By Joe Dyton, WCI ContributorThere are a number of terms to describe private investors, including accredited investors, venture capitalists, and qualified purchasers. All serve a similar purpose—investing money in an entity in hopes of a return—but they have different designations and requirements. A qualified purchaser, for example, is a person or entity that can invest in securities or products because they meet specific thresholds set forth by the Investment Company Act of 1940.
Keep reading to learn more about those thresholds and how qualified purchasers differ from accredited investors and more.
Definition of a Qualified Purchaser
A qualified purchaser is an investor with at least $5 million worth of investments. They could also invest $25 million or more on a discretionary basis for other qualified purchasers. Trusts with at least $5 million in assets could also be deemed qualified purchasers if two or more close family members own the trust. However, the trust must not be created solely as an investment tool. The trustees must also be qualified purchasers to qualify.
To summarize, an individual or entity must meet one of the following criteria to be a qualified purchaser:
- Solo investor with at least $5 million in assets
- Institutional investor or foundation with $25 million or more. Examples include banks, corporations, and pension funds.
- Families, trusts, or estate planning entities with at least $5 million in investments
- Qualified institutional buyers with $100 million or more
Qualified Purchaser vs. Accredited Investor
Both qualified purchasers and accredited investors can invest in private funds and companies, but the terms are not interchangeable. Whether someone can be considered a qualified purchaser depends on how much money they have in investments. Meanwhile, accredited investors must reach certain income or net worth thresholds.
As previously stated, qualified purchasers must have a least $5 million in owned or managed investments. Accredited investors don’t have to reach as high a financial bar. Instead, they must have at least a $1 million net worth or earn $200,000 annually as an individual ($300,000 with a spouse or spouse equivalent).
Additionally, accredited investors cannot put money into 3(c)(7) funds, but qualified purchasers can. These funds may have up to 2,000 qualified purchasers as investors. The 3(c)(7) funds refer to a part of the aforementioned Investment Company Act of 1940 that exempts private investment companies from some Securities and Exchange Commission (SEC) regulation. Investors must meet certain criteria to be granted this exception. This criterion includes the company showing it does not intend to make an initial public offering and to prove its investors are qualified purchasers.
More information here:
Private Real Estate Lending Funds
How to Become a Qualified Purchaser
There's no way to formally “become” or “apply” to be a qualified purchaser. That status is reached by meeting the financial requirements outlined in the Investment Company Act of 1940. It is up to investment issuers to follow the law and have investors certify to them that they are a qualified purchaser.
Investment issuers can look at several different investment avenues to ensure someone is an actual qualified purchaser. These investments include securities—such as stocks, bonds, and notes—and real estate that’s used solely for investments. A person’s primary residence cannot be considered part of their net worth when determining qualified purchaser status. Similarly, cash on hand that’s set aside for investments can be counted toward someone’s qualified purchaser designation, but cash for day-to-day expenses cannot be.
Commodity futures contracts, physical commodities (precious metals) being held for investment purposes, and an investment company’s binding capital commitments are all also approved investments to meet the qualified purchaser requirements.
Benefits of Becoming a Qualified Purchaser
Being a private investor in general comes with its own set of perks. Put your money into the right product, business, fund, property, etc., and you could create a nice additional revenue stream. Being a qualified purchaser, however, comes with even more advantages than being a general personal investor or even an accredited investor.
For example, qualified purchasers can take part in more investment opportunities. They are considered the highest level of investors by law. Every investment type is available to qualified purchasers. Since they have to meet a specific financial criterion, qualified purchasers can access investment opportunities that are deemed higher risk, while publicly traded security investors cannot. These higher-risk investments potentially provide the opportunity for greater returns. Plus, qualified purchasers’ net worth makes them accredited investors so they can take part in opportunities that are typically only available to accredited investors.
More information here:
How a Moderate Income Physician Should Think About Being an Accredited Investor
The Bottom Line
Qualified purchasers must meet a lot of financial demands to reach that status, but for good reason—it's to protect investors. The high financial bar helps ensure that only individuals and entities that can afford the potential losses that could occur in investing in high-risk opportunities are participating. The SEC’s goal is to shield less financially secure or inexperienced investors from losses they might not be able to afford.
While it may look like the additional investment opportunities afforded to qualified purchasers increase their chances of losing their money, this status actually gives them additional chances to invest and build a greater net worth. Such an opportunity only exists if they’re qualified to take part in the first place.
If you are interested in private real estate investing opportunities, start your due diligence with those who support The White Coat Investor site:
Featured Real Estate Partners
The White Coat Investor is filled with posts like this, whether it’s increasing your financial literacy, showing you the best strategies on your path to financial success, or discussing the topic of mental wellness. To discover just how much The White Coat Investor can help you in your financial journey, start here to read some of our most popular posts and to see everything else WCI has to offer. And make sure to sign up for our newsletters to keep up with our newest content.
