To legally accept funds under Rule 506(c), you are required to take "reasonable steps" to verify that every single investor meets the SEC's criteria.
The SEC divides accredited investors into Individuals (Natural Persons) and Entities. Here is the exact breakdown of how they qualify.
1. Individuals (Natural Persons)
An individual can qualify through wealth, income, or professional credentials.
The Income Test
- Individual: An annual income exceeding $200,000 in each of the two most recent years.
- Joint (with a spouse or spousal equivalent): A combined annual income exceeding $300,000 in each of the two most recent years.
- The Catch: The investor must also have a "reasonable expectation" of reaching that same income level in the current year.
The Net Worth Test
- The investor must have a net worth exceeding $1,000,000, either individually or jointly with a spouse/spousal equivalent.
- The Primary Residence Rule: The absolute most common point of confusion is how the investor's home is treated. The fair market value of their primary home is excluded entirely from their assets, and the mortgage on that home is excluded from their liabilities.
Exception: If the mortgage is underwater (meaning they owe more than the home is worth), the excess debt does count as a liability and reduces their net worth.
The Professional Credential Test
An individual can qualify regardless of their income or net worth if they hold certain active financial licenses in good standing.
- Series 7 (General Securities Representative)
- Series 65 (Licensed Investment Adviser Representative)
- Series 82 (Private Securities Offerings Representative)
2. Entities (Corporations, LLCs, Trusts, and Funds)
For businesses or trusts investing in your offering, they generally qualify under one of three paths:
The Asset Test
- Any organization (LLC, Corporation, Partnership, 501(c)(3) charity, or Trust) with total assets exceeding $5,000,000 qualifies.
- The Rule: The entity cannot have been formed for the specific purpose of buying into your offering.
The Equity Owner Test
- An entity of any size qualifies if every single individual equity owner of that entity is an accredited investor. For example, if a small family LLC with only $50,000 in assets wants to invest, but it is owned entirely by two individuals who both meet the $200,000 income test, the LLC itself is considered accredited.
Regulated Entities
- Banks, insurance companies, registered investment companies, and business development companies automatically qualify by nature of their regulatory status.
- Family Offices: A family office qualifies if it manages greater than $5,000,000 in assets, was not formed specifically for this investment, and its investments are directed by a person with sufficient financial knowledge.
How to Handle This for a 506(c) Launch
Because you are doing a 506(c) offering, you cannot rely on an investor simply checking a box on a questionnaire. You must proactively verify these numbers.
To keep things simple for yourself, look into utilizing specialized third-party software platforms (like VerifyInvestor or Parallel Markets). They act as a safe-harbor buffer; the investor securely uploads their private tax documents or CPA letters to the platform, and the platform issues you a clean verification certificate. This keeps sensitive financial records out of your inbox while checking your legal compliance box.