Qualified Purchaser vs Accredited Investor – What You Need to Know
A number of regulatory classifications govern which investors can access certain investment opportunities. Two of the most common classifications in this regard are qualified purchasers and accredited investors.
Individuals who fall into these classifications are allowed to participate in certain offerings that aren’t registered with the SEC. In general, this refers to shares that are not sold in markets open to the public and instead are issued by privately held companies and startups. As you might imagine, the risk associated with such investments can be rather significant. So too, however, is the potential reward.
While qualified purchasers and accredited investors are both able to invest in certain private investment opportunities, there are differences in the two classifications. There are also differences in the specific investments that each can make. With that in mind, let’s take a look at qualified purchasers vs. accredited investors and outline what you need to know about each of them.
What is a Qualified Purchaser?
In the simplest terms, qualified purchaser status is afforded a person or a family business holding an investment portfolio with a value of $5 million or more. Elements of the portfolio in question may not include a primary residence, nor property used in the normal conduct of business.
Alternatively, a single person can operate on behalf of a consortium of individuals who hold qualified purchaser status — and the capability of investing $25 million or more — with the same property-related exclusions noted above.
Further, a trust can hold qualified purchaser status if it has a portfolio with a value of at least $5 million and is owned by at least two close members of a familial unit. The owners can include spouses and siblings, as well as children of the lead investor and the spouses of those offspring.
Qualified Purchasers and The Investment Company Act of 1940
Privately held capital firms are considered investment companies under the tenets of the 1940 Investment Company Act (“the ‘40 Act”) when they make — or propose to make — public offerings of which qualified purchasers are not among the sole holders of its outstanding securities.
The ‘40 Act considers qualified purchasers to be those who meet the criteria outlined above. This, in turn, means funds selling only to qualified purchasers are exempt from regulation under the ’40 Act. In other words, investment companies are not required to adhere to certain SEC requirements when they choose to work exclusively with qualified purchasers.
Under Section 2(a)(51) of the Investment Company Act, a “qualified purchaser” is:
- A person holding $5 million or more in investments
- A company holding $5 million or in investments owned by close family members
- A trust, albeit not one formed specifically for the investment in question, holding $5 million or more in investments
- An investment manager with $25 million or more under management
- A company holding $25 million or more in investments
Determining Qualified Purchaser Status
Unregistered securities issuers are tasked with confirming that investors meet the requirements to be considered qualified investors. As an example, in a situation involving a startup investment through a venture fund, the private equity firm is considered the general partner (GP), while investors are looked upon as limited partners (LPs).
While the actual steps involved can vary according to the nature of the unregistered securities on offer, typical LP documentation that GPs must consider includes tax returns, W-2s, bank statements and brokerage statements for asset-based accreditation. Proof of accreditation, which can be obtained through a variety of methods according to the SEC’s new definitions, must be provided by a potential LP as well.
Investments suitable for the purposes of serving as a foundation for the conferring of qualified purchaser status include the following:
- Securities such as stocks, bonds and notes — aside from those of a third-party issuer currently held under common control with the entity seeking qualified purchaser status.
- Real estate held exclusively for investment purposes — primary residences and/or property used in the everyday conduct of the entity’s business cannot be considered.
- Commodity futures contracts, options on commodity futures and options on physical commodities traded on a contract market or board of trade held for investment purposes.
- Stockpiles of physical commodities such as precious metals, held specifically for the purposes of investment, as long as futures contracts in these commodities are traded on a contract market or a board of trade.
- Swaps and similar individually negotiated financial instruments — aside from securities — held specifically for the purpose of investment.
- Binding capital commitments of an investment company or commodity pool.
- Liquid assets held exclusively for the purpose of investment. Cash employed to meet everyday expenses by the investor is exempt from consideration. So too is the day-to-day working capital of a company.
Benefits of Qualified Purchaser Status
Among the advantages of holding qualified purchaser status is the ability to participate in a broader range of investment opportunities than is open to accredited investors, as you will see below.
What is an Accredited Investor?
Under Rule 501(a) of the Securities Act of 1933, only individuals with a net worth (or a joint net worth in the case of a married couple) in excess of one million dollars (less the value of their primary home) can be considered accredited investors. However, instead of that net worth, an individual must be capable of demonstrating an annual individual income of $200K or greater. That income must exceed $300K annually if joint status is sought.
Further, this income level must be demonstrable for each of the two years immediately prior to seeking accreditation. The investor(s) could also demonstrate that it will be maintained in the current year.
Possession of a FINRA Series 7, Series 65, or Series 82 financial securities license is another way to obtain accreditation outside of net worth requirements.
Attaining accredited investor status through a trust is also possible, providing said trust holds assets in excess of $5 million and was not formed specifically to invest in one particular fund. A person with a demonstrable ability to evaluate the upsides and downsides of a given investment (also known as a sophisticated investor) must guide the trust. The idea here is to protect individual investors by ensuring they have the expertise required to adequately evaluate an investment — along with more than enough money in reserve to weather the situation if an investment does not perform as anticipated.
Benefits of Accredited Investor Status
Accredited investors invest in funds with fairly strict limits regarding the size of the investor pool. Known as 3(c)(1) funds, they are typically limited to 100 accredited investors. This number can be expanded to 250 investors if the size of the fund is $10 million or less.
Qualified Purchaser vs Accredited Investor
It can be said all qualified purchasers are likely to be accredited investors, but accredited investors are not necessarily qualified purchasers. This is because the threshold to attain qualified purchaser status is positioned beyond that of the accredited investor.
After all, qualified purchasers must be capable of investing $5 million or more on their own, which means they will likely meet the $1 million net worth requirement to be considered an accredited investor. Granted, the two don’t always go hand in hand, but they do align more often than not.
Thus, in addition to the 3(c)(1) funds open to accredited investors, qualified purchasers have access to 3(c)(7) funds. These funds can accommodate as many as 2,000 qualified purchasers, compared to the much lower limits allowed by 3(c) (1) funds.
Why This Matters
The SEC is serious about protecting small investors, both from themselves and from slick market operators. Limiting participation in the most risky investment categories to people who have the experience and financial wherewithal to absorb the aftermath of a large investment gone wrong helps insulate the general public from such occurrences.
Keep in mind, unregulated investments typically have no reporting or disclosure requirements and they tend to be illiquid in nature. Those who don’t have the means to deal with losses of this magnitude, nor the experience and sophistication to understand them, are thought to be better off excluded from them.
However, this also eliminates many people from sharing the upside opportunities that investments of this nature offer. Still though, given the events leading up to some of the previous recessions, it is believed the general public is better off insulated from the temptation these offerings can present. Thus, in order to attain qualified purchaser or accredited investor status, one must be an experienced investor with the means to absorb potentially significant losses.
Change is Afoot
On the other hand, regulators have come under intense pressure of late to relax some of these standards to broaden the pool of individuals permitted to invest in opportunities such as pre-IPO startups. The fairness of limiting the possibility of realizing the potentially significant yields these investments can provide to those who are already well off is increasingly coming into question.
Meanwhile, Yieldstreet already opens a number of investment strategies that were formerly available only to institutional investors and the top one percent of earners to all investors. The company can help you capitalize on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of unique alternative investments. Moreover, you can get started with a relatively small amount of capital. You’ll find investment opportunities across a broad range of asset classes offering a variety of yields and durations with minimum investments as low as $5,000.
Come see how Yieldstreet can help you achieve financial independence today.
What's Yieldstreet?
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.
2 Represents an average net realized internal rate of return (IRR) with respect to all matured investments in your portfolio, utilizing the effective dates and amounts to and from the investments and net of management fees and all other expenses charged to the investments. Past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. All securities involve risk and may result in significant losses, including the loss of principal invested.[read more]