Qualified Purchaser Definitive Guide
Chances are if you’ve been evaluating alternative investment opportunities like hedge funds or private equity funds the term, qualified purchaser, has been mentioned. To access certain investment opportunities, an investor may be required to meet the criteria of a qualified purchaser set by the Securities and Exchange Commission (SEC). The SEC is a U.S. regulating body and has the authority to set rules and regulations for entities including but not limited to companies, funds, investment advisors, and investors.
Simply, a natural person or family-owned entity that has $5,000,000 or more in investments is a qualified purchaser.1 So, what constitutes an investment? The SEC has a broad definition of an investment, with examples including but not limited to stocks, vacation homes, bonds, ownership in rental properties, self-directed retirement accounts, futures contracts, and cash. All of which contribute to meeting this $5,000,000 minimum threshold. 2
There are a few additional ways to be considered a qualified purchaser:
1. If you invest a minimum of $25,000,000 in your own account or on someone else’s behalf. This can either be done as an individual or entity.3 For instance, if you start your own hedge fund with $25,000,000 in assets under management then your entity (the hedge fund) is a qualified purchaser.
2. If an entity’s ownership is all qualified purchasers then that entity qualifies as one as well.4 For example, Taylor, Abbie, and Ram—all of whom are qualified purchasers—start an LLC to invest in real estate. That entity (the LLC) is considered a qualified purchaser, as well.
3. If the entity is a trust not necessarily created for a particular investment and is overseen by and managed by qualified purchasers.5
Why would a Sponsor (e.g. fund manager, VC, or real estate developer) go through the hassle of ensuring their investors are qualified purchasers? More often than not, they prefer to have only qualified purchasers in order to forego strict SEC regulations. In doing so, there is no need for a more complex route of filing for a public offering and the investment qualifies under the Investment Company Act of 1940 for a 3(C)(7) exemption.6 A Sponsor gains access to however number of investors they desire while avoiding cumbersome securities restrictions.7
For a more comprehensive criteria of who qualifies as a qualified purchaser, please click here.
Regardless of your investor status, investors should take the time to perform comprehensive due diligence, check exemption status via NASAA’s Electronic Filing Depository System. Also, ensure your investment professional is registered via the Investment Adviser Public Disclosure site. In addition, to verifying if an investment advisor comes up in the SEC Actional Lookup-Individuals site.