Table of Contents
What is an accredited investor?
What is a qualified purchaser?
Key differences between accredited investors and qualified purchasers
Why do accredited investor and qualified purchaser designations exist?
The bottom line
Jun 22, 2022
6 min read
Accredited investors and qualified purchasers are people and entities that meet specific federal criteria that allow them to purchase unregistered securities.
Accredited investors and qualified purchasers are both investors who can access investment opportunities that aren’t available to everyday people.
While anyone can buy stock in a company that’s publicly traded on a stock exchange, private companies often raise money by offering bonds or stock in private fundraising events, available only to investors with special designations. These investors can be people, companies, and other types of legal entities (such as trusts) that have a lot of wealth, income, or knowledge about making investment decisions.
The primary differences between accredited investors and qualified purchasers are the requirements to become one and investment opportunities available to each. Becoming a qualified purchaser requires more money, but it can also give investors access to more investments than accredited investors.
Here’s a closer look at how someone can qualify as either an accredited investor or a qualified purchaser, and the similarities and differences between the two.
The Securities Act of 1933 (the ‘33 Act) sets the criteria for an accredited investor in Rule 501(a) of the law. The U.S. Securities and Exchange Commission (SEC) has occasionally updated the accredited investor requirements over the years. Today, individuals can qualify based on their income, net worth, employment, or knowledge.
: An individual who earned over $200,000 (or a couple who earned at least $300,000) during the previous two years and expects to earn that much in the current year.
:Individuals and couples who have a net worth of at least $1 million, not including their primary residence.
: Higher-ups and knowledgeable employees of companies or funds that are offering securities to accredited investors may be able to qualify and purchase those securities even if they don’t meet one of the other accredited investor requirements.
: Financial professionals can receive accredited investor status if they hold in good standing a relevant professional credential—a Series 7, Series 65, or Series 82 license.
High-net-worth individuals who have a family office—a company to manage the family’s investments—can also qualify if the family office has at least $5 million in assets under management. Entities, including corporations, limited liability companies, and trusts, may be accredited investors as well, but the specific requirements and rules vary depending on the type of entity.
Accredited investors are able to purchase unregistered securities in certain circumstances. For example, they can invest in venture capital funds that are structured as 3(c)(1)s. These funds allow up to 100 accredited investors to invest, or 250 accredited investors if the fund size is less than $10 million.
Qualified purchasers are a step up from accredited investors, in terms of what they can invest in and the requirements to become one. The Investment Company Act of 1940 (the ICA) sets the criteria for qualified purchasers, which revolves around a person or entity’s investments. There is also a similar term, qualified institutional buyer, for larger entities, such as companies that have over $100 million in securities. But investors can be qualified purchasers if they are:
Additionally, in order to meet the requirement to become a qualified purchaser, a person or company must create an entity for a purpose other than investing in a particular unregistered security. However, an entity could be created to broadly invest in a variety of unregistered offerings.
Qualified purchasers will generally also be accredited investors, but they can also invest in additional offerings. For example, they can also invest in 3(c)(7) funds. Hedge funds and private equity funds may use this structure to raise a larger amount of money than they could with the 3(c)(1) structure.
The main differences between accredited investors and qualified purchasers come down to the eligibility requirements and what someone can do once they meet the requirements.
A person or entity can qualify for either type of status based on the investments they hold.
There are more paths to becoming an accredited investor than there are paths to becoming a qualified purchaser. Accredited investors can qualify by metrics other than the value of their investments, including knowledge and employment. Qualified purchaser status depends on total investments and starts at a minimum of $5 million.
Both accredited investors and qualified purchasers can buy unregistered securities that aren’t available to the general public.
Qualified purchasers can invest in funds, such as 3(c)(7) funds, that don’t accept investments from accredited investors.
Federal laws define who and what qualifies as an accredited investor or qualified purchasers and the SEC oversees the enforcement of organizations that are selling securities to these investors.
The ‘33 Act defines accredited investors while the ICA defines qualified purchasers.
The entity offering a security to either accredited investors or qualified purchasers is responsible for verifying the investor’s current eligibility.
Both accredited investors and qualified purchasers can access private investment opportunities that aren’t registered with the SEC.
The SEC limits these offerings because unregistered securities don’t have the same reporting and disclosure requirements as registered investments—such as the stocks that can be bought and sold on a stock exchange—have. As a result, it can be more difficult to understand and evaluate the risk involved with the investment. And, because they’re not publicly traded, it may also be more difficult to resell the securities.
By limiting their sale to people and entities that have enough experience to evaluate the risk or enough wealth to withstand a loss, the SEC tries to protect everyday investors. However, the rules also keep many investors from buying securities from startups and other opportunities that, even though they may have a lot of risk, also offer a lot of potential gains.
Accredited investors and qualified purchasers are people and entities that meet specific federal criteria that allow them to purchase unregistered securities. In general, the qualified purchaser status is a step up, which requires more wealth but can also give someone access to more types of investments.
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