Qualified purchaser

What is a qualified purchaser?

A qualified purchaser is an individual or entity that can invest in securities or investment products, like venture capital funds or private funds, because they meet specific sophistication thresholds set by the Investment Company Act of 1940.

The criteria to be classified as a qualified purchaser can differ depending on whether you’re an individual, trust, other entity type, or investment manager. The requirements also vary depending on the type of security or investment product you’re purchasing.

Qualified purchaser vs. accredited investor

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

Qualified purchaser criteria

Qualified purchasers can invest in a wider range of investment opportunities than they could with accredited investor status. For instance, a qualified purchaser is often allowed to 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, whereas an accredited investor would only be allowed to invest in a Section 3(c)(1) fund. This includes private funds and companies, such as venture capital funds and private equity funds.

Specific thresholds must be met to qualify:

Individuals & 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. 

Investments can include:

• Stocks

• Bonds

• Investment properties

• Commodities

• Cash and cash equivalents

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.