For a startup raising under Regulation D, two questions come first: does each investor qualify, and what must the company do to establish that qualification? Rule 506(b) uses a reasonable-belief standard. Rule 506(c) also requires reasonable steps to verify accredited status.
A new salary, an impressive title, or a large check does not by itself answer either question.
Who qualifies under Rule 501(a)?
An investor needs one applicable qualification route, not every route. The governing definition is Rule 501(a); the SEC’s overview provides a useful starting point.
| Individual route | Requirement |
|---|---|
| Individual income | Income exceeding $200,000 in each of the two most recent years, with a reasonable expectation of reaching that level in the current year. |
| Joint income | Income exceeding $300,000 together with a spouse or spousal equivalent in each of the two most recent years, with the same current-year expectation. Joint tax filing is not required. |
| Net worth | More than $1 million, individually or jointly with a spouse or spousal equivalent, at the time of sale; apply the primary-residence exclusions and debt exceptions below. |
| Credentials | A Series 7, 65, or 82 license held in good standing. |
| Issuer role | A director, executive officer, or general partner of the issuer, or of a general partner of the issuer. The qualification is tied to that issuer. |
| Private-fund employee | A knowledgeable employee as defined by the applicable Investment Company Act rule, for an investment in that private fund. Ordinary employment by a private fund is not enough: the definition covers certain senior persons and certain employees who participate in the fund’s investment activities as part of their regular functions, with a 12-month requirement on that employee route. Employment at a fund does not confer universal accredited status for other issuers’ offerings. |
A raise does not erase the two-year test
Suppose an investor earned $150,000 in one of the two preceding years and has just accepted a $300,000 job. The new contract may support the current-year expectation, but it does not satisfy the missing historical year under the individual-income route. Check another route, such as qualifying joint income, net worth, or credentials.
The threshold is tested in each historical year; it is not a two-year average. A current change in employment requires a realistic assessment of expected income, including other income sources.
Calculate net worth without the primary residence
Exclude the primary residence as an asset. Generally exclude debt secured by that residence up to its estimated fair market value. Include the underwater portion as a liability. Also include an increase in home-secured debt during the 60 days before the securities purchase, unless it resulted from acquiring the residence.
Example: $1.2 million in investment assets and $100,000 of counted liabilities gives $1.1 million of qualifying net worth. A home worth $800,000 with a longstanding $500,000 mortgage adds nothing to that calculation. Other assets and liabilities still need to be identified; liquid assets alone are not net worth.
Spouses and spousal equivalents
Joint income and joint net worth can count regardless of whether the couple files a joint return. A spousal equivalent is a cohabitant occupying a relationship generally equivalent to that of a spouse. Joint net worth does not require jointly titled assets or a joint purchase of the securities.
Entities, trusts, and family offices
Identify the purchaser before applying the test. An LLC, corporation, partnership, Section 501(c)(3) organization, or Massachusetts or similar business trust may qualify under Rule 501(a)(3) if it was not formed for the specific purpose of acquiring the offered securities and has total assets exceeding $5 million. Rule 501(a)(9) separately covers an entity of a type not otherwise listed in the specified Rule 501(a) categories if it was not formed for that purpose and owns investments exceeding $5 million. An entity may also qualify under Rule 501(a)(8) if all of its equity owners are accredited investors. Apply the actual subsection to the entity type.
A trust can qualify under Rule 501(a)(7) if it has more than $5 million in total assets, was not formed for the specific acquisition, and its purchase is directed by a sophisticated person. Do not assume that a trustee’s personal wealth qualifies the trust.
Family offices and family clients have their own conditions under Rule 501(a)(12)–(13), including more than $5 million in family-office assets under management, a purpose limitation, and investment direction by a person with the required knowledge and experience. Banks, registered advisers, and other institutions may qualify under separate categories.
Qualification and verification are different jobs
| Question | Rule 506(b) | Rule 506(c) |
|---|---|---|
| General solicitation | Prohibited | Permitted |
| Accredited purchasers | Purchaser must fall within a Rule 501(a) category or the issuer must reasonably believe at the time of sale that the purchaser does. A questionnaire may support reasonable belief; it is not an automatic safe harbor. | All purchasers must be accredited, and the issuer must take reasonable steps to verify |
| Non-accredited purchasers | Limited allowance, with sophistication, purchaser-counting, and Rule 502(b) disclosure requirements | Not permitted |
| Questionnaire alone | May support reasonable belief when the surrounding facts support reliance | A bare checkbox ordinarily does not satisfy verification |
Under Rule 506(b), the non-accredited purchaser limit is 35 in any 90-calendar-day period, applying Rule 501(e)’s counting provisions and the offering/integration rules. Each non-accredited purchaser must have the required sophistication, alone or with a purchaser representative, or the issuer must reasonably believe that immediately before sale. An all-accredited offering avoids those additional purchaser and prescribed disclosure requirements, but antifraud obligations remain.
Rule 506(c)’s verification methods
The rule provides nonexclusive methods for natural persons. Other reasonable methods can work; these are not the only permitted routes. Contrary knowledge prevents reliance on the listed safe harbors.
- Income: review IRS forms reporting income for the two most recent years and obtain a written current-year expectation.
- Net worth: review qualifying asset documentation and a consumer report from at least one nationwide consumer reporting agency, both dated within the prior three months. Obtain a written representation that all liabilities necessary to determine net worth have been disclosed.
- Professional confirmation: obtain written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney in good standing, or CPA in good standing that the professional took reasonable verification steps within the prior three months and determined the purchaser was accredited.
- Grandfathered investors: the narrow route for an accredited purchaser in the same issuer’s Rule 506(b) offering before September 23, 2013, who still holds those securities, uses a certification at sale.
- Previously verified investors: where the issuer previously took reasonable verification steps under the rule, a written representation at sale can satisfy verification for five years from that verification, absent contrary information. A prior Rule 506(b) purchase alone is not prior verification.
The high-minimum-investment route
The SEC staff’s March 12, 2025 Latham & Watkins letter addresses verification through a high minimum investment together with specified representations and conditions. Natural persons must represent qualification under the net-worth or income categories; entities must represent qualification under one of the categories covered by the letter. The minimum investment must not be financed by a third party specifically for that investment, and the issuer must have no contrary actual knowledge. Additional owner-level conditions apply to entities accredited solely through their owners.
This is a verification approach, not a new definition of accredited investor. A person does not become accredited merely by investing $200,000. Review the letter’s facts and conditions before building this route into subscription documents.
A closing file that answers the question
- Identify the legal purchaser and the subsection under which it qualifies.
- Collect an accurate questionnaire and follow up on inconsistent answers.
- For Rule 506(c), record the verification method, supporting documents or professional confirmation, and relevant dates.
- Resolve non-accredited participation and disclosure obligations before accepting funds.
- Retain the record securely and reassess eligibility at each sale; track any permitted verification reuse separately.
A verification service can help administer the process. Choose it based on the actual method and documentation it delivers. The issuer still needs a complete exemption analysis.
Frequently asked questions
Can a new high-paying job make me accredited?
It can support expected income for the current year. It cannot replace either of the two required historical years under the income test. Another qualification route may apply.
Do spouses have to file jointly?
No. Joint income and joint net worth can count with a spouse or spousal equivalent regardless of tax filing status.
Does accredited status last forever?
No. Qualification is assessed at the sale. Rule 506(c)’s five-year verification-reuse provision has separate conditions and does not permanently confer accredited status.
Can my LLC use my accredited status?
An LLC whose equity owners are all accredited can qualify under Rule 501(a)(8). Otherwise, examine the other entity categories; one wealthy owner does not automatically qualify a multi-owner entity.
Related reading
Before your next closing, make sure the investor file supports the exemption the company is claiming.
This post is for educational purposes and is not legal or tax advice.
