Qualified Purchaser

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21 Aug, 2024

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Qualified Purchaser Definition

A qualified purchaser is a natural person, i.e., an individual or family-owned business with an investment worth $5 million or more. Thus they can prove better financial security and enjoy access to certain special asset classes. However, a family business whose core function is to invest in funds cannot become a qualified purchaser.

The other investors recognized as qualified purchasers include a trust (managed and sponsored by the qualified purchasers); any individual or entity (who invests $25 million or more at self-discretion or on behalf of others); and any other entity formed by the qualified purchasers.

Qualified Purchaser Definition

According to ICA, a qualified purchaser refers to any natural person, i.e., individual or family-owned business or trust, that secures an investment of at least $5 million, except family businesses primarily engaged in fund investing.
Any trust managed or sponsored by the qualified purchasers, entities owned by the qualified purchasers, and the individual or entity with a minimum $25 million investment (either self or on behalf of other qualified purchasers) falls under this category.
Generally, qualified purchasers invest in securities, bonds, real estate, financial commodities, and other assets as shareholders, angel investors, and venture capitalists.

Qualified Purchaser Explained

Qualified purchasers are a classification of investors who can prove themselves to have better financial stability and thus can access some unregulated asset classes and privileges. As per the Federal Law, i.e., under Section 2(a)(51) of the Investment Company Act, 1940, any natural person (physical person) or entity falls under the category of qualified purchasers, including:

An individual having a minimum of $5 million investment;
A family-owned business with an investment of $5 million or more, excluding the one whose core function is investing in funds;
A trust run by qualified purchasers;
An individual or entity with at least $25million invested by self or taken from other qualified purchasers; and
An entity formed and managed by qualified purchasers.

A qualified purchaser can be a shareholder, angel investor, or venture capitalist who directly invests in:

A company's securities, such as equity, bonds, and notes;
Real estate, including residential or commercial properties;
Financial commodities, i.e., commodity futures, options, and commodity futures contracts;
Stocks of physical commodities like gold or other precious metal;
Negotiable financial instruments such as swaps;
Liquid assets such as cash

Private or hedge fund issuers must register the securities with the Securities and Exchange Commission (SEC). However, they are exempted from such registration while selling these securities to qualified purchasers or accredited investors. Also, a qualified purchaser seeks better investment opportunities when compared to retail investors. As a result, they can put and multiply their money in private funds. Moreover, they are not overburdened by the extensive administration, paperwork, and registration formalities.

Tax Registration

According to the California Department of Tax and Fee Administration (CDTFA), a person or business makes a gross receipt of at least $0.1 million from its business operations in a particular accounting year. As per section 6225 to the Revenue and Taxation Code passed in Assembly Bill x4-18 of 2009, a person or business who qualifies as a qualified purchaser must register with CDTFA for tax purposes. The registered individual or business has to file the annual tax return with the CDTFA and pay off the due tax liabilities directly to the authority, including the use tax for buying goods from other state retailers.

Qualified Purchaser vs Accredited Investor vs Qualified Client

Unlike retail investors, a qualified purchaser and an accredited investor are individual investors who receive private fund investment opportunities. However, a qualified client is a high-net-worth individual who passes the assets under management test.

The broad differentiation between the three can be given below:

Basis	Qualified Purchaser	Accredited Investor	Qualified Client
Meaning	An individual, family-owned business, or trust with an investment worth $5 million.	An individual or business entity not registered with financial authorities based on income, asset size, net worth, etc.	An individual with a net worth of $1 million plus and an investment worth $0.5 million or more under an advisor's management.
Comprises of	Individuals, family-owned businesses, trusts, and entities.	High net-worth individuals and institutional investors.	High net worth individual or entity.
Recognized Under	Section 2(a)(51) of the Investment Company Act of 1940	Rule 501 of Regulation D of the Securities and Exchange Commission	Rule 205-3 of the Investment Advisors Act of 1940
Income	No minimum income requirement	An individual income of $0.2 million in the last three years or a joint income (with the spouse) of $0.3 million	No criteria
Net Worth	A minimum of $5 million of investment.	A minimum net worth of more than $1 million, individually or jointly, excludes the primary residence's net value.	A minimum net worth of $2.1 million, or assets worth $1 million or more being managed by an advisor.
Investing On Behalf of Others	An entity with $25 million or more invested on behalf of others	Not applicable	Not applicable
Private Fund Investments Allowed	3(c)(1) funds, 3(c)(7) funds	3(c)(1) funds	No criteria
Exempted from the Investment Advisors Act of 1940 provisions	No	No	Yes

Frequently Asked Questions (FAQs)

Is a QIB a qualified purchaser?

Although many Qualified Institutional Buyers (QIB) acquire the qualified purchaser status, the concepts differ. A QIB is a financial institution like a bank, FII(Foreign Institutional Investors), insurance company, mutual fund house, etc., that must have an unrestricted investment of $100 million or more in the securities. However, a qualified purchaser must be an individual or family-run business with investments worth $5 million.

Who determines accredited investor / qualified purchaser status?

The one who issues the unregistered securities must ascertain the investor's status as an accredited or qualified buyer. They go through the person's tax returns, bank statements, W-2s, brokerage statements, and license documentation for series 7, series 65, or series 82. Generally, general partners sometimes assign the verification task to accountants and lawyers.

What are the SEC exemptions for funds with qualified purchasers?

The funds that accept investments from qualified purchasers rather than going for an Initial Public Offering (IPO) are eligible for the SEC exemptions 3(c)(7) under the Investment Company Act (ICA), 1940.

Some of these exemptions include:
· No need for SEC registration as an investment company;
· No limit on the number of investors; and
· Flexible investing methodology and corporate structure.