Qualified Purchasers: Who They Are and Why Companies Must Verify Them (2024)

Businesses are legally required to perform due diligence against investors and qualified purchasers to protect their interests and comply with regulations. But what exactly defines a “qualified purchaser”, and how can you be sure that a potential investor meets the criteria? Let’s delve into the details to understand the process and its importance.

What is a qualified purchaser?

A Qualified purchaser is an individual or entity that meets certain financial thresholds as defined by the INVESTMENT COMPANY ACT OF 1940. This designation allows them to participate in certain investment opportunities that are typically unavailable to the general public. Qualified purchasers are often considered to have a sophisticated understanding of financial markets, which allows them to engage in high-risk investments. This status is crucial in the world of private investment funds, particularly in hedge funds and other complex financial instruments.

Qualified purchaser criteria

The criteria for being a qualified purchaser are as follows: 

• An individual typically needs to own $5 million or more in investments to qualify. 
• For entities, such as trusts or corporations, the threshold is usually $25 million in investments. 
• These investments can include stocks, bonds, and other financial assets.

Typically the investments exclude: 

• primary residences
• personal property.

The rationale behind these thresholds is that those with significant amounts already invested are better equipped to handle the risks associated with certain investments. Additionally, some entities, such as family offices and certain types of trusts, can qualify as qualified purchasers if they meet specific requirements. 

Meeting these criteria does not automatically make one a qualified purchaser, as verification and documentation are necessary steps to obtain this status.

Qualified purchasers vs accredited investors

US securities laws define “accredited investors” and “qualified purchasers” as individuals or entities with the financial expertise and resources to manage higher risks and larger capital commitments. These designations allow them to participate in non-public investment opportunities.

Unlike accredited investors, who only need to meet specific income or net worth criteria, qualified purchasers must meet higher thresholds: 

• Accredited investors: Must meet net worth requirements of at least $1 million (excluding their primary residence) or have an annual income of $200,000 (or $300,000 jointly with a spouse) for the past two years.
• Qualified purchasers: Must exceed the investment thresholds mentioned above, making them often referred to as “super-accredited” investors due to the higher financial criteria.

Being a qualified purchaser therefore opens doors to a wider range of investment opportunities, often with the potential for higher returns. However, it also comes with greater risk, requiring a deeper understanding and greater financial stability.

Qualified purchaser status: Verification and documentation

To acquire a qualified purchaser status, investors must go through a verification process that typically involves providing financial documentation. This includes: 

• statements of investments (brokerage accounts and financial statements) 
• other relevant documents that prove ownership of the assets above a certain threshold. 

The verification process is often handled by an investment fund or a third-party service that specializes in investor qualification. In some cases, a self-certification may be sufficient, but this is less common and often requires follow-up verification. The goal of this process is to ensure that only those who truly meet the financial thresholds are granted access to qualified purchaser-level investments.

Documentation must be up-to-date and accurate, as any misrepresentation can lead to legal consequences. 

The verification process includes detailed documentation, which is a critical step in protecting both the investor and the investment fund from potential risks. Once verified, the investor can participate in various high-level investment opportunities, including hedge funds, private equity, and venture capital funds.

Suggested read: Guide to Digital Document Verification for Compliance and Fraud Prevention

Regulatory protections

The regulatory protections for qualified purchasers are designed to balance access to high-risk investments with the need for investor protection. Unlike retail investors, who are shielded by strict regulations and disclosures, qualified purchasers are expected to have the financial acumen to understand the risks involved. 

However, this does not mean they are without protection. The SEC still imposes certain regulations on qualified purchasers to prevent fraud and ensure transparency in the investment process. 

For example, investment funds that cater to qualified purchasers are required to provide detailed disclosures about the risks and strategies of the investments. Additionally, these funds are often subject to audits and regulatory reviews to ensure compliance with federal laws. The higher financial thresholds for qualified purchasers serve as a form of protection, ensuring that only those with the financial means and understanding can participate. This regulatory framework aims to create a safer investment environment while allowing for greater investment opportunities for those who qualify. Nevertheless, qualified purchasers are encouraged to perform their due diligence and consult with financial advisors before making investment decisions.

Why is it necessary to conduct qualified purchaser checks?

Qualified purchaser checks are necessary to ensure that only individuals or entities with sufficient financial resources and investing acumen can access certain high-risk investment opportunities. These checks serve as a safeguard against exposing less experienced or less financially stable investors to complex and potentially volatile investment vehicles. 

The verification process, which includes providing detailed financial documentation, ensures that only those who truly meet the financial criteria can participate. This is crucial not only for protecting individual investors but also for maintaining the integrity of financial markets. By limiting access to these investments, regulators aim to reduce the potential for widespread financial harm that could result from inexperienced investors participating in high-risk ventures. Moreover, these checks help investment funds comply with SEC regulations, reducing their risk of legal issues. Overall, qualified purchaser checks are a key component of a regulatory framework, designed to balance investor protection with access to exclusive investment opportunities.

How can Sumsub help?

Sumsub offers a comprehensive platform to help businesses meet regulatory requirements for qualified purchasers through robust KYC (Know Your Customer) and KYB (Know Your Business) solutions.

For KYC, our tools quickly verify identity and address, ensuring that businesses can easily confirm investor credentials and meet regulatory requirements. We also provide custom questionnaires to gather detailed financial information, along with AML screening to protect against financial crimes by checking individuals and organizations against PEP lists, sanctions databases, and adverse media.

For KYB, we validate businesses by cross-referencing corporate documents with official registries and proprietary databases. We also verify the identities of Ultimate Beneficial Owners (UBOs) using both document-based and non-documentary methods, like live video calls, for added security when required.

Sumsub provides robust tools for identity theft prevention. Using biometric verification, our platform helps ensure that only legitimate qualified purchasers gain access. 

With Sumsub, businesses can confidently verify qualified purchasers, prevent identity fraud, and monitor transactions in real time, ensuring both security and compliance throughout the user journey. Together, these measures protect the integrity of financial systems, ensuring that qualified purchasers meet the regulatory standards and pose no risk of financial crime.

FAQ

• What is a qualified purchaser?

  A qualified purchaser is an individual or entity that meets high financial thresholds, allowing them access to certain exclusive investment opportunities under the US securities law.

• What is a qualified client vs. qualified purchaser vs. accredited investor?

  Although ‘accredited investors’, ‘qualified clients’, and ‘qualified purchasers’ have similarities, each has a distinct meaning in different regulatory contexts. Accredited investors can participate in private securities offerings, qualified clients can receive specific investment advice and pay performance fees, and qualified purchasers can invest in certain funds exempt from registration under the Investment Company Act of 1940.

• What is the difference between a qualified eligible person and an accredited investor?

  A qualified eligible person (QEP) is a classification under Commodity Futures Trading Commission regulations with specific criteria for trading in certain commodity pools, whereas an Accredited Investor meets SEC criteria based on income or net worth to participate in private securities offerings.