Individual investors are beginning to diversify their portfolios using digital platforms with greater frequency. Many of these platforms are for accredited investors only. You might already be familiar with the term ‘accredited investor,’ or perhaps you have a vague understanding of what it means to be accredited.
But do you know what a qualified purchaser is? That is a less familiar term–and one that contains distinct differences from accredited investors.
In this article, we’ll explore both accredited investors and qualified purchasers. We’ll explain what they are, how they differ, and the access to investment opportunities that each classification affords.
Key Takeaways
- The requirements for becoming a qualified purchaser are more stringent than those of becoming an accredited investor
- Qualified purchasers gain access to certain investment opportunities that even accredited investors aren’t privy to
- The purpose of these designations is to protect the general public from investment opportunities that aren’t regulated by the SEC
What is a Qualified Purchaser?
A qualified purchaser is either an individual or entity (company, trust) that can invest in securities that aren’t registered with the Securities and Exchange Commission (SEC).[1]
The term is intended to identify investors with the financial sophistication to bear the risks associated with investment opportunities that are typically not available to the general public due to their unregistered status with the SEC. To that end, the Investment Company Act of 1940 established criteria for becoming a qualified purchaser:[2]
- An individual with more than $5,000,000 in investments
- A company with more than $5,000,000 in investments and is owned by two or more natural persons who are related (siblings, spouses, or descendants)
- A trust that was not formed for the specific purpose of acquiring the securities offered, and where the trustee and each contributor of assets are qualified purchasers
- Any individual or entity that invests more than $25,000,000 on behalf of other qualified purchasers
- Qualified institutional buyers (QIBs) as defined in Rule 144A under the Securities Act of 1933, provided they meet certain investment thresholds
What is the Difference Between a Qualified Purchaser and an Accredited Investor?
If you’ve read our https://heronfinance.com/blog/4-easy-steps-to-becoming-an-accredited-investor/, you’d know that the term ‘accredited investor’ is also a designation for individuals who can purchase unregistered securities.
The difference between a qualified purchaser and accredited investor primarily lies in the criteria for qualification and the investment opportunities available to each. Each designation caters to different levels of financial sophistication and investment capacity.
As a reminder, the criteria for becoming an accredited investor are based on income, net worth, or professional expertise. An individual qualifies as an accredited investor in one of three ways:[3]
- If they have an annual income exceeding $200,000 (or $300,000 if filing jointly) for the last two years with the expectation of the same or higher income in the current year
- If they have a net worth exceeding $1 million, either individually or jointly with a spouse, excluding the value of the primary residence
- If they have received either the Series 7, Series 65 or Series 82 professional qualifications
Entities can also qualify as accredited investors if they have total assets in excess of $5 million or if all of their equity owners are accredited investors.
You might have noticed that the requirements for becoming a qualified purchaser are stricter than those of becoming an accredited investor. In practical terms, that means every qualified purchaser is indeed an accredited investor, though not every accredited investor is a qualified purchaser (an individual making over $200,000 per year is accredited, but not a qualified purchaser).
This brings us to the natural next question…
Why Should Investors Care if They are Qualified Purchasers?
The reason has to do with the investment opportunities available to qualified purchasers. Accredited investors have access to a broad range of private investment opportunities, including private credit, venture capital, hedge funds and private equity. However, they are typically restricted to investing in 3(c)(1) funds, which have a limit on the number of investors they can accept.
In addition to the investment opportunities available to accredited investors, qualified purchasers have access to 3(c)(7) funds (a pooled investment vehicle that is excluded from the definition of investment company in the Investment Company Act).[4] This allows qualified purchasers to participate in a wider range of high-risk, high-reward investment opportunities.
So while both accredited investors and qualified purchasers can invest in private markets, qualified purchasers meet a higher financial threshold, and,as a result, have access to a broader range of investment options, including those with potentially higher risks and rewards.
The SEC aims to protect individual investors from risky investments by limiting participation to those with the financial capability and experience to absorb potential losses. While this approach excludes many investors from high-reward opportunities, it is considered necessary to protect the public from the allure of unregulated, illiquid investments that have no reporting or disclosure requirements.
Of course, this also precludes many individuals from sharing in the upside opportunities that investments of this nature have to offer. As a result, regulators are facing pressure to allow more individuals to invest in such opportunities. For example, there is a push to allow individual investors to gain access to pre-IPO startups.[5]
Heron Finance is helping lead this push to increase access to investment opportunities typically only available to institutional investors and the ultra wealthy. Our platform builds diversified portfolios of private credit deals for accredited investors (you don’t need to be a qualified purchaser to start investing!).
So if you’re an accredited investor looking to diversify your portfolio with an alternative asset, click the button below and set up your Heron Finance account. If you’re not certain if you’re accredited–don’t worry–we’ll walk you through the steps to verify your accreditation status. It only takes a few moments to get started.
