Accredited Investor vs Qualified Purchaser | What’s the Difference?
In this post we’ll explain the difference between an accredited investor an a qualified purchaser. This distinction is important as certain funds only allow investment AIs and/or QPs. So what does it mean to be an accredited investor versus a qualified purchaser?
The term accredited investor is defined in Rule 501 of Regulation D.
An accredited investor is an investor that is permitted by the Securities and Exchange Commission to invest in certain investment offerings not available to the general public given they meet certain criteria. More simply put, if you want to invest in private funds (think hedge funds, real estate funds, venture capital funds, etc) you’ll need to be an accredited investor. Only then can the fund accept you as a limited partner (LP) and accept your capital.
Accredited Investor Criteria:
There are two primary ways an investor can qualify as an accredited investor. Note investors only need to meet ONE of these two criteria to qualify as an accredited investor.
- Income: Greater than $200,000 per year for the last two years income (if filing singly) or 300,000 in joint income (if filing married)
- Net Worth: Greater than a $1 million dollar net worth (excluding primary residence and debts) either individually or jointly with
Due to legal structure and corresponding SEC rules, some private offerings actually require more than accredited investor status to invest. This elevated investor status is known as being a qualified purchaser. Here are the requirements to be classified as a QP (again note only one of these criteria must be met):
- Ownership of $5 million or more in investments. This applies to individuals and family owned businesses. Note if investing as a family owned business, it cannot be formed solely for the purpose of investing in the fund.
- Investing at least $25 million. This $25 million threshold applies to individuals either for their own accounts or on others’ behalf. Once again, an entity can’t be been formed for the sole purpose of investing in the fund. The $25 mil threshold typically applies to professional investment managers or corporations.
- Entity or trust with all qualified purchasers. If an entity is compromised solely of QPs (>$5m each) it is treated as a qualified purchaser.
Accredited Investor vs Qualified Purchaser Differences
There are three big differences between accredited investors and qualified purchasers. Here’s the summary
- Accredited Investor status has an income competent; Qualified Purchaser status does not. If you’ve earned $200k+ ($300k+ if joint) each of the past two years you can qualify as an AI based on income. QP status has no such income qualifier.
- $1m vs $5m. AIs need a net worth of at least $1 million (the only exception is if they meet the income requirements) while QPs need to have at least $5 million of investments.
As you can see, the standard is higher to become a QP compared to an AI.
Qualified Client Definition
There is a third term or investor classification that you may see from time to time. It’s fairly uncommon but some private funds require Qualified Client status. What does it mean to be a qualified client?
- Investor has at least $1 million under management with the investment adviser; OR
- Net worth (excluding primary residence) of greater than $2.1 million
Again, QC status is not seen as frequently but it is important to be aware of QCs as well.
How can you verify your accredited investor status or qualified purchaser status?
There are two primary ways to verify your status. Often funds will require LP’s to prove out their status before he or she can invest so it’s important to know how to verify if necessary.
- Ask your accountant: Many CPAs will gladly provide you a letter that states you are accredited. Often they will do this free of charge as a courtesy to their clients. Simply ask them to provide a dated letter and you’ll be good to go. Note you may need to provide proof of your income and/or investments if they do not already have close knowledge of your financial situation.
- Verify with a 3rd party service: Another popular method is to use a 3rd party service. We
- VerifyInvestor.com – costs $59 for an individual investor.
- EarlyIQ.com – costs $49 for an individual investor.
- Accredited.am – cost is free but they will market private placement opportunities to you (as you can imagine there are plenty of funds looking for individuals with >$1m net worth to market to).
We hope you now have a better understanding of both accredited investors and qualified purchasers. If you have any questions please just drop a comment below. Happy investing!
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