Accredited Investor Vs Qualified Purchaser: Difference Explained
When launching an investment, a Sponsor will determine whether to raise capital from accredited investors or qualified purchasers. This determination is based on a variety of reasons ranging from raise amount to the permission for general solicitation.
Under the Investment Advisers Act of 1940, the Securities and Exchange Commission (SEC) has the authority to determine the eligibility requirements for investors. Combined with the Investment Company Act and the Securities Act of 1933, the SEC has plenty of authority to dictate how private investment is undertaken in the US. An investor can qualify as both an accredited investor and qualified purchaser, though being recognized as a qualified purchaser has a significantly higher threshold than an accredited investor.
· An accredited investor has a total assets in excess of $1 million individually or jointly with a spouse.1
· A qualified purchaser has to demonstrate having $5 million in investments or investible assets.
It is important to note that both accredited investor and qualified purchaser qualification requirements state a primary residence is to be excluded from net worth and investable assets calculations.
If an accredited investor does not meet the net worth requirement, they can show an income of more than $200,000 or $300,000 joint income with a spouse in each of the prior two years. In addition, this investor should anticipate making the same for the current year.2
In 2020, the SEC provided some wiggle room for those seeking to invest in accredited investor opportunities but did not meet the requirements. If an investor demonstrated financial sophistication via their business and/or educational experience, then they are able to access accredited opportunities without being required to register normally.3 To read in detail the SEC modifications on who qualifies as an accredited investor, please click here.
However, the Sponsor needs to reasonably believe this individual has knowledge and experience to evaluate the pros and cons of an investment opportunity. If intending to qualify based on knowledge and investment experience, a few of the questions an investor may be asked are:
a) What is the investor’s employment history, most likely following college or in the past ten years in relation to financial and/or business? Do they run a successful family owned business or demonstrate any other qualified client behavior?
b) How often do they make investments in alternative investments like a venture capital fund? Do they have any assets under management currently in a private fund?
c) What do they as an investor bring to the table with their own knowledge in evaluating an investment opportunity? What’s the purpose of investing in this opportunity?
If you’re ready to invest, a Sponsor will request verification of your accredited investor status via licensed attorney, certified public accountant, investment advisor registered with the SEC or SEC registered broker-dealer. There are websites that are for the specific purpose of acquiring verification, such as Invest Ready or Accredited.am.
An investment’s accredited or qualified purchaser exemption status can be checked via the NASAA’s Electronic Filing Depository System.