Understanding Qualified Investors and How to Work With Them

Diving deeper into the topic of working with qualified investors

Businesses of any scale demand caution. So, even if the investor is deemed qualified by others, it doesn’t hurt to double check them before committing to any transactions. Or, to be precise, companies are legally obliged to do so. But how to determine if the investor fits the description?

Let’s find out.

What is a qualified investor
Similar to other types of investors, qualified investor definition will entirely depend on the jurisdiction they are under and on the circumstance of the deal.

To generalize, a qualified investor is an entity legally permitted to purchase private securities, venture capital funds, hedge funds and other private placements through limited offers. Alike an accredited one, qualified investor has high income and high net worth equal or higher than the specific standards stated in the relevant law.

How to become a qualified investor
Qualified investors can be individuals, financial institutions, businesses, trusts, corporations, organizations, including non-profit ones. The accreditation can be acquired by meeting all or some of the following requirements:

Income and net worth 

For individuals, the essential criteria is a person’s annual income, or, alternatively, their net worth (individual or, if the person is married, combined with that of their spouse). The net worth is also traditionally evaluated with respect to legal entities. The thresholds depend on specific regional laws, for instance:

  • In the US, a natural person alone (or together with a spouse) has to have a net worth over $1,000,000; or an income over $200,000 (or joint income over $300,000 together with a spouse) for the past two years with the expectation of the same income value in the current year;
  • In Canada, a person alone (or together with a spouse) has to own $1 million in financial assets; or net worth (individual or joint if married) over $5 million; alternatively, an individual’s net income before taxes has to be over $200,000 (or $300,000 together with a spouse) in the two most recent years with the expectation of the same income value in the current year;
  • In the UK, to become a high-net-worth investor, a person has to earn at least 100,000 GBP a year or have at least 250,000 GBP in assets (regardless of the individual’s primary residence, insurance, and pension policies).

The type of a legal entity

Normally, certain types of legal persons obtain the status of accredited investors by definition, for instance:

  • In Estonia, credit institutions, investment firms, management companies, investment funds and other financial institutions subject to financial supervision, market traders in commodities and commodity derivatives and certain other types of legal entities are considered qualified investors;
  • Likewise, in the US, banks, registered investment companies, insurance firms, business development companies, or small business investment companies are all regarded as accredited investors.

For Australia, Singapore and more jurisdictions, have a look at the article on Reaching transparency with sophisticated investors for fraud exposure and ensured reputation

Knowledge

Apart from monetary assets, a person or an entity should have a deep insight into the market and have experience in dealing with securities. Qualified investors should be able to calculate and evaluate the investment risks that come with the purchase. Professional and educational background can also be evaluated to determine a person’s eligibility.

For instance, in the EU, the MiFID states that an individual must adhere to at least two of these criteria to be considered an “elective” professional client:

1) an individual has to carry out trade transactions of at least EUR 50,000 in the relevant field with the average frequency of 10 times per quarter over the past four quarters;

2) individual’s financial instrument portfolio has to exceed EUR 500,000, including cash deposits and financial instruments;

3) at least one year of financial sector work experience in a position that demands knowledge relevant to the transactions.

Sumsub provides a bank-grade check of all types of investors from local and international jurisdictions. 

How to establish business relationships with qualified investors 
The necessity to verify qualified investors comes from companies selling unregistered private offerings. Such business deals lawfully demand each firm to take precaution steps and verify the eligibility of a qualified investor, which can be done through requesting W-2s, bank statements, tax returns, and other information.

There are roughly three steps to investor verification that are necessary to ensure the safety of every transaction. Follow the link to read the full guide to investor verification.

Non-qualified
Any non-qualified or non-accredited investor is an entity that doesn’t meet certain jurisdictional criteria. As an example, according to SEC, a non-qualified investor income is usually lower than $200,000 individually or $300,000 with a spouse. Same goes for the net worth, which will be lower than required for an accredited entity.

Qualified Investor vs. qualified institutional buyer 
Qualified institutional buyer is a status given under the United States regulation to a financially sophisticated and legally recognized securities purchaser. To become a qualified institutional buyer, corporations should on a discretionary basis invest more than $100 million into securities, with the broker-dealer investment threshold of $10 million.

Unlike a qualified investor, the qualified institutional buyer is a corporation and cannot be an individual.

QIB corporations can be domestic or foreign financial institutions, insurance and investment companies, business development companies, charitable organizations, investment advisors, trust funds and benefit plans.

To limit regulatory restrictions and public filing requirements, some of the private offerings of stocks and bonds are open only to qualified institutional buyers.

Although investors have many different names and descriptions, all of such privileged buyers, including qualified investors, hold under-regulated access to securities. Depending on the legislation law, companies have to oversee investors undergo proper checks and establish a trusting relationship between themselves (offering issuers) and the buyer.

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