Qualified Purchasers and Accredited Investors: What’s the difference?
As you set up your hedge fund, it’s important to understand the difference between an Accredited Investor and a Qualified Purchaser, and why it matters for your fund. In this post, we outline the main differences between the two.
What Is An Accredited Investor?
Accredited investors can invest in securities that are not registered with the SEC and are not offered to the general public. These unregistered securities are expected to be riskier and are not held to the same disclosure standards that publicly traded investments are. The SEC put forth a series of requirements to ensure that investors are sophisticated enough to understand the risks involved with investing in unregistered securities.
To be considered an Accredited Investor, the following qualifications must be met:
Accredited investors must have an individual annual income over $200,000. If filing with a spouse, the joint annual income must be above $300,000.
This income must be made for two consecutive years, and it is expected that the same minimum income will be made in the upcoming year.
#2 Net Worth
In addition to proof of income, accredited investors must have a net worth (or joint net worth) of over $1 million. The value of the individual’s primary residence does not count towards this value.
#3 Private Companies
Private companies can also be considered accredited investors. Private businesses with assets above $5 million qualify as accredited investor entities.
What is a Qualified Purchaser?
Certain funds are exempt from registering with the SEC (Regulation D) as long as the fund’s investors are accredited investors or qualified purchasers. Qualified purchasers have higher financial thresholds compared to accredited investors and it is generally accepted that it’s more difficult to qualify as a qualified purchaser than an accredited investor.
To be considered a qualified purchaser, at least one of the following qualifications must be met:
The individual or private business must own at least $5 million in investments. Investments can include stocks, bonds, loans, futures, cash, real estate, and other assets. Similar to standards for accredited investors, “investments” does not include the primary residence and or property used for business.
#2 Active Investments
The purchaser must invest at least $25 million—whether this be their own money or on the behalf of someone else. This extends the classification to those who are professional investment managers or corporations who invest client’s money.
A trust that is sponsored and managed by qualified purchasers can be considered a qualified purchaser itself. In order to be considered for this, there must be reasonable proof to confirm that the trust was not formed solely to enable the purchaser to invest in the fund.
Accredited Investors v Qualified Purchasers
Becoming an accredited investor has comparatively less barriers to entry due to its lower financial qualifications. Because of this, qualified purchasers may sometimes be referred to as “super-accredited investors”.
Qualified purchasers also tend to have more opportunities to invest as certain funds can accept up to 2000 qualified purchasers while others can only accept up to 100 accredited investors.
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