Business market holds many types of investors with a spectrum of benefits and access limitations to private offerings, hedge funds, private equity funds, and venture capital funds. There are also different jurisdictional laws that impact who can invest in these funds, how entities attain a certain title and why businesses are obliged to verify them.
Coming from the US jurisdiction, one of such titles is a qualified purchaser.
What is a qualified purchaser?
US Securities and Exchange Commission (SEC) puts a qualified purchaser as an individual or a family business that has over $5M in investments or an individual/entity that invests over $25 million on their own account or on others’ behalf.
Common examples of these “investments” include:
- Securities (stocks, bonds) in public companies;
- Securities in a private company (valued at $50M or more);
- Real estates for investment purposes. (apartment buildings, rental houses, vacation home);
- Financial instruments such as futures and swaps;
- Cash/cash equivalents in the bank (Treasury bills or certificates of deposit);
- Retirement plans and trust funds controlled by an individual.
Qualified purchaser can also be:
- a trust sponsored by and managed by qualified purchasers;
- an entity owned strictly by qualified purchasers.
If an entity is claimed a qualified purchaser, it is exempt from registering and making their offering of securities public.
Qualification differences between investors matter: qualified purchaser vs accredited investor
The terms qualified and accredited investor are often interchanged as thought to be synonyms. However, it is more complicated than that. In this case, the thresholds is the key difference.
For the status of the accredited investor individuals need to have:
- a net worth over $1M;
- an income over $200,000 per year ($300,000 together with a spouse) for the past three years.
While qualified purchasers require much more — over $5M worth of investments. Such segregation makes them more privileged with more offerings open. That is why private funds often seek solely qualified purchasers as investors.
Qualified purchaser checks
According to SEC, as any other investor that has access to unregistered securities, qualified purchaser has to be officially verified by every business that works with them. And although qualified purchaser’s status is a bit higher than that of a qualified client or an accredited investor due to higher income and net worth, the verification drill stays the same for all of the aforementioned.
To follow up on qualified purchaser checks, have a look on our step-by-step guide to investor verification.
Whether launching or managing the fund, it is essential to know the eligibility of investors companies are having transactions with. Understanding investor categories helps to comply with the investor qualification standards assigned by SEC legislation and avoid reputation harming consequences of dealing with the wrong investor.