Estimated reading time: 5 minutes
It may not feel like it, but sometimes, the gatekeepers have your best interests at heart.
The U.S. Securities and Exchange Commission (SEC) created the classifications of "accredited investor" and "qualified purchaser” to protect certain investors from the potential pitfalls of high-risk investments like hedge funds, private equity funds, and venture capital funds.
These terms represent the SEC’s ongoing efforts to balance investor protection with the need to allow sophisticated investors access to a broader range of investment opportunities.
In this article, we’ll take a closer look at the difference between accredited investors and qualified purchasers, including some of the exclusive investment opportunities that are available to each classification.
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KEY TAKEAWAYS
While both qualified purchasers and accredited investors are high-net-worth individuals or entities, the threshold for being considered a qualified purchaser is significantly higher.
An accredited investor must meet a net worth threshold of $1 million (excluding primary residence) or have an income exceeding $200,000 in each of the last two years ($300,000 with spouse).
Meanwhile, a qualified purchaser must have at least $5 million in investments for individuals or $25 million for entities.
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Table of Contents
- Accredited Investor Definition
- Qualified Purchaser Definition
- Opportunities for Non-Accredited Investors
- Invest Your Retirement Funds in Private Markets
Accredited Investor Definition
An accredited investor, as defined by the U.S. Securities and Exchange Commission (SEC), is an individual or entity that meets certain financial criteria, allowing them to invest in securities not registered with financial authorities. These investors are deemed to have the financial sophistication and capacity to bear the risk of unregistered securities.
There are two ways that individuals can qualify as accredited investors: financial or professional qualifications. We’ve listed these qualifications below:
Financial Qualifications
- A net worth exceeding $1 million, either alone or together with a spouse, excluding the value of their primary residence, or
- An income exceeding $200,000 ($300,000 for joint income) for the last two years, with the expectation of earning the same or higher income in the current year.
Professional Qualifications
- Licensed Investment Professionals: Individuals holding licenses like Series 7, Series 65, or Series 82. These licenses demonstrate their expertise in financial and investment matters.
- Company Executives: Directors, executive officers, or general partners of the company issuing the securities.
- Knowledgeable Employees: Employees who have significant knowledge and experience in private funds, making them suitable for investments in private funds.
- Family Clients of a Family Office: Any client associated with a family office that qualifies as an accredited investor.
Accredited Investor Opportunities
Accredited investors have access to an expanded range of investment opportunities. These offerings often involve higher risk and require a greater level of financial sophistication.
Here are a few investing opportunities only available to accredited investors:
- Regulation D Offerings: Accredited investors can participate in offerings under Regulation D (Rule 506(b) and 506(c)), which allows companies to raise capital without registering the securities with the SEC.
- No Crowdfunding Limits: Under Regulation Crowdfunding, non-accredited investors are subject to investment limits based on their income and net worth. Accredited investors do not have these limitations.
- Reduced Disclosure Requirements: Companies raising funds from accredited investors can provide less detailed disclosure compared to public offerings, making the process faster and less costly.
- Secondary Market Transactions: Accredited investors can participate in secondary market transactions of private company shares, allowing them to buy and sell shares of private companies before they go public.
Qualified Purchaser Definition
A "qualified purchaser" is a term defined under the Investment Company Act of 1940, which refers to an individual or entity that meets certain financial criteria established by the U.S. Securities and Exchange Commission (SEC).
These criteria are generally higher than those required for an accredited investor and are intended to identify individuals and institutions with significant investment experience and financial resources.
According to Section 2(a)(51) of the Investment Company Act of 1940 and Rule 2a51-1, qualified purchasers are:
- Individuals: Own $5 million or more in investments (excluding primary residence and property used in business).
- Family Companies: A family-owned company with $5 million or more in investments.
- Trusts: A trust not formed specifically for the investment, where the trustee and each contributor are qualified purchasers, and the trust holds at least $5 million in investments.
- Entities: An entity (such as a corporation or partnership) with $25 million or more in investments.
Qualified Purchaser Opportunities
Qualified purchasers have access to certain investment opportunities that accredited investors do not. These opportunities are often in the realm of private funds and high-net-worth investment vehicles that come with different regulatory exemptions.
Here are some examples of investments available to qualified purchasers but not accredited investors:
- 3(c)(7) Hedge Funds: Funds that rely on the 3(c)(7) exemption under the Investment Company Act of 1940 are only available to qualified purchasers. These funds can have up to 2,000 investors and are not subject to many of the regulatory requirements that govern mutual funds and other types of investment vehicles available to the general public.
- Certain Real Estate and Private Equity Funds: Many real estate and private equity funds that cater to high-net-worth individuals and institutional investors are structured to accept only qualified purchasers. This structure allows them to avoid some regulatory scrutiny and cater to more sophisticated investors.
- High-Risk Venture Capital Funds: Some venture capital funds that invest in very early-stage, high-risk startups may only accept qualified purchasers. These funds typically involve high minimum investments and a longer time horizon for potential returns.
- Special Purpose Vehicles (SPVs): SPVs created for specific investment opportunities, such as a single large private equity deal or a real estate project, may be limited to qualified purchasers. These vehicles often involve significant due diligence and larger financial commitments.
Opportunities for Non-Accredited Investors
While non-accredited investors may face certain restrictions, recent regulatory changes have provided access to a wider range of private market opportunities.
By leveraging crowdfunding platforms, P2P lending, investment clubs, and private REITs, you can diversify your investment portfolio and potentially achieve higher returns. For a deeper dive into the opportunities available for non-accredited investors, check out our recent blog post, 4 Non-Accredited Investor Opportunities.
Invest Your Retirement Funds in Private Markets
When evaluating private market opportunities, it's crucial to conduct thorough due diligence to protect your investments. Our Due Diligence Guide provides detailed checklists and red flags to watch out for as you assess private equity and real estate opportunities.
Self-Directed IRA Due Diligence Guide
Finally, if you're an experienced private equity investor, you may want to consider leveraging your retirement funds by investing in private equity through a self-directed IRA (SDIRA).
A self-directed IRA functions exactly the same as an IRA from a bank or brokerage with one exception – you have the added flexibility to invest in alternative assets, such as real estate, private equity, and more.
This can be a powerful tool for diversifying your portfolio and maximizing your retirement savings.
Want to learn more about SDIRAs? Download our SDIRA Basics Guide. Inside, we’ve included a brief breakdown of the IRS rules, examples of what you can and cannot invest in, and a step-by-step process to get started.
Bonus: If you become an Entrust client, you gain exclusive access to Entrust Connect, our online investment marketplace. We regularly update Entrust Connect with new offerings, including early-stage technology companies, real estate development firms, and closed-end interval funds.
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