Accredited Investor or Qualified Purchaser: What’s the Difference?

Origin investors must be accredited investors or qualified purchasers. These are requirements set by the Securities and Exchange Commission and identify individual investors who are allowed to take on the risk of private investments. Private equity and other nonpublic offerings are illiquid and lack the level of disclosure that comes with registered public securities. As a result, investors must satisfy one or more requirements regarding income, net worth, expertise or knowledge. While often used interchangeably, accredited investor and qualified purchaser have different requirements; they are not synonymous.

What is an Accredited Investor?

Accredited investors meet income, net worth or educational requirements that allow them to purchase financial investments, such as securities or real estate, that are not registered with regulatory authorities. The accredited investor definition was updated in 2020. Persons or entities can be accredited investors under any of these conditions:

• A person’s net worth, or joint net worth with spouse, exceeds $1 million. The value of a primary residence must be excluded.
• A person’s income exceeds $200,000 in each of the past two years and is expected to reach the same level this year.
• A couple’s income exceeds $300,000 in each of the past two years and is expected to reach the same level this year.
• A business, investment company or family office holds more than $5 million in assets, or all its equity owners are accredited.
• A person is licensed or registered as an investment adviser or is a knowledgeable employee of a fund.

There is no one place to register your investor status, confirm your income level or tax returns, or be certified as an accredited investor. The government does not review individual investor credentials or certify financial statements. Instead, companies that offer investments must determine who is an accredited investors as part of their due diligence process. Investors can’t simply check a box, though. Once they inquire about an investment opportunity, they may be asked to fill out an online form to start the process.

What is a Qualified Purchaser?

The qualified purchaser definition is based not on net worth or income but on investment holdings, and the requirements are higher than those for accredited investors. Because of this, qualified purchasers typically have more investment opportunities then accredited investors.  For example, they can commit to private offerings with up to 2,000 qualified purchasers, while other funds must be limited to 100 or fewer accredited investors.

The term is often used interchangeably with qualified investor, but qualified purchaser is the legal term. Persons or entities can be qualified purchasers under any of these conditions:

• A person with $5 million or more in investments, either independently or together with spouse. The value of a primary residence or business property must be excluded.
• A family with $5 million or more in investments through a charity, company or estate, or a trust set up for their benefit.
• A trust sponsored and managed by qualified purchasers, which is not formed solely to invest in a fund.
• A person with discretionary control of at least $25 million in assets, for others or their own accounts.
• An entity consisting solely of qualified purchasers.

The higher threshold requirements for qualified purchasers allow funds with a small group of private equity investors to buy and sell public assets such as mortgage-backed securities without the reporting requirements of a publicly traded bond fund.