Qualified Purchaser vs Accredited Investor: What's the Difference?

Published on
 
September 12, 2022
Qualified Purchaser vs Accredited Investor

Some investment opportunities are only available to investors with specific credentials. The two most common types of investors are the qualified purchaser vs accredited investor. If you fall within one of these qualifications, you may have access to specific SEC offerings that other investors don't have.

The investment company you try to invest with will tell you the credentials required to invest in a fund. Here's what you must know about accredited investors and qualified purchasers.

Accredited Investor vs Qualified Purchaser

Accredited investors and qualified purchasers have access to unique offerings, but some investments are only for accredited investors, and others are only for qualified purchasers. In addition, both classifications have different requirements for an investor to become one.

What Is an Accredited Investor

According to the Securities and Exchange Commission, you must meet certain net worth, income, or licensure status to have accredited investor status. If you meet the requirements, you may access private equity funds that retail investors can't invest in.

Accredited Investor Requirements

To get accredited investor status as an individual, you must meet one of the following requirements.

You must have an individual or a joint net worth of at least $1 million. However, this doesn't include the value of your primary residence. You may qualify if you don't meet the net worth requirements but make at least $200,000 a year individually or $300,000 jointly.

However, to use the income to become an accredited investor, you must meet the income requirements for two years before applying for accredited investor status. You must also prove that the income is likely to continue.

One last way to qualify as an accredited investor is to hold a FINRA Series 7, Series 65, or Series 82 license. If you have one or more of these licenses in good standing, you can bypass the net worth or income requirements.

There's also one more way to achieve accredited investor status, and that's through a trust. To do this, you must prove you didn't create the trust strictly to invest in a specific investment. For the trust to qualify, it must have at least $5 million in assets. The person in charge of the trust must also demonstrate working knowledge or financial sophistication of the intended investment.

The key is to ensure accredited investors don't qualify based on their assets alone but that they also have the knowledge to manage the investment and can avoid the risk of losing their net worth.

How to Become an Accredited Investor

To become an accredited investor, each firm you invest with must determine that you qualify. The SEC released guidelines in 2013 to help firms determine which investors meet the accredited investor criteria. Typically, it means going through a screening process, including a verbal conversation and providing the firm with proof of your net worth or income.

The documentation may include:

  • Financial statements
  • Tax returns
  • A credit report
  • Proof of licensure
  • Knowledgeable employees that understand the fund in question

Accredited Investor Opportunities

Accredited investors have access to funds that the general public doesn't. For example, they can invest in 3(c)(1) funds that typically have a maximum investor pool of 100 investors. This is primarily due to the higher risk the investments have. Therefore, accredited investors must prove they have the capital, knowledge, and risk tolerance to withstand the risk.

A few examples of accredited investor opportunities include:

  • Real estate investments are not open to retail investors
  • Venture capital funds
  • Investing in farmland
  • Angel investing
  • Private equity funds
  • Hedge funds
  • Private placements

Accredited Investors Example

An investor has a net worth of $3 million, and he and his wife together make $400,000 per year. They've had a steady income for the last three years, and since they are both doctors, it's assumed their income will likely continue.

The investors qualify because they meet the net worth requirement. But even if they didn't, their income would qualify them as accredited investors.

Benefits

There are several benefits and opportunities of becoming an accredited investor, including:

  • Opportunities to invest in small startup businesses - Private funds are often reserved for accredited investors. If you're accredited, it allows you to invest in new startups, helping them get off the ground and running before they can go public.
  • Chance to earn higher yields - There's no guarantee you'll earn more as an accredited investor, but there are opportunities for higher-yield investments since most private investments are riskier but have higher yields.
  • Allows diversification - Investing only in the public market can be risky, especially as interest rates increase. Accredited investors have access to alternative investment opportunities that retail investors don't have.

Drawbacks

There are also some drawbacks to meeting accredited investor qualifications, including:

  • Higher risk investments - Higher risk means a higher chance of a loss. So while the higher yields are nice, there's a larger chance you'll lose money.
  • High minimum investment requirements - Most investments requiring an accredited investor have high minimum requirements. This means you invest a large amount of your capital in one asset.
  • Higher fees - Most private funds have much higher fees than publicly traded funds. This decreases the profits you earn if the investment does well or furthers your loss if it doesn't.

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What Is a Qualified Purchaser

Unlike accredited investor status, you achieve qualified purchaser status based on the value of your investments, not your net worth or income. As a result, qualified purchasers also have more investment opportunities than accredited investors.

Qualified Purchaser Requirements

To qualify as a qualified purchaser, you must have an investment portfolio worth at least $5 million or a combined portfolio of $25 million between yourself and other qualified investors. Like the accredited investor rules, the portfolio cannot include your primary residence or any property used to conduct business.

How to Become a Qualified Purchaser

Like verifying accredited investors, it's up to each security issuer to determine if an investor qualifies as a qualified purchaser.

The typical documentation required includes tax returns, W-2s, brokerage, and bank statements. Some companies vet investors themselves, and others rely on the expertise of attorneys, accountants, or other third parties.

Qualified Purchaser Investment Opportunities

Like accredited investors, qualified purchasers have unique investment opportunities. Because qualified purchasers must have $5 million in assets and meet the accredited investor requirements, they can invest in 3(c)(1) investments as well as 3(c)(7) funds, which allow up to 2,000 investors.

Qualified Purchasers Example

To have qualified purchaser status, you must meet the investment portfolio requirements either by yourself or with a group of other investors.

This includes wealth managers who manage portfolios for investors; however, each investor the wealth manager oversees must qualify as a qualified purchaser for the wealth manager to qualify.

For example, if a wealth manager invests $30 million for his clients, but not all investors meet the qualified purchaser requirements, the manager doesn't qualify.

However, if all clients met the requirements OR the wealth manager had his own portfolio worth at least $5 million, he would qualify.

Benefits

There are several benefits of becoming a qualified purchaser, including:

  • Access to more investments - Only qualified purchasers can invest in 3(c)(7) funds; accredited investors cannot invest in them.
  • Ability to diversify your portfolio - With more investment opportunities at your fingertips, you can diversify your portfolio, offsetting the risk of loss.
  • There's no income requirement - Your qualifications to become a qualified purchaser are strictly based on the size of your portfolio, not your income.

Drawbacks

Like there are benefits, there are also downsides to becoming a qualified purchaser:

  • Much higher risk of loss - Because you're investing in much higher amounts and in riskier assets, there is a much higher risk of loss.
  • Higher investment requirements - Most investments for qualified purchasers require high minimum investment requirements, tying up your capital in one fund.

Qualified Purchasers and The Investment Company Act of 1940

The Investment Company Act of 1940 focuses on investment products and the companies behind them, versus the Securities Act, which focuses on investors. Private capital firms are investment companies under the Act. Any company selling investments to anyone other than qualified purchasers must meet the Act's regulations.

In short, this means investment companies must follow the SEC guidelines if they offer investments to anyone other than qualified purchasers.

Qualified Purchasers and Accredited Investors FAQ

Is a Qualified Purchaser the Same as a Qualified Institutional Buyer?

Qualified purchaser status and qualified institutional buyer status sound similar, but they have different requirements. For example, a qualified purchaser has at least a $5 million portfolio. However, to be a qualified institutional buyer, institutions must have at least $100 million in securities and a net worth of $25 million.

Why Is Investor Qualification So Important?

The largest reason investor qualification is so important is because it protects investors from getting in over their heads. High-risk investments or investments that require a lot of capital are reserved for qualified investors, whether accredited or qualified purchasers.

What Investments Can an Accredited Investor or Qualified Purchaser Make?

Qualified purchasers can make all the investments accredited investors can make, plus they can invest in 3(c)(7) funds, which are even riskier than the funds accredited investors can invest in, which are 3(c)(1) funds. For investment advice, consult an investment advisor or investment manager.

How Do I Calculate My Net Worth?

Your net worth is the total of all your assets minus any liabilities. When figuring out your net worth to determine if you meet the accredited investor qualifications, you shouldn't include the value of your primary residence.

Qualified Purchaser vs Accredited Investor: The Bottom Line

When comparing a qualified purchaser vs an accredited investor, you'll find many similarities. They both have access to many more investment opportunities than the average investor, but the investments are riskier. So know what you're investing in, the risk you're taking, and make sure it's something you're comfortable with, and you aren't investing simply because you qualify. Learn more by signing up and visiting our blog.

Disclaimer

This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security which can only be made through official documents such as a private placement memorandum or a prospectus. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Neither Concreit nor any of its affiliates provides tax advice or investment recommendations and do not represent in any manner that the outcomes described herein or on the Site will result in any particular investment or tax consequence.Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Concreit does not guarantee its accuracy.

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