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
Accredited Investor vs. Qualified Purchaser: Main Differences
Jun 9, 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.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Disclosures
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
How to Become an Accredited Investor: Paths, Requirements, Verification
Becoming an accredited investor can be important for anyone who wants to invest in a private company, such as a startup, or buy other types of unregistered securities.
Read More
Understand Updates to Accredited Investor Rule 501(a)
Rule 501(a) of Reg D of the ‘33 Act defines how a person or entity can qualify as an accredited investor—a requirement for purchasing some unregistered securities.
Read More
How Accredited Investor Exemptions Work
The SEC exempt offerings allow private companies to offer and sell securities without registering the securities with the SEC, it's a starting process for small businesses.
Read More
Accredited Investor: What It Is and How to Become One
A person or entity that qualifies based on the SEC’s definition, they are able to invest in security offerings and other investments that aren’t generally available.
Read More