held to a standard of transparency.

Private markets? Not so much.

Private companies don’t need to provide the same disclosures. They can raise money via private placements, selling equity directly to investors without registering the securities with the SEC. But to do that, they can only sell to people who meet the accredited investor definition (with limited exceptions).

The idea is this: if you’re going to play in a riskier sandbox—no disclosures, no liquidity, no safety net, you need to be able to understand the risk or afford the loss.

Accredited investor requirements

The SEC defines accredited investors in Rule 501 of Regulation D. The criteria differ slightly for individuals vs institutions, but they boil down to three broad categories:

1. Income
2. Net worth
3. Professional qualifications

Let’s walk through them.

For individuals

You qualify as an accredited investor if you meet any of the following:

1. Income test

• $200,000 or more in income in each of the last two years (as an individual), with a reasonable expectation of the same this year
• Or $300,000 or more in combined income with a spouse or “spousal equivalent”

Note: You can’t mix and match individual income from one year and joint income from the next. It has to be consistent.

2. Net worth test

• $1 million in net worth, excluding your primary residence
• Can be individual or joint with a spouse

Assets like 401(k)s, IRAs, brokerage accounts, and even crypto can count, just not your house.

3. Professional credentials

• Hold a FINRA Series 7, Series 65, or Series 82 license and be in good standing
• Or be a “knowledgeable employee” of a private fund (e.g., analysts or partners at VC firms)

4. Executive role at issuer

• You’re an executive officer, director, or general partner of the company offering the investment
• (Yes, this applies if your startup is running a secondary or doing a private placement)
  
  

For institutions

Entities can also be accredited, based on their type and assets under management.

You qualify if you are:

• A corporation, partnership, trust, or LLC with over $5 million in assets
• A family office with $5 million+ in AUM
• A registered investment advisor (RIA), bank, insurance company, or broker-dealer
• An entity in which all equity owners are accredited investors

Important catch: if an LLC is formed just to buy one specific investment, it can’t qualify, regardless of assets.

What about non-accredited investors?

If you don’t meet the criteria above, you’re considered a non-accredited investor. That doesn’t mean you’re not allowed to invest; it just limits your access to certain private deals.

You can still:

• Buy public stocks, ETFs, and mutual funds
• Invest in real estate, bonds, and some crowdfunding deals
• Hold startup equity you’ve earned as an employee

But you typically can’t buy private shares in a startup unless:

• The offering allows non-accredited investors under Regulation CF or A
• You’re participating through a qualified fund manager or investment platform with proper exemptions
• You’re already an employee and receiving equity as compensation (which is allowed)

For most startup employees, earning equity and selling their common stock in tenders is fine. However, buying and selling other company’s stock on the secondary market may require accredited investor status.

How do you prove you’re accredited?

There’s no government-issued “accreditation badge.” Yes, more PDFs—sorry in advance, but the SEC loves its paperwork.

Instead, the burden falls on the company (or investment platform) offering the private placement to verify that you qualify. That usually means:

• Filling out a questionnaire
• Providing tax returns, W-2s, or brokerage statements
• Getting a verification letter from a CPA, attorney, or RIA
• In some cases, undergoing a credit check

If you’re investing through a fund or platform like AngelList, they often handle this process for you behind the scenes.

Recent updates to the definition

For decades, the accredited investor rules were based purely on income or net worth, and those thresholds haven’t changed since the 1980s.

In 2020, the SEC finally expanded the definition to allow more access based on financial knowledge, not just wealth. That included:

• Financial professionals with Series 7, 65, or 82 licenses
• “Knowledgeable employees” of private funds
• Registered investment advisors (RIAs)

This was a big deal. It recognized that some investors might be sophisticated enough to participate, even if they weren’t millionaires.

And more changes may be coming. The bar may move, but understanding the rules today is your edge tomorrow.

What’s next for accredited investor rules?

The SEC has hinted at raising the income and net worth thresholds to account for inflation. That could mean:

• Fewer individuals qualify under the current $200K/$1M thresholds
• Startup employees who qualify today might not in the future
• A greater emphasis on knowledge-based accreditation, not just wealth

However, some in Congress and the SEC Small Business Advisory Committee have pushed back, arguing that raising the bar could limit investment access for lower-income regions and underrepresented groups.

In 2023, the House passed several bills aimed at:

• Codifying the current thresholds into law
• Expanding knowledge-based accreditation pathways
• Requiring the SEC to create a new “sophistication test” for investors

If passed, that could broaden access to private investments for more people, especially those with financial expertise, even if they’re not ultra-wealthy.

Why it matters to startup employees

You might be thinking: I already have equity. Why does any of this matter to me?

Here’s where accredited investor rules come into play:

• Secondary sales: If your company allows you to sell shares on the secondary market, buyers may need to be accredited. 
• Tender offers: Some participation may be limited to accredited investors
• Angel investing: If you want to start investing in friends’ or former coworkers’ startups, you’ll likely need accreditation
• Liquidity planning: Understanding your status helps you prep for IPOs, buybacks, or private sales

Bottom line? If you’re planning to do anything with your startup equity beyond holding it, these rules apply.

Thinking about selling shares or investing in a secondary?

Prospect helps you project the value of your equity, plan smarter exits, and avoid costly mistakes.

Key myths & mistakes

The accredited investor rules sound technical (and they are), but the biggest risk is misinterpreting them. Here are a few common slip-ups we see from startup employees:

Myth: You need an SEC certificate.
There’s no official “accreditation badge.” You qualify based on meeting the SEC’s criteria. Verification happens deal-by-deal, usually via a form or a few docs, not by applying to a government registry.

Mistake: Mixing individual and joint income years.
If you're applying under the income test, you can’t combine $200K as an individual one year and $300K joint the next. It has to be two consistent years, either solo or combined.

Myth: Exercising options always requires accreditation.
Exercising stock options (ISOs or NSOs) doesn’t require you to be an accredited investor—it’s part of your compensation. But selling those shares later in select scenarios, via a secondary or a tender event under Rule 506(c), often does.

TL;DR

• An accredited investor can buy and sell unregistered securities in private markets
• You qualify by income ($200K+), net worth ($1M+), or financial credentials (Series 7, 65, 82, etc.)
• Institutions can also qualify based on assets or entity type
• These rules protect less-experienced investors from opaque, illiquid, and risky investments
• More changes may be coming, including new tests for financial sophistication

If you’re not sure whether you qualify or what that means for your equity strategy, Prospect can help.

We’ve built tools that work quietly in the background: monitoring your equity, surfacing opportunities, and flagging risks. No SEC jargon required.

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