In the world of finance, not all investments are created equal. Some are open to everyone. Many are limited to a select number of private investors. But, when it comes to investing privately, how do we define who has the financial stability and experience to make informed decisions?
Accredited investors and qualified purchasers are two distinct rungs of the investment ladder. Each investor status has well-defined eligibility criteria, and both are provided with specific investment opportunities that the general public cannot access.
I’ll discuss what lucrative opportunities accredited investors and qualified purchasers can invest in. And most importantly, we’ll explore the key differences between the two statuses.
But let’s start with the basics. What are accredited investors and qualified purchasers, and how do you become one?
What is an Accredited Investor?
The term “accredited investor” is a status provided to persons or entities who meet specific legislative, income, or net worth requirements.
Becoming an accredited investor qualifies you to make alternative investments in private market opportunities not regulated by the U.S. Securities and Exchange Commission (SEC).
For example, accredited investors can invest in private equity funds, hedge funds, and 3(c)(1) funds, typically limited to a maximum of 100 or up to 250 if the fund’s size is below $10 million.
Related: How to sell the shares of a private company?
Accredited Investor Qualifications and Eligibility Criteria
The criteria for becoming an accredited investor are quite straightforward. To be eligible, you must meet at least one of the following:
- Income: An annual income of over $200,000 in the last two years for an individual or $300,000 in the last two years for a couple. You must also prove that you expect to make the same amount or more in the coming years.
- Net worth: A net worth of $1 million or more, excluding the value of your home (either individually or combined with a spouse).
- Licenses: The possession of a Series 7, 62, 65, or 82 license. Each license proves to the SEC that you have the capabilities and expertise to invest in unregulated private market opportunities.
- Expertise: Being a sufficiently “knowledgeable employee” of a private fund.
You can also qualify as an accredited investor with a trust fund if it meets all three requirements.
- Net worth: Your fund’s total assets are greater than $5 million.
- Intentions: You did not form the fund specifically for the purpose of investing in a particular fund.
- Expertise: You can prove that you or your fund managers have the financial knowledge, skills, and experience to evaluate the merits and risks of an investment.
What is a Qualified Purchaser?
“Qualified purchaser” is a regulatory status provided to individuals or entities that meet certain investment criteria. Unlike accredited investors, qualified purchaser status depends on the value of a person’s investments, not their net worth or household income.
Qualified purchasers are the highest possible level of investors. As such, the eligibility for achieving this status is strict. That said, those that meet the requirements have access to a broader number of unregistered securities, such as 3(c)(7) investment funds and larger investment opportunities containing over 100 investors.
With the higher entry requirements and a broader range of opportunities available, it’s perhaps no surprise that qualified purchasers are often called “super accredited investors”.
Qualified Purchaser Qualifications and Eligibility Criteria
To become a qualified purchaser, an individual, married couple, or family office must have at least $5 million in investments, not counting the value of their primary residence. Eligible investments include:
- Bonds.
- Stocks.
- Cash and cash equivalents.
- Commodities.
- Investment properties.
Alternatively, Darren Robertson explains that an individual could achieve qualified purchaser status through a trust, provided they meet one of the following criteria:
- The trust has $5 million or more in investments, and two or more close family members own the trust.
- The individuals granting assets to the trust are qualified purchasers, and the trust was not exclusively made to invest in a particular fund.
A company or entity is also eligible for qualified purchaser status if they have investments of $25 million or more. Finally, an investment manager can qualify, provided they manage over $25 million.
Accredited Investors vs Qualified Purchasers: What’s the Difference?
Despite the similarities between qualified purchasers and accredited investors, there are a number of notable distinctions between the two. Let’s explore four critical differences between accredited investors and qualified purchasers.
- Eligibility criteria: Accredited investors are defined based on their annual income, net worth, or possession of certain licenses. In contrast, qualified purchasers are defined by the value of their investments.
- Investment opportunities: Qualified purchasers have more investment opportunities, as they have access to both 3(c)(1) and 3(c)(7) funds. In contrast, accredited investors can only access 3(c)(1) funds.
- Limitations: As accredited investors can only invest in 3(c)(1) funds, they are typically limited to 100/250 investors under most circumstances. On the other hand, qualified investors can participate in funds with much larger investor limits.
- Regulation: Accredited investors are still subject to certain laws and regulations, whereas qualified purchasers have additional exemptions from SEC legislation.
Qualified Purchasers vs Accredited Investors: Why do we Need to Differentiate Between the Two?
It’s important that the SEC differentiates between accredited investors and qualified purchasers for two key reasons: Financial stability and expertise.
Financial Stability
Qualified purchasers typically have more financial stability than accredited investors, allowing them to bear more risk and withstand substantial losses. This grants them access to the most unregulated asset classes, like 3(c)(7) funds and funds containing more than 100 investors.
By imposing strict eligibility criteria on qualified purchaser status, the SEC protects less financially secure investors from these high-risk investment opportunities, meaning that accredited investors can purchase pre-IPO shares, and non-sophisticated investors will need to wait until a company officially lists its initial public offering (IPO).
Expertise
As the SEC determines qualified purchaser status on the value of an individual’s investment portfolio, all eligible qualified purchasers prove they have a history of successful past performances. This means those who qualify have the financial sophistication and knowledge to navigate the complexities of unregulated 3(c)(7) investment opportunities.
What can you Invest in as an Accredited Investor?
Accredited investors gain access to a number of special, private investment opportunities, such as:
- Angel investments.
- Real estate investment funds.
- Venture capital funds.
- Hedge funds.
- Private equity investments.
- Specialty investment funds.
- 3(c)(1) funds (funds with a maximum of 100 investors, or 250 investors for a fund size of $10 million or less).
Each of these entities sells securities known as Regulation D offerings. Any company that registers with the SEC and submits a Regulation D offering only needs to put forward essential information such as the company’s location, key offering, and primary officers.
Any additional information they choose to provide is entirely up to their discretion. That said, all Regulation D offerings must still adhere to anti-fraud and anti-manipulation provisions. Regulation D offerings can benefit accredited investors by providing them with unique opportunities for diversification.
They also have the potential to lead to more substantial returns on investment because Regulation D allows funds and startups to avoid the costs and complexities associated with public offerings.
Related: How Sam Marks leveraged angel investments to own his future.
That said, with high rewards comes high risk. As regulation D offers are unregulated and have limited disclosure requirements, investors must remain cautious and use their expertise to make informed investment decisions.
What can you Invest in as a Qualified Purchaser?
Qualified purchasers gain access to all of the Regulation D investments offered to accredited investors, such as 3(c)(1) funds. In addition, they can also invest in private 3(c)(7) funds. These funds are only open to qualified purchasers and typically have an investor limit of 2000, compared to the 100/250 investor limit of 3(c)(1) funds.
As 3(c)(7) funds consist exclusively of experienced qualified purchasers, they have the potential to yield massive returns. Qualified investors’ expertise and financial capabilities typically result in fewer regulatory oversights, more effective risk management, and greater adaptability to evolving economic landscapes.
That said, 3(c)(7) funds are even higher risk than 3(c)(1) funds. The increased complexity of investment opportunities and the wider range of financial expertise among participants often introduce additional challenges, making a deep understanding of investment strategies critical for success. In addition, 3(c)(7) funds are even more unregulated than 3(c)(1) funds, meaning due diligence is essential.
The Future of Private Investments
The world of private investments has never been more enticing, but it’s essential that those interested have a firm understanding of the options available to them and the risks involved.
The legislation and compliances outlined by the SEC are ever-changing. The SEC has been pressured to relax its standards and allow more individuals to access private investment opportunities while, at the same time, being very pro ethical investing. Many consider limiting the opportunity of high ROI investments to those with significant wealth is unfair.
Summing Up
The aura surrounding private investment opportunities has been demystified with the ambition of helping accredited investors and qualified purchasers make informed decisions while safeguarding their financial stability.
With the right combination of investment advice, knowledge, and expertise, you’ll be prepared to make well-informed decisions regarding the investments best suited to your goals.
Flippa’s sophisticated marketplace is the best way to invest in the businesses, digital assets and ideas you value the most. Whether you’re a seasoned accredited investor looking to expand your portfolio or an aspiring entrepreneur honing in on your first digital venture, Flippa’s platform will enable you to turn your financial aspirations into a reality.
Start buying and selling on Flippa today.
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