Qualified Purchaser vs Accredited Investor: A Complete Guide

U.S. securities laws allow qualified purchasers and accredited investors to access certain non-public investments.

These designations identify investors who are expected to have the knowledge, expertise, and capital to handle the additional risks and requirements of investing in private markets.

The primary difference between a qualified purchaser and an accredited investor is that the latter must meet certain income, net worth, or licensing criteria, while a qualified purchaser must have a net worth of at least $5 million.

Since the net worth criteria to be an accredited investor is set at $1 million, every qualified purchaser automatically qualifies as an accredited investor.

There are several more details you should know about these designations, including which assets count toward net worth, more about the full requirements, how to certify your status, and which investment opportunities are available.

I cover all of these in more detail in the sections below.

Accredited investor: criteria and opportunities

Accredited investor status is defined in Regulation D of the Securities Act of 1933.

It's easier to qualify as an accredited investor than it is to become a qualified purchaser. To be accredited, an individual must meet only one of the following criteria:

• Have a net worth of at least $1 million, excluding your primary residence.
• Have an annual income of at least $200,000 or a joint annual income of at least $300,000 for the two most recent years, and a reasonable expectation of reaching this level in the current year.
• Have a current Series 7, 62, or 65 securities license.
  

If you meet any of these criteria, you qualify as an accredited investor.

Entities can also be accredited investors. Registered brokers, dealers, advisors, insurance, and investment companies are all considered to be accredited investors, as are banks, savings & loans, and family offices.

Furthermore, certain retirement plans and trusts with at least $5 million in assets are also considered to be accredited.

However, they must not have been initiated solely for the purpose of backing a specific investment and must be directed by someone who has the experience and skills necessary to evaluate the pros and cons of the investment.

Additionally, directors, executive officers, or general partners of the issuer of the securities being offered also qualify as accredited.

How to become an accredited investor

There is no formal application or certification process to become an accredited investor.

Instead, it is up to the investment issuer to validate that investors are accredited.

Most issuers require supporting documentation from potential investors, such as bank statements, tax returns, brokerage statements, or a copy of a securities license.

Accredited investors will need to complete this certification process with every issuer they want to invest with.

Investment opportunities for accredited investors

Accredited investors have access to more investment opportunities than non-accredited (or retail) investors do, because of their presumed ability to bear the additional risks.

Some of the most common investments made by accredited investors are:

• Private equity: Invest in private companies directly (via a secondary marketplace like Hiive) or through private equity or VC funds. These investments may have high returns but typically involve illiquidity and higher risk.

• Hedge funds: Hedge funds employ various strategies to generate returns, including long and short positions, leverage, and derivatives. Hedge funds often have high minimum investment requirements and are subject to less oversight.

• Real estate syndications: In real estate syndications, multiple investors pool their funds to invest in real estate projects. These investments offer potential for rental income, capital appreciation, and tax benefits.

• Private debt: Lend money to private companies or people through private debt funds or lending platforms (like Percent). These investments offer regular income through interest payments but may involve credit risk and illiquidity.

• Private placements: Participate in private placements of securities, such as shares of private companies or debt instruments, typically offered to a select group of investors outside of public markets.

• Commodities and futures: Trade commodities and futures contracts through specialized platforms or invest in commodity-focused funds, gaining exposure to various commodities like gold, oil, or agricultural products.

If you're considering investing in one or more of these investments, you should be comfortable performing extra due diligence and be prepared for heightened volatility and the potential loss of capital.

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For more information, check out our article on the best investments for accredited investors.

Qualified purchaser: criteria and opportunities

Qualified purchaser status is defined by the Securities Act of 1940.

It's more difficult to be a qualified purchaser than it is to be an accredited investor.

To become a qualified purchaser, you must meet one of the following requirements:

• Have a net worth of at least $5 million, excluding your primary residence.
• Have a family or estate-planning entity with at least $5 million in assets, if it was not formed for the specific purpose of investing in a particular fund, and its trustees are qualified purchasers.
• Be an investment manager with at least $25 million under management.
• Be a qualified institutional buyer under Rule 144A with at least $100 million in assets.

If you meet any of these criteria, you qualify as a qualified purchaser. You also qualify as an accredited investor.

How to become a qualified purchaser

There is no formal application process or government certification to become a qualified purchaser.

At this point, it is the responsibility of the issuer to verify the status of a qualified purchaser before allowing them to participate in their offerings. 

Issuers will request proof of your net worth, which may include brokerage and bank statements, documentation of real estate holdings, proof of stockpiles of physical commodities, or any paperwork regarding other investments.

You must verify that you meet the qualified purchaser requirements with each issuer you work with.

Investment opportunities for qualified purchasers

Qualified purchasers are a subset of accredited investors with an even higher threshold for investable assets.

While the two groups have many overlapping investment opportunities, there are a few that are only available to qualified purchasers. Some of these include:

• Certain private funds (with higher minimums): Some private funds may have higher minimum investment thresholds specifically for qualified purchasers. These funds may offer investors exclusive opportunities or terms.

• Certain types of private placements: In some cases, private placements of securities may be restricted to qualified purchasers, particularly for investment opportunities with higher minimums or more complex structures.

• Certain direct investments in private companies: Qualified purchasers may have access to direct investment opportunities in private companies that are not available to accredited investors; these may involve larger capital commitments and potentially more exclusive access to deals.

• Certain institutional investments: Qualified purchasers may have access to institutional investment opportunities, such as certain private equity co-investments or direct placements in large-scale infrastructure projects.

• Specialized investment vehicles: Qualified purchasers may have access to specialized investment vehicles designed specifically for institutional or high-net-worth investors, offering tailored investment strategies or access to unique asset classes such as distressed debt or structured products.

When compared to the options available to accredited investors, the opportunities for qualified purchasers often come with higher minimum investment requirements, greater complexity, and potentially higher risks.

You should have both money and expertise when investing in these assets.

3(c)(1) vs 3(c)(7) funds

If you read the Securities Act of 1933 and the Securities Act of 1940 closely, you'd notice the specific language used with regards to which type of funds accredited investors and qualified purchasers can invest in.

A qualified purchaser is often able to invest in funds that fall under both Sections 3(c)(1) and 3(c)(7) of the Investment Company Act, whereas an accredited investor is only allowed to invest in the former.

Here is a summary of those differences:

	Accredited investor	Qualified purchaser
3(c)(1) funds	Investment is allowed, with restrictions on the maximum number of beneficial owners permitted in the fund.	Investment is allowed, with restrictions on the maximum number of beneficial owners permitted in the fund.
3(c)(7) funds	Cannot invest	Investment is allowed, but if the number of qualified purchasers exceeds 2,000, additional regulatory obligations apply.

Final verdict

The SEC put these regulations in place to protect retail investors from complex investments they may not understand or be able to afford if losses are incurred.

These largely unregulated investments are often illiquid and are not subject to the same disclosure requirements as public securities.

Because of their heightened risk and complexity, regulators believe the general investor is better off excluded from these types of investments altogether.

That said, change may be coming. Regulators have come under pressure to relax some of these standards to allow more investors to access these opportunities. 

The argument is that the current qualifications are unfair and only allow already wealthy investors to benefit from the diversification and potential for higher yields that private investments offer.

However, in the meantime, if you don't qualify as either an accredited investor or a qualified purchaser, you may be interested in our article on the best alternative investments for non-accredited investors.