Determining Qualified Purchaser Status

The SEC has classifications that determine which investors can participate in investment opportunities that aren’t registered with the regulatory agency. One of the most common such classifications is “qualified purchaser,” which does have its privileges, including the ability to invest in shares issued by startups and privately held organizations. But do you know what goes into determining qualified purchaser status? Let’s look at that — and more.

Just What is a Qualified Purchaser?

A qualified purchaser is a person or family business that has at least $5 million in investments. Such investments are broadly defined, and can include financial contracts, real estate, stocks and bonds, and commodity futures contracts. The rub is that the portfolio may not include a main residence or a property that used for day-to-day business.

An individual can also achieve such status if they function on behalf of a group of individuals who are qualified purchasers and who can invest $25 million or more. As well, a trust may be deemed a qualified purchaser if its investments are valued at $5 million or more and is owned by two or more closely related family members. Note that a trust may not be established for the sole purpose of gaining qualified purchaser status.

What are the Benefits of Being a Qualified Purchaser?

Compared with accredited investors — the other most common SEC investor classification — qualified purchasers can pursue a wide range of investment opportunities. That makes sense, since eligibility requirements are tougher for qualified purchasers, also known as super-accredited investors. The main qualification requirement is at least $5 million in investments. So, really, qualified purchasers are investing at a whole other level.

What’s more, qualified purchasers also have access to 3(c)(7) funds, which accept a maximum of 2,000 qualified purchasers. Compare this with the markedly lower limits allowed by 3(c)(1) funds, in which qualified purchasers may also invest. And what is a 3(c)(7) fund? Well, it’s a type of private equity fund that may not be designated as an investment company because it has no more than 100 beneficial owners.

Who Determines Qualified Purchaser Status?

The issuer of unregistered securities is responsible for verifying that an investor does indeed qualify as a qualified purchaser. The nuts and bolts of the verification process, though, can vary depending on the sale of unregistered securities.

In general, though, required documentation includes tax returns, W-2s, and brokerage, asset, and bank statements. Such investors may also need a letter from their attorney, certified public accountant, registered investment advisor, or registered broker vouching for their qualification. All documents must be up to date, accurate, and complete.

When it comes down to it, qualified purchaser status, and figuring out how much in investments a prospective investor holds, necessitates a close and clear-eyed analysis of the investor’s circumstances, since investors can “self-certify.”

Investors must not knowingly falsify their status, however, because there will be repercussions including liability for failed projects or deals. Investors who violate securities laws by lying about their status may also be prosecuted, so, doing so is totally not worth the risk.

In sum, determining qualified purchaser status can be a bit nuanced, but it really boils down to total investments. The key take away is that qualified purchasers, because of the status’s high qualification threshold, are really functioning on a different playing field, when it comes to investment opportunities.

If you’re not yet close to that status, the alternative investment platform Yieldstreet has passive, secondary-income opportunities across a variety of asset classes that don’t break the bank and that aren’t dependent on an up and down stock market.