Qualified Purchaser vs Accredited Investor: Key Differences
By David Brummer
Determining whether you are a qualified purchaser as opposed to an accredited investor is pivotal for accessing advanced investment options. This comparison will pinpoint the defining criteria of each investor title and spotlight their investment privileges within the context of qualified purchaser vs accredited investor. Expect to uncover which designation aligns with your financial stature and how it influences your potential investment pathways. For additional info read our Accredited Investor 101: Definition, Requirements, and FAQs article.
Note: This article is geared toward a US audience.
Key Highlights
- Qualified Purchasers and Accredited Investors are both wealthy individuals or entities given access to a broader range of sophisticated investment opportunities that are defined by respective financial thresholds and sophisticated financial understanding.
- Qualified Purchasers primarily distinguish themselves by their ability to invest in 3(c)(7) funds without investor count limitations, whereas Accredited Investors have access to 3(c)(1) funds and private securities under Regulation D exemptions.1
- SEC regulations play a critical role in defining and protecting the categories of Qualified Purchasers and Accredited Investors, ensuring access to certain investment opportunities is limited to those with the requisite financial acumen and resources.
Qualified Purchaser: Breaking Down the Definition
The term "Qualified Purchaser" refers to an individual or entity characterized by the total aggregate value of assets they hold. The Securities and Exchange Commission (SEC) uses this term as a regulatory label for wealthy investors and qualified purchasers. This status provides investors with access to a wider range of investment options, often targeted toward experienced investors capable of handling significant financial risks.
The prerequisites for attaining qualified purchaser status differ according to the type of entity. The minimum portfolio value requirements are:
- Individuals or family businesses: $5 million
- A person acting for their account or the accounts of other qualified purchasers: $25 million
Criteria for Qualified Purchaser Status
Attaining Qualified Purchaser status requires individuals to comply with certain financial thresholds associated with their investments. Specifically, an individual becomes a Qualified Purchaser when they hold at least $5 million in investments. Companies, trusts, or investment managers also fit this category if they have investments valued at $25 million or more. These criteria ensure that only those with substantial resources and a level of financial sophistication can access the broader investment opportunities that are exclusive to Qualified Purchasers.
Although the criteria for achieving qualified purchaser status may appear rigid, their primary purpose is to safeguard investors. These thresholds ensure that only individuals or entities with the financial acumen and resources to endure potentially significant losses are allowed to participate in high-risk (and high reward) investment opportunities. In this way, the SEC aims to protect less experienced or financially equipped investors from risk beyond their assumed tolerance for loss.
Types of Qualified Purchasers
The label "Qualified Purchaser" applies to a wide array of entities. These include:
- Individuals
- Corporations
- Trusts
- Institutional investors
Beyond family trusts, other entities like investment managers and companies that hold significant investment assets can also attain Qualified Purchaser status. Essentially, any entity that owns substantial investments, whether it’s a family trust, a business, or an individual, can qualify, granting them access to a unique range of investment opportunities.
Accredited Investor: Understanding the Basics
These investors are considered financially sophisticated and are assumed to require less protection from regulatory bodies, thanks to a theoretically higher degree of knowledge and financial capability. The designation applies to individuals or entities that meet specific income, net worth, or licensure criteria. When comparing accredited vs non-accredited investors, the key difference lies in the financial qualifications and investment opportunities available to each group.
Becoming an Accredited Investor provides access to a more extensive range of investment opportunities, including private securities. They can participate in unregistered and illiquid securities offerings, often under Regulation D. As such, upon meeting the threshold, Accredited Investors should consider new investment opportunities that align with their strategy, risk tolerance, and capital availability.
Accredited Investor Requirements
The qualifications one requires to become an accredited investor are varied. In the US, individuals can qualify if they have an annual income exceeding $200,000 individually, or $300,000 jointly with a spouse, for the past two years and expect the same amount in the current year. Alternatively, individuals can also qualify by having a net worth greater than $1 million, either individually or jointly with a spouse, excluding the value of their primary residence.
The definition of accredited investors extends beyond individuals to also include registered brokers and investment advisors. Our article Accredited Investor Verification: How to Prove Your Status can be used as a handy guide.
Categories of Accredited Investors
The category of Accredited Investors includes:
- Individuals or couples
- Banks
- Insurance companies
- Brokerage firms
- Charitable organizations
- Business entities
- Trusts with assets over $5 million
- Limited liability companies with at least $5 million in assets
- Corporations
- Partnerships
- LLCs
- 501(c)(3) organizations with assets over $5 million
All these entities are classified as accredited investors and qualified. Read our article on How to Become an Accredited Investor: Essential Criteria for additional information.
Comparing Qualified Purchasers and Accredited Investors
Despite their differing definitions and requirements, a common characteristic of Qualified Purchasers and Accredited Investors is their representation as financially capable investors with access to a suite of investment opportunities beyond the reach of the general public. It’s also worth noting that many measures of financial sophistication such as income or net worth are common to both.
The primary distinction between the two is the scope of investment opportunities accessible to them. While both Qualified Purchasers and Accredited Investors have access to private investment opportunities not registered with the SEC, their scope varies between them. There is a significant overlap, yet distinct differences exist between the investment opportunities for Qualified Purchasers and Accredited Investors.
Investment Access
The investment opportunities available to Qualified Purchasers and Accredited Investors differ significantly. Qualified Purchasers have exclusive access to 3(c)(7) funds, which are immune to the limited investor counts that typically apply to funds open to Accredited Investors. Conversely, Accredited Investors can participate in 3(c)(1) funds and other private securities under Regulation D exemptions.2 (Rule 504 of Regulation D exempts from registering the offer and sale of up to $10 million of securities in a 12-month period).
The distinction lies in the number of investors that these funds can accommodate. While 3(c)(1) funds limit the number of participants — often up to 100 accredited investors — there is no such restriction in 3(c)(7) funds for Qualified Purchasers, allowing larger pools of capital. Thus, by their substantial financial resources, Qualified Purchasers gain access to sophisticated and higher-risk investment products, including a broader range of complex funds with more than 100 investors.
SEC Regulations and Their Impact on Wealthy Investors
SEC regulations significantly influence the terrain for affluent investors. The SEC protects investors by limiting access to high-risk investments only to those who meet specific financial and non-financial criteria. The regulatory distinctions among accredited investors, qualified purchasers, and other investor statuses are a testament to these protective measures.
For example, Qualified Purchasers enjoy exemptions from some regulations under the 1940 Investment Company Act. This exemption allows for investments in companies that would otherwise be subject to SEC requirements. Additionally, due to their financial sophistication, Qualified Purchasers are exempt from state registration under the SEC’s approach to defining ‘qualified purchaser’ within the Securities Act. These exemptions mean qualified purchasers have access to more unregulated investment opportunities than accredited investors.
Protecting Investors
The SEC’s role is to provide both investor protections and prevent market manipulation. To this end, the SEC provides regulations like Rule 506(b) and Rule 506(c) under Regulation D to restrict certain high-risk investments to accredited investors, imposing fewer limitations on qualified purchasers for private placements. Economic downturns can lead to a surge in defaults within alternative investment funds, highlighting the SEC’s efforts to protect investors.
However, investor protection is hampered by transparency issues within alternative investment funds that have limited disclosure, causing complications in the assessment of credit risk. Furthermore, illiquid assets present in alternative investment funds add to investor risk due to difficulties in valuation.
Evolving Regulatory Landscape
The regulatory environment for wealthy investors is evolutionary, rather than dynamic The Securities and Exchange Commission (SEC) updated its rules on accredited investors in 2020 to expand the pool of individuals and entities eligible to participate in certain private securities offerings. The update was part of the SEC's broader effort to modernize and improve the framework for capital formation while maintaining investor protection.
The SEC recognized that the existing criteria for determining accredited investor status, which had been largely unchanged for decades, might not fully capture individuals or entities with the sophistication and financial means to participate in private investments. Therefore, the SEC aimed to broaden the definition of accredited investors to reflect changes in the financial landscape and to provide greater access to investment opportunities for a wider range of investors. The SEC amended the definition of accredited investors in December 2020, to better identify investors with the knowledge and expertise to participate in private markets.
Popular Investment Strategies for Qualified Purchasers and Accredited Investors
For Qualified Purchasers and Accredited Investors, diversification is a common goal, with portfolios extending beyond traditional investments to include alternative assets. This approach is to mitigate risk and in turn, potentially enhance returns. Investment diversification, which is widely considered essential for a well-balanced investment portfolio, often includes a mix of:
- Equities
- Commodities
- Various alternative assets tailored to individual risk tolerance and investment objectives
Private equity investments are common components in the diversified portfolios of Qualified Purchasers and Accredited Investors.
Alternative Investments
The realm of alternative investments is vast and gaining popularity among wealthy investors. These investments encompass diverse categories such as:
- private equity
- luxury commodities like rare whisky or wine
Conclusion
In conclusion, understanding the distinctions between Qualified Purchasers and Accredited Investors is crucial for wealthy investors seeking to navigate the complexities of the investment landscape. Both categories represent financially sophisticated investors with access to a range of investment opportunities not available to the general public. However, the breadth of these opportunities differs between the two, with Qualified Purchasers having access to a broader range of complex funds.
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1 https://www.sec.gov/education/capitalraising/building-blocks/private-fund
2 https://www.sec.gov/education/smallbusiness/exemptofferings/rule504