Anyone can invest in publicly traded mutual funds and exchange-traded funds. But if you seek to put money in more expansive, more exclusive investments such as real estate funds, there’s certain criteria to be met. You must have a certain amount of capital and investments.
Enter the regulatory terms “qualified purchaser” and “accredited investor,” classifications established by the SEC to govern investor access to offerings from privately held companies and startups and the like.
Qualified purchasers are widely known as super-accredited investors, owing to the relatively high financial threshold they must meet based on their investments. There are definite benefits to being a qualified purchaser, but as we say, such designation requires a lot more money.
Here are the pros and cons of being a qualified purchaser – and more.
What is a Qualified Purchaser?
This is an individual or family-owned concern that has at least $5 million in investments, not including a main residence or a property used for day-to-day business. By “investments,” we mean stocks and bonds as well as, say, commodity futures, financial contracts, real estate, and other assets held for investment purposes.
You can also be deemed a qualified purchaser if you’re a person or entity such as a fund manager that invests a minimum of $25 million in private capital, even if it’s on behalf of other qualified purchasers.
Trusts managed by qualified purchasers, or an entity wholly owned by qualified purchasers, can also be included in the qualified purchaser class.
Just don’t try to skirt the rules by forming an entity or family-owned business with the sole purpose of investing in a fund. That’s a regulatory no-no.
What is an Accredited Investor?
We broach this because, as we mentioned early on, accredited investors and qualified purchasers are two of the top SEC classifications when it comes to accessing certain investment opportunities. In fact, some people tend to think of the two classifications as the same. But that’s not so. Also, knowledge of accredited investing will help you understand more about what it means to be a qualified purchaser.
As set forth by the SEC, an accredited investor must meet one of the following requirements: they must earn at least $200,000 if they’re single. If they’re married, they must show a combined income of at least $300,000. And this level of yearly income must be consistent.
Such an investor could also have a net worth of at least $1 million, either by themselves or together with a spouse. The net worth must exclude the value of a main residence, however.
As well, an accredited investor can also be a “knowledgeable employee” of specific investment funds or is specially licensed.
What are the Pros and Cons of Being a Qualified Purchaser?
Perhaps the main advantage of being a qualified purchaser is the ability to engage in a wider range of investment opportunities than can accredited investors. That’s a ginormous plus.
Because they also typically meet the threshold for accredited investor designation, qualified investors can invest in 3(c)(1) funds. Moreover, they can also invest in a fund type called 3(c)(7), which can accept up to 2,000 qualified purchasers. That’s way more than accredited investors are allowed.
As far as any downsides go, qualified purchasers do have to jump through more hoops to attain their designation. You need a lot more money than you would to become an accredited investor.