What You Need to Know About Qualified Purchasers
In order to protect investors and maintain fair and equitable financial markets, the Securities and Exchange Commission (SEC) established regulatory classifications to govern who can and cannot access certain investment products. These classifications are often for more complex or riskier investments to ensure that investors have the capital and the sophistication to take on the product.
“Qualified purchaser” is one common classification in this regard. Individuals who fall into this classification are allowed to participate in particular offerings that are not registered with the SEC. If an investment is not registered with the SEC, this means the shares are not sold in public markets but are issued by privately held companies.
For example, private funds are excluded from registration as investment firms if they do not issue shares to the public and one of the two additional conditions is met. The fund must be held by no more than 100 persons, or it must be owned only by “qualified purchasers,” in order to qualify.
What Does It Mean To Be A Qualified Purchaser?
Qualified purchaser status is granted to an individual or an entity that holds an investment portfolio worth $5 million or more. The value of a primary residence or a commercial property are not to be included in the valuation of the portfolio. The definition of a qualified purchaser is not dependent on net wealth or earnings, only on investment holdings.
Additionally, an entity such as a trust can hold qualified purchaser status if it has a portfolio valued at $5 million or more and is owned by at least two close members of a familial unit. Entities seeking qualified purchaser status must not be created for the sole purpose of investing in private funds.
Standards For Becoming A Qualified Purchaser
Privately held capital firms are defined as investment companies under the 1940 Investment Company Act when they propose or initiate public offerings that are offered to the general public and not only qualified purchasers. The 1940 Investment Company Act outlines the definition of a qualified purchaser.
Investment funds that only sell to qualified purchasers are exempt from the regulation under the Investment Company Act. This means
Under Section 2(a)(51) of the Investment Company Act, a “qualified purchaser” is a person or entity that meets any of the following criteria:
- An individual holding $5 million or more in investments, not including primary residence or business property.
- A family-owned business holding $5 million or more in investments.
- A trust holding $5 million or more in investments, as long as it has not been formed specifically for the investment in question.
- A company holdings $25 million or more in investments
- An investment manager with $25 million or more under management.
- Any entity where every owner is a qualified purchaser
Note that for the above definition of investments this includes stocks, bonds, and other securities including real estate investments, futures contracts, commodities, and more. Primary residence and property used in the daily conduct of the entity’s business cannot be considered.
Qualified Purchaser vs. Accredited Investor
Qualified purchaser and accredited investor are two of the most common regulatory classifications made by the SEC. Although these classifications both give the investor access to investments that are not available to the general public, the thresholds to become a qualified purchasers are higher than that of an accredited investor.
It is likely that an individual who is a qualified purchasers would also be an accredited investor; however, accredited investors are not necessarily qualified purchasers. Qualified purchasers have more stringent qualifications an individual must meet. An accredited investor is an individual or entity that is allowed by the SEC to trade unregulated securities. Read more about the qualifications to become an accredited investor here.
One of the most notable differences is that financial requirements for accredited investors are much lower than for qualified buyers. Accredited investors should have a combined wealth (excluding their principal home) of more than $1 million, or they must have generated earnings of more than $200,000 per year ($300,000 when coupled with a marriage) for at least three years in order to be considered accredited.
Meanwhile, qualifying purchasers must have a total investment portfolio totaling at least $5 million. The phrase “super-accredited” investor, or some version of that word, is occasionally used to describe qualified purchases as a result of this.
Qualified Purchaser vs. Qualified Institutional Buyer
A qualified institutional buyer (QIB) is a classification of investor that can be assumed to be sophisticated and therefore does not require regulatory protections given by the Securities Act. In simple terms, QIBs are institutional investors that own or manage at least $100 million worth of securities.
Similar to how most qualified purchasers will qualify as accredited investors, most QIBs will meet the threshold for qualified purchasers. However, the QIB definition relates to the ability to purchase securities on the secondary market until the SEC’s 144A exemption whereas the qualified purchaser definition relates to whether a fund is exempt from ICA registration and reporting requirements.