When searching for potential investment opportunities, you will discover several accessible ETFs and publicly traded mutual funds that just about anyone can invest in.
That said, for a more exclusive and capital-intensive investment opportunity, like a private real estate fund or syndicated real estate fund, you must meet some qualifications.
Syndicated real estate investment opportunities use terms like qualified purchasers and accredited investors. And while many people use these terms interchangeably, they are not the same.
This article will explain the differences between a qualified purchaser vs accredited investor. It will also highlight the different investments falling under these investor designations. In addition to these, you will also learn the steps to take if you are looking to become a qualified purchaser or accredited investor.
What is a Qualified Purchaser?
A qualified purchaser is a term that refers to a family-owned company or individual that has more than $5 million in investments. One of the differences between qualified purchasers and accredited investors is that there isn’t a net income or yearly income benchmark for the former. Instead, a benchmark is placed on investments.
Most private funds owned by more than 100 people cannot register with the SEC. Private funds only qualify if every owner is a qualified purchaser.
Just as with accredited investors, qualified purchasers have access to only certain funds, including a venture capital fund or hedge fund.
In broad terms, investments involving qualified purchasers can include futures contracts, bonds, stocks, cash equivalents, cash, real estate, commodity futures contract, financial contracts, and the total assets held by the business or individuals for investment purposes. Primary residences or business properties do not count towards the investment benchmarks.
Qualifications of Qualified Purchasers
Apart from having more than $5 million in investments, there are other ways one can become a qualified purchaser.
- An entity or individual needs to have invested a minimum of $25 million in private capital. This can be on behalf of other qualified purchasers or their own accounts.
- A trust sponsored and operated by qualified purchasers also qualifies.
- An entity wholly owned by qualified purchasers.
The most important caveat to qualifying as a qualified purchaser is that none of these entities can be created as an investment company solely for investing in private funds. The SEC makes certain exemptions for funds exclusively open to qualified purchasers as they aren’t required to register with the regulatory body.
As a benefit, these unregistered funds do not have to publicly disclose investment positions. With this exemption status, these unregistered funds gain access to as many investors as they desire while still being flexible in their investment methodology and corporate strategy.
What is an Accredited Investor?
An accredited investor defines a business or person allowed to trade in securities that aren’t registered with financial regulatory authorities, such as private funds. These unregistered sellers can only sell shares to accredited investors that meet a certain net worth threshold, income, governance status, asset sizes, financial sophistication, or professional experience.
The term comes from the Securities and Exchange Commission’s Regulation D. Rule 501a of Regulation D expands the definition of accredited advisor, which refers to investors that do not have a high need for protection in regulatory disclosure filings. As such, these unregistered securities are a lot riskier and not held to the same disclosure standard as publicly-traded investments.
This provides a benefit to companies as they do not have to register their securities with the SEC. Ultimately, this helps them save money in the long run. These private placements are offered only to accredited investors with the financial wherewithal to understand the risk levels since they have fewer legal protections.
A person or entity with accredited investor status engages in high-risk, high-reward investments. That means there is a high chance of failure. This is why the SEC offers protection for an individual investor who might not have the investment fund or financial sophistication to handle these types of investments.
Qualifications of an Accredited Investor
Regulatory bodies such as the SEC have benchmarks in place for anyone who wants to qualify as accredited investors.
To be an accredited investor, you need to have a yearly income of more than $200,000. A qualified investor filing with their spouse must have a joint income of more than $300,000.
Another accredited investor qualification is that they must maintain this income benchmark consistently for at least two years to be eligible. In addition to this, there must be ample indication that subsequent yearly incomes will meet or even supersede the minimum amount.
Additionally, to become an accredited investor, you must have a net worth of more than $1 million either with your spouse or on your own. According to financial regulations, your primary residence does not count towards your net worth.
An accredited investor can also be an executive officer, director, or general partner of the company issuing the unregistered securities. Private businesses and companies can also qualify as accredited investors if the combined asset of the organization is more than $5 million.
If a business has equity owners that qualify as accredited investors on their own, then that business also qualifies. Nevertheless, organizations created solely to buy unregistered securities cannot qualify as accredited investors.
A person can also become an accredited investor if they can demonstrate a level of professional or educational experience with unregistered securities.
What Investments Fall Under Each Category?
For qualified purchasers, yearly income or net worth is not the benchmark for investor qualification. Instead, the focus is on the value of your investment fund. The following are the types of investments that qualified purchasers can have access to:
- Real estate held for investment purposes. This does not include real estate used for business or residence.
- Securities such as notes, bonds, and stocks.
- Commodities futures contracts, commodity futures, options, as well as options on physical commodities, which are held for investment purposes.
- Financial contracts like swaps or other individually negotiated financial transactions that do not fall under the securities category.
- Physical commodities, such as silver or gold, are held for investment purposes.
- Cash, as well as cash equivalents, are held for investment purposes. These cannot include funds used to service daily expenses. Also, it cannot include the working capital of a business.
- Binding capital commitments either for a commodity pool or an investment company.
The primary goal of becoming an accredited investor is to ensure that the right companies and individuals can safely buy unregistered securities. This ensures that these investment opportunities are not open to investors that do not have enough capital or the right financial know-how. Accredited investors are also able to invest in high-risk deals, angel investments, hedge funds, and complex venture capital deals.
How to Become a Qualified Purchaser or Accredited Investor
To become a qualified purchaser or accredited investor, you must proactively prepare for the role. One way is to consult a lawyer, CPA, or investment advisor to create a letter highlighting your accreditation status.
At the moment, there is no formal process for anyone looking to become an accredited investor. This process is at the discretion of the unregistered securities to verify the status of the companies or individuals looking to invest. The unregistered securities must make sure that potential investors meet one or more of the requirements of becoming an accredited investor.
If you think you meet the requirements of an accredited investor, then you need to speak with the issuer of the unregistered securities. You will receive a questionnaire to confirm your eligibility.
In addition to this, you will need to provide proof of your claims. This will typically involve providing several financial documents, such as your financial statements, tax returns, account information, W2 forms, credit reports, a balance sheet, or a review letter from advisors, investment brokers, tax attorneys, or CPAs.
The process of verification is the responsibility of each entity offering private funds. They need to ensure each potential investor meets the requirement as a qualified purchaser before they can invest.
Since the criteria of a qualified purchaser lie in investments rather than net worth or income, the financial documents required are unique and vary from one individual or entity to another.
So long as you meet the qualifications outlined in the earlier section of this article, you only have to provide information to the private fund organization and wait for them to decide on your qualifications.
Now you know the difference between a qualified purchaser vs accredited investor. There are many requirements to be met to become either a qualified purchaser or an accredited investor.
The burden of verifying each individual investor for either category lies with the company offering the unregistered securities, ensuring that only those with the capital and financial know-how can participate in this type of investment opportunity.