Accredited Investors and Qualified Purchasers are two investor classifications created to ensure that individuals investing in higher risk, less liquid, or less regulated products have the income, assets, or expertise to bear that risk. The Accredited Investor standard was established by a 1982 amendment (Regulation D) to the Securities Act of 1933, while the Qualified Purchaser standard was created by the 1996 National Securities Markets Improvement Act, an amendment to the Investment Company Act of 1940. Understanding which of these categories you fall into determines the types of private investment opportunities available to you.
What Is an Accredited Investor?
An Accredited Investor is an individual who has earned at least $200,000 in each of the past two years ($300,000 if married filing jointly) and reasonably expects to earn the same or more in the current year. An individual may also qualify with a net worth exceeding $1,000,000, excluding the value of their primary residence. This net worth test applies to both single filers and married couples filing jointly.
Several entities can also qualify as Accredited Investors:
- Trusts directed by a sophisticated person (provided the trust was not formed for the sole purpose of acquiring access to sophisticated investments) and holding more than $5,000,000 in assets.
- Business entities with more than $5,000,000 in investments, if they were not created solely to gain access to sophisticated investments.
- Entities owned entirely by Accredited Investors, which are automatically considered Accredited Investors themselves.
- Licensed professionals who hold a Series 7, 65, or 82 license in good standing.
What Is a Qualified Purchaser?
A Qualified Purchaser is an individual investor or married couple with more than $5,000,000 in investable assets.
This category also extends to:
- Family offices and certain trusts provided the trust holds more than $5,000,000 in investable assets.
- Investment managers with more than $25,000,000 in assets under management.
- Qualified Institutional Buyers (QIBs), who are automatically treated as Qualified Purchasers.
What Investment Opportunities Do These Classifications Unlock?
1. 3(c)(1) and 3(c)(7) Funds
These are private investment funds that do not register with the SEC and are commonly referred to as hedge funds.
- 3(c)(1) funds are open to both Accredited Investors and Qualified Purchasers but cap their total number of investors at a low limit.
- 3(c)(7) funds are restricted to Qualified Purchasers only but can accommodate up to 2,000 investors before reaching capacity.
2. Private Placements
A private placement occurs when a private (non-public) company raises capital by selling stock or bonds to a select group of investors rather than the general public. In some cases, a third party will offer a co-investment opportunity, giving investors either direct access to a deal the third party has already made or indirect access through a fund or fund-of-funds structure.
Accredited Investor vs. Qualified Purchaser: Why the Distinction Matters
Accredited Investors and Qualified Purchasers are distinct classifications with access to different types of private investment products. These opportunities are generally unavailable to the general public because of the complexity, risk, and illiquidity involved. If you believe you may qualify as an Accredited Investor or a Qualified Purchaser, it’s worth exploring which investment products you’re eligible for and whether they align with your financial goals.
About the Author
Aaron Belletsky, CFP® is a Certified Financial Planner® and an associate financial advisor with Landmark Wealth Management, LLC, a fee-only SEC registered investment advisory firm. He works with individuals and families to develop comprehensive financial strategies to achieve their long-term goals.