Certain regulatory classifications dictate which investors can pursue investment opportunities that aren’t registered with the Securities and Exchange Commission. “Qualified purchaser’ is one of the most common ones. Such an investor can, say, invest in shares issued by startups and privately held companies. While such investments carry a certain amount of risk, as do all investments, they can also reap significant rewards.
There are other things you can do as a qualified purchaser.
Let’s look at that and more.
What is a Qualified Purchaser?
Along with accredited investors, qualified purchasers are among the most common regulatory classifications. Rather than just shares that are sold in markets that are open to the public, these investors can take advantage of private offerings and make other moves that we will discuss.
Boiled down, a qualified purchaser is an individual or family business that has investments valued at a minimum of $5 million. Such investments can include, for example, real estate, financial contracts, stocks and bonds, and commodity futures contracts. The main proviso here is that portfolio components cannot include a chief residence or a property that’s used for everyday business.
Alternatively, an individual can function on behalf of a group of people who are qualified purchasers and who can invest at least $25 million. Moreover, a trust may be afforded qualified purchaser status if its investment portfolio is valued at a minimum of $5 million and is owned by at least two closely related family members, such as siblings. A trust may not be formed for the sole purpose of gaining such status, however.
Who Determines Who is a Qualified Purchase?
The responsibility of verifying that an investor qualifies as a qualified purchaser – or accredited investor, for that matter – falls to the issuer of unregistered securities. The specific verification process, however, can vary depending on the sale of unregistered securities.
What Can You Do as a Qualified Investor?
In general, qualified purchasers have access to a relatively broader range of investment opportunities, particularly in comparison to accredited investors. After all, eligibility requirements for the former are steeper, and there’s a reason that qualified purchasers are commonly referred to as “super-accredited” investors: they must have at least $5 million in investments. That investment capability alone is an advantage. In other words, qualified purchasers are really competing at a higher level.
Another major benefit of being a qualified purchaser is having access to 3(c)(7) funds, which can handle up to 2,000 qualified purchasers. This is compared with the significantly lower limits permitted by 3(c)1) funds, in which qualified purchasers may also invest.
A 3(c)(7) fund, as outlined in the Investment Company Act of 1940, is a kind of private equity fund – a pooled investment vehicle — that is excluded from the definition of investment company because it has no more than 100 beneficial owners.
So, what can you do as a qualified purchaser? Quite a lot, at least as compared with accredited investors, because the threshold is so high to become one. If you can gain that status, investment opportunities are plenty.
An additional item to note is that while federal regulators have recently felt pressure to relax standards to permit more individuals to invest in start-ups and other opportunities, alternative investment platforms such as Yieldstreet already provides many ways for those who are not institutional investors or who are not in the top tier of earners to get in on a range of asset classes with minimum investments as low as $500. Such opportunities may be worth checking out.