What Is a Qualified Purchaser? Definition & Criteria

A “Qualified Purchaser” is a designation under U.S. securities law, specifically the Investment Company Act of 1940, identifying certain sophisticated investors. This classification allows individuals and entities to participate in private investment opportunities unavailable to the general public. Funds selling exclusively to Qualified Purchasers can be exempt from certain Securities and Exchange Commission (SEC) registration and regulatory requirements. This ensures investors in less regulated offerings are financially capable and knowledgeable enough to understand and bear the associated risks.

Criteria for Individuals

For an individual to qualify as a Qualified Purchaser, they must own at least $5 million in investments. This threshold is specific to investments and explicitly excludes the value of a primary residence or any property used in the regular course of business. The definition of “investments” for this purpose is broad, encompassing various financial assets.
Investments include:
Securities such as stocks, bonds, and notes.
Real estate held purely for investment purposes.
Cash and cash equivalents, like Treasury bills or certificates of deposit, held for investment rather than for everyday expenses or working capital.
Commodity futures contracts, options on commodity futures, options on physical commodities, and physical commodities themselves (such as gold or silver) held for investment purposes.
Certain financial contracts like swaps or similar individually negotiated transactions.

Criteria for Entities

Entities can also achieve Qualified Purchaser status by meeting specific investment thresholds. A company generally qualifies if it owns $25 million or more in investments, applying to various organizational structures, including corporations and partnerships.
Family-owned businesses can qualify if they hold at least $5 million in investments, provided the business is owned by close family members such as spouses, parents, children, siblings, and their respective spouses. Trusts can also be Qualified Purchasers if they hold at least $5 million in investments, with the important condition that the trust was not formed solely for the purpose of acquiring the specific investments in question. For certain trusts, all trustees and settlors must also individually meet the Qualified Purchaser criteria. An investment manager can qualify if they manage at least $25 million in investments on a discretionary basis for other Qualified Purchasers.

Verifying Qualified Purchaser Status

Determining Qualified Purchaser status typically involves a verification process, often initiated by the investor themselves. Investors usually self-certify their status through representations and warranties within private fund subscription documents. These documents require investors to affirm that they meet the defined financial requirements.
While investors provide this attestation, fund managers or issuers of unregistered securities bear the responsibility to reasonably believe the investor meets the criteria. This due diligence may involve reviewing financial documentation supplied by the investor, such as brokerage statements, bank statements, or tax returns. Some firms may also engage third-party verification services to confirm an investor’s status, ensuring compliance with regulatory standards. The objective is to confirm that only those with sufficient financial resources and understanding are granted access to these investment opportunities.

Investment Opportunities for Qualified Purchasers

The Qualified Purchaser designation grants access to private investment opportunities typically unavailable to the general public. These opportunities primarily involve private investment funds operating under specific SEC registration exemptions. Funds like private equity, hedge, and venture capital funds often rely on Section 3(c)(7) of the Investment Company Act of 1940.
This exemption permits these funds to avoid extensive regulatory burdens and public disclosure requirements. By limiting their investors exclusively to Qualified Purchasers, these funds can accept up to 2,000 investors, compared to other exemptions capping investor count at 100. Qualified Purchasers are presumed to have the financial sophistication and capacity to evaluate and manage the higher risks associated with these less regulated, often less liquid, investments.