The Difference Between Qualified Purchasers and Accredited Investors

The Difference Between Qualified Purchasers and Accredited Investors

There are a couple of regulatory classifications that basically dictate who gets to invest where. These SEC categories include qualified purchasers and accredited investors. Those who fall under these classifications are permitted to participate in opportunities that aren’t registered with the regulatory agency.

Overall, this refers to shares that aren’t sold in markets that are open to the public, and that are issued by privately held companies and startup organizations. However, there are distinct differences between qualified purchasers and accredited investors. Let’s explore those – and more.

Qualified Purchaser

Boiled down, the status is conferred on an individual or a family business that has at least $5 million worth of investments, less a primary residence or property that’s used for day-to-day business.

Another way to gain such status is by operating on behalf of a consortium of individuals who already are qualified purchasers, and who can invest at least $25 million.

Moreover, a trust may also be deemed a qualified purchaser if it has an investment portfolio that’s valued at $5 million or more and is owned by at least two close members of a family unit. Think siblings and spouses here.

Accredited Investor

As set forth by law, only people with a net worth of at least $1 million – minus the value of the main residence — can be deemed, accredited investors. If the investor is married, then the $1 million net worth may be joint.

In addition, an accredited investor candidate must have an annual income of at least $200,000 – or $300,000 jointly – and must have had such annual income for at least two years immediately prior to seeking accreditation. As well, it must be demonstrated that such income level will be maintained in the year in which accreditation is sought. A certain type of financial securities license is also required.

The status can also be gained through a trust, provided that the trust has assets valued at more than $5 million and was not formed with the express purpose of achieving said status. Such a trust must be led by someone – sometimes referred to as a “sophisticated investor” – who can make highly informed decisions about a given investment.

The Differences Between the Two

It’s true that while all qualified purchasers are probably accredited investors, not all accredited investors are qualified purchasers. Why? Because the threshold to attain qualified purchaser status is much higher than for accredited investors. After all, qualified purchasers must be able to invest at least $5 million on their own, which means they will likely meet the $1 million net worth requirement to become an accredited investors.

Note that accredited investors can participate in funds – 3(c)(1) — that cap the size of the investment pool at 100. That figure is put at 250 if the fund size is $10 million or less.

So, not only do qualified purchasers have access to 3(c)(1) funds, but they may participate in 3(c)(7) funds, which may accommodate as many as 2,000 such investors. That’s compared to the markedly lower limits permitted by 3(c)(1) funds.

Now you know the chief differences between qualified purchasers and accredited investors. You should also know that federal regulators are feeling the heat lately to ease standards to allow more people to invest in opportunities including pre-IPO startups.

In the interim, though, the alternative investment platform Yieldstreet already offers several investment opportunities that once were the primary domain of institutional investors and top-tier elite earners. To get started, such investment strategies require a relatively small amount of capital — as low as $500 — across a range of investment classes.

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