In the growing world of alternative investments, two investor categories often come up: "qualified purchaser" and "accredited investor." Both categories identify investors with financial knowledge and resources for riskier investments. However, they have distinct definitions and requirements. Here we break down the differences to help you navigate your own status and what investments are right for you.
What is an Accredited Investor?
The U.S. Securities and Exchange Commission (SEC) defines an accredited investor under Regulation D. The primary purpose of this definition is to ensure that those participating in private investments have a certain level of financial stability and understanding, which may reduce the risk of financial harm. Here are the main criteria to qualify as an accredited investor:
- Income Test: An individual investor must have an annual income of $200,000 or more (or $300,000 combined with a spouse) for the last two years and a reasonable expectation of the same income level in the current year.
- Net Worth Test: An individual or entity must have a net worth exceeding $1 million, either alone or together with a spouse, excluding the value of their primary residence.
- Entities: Certain entities like banks, insurance companies, and employee benefit plans with assets exceeding $5 million, as well as directors, executive officers, or general partners of the company selling the securities, are also considered accredited investors.
- Certifications: Individuals with specific professional designations or credentials are also considered accredited investors. These include the Series 7, 65 or 82.
EquityZen’s pre-IPO investments are available to accredited investors. With investment minimums as low as $10,000 we aim to make private market investments available to more investors.
Interested in browsing the private company investment opportunities available on EquityZen's marketplace?
What is a Qualified Purchaser?
The definition of a qualified purchaser is governed by the Investment Company Act of 1940 and is typically more stringent than that of an accredited investor. Qualified purchasers are deemed to have a higher level of financial sophistication and resources, allowing them access to more exclusive investment opportunities. Here are the primary criteria to qualify as a qualified purchaser:
- Individuals: An individual or a family-owned business not less than $5 million in investments.
- Family Offices: A family-owned entity with at least $5 million in investments and owned by a family with a shared goal of wealth management. Family offices are considered institutional investors.
- Entities: Any entity (e.g., a corporation or partnership) not formed for the specific purpose of acquiring the securities offered, owning at least $25 million in investments.
- Trusts: Any trust not formed for the specific purpose of acquiring the securities offered, where all of the settlors are qualified purchasers.
Key Differences Between Qualified Purchasers and Accredited Investors
Financial Thresholds:
- Accredited Investors: The income and net worth thresholds are relatively lower ($200,000 income or $1 million net worth) for accredited investors vs. qualified purchasers.
- Qualified Purchasers: The investment holding thresholds are significantly higher ($5 million for individuals and $25 million for entities) for qualified purchasers.
Scope of Opportunities:
- Accredited Investors: Can participate in a wide range of private placements and alternative investments like pre-IPO shares and some hedge funds.
- Qualified Purchasers: Can access more exclusive, often higher-risk, higher-reward investments, such as a broader range private equity funds and sophisticated investment vehicles that are only available to qualified purchasers.
Regulatory Intent:
- Accredited Investors: The aim is to protect less sophisticated investors by setting a moderate financial bar, but still allowing broader access than historically available. In the United States, over 24 million households, 18.5% of all households, quality as accredited investors.
- Qualified Purchasers: The goal is to ensure only highly sophisticated investors, who can withstand potential losses and understand complex investment strategies, participate in certain high-stakes investment opportunities.
Investment Structures:
- 3c(1): Under Regulation D, accredited investors can participate in 3c(1) investment offerings. These investments typically limit the number of investors to 100 accredited investors.
- 3c(7): Under RegulationD, qualified purchasers can participate in both 3c(1) and 3c(7) investment offerings. These offerings can accept a larger number of qualified purchasers, but also typically come with higher investment minimums.
Why These Distinctions Matter
Understanding whether you qualify as an accredited investor or a qualified purchaser can significantly impact your investment strategy. These distinctions determine what kind of investment opportunities are available to you and the level of risk those opportunities might entail.
- For Novice Investors: If you’re a new investor in alternatives, first confirm if you have accredited investor status. This will open doors to many investment opportunities while maintaining a reasonable risk threshold.
- For Experienced Investors: As you accumulate more wealth and investment experience, you may eventually qualify as a qualified purchaser. This will allow you to explore more exclusive and potentially lucrative investment opportunities, aligning with higher financial goals and sophisticated strategies.
Navigating the various investor definitions is crucial for making informed decisions about the role of alternatives and private company investments in your portfolio. While both accredited investors and qualified purchasers are deemed capable of handling investment risks, the criteria and opportunities can differ. Understanding these differences will help you determine your own standing and set goals for your investment portfolio. Whether you're new to investing or want to improve, knowing your investor category can help you make smart financial choices.
Interested in browsing the private company investment opportunities available on EquityZen's marketplace?
