A qualified purchaser is defined by the Securities and Exchange Commission (SEC) as an individual or family business with over $5 million in investments, not including a primary residence. A family business would not qualify if its sole function is to invest in a fund.
Other entities might also qualify as a qualified purchaser if certain requirements are met.
- A trust sponsored and managed by qualified purchasers.
- An individual or entity that invests a minimum of $25 million for others or themselves.
- Any entity where all owners are qualified purchasers.
In the above categories, even if the other requirements are met, if the entity was formed with the sole purpose of investing in a fund, it will not meet the criteria of a qualified purchaser.
Investments in a 401(k) count towards the minimum threshold, but only if the plan participant has the ability to make allocations.
Is a Qualified Purchaser Different from an Accredited Investor?
While some use the terms interchangeably, a qualified purchaser and accredited investor are different designations with different requirements and investment eligibility. It is generally harder to qualify as a qualified purchaser than an accredited investor.
Instead of investing thresholds for a qualified purchaser discussed above, an accredited investor is defined using income and net worth. To quality, the requirement is an income of over $200,000 for the past 2 years and a net worth exceeding $1 million. If filing jointly with a spouse the annual income threshold rises to $300,000. An accredited investor can also qualify with proven professional experience or education even if they don’t meet the financial requirements.
Why Would you Need to be a Qualified Purchaser?
Qualified investors have access to higher-risk investment opportunities, including those not sold on the public exchange.
The Investment Company Act of 1940 exempts some funds from registration with the SEC. This exemption is used by hedge funds, private venture capital, and other private funds to escape some of the SEC regulations imposed on investment funds. Investing in these funds requires sophisticated investors as defined by the qualified purchaser and accredited investor designations.
There are two levels of exemptions, a 3(c)(1) exemption for funds with less than 100 accredited investors or qualified purchasers. A 3(c)(7) exemption is for private investment funds with up to 1,999 qualified purchasers. The wealth standard for investors in a 3(c)(7)fund is higher, and participants must be qualified purchasers.
It is the responsibility of the private investment fund to verify that participants are either accredited investors or qualified purchasers.