Qualified purchaser

What is a qualified purchaser?

A qualified purchaser is an individual or entity that meets the sophistication and financial requirements to invest in certain securities and private funds—including venture capital funds, private equity funds, and hedge funds.

As qualified purchasers must meet high investment thresholds, they are presumed to have a sophisticated understanding of financial markets and the ability to assess and manage high-risk investments. This allows them to participate in investment opportunities that are typically not available to the general public or accredited investors.

For instance, a qualified purchaser can typically invest in funds that are exempt from the Securities and Exchange Commission (SEC) registration, under both Sections 3(c)(1) and 3(c)(7) of the Investment Company Act. However, an accredited investor would only be allowed to invest in a Section 3(c)(1) fund. 

Qualified purchaser requirements

The qualified purchaser requirements are defined by the SEC under Section 2(a)(51) of the Investment Company Act of 1940. The criteria to be classified as a qualified purchaser can differ depending on whether you’re an individual investor, trust, family office, or investment manager. The requirements also vary depending on the type of security or investment product being purchased.

Specific thresholds must be met to qualify:

• Individuals and married couples: An individual or married couple is a qualified purchaser if they have $5 million or more in investments or joint investments, excluding their primary residence or business property.

• Family offices: A family office can be a qualified purchaser if it has at least $5 million in investments.

• Investment managers: An investment manager qualifies if they manage at least $25 million in investments for other qualified purchasers.

• Trusts: A trust whose trustee and all settlors are qualified purchasers, or certain types of trusts that have at least $5 million in investments, would also qualify.

Qualified purchaser vs. accredited investor

Although qualified purchasers and accredited investors can both invest in certain private funds and companies, they are not the same. The criteria for qualified purchasers is based on the amount of money held in investments, whereas accredited investors must reach specific income or net worth thresholds.

Qualified purchaser requirements for owned or managed investments

A qualified purchaser must satisfy a higher bar. These qualified purchase categories can range from $5 million to $100+ million in owned or managed investments. These are the specific requirements:

• An individual with >$5M

• A family or estate planning entity with >$5M

• An investment manager with >$25M 

• A qualified institutional buyer under Rule 144A with >$100M 

Accredited investor requirements for net worth and annual income

An accredited investor, on the other hand, must have a net worth of at least $1 million or earn at least $200,000 annually, unless they meet other sophistication requirements. These are the specific requirements:

• Net worth: > $1M, not including primary residence (individual or joint with spouse or partner)

• Annual income*: > $200k (individual); > $300k (jointly with spouse or spousal equivalent)

*In each case for at least the past two years and reasonably expects the same in the current year.

3(c)(1) & 3(c)(7) funds

Accredited investors are typically not allowed to invest in 3(c)(7) funds, which are limited to qualified purchasers but can have up to 2,000 qualified purchaser investors. On the other hand, 3(c)(1) funds can only have up to 100 beneficial owners (i.e. ultimate owners when looking through to the ownership of its investors).