In the realm of finance, not all investments are equal. Some are open to all. Many are restricted to a narrow group of private investors. However, when it comes to investing privately, how do we determine who has the financial stability and competence to make sound decisions?
Accredited investors and qualified purchasers are two separate rungs on the investment ladder. Each investor category has well-defined eligibility conditions, and both receive unique investment opportunities that the general public does not have access to.
I’ll talk about the lucrative options that authorized investors and eligible buyers can invest in. Most importantly, we will look at the fundamental differences between the two statuses.
But let’s start with the essentials. What are accredited investors and qualified buyers, and how can you become one?
What is an Accredited Investor?
The term “accredited investor” refers to individuals or businesses that meet certain legislation, income, or net worth standards.
Accredited investor status allows you to make alternative investments in private market opportunities that are not regulated by the Securities and Exchange Commission (SEC).
Accredited investors, for example, can invest in private equity funds, hedge funds, and 3(c)(1) funds, with a maximum of 100 or 250 if the fund’s size is less than $10 million.
Accredited Investor Qualifications and Eligibility Criteria
The requirements for becoming an authorized investor are rather basic. To be eligible, you must fulfill at least one of the following:
- Income: An annual income of more than $200,000 in the previous two years for an individual or $300,000 for a couple. You must also demonstrate that you intend to earn the same amount or more in the following years.
- Net worth: A net worth of $1 million or more, excluding the value of your property (either alone or with your spouse).
- License: Possession of a Series 7, 62, 65, or 82 license. Each license demonstrates to the SEC that you have the necessary skills and knowledge to invest in unregulated private market opportunities.
- Expertise: Becoming a suitably “knowledgeable employee” of a private fund.
- A trust fund that meets all three standards can also be used to qualify as an accredited investor.
- Net worth: Your fund’s total assets exceed $5 million.
- Intentions: You did not create the fund to invest in a specific fund.
- Expertise: You can demonstrate that you or your fund managers have the financial knowledge, skills, and experience to assess the benefits and hazards of an investment.
What is a Qualified Purchaser?
Individuals or corporations that meet specified investment conditions are granted the regulatory designation of “qualified purchaser”. Unlike accredited investors, qualified purchaser status is based on the value of an individual’s investments rather than their net worth or family income.
Qualified purchasers represent the highest level of investment. As a result, the requirements for earning this designation are stringent. Those who meet the qualifications have access to a broader range of unregistered securities, including 3(c)(7) investment funds and larger investment opportunities with more than 100 participants.
With tougher admission standards and a broader choice of alternatives accessible, it’s not surprising that qualified buyers are frequently referred to as “super accredited investors”.
Qualified Purchaser Qualifications and Eligibility Criteria
To be a qualifying purchaser, an individual, married couple, or family office must have at least $5 million in investments, excluding the value of their primary property. Eligible investments include:
- Bonds
- Stocks
- Cash and cash equivalents
- Commodities
- Investment properties
Alternatively, Darren Robertson explains that an individual could gain qualified purchaser status through a trust if they match any of the following criteria:
- The trust contains at least $5 million in investments and is owned by two or more close family members.
- The persons granting assets to the trust are qualified purchasers, and the trust was not created solely to invest in a certain fund.
A firm or entity can also qualify for qualified purchaser status if it invests $25 million or more. Finally, an investment manager can qualify if they manage more than $25 million.
Accredited Investors vs Qualified Purchasers: What’s the Difference?
Despite their similarities, qualified purchasers and accredited investors have some major differences. Let’s look at four key differences between accredited investors and qualified purchasers.
Eligibility criteria: Accredited investors are determined by their annual income, net worth, or possession of specific licenses. In contrast, qualified purchasers are identified by the value of their investments.
Investment opportunities: Qualified purchasers have greater investment options because they have access to both 3(c)(1) and 3(c)(7) funds. In contrast, authorized investors can only invest in 3(c)(1) funds.
Limitations: Because authorized investors can only invest in 3(c)(1) funds, they are usually restricted to 100/250 individuals in most cases. Qualified investors, on the other hand, have access to funds with far higher investor limitations.
Regulation: While accredited investors are still subject to certain laws and regulations, qualified purchasers have extra exemptions from SEC legislation.
Qualified Purchasers vs Accredited Investors: Why do we Need to Differentiate Between the Two?
The SEC should differentiate between accredited investors and qualified purchasers for two reasons: financial stability and knowledge.
Financial Stability
Qualified purchasers are often more financially stable than qualified investors, allowing them to take on more risk and tolerate significant losses. This gives them access to the most unregulated asset classes, such as 3(c)(7) funds and those with more than 100 investors.
The SEC protects less financially secure investors from high-risk investment opportunities by imposing strict eligibility criteria on qualified purchaser status. This means that accredited investors can purchase pre-IPO shares while non-sophisticated investors must wait until a company’s initial public offering (IPO) is officially listed.
Expertise
The SEC bases qualified purchaser status on the value of an individual’s investment portfolio, therefore all qualified purchasers must demonstrate a track record of successful past performance. This means that people who qualify possess the financial competence and knowledge required to negotiate the difficulties of unregulated 3(c)(7) investment options.
What can you Invest in as an Accredited Investor?
Accredited investors have access to a variety of unique, private investment possibilities, including:
- Angel investments
- Real-estate investment funds
- Venture capital funds
- Hedge funds
- Private equity investment
- Specialty investment funds
- 3(c)(1) funds (funds with a maximum of 100 investors, or 250 investors for funds under $10 million)
Each of these organizations offers securities through Regulation D offerings. Any firm that registers with the SEC and files a Regulation D offering just needs to provide basic information such as its location, key offering, and primary officers.
Any further information they want to offer is totally at their choice. However, all Regulation D offerings are still subject to anti-fraud and anti-manipulation regulations. Regulation D offerings can provide authorized investors with unique diversification opportunities.
Regulation D also permits funds and companies to avoid the expenses and complications associated with public offers, which could lead to higher returns on investment.
However, with great benefits comes great danger. Regulation D offers are unregulated and have minimal disclosure obligations, so investors must exercise caution and utilize their skills to make informed investment decisions.
What can you Invest in as a Qualified Purchaser?
Qualified purchasers get access to all Regulation D assets available to qualified investors, including 3(c)(1) funds. In addition, they may invest in private 3(c)(7) funds. These funds are only available to eligible buyers and often have an investor limit of 2000, as opposed to the 100/250 limit of 3(c)(1) funds.
Because 3(c)(7) funds are comprised entirely of experienced qualified purchasers, they have the potential to generate enormous profits. Qualified investors’ skills and financial capabilities usually result in less regulatory oversights, better risk management, and greater adaptation to changing economic environments.
However, 3(c)(7) funds have significantly greater risk than 3(c)(1) funds. The increased complexity of investment opportunities, as well as the larger diversity of financial skills among participants, can pose new problems, making a thorough understanding of investment methods important to success. Furthermore, 3(c)(7) funds are even less regulated than 3(c)(1) funds, requiring extra caution.
The Future of Private Investments
The world of private investing has never been more appealing, but those interested must have a thorough awareness of the possibilities available and the risks associated.
The SEC’s legislation and compliance guidelines are constantly evolving. The SEC has been under pressure to lower its regulations and allow more people to access private investment options while remaining strongly committed to ethical investing. Many people believe that limiting the possibility for high-return investments to those with great wealth is unjust.
Conclusion
The aura surrounding private investment options has been demystified with the goal of assisting accredited investors and eligible purchasers in making educated decisions while maintaining financial stability.
With the proper combination of investing advice, knowledge, and skill, you’ll be able to make informed judgments about which investments are most suited to your objectives.