Qualified purchaser

The qualified purchaser standard was created by the . This law established the Section 3(c)(7) exemption from Investment Company Act registration. The qualified purchaser standard sets a much higher wealth threshold than the requirement. This effectively limits to sophisticated institutional investors and .

The qualified purchaser designation works differently from the accredited investor standard in two key ways: threshold amounts and measurement criteria. Accredited investors qualify based on income levels or net worth that includes real estate. Qualified purchasers, however, must demonstrate much higher levels of actual investment holdings. Their primary residences and business assets don't count toward the qualification.

The Investment Company Act defines qualified purchasers across several distinct categories. Each category has different threshold requirements. Individual natural persons qualify by owning at least $5 million in investments. Family companies may also qualify when they own at least $5 million in investments and maintain direct or indirect ownership by two or more related natural persons. These related persons include siblings, spouses, lineal descendants, or entities established for their benefit.

For larger institutional participants, the rules are different. Any person acting for their own account or for other qualified purchasers qualifies when they own and invest on a discretionary basis at least $25 million in investments. However, there's an important caveat: they must not have been formed specifically to acquire the securities being offered.

The qualified purchaser definition focuses specifically on "investments" rather than net worth or total assets. This creates a narrow and precise qualification standard. The SEC has provided detailed guidance on what counts as investments. Generally, investments include securities, real estate held for investment purposes, cash equivalents, and certain commodity interests. However, several major assets are explicitly excluded: primary residences, personal-use property, and assets used in trade or business.

This investment-focused approach ensures that qualification reflects actual investment sophistication and market participation. It's not just about general wealth accumulation. The distinction becomes particularly important for high-net-worth individuals whose wealth may be concentrated in non-investment assets such as primary residences or operating businesses.

Trust structures present unique qualification challenges that require careful analysis of trustee and settlor status. For trusts not formed specifically for acquiring Section 3(c)(7) fund interests, both the trustee responsible for investment decisions and each must qualify as qualified purchasers. The SEC evaluates trustee qualification at the time investment decisions are made. Settlor status is determined when assets are contributed to the trust.

When multiple trustees exist, only the trustee with investment decision-making authority needs to qualify as a qualified purchaser. cannot qualify solely based on beneficiary status. This is true even when all beneficiaries are qualified purchasers, unless the trustee and settlor also meet the requirements.

Investment advisers and fund managers need only maintain a "reasonable belief" that investors qualify as qualified purchasers at each investment date. They don't need to conduct exhaustive verification procedures. This reasonable belief standard allows reliance on investor representations in and periodic confirmations of continued qualification.

Fund documentation typically requires consent for interest transfers. This ensures appropriate qualified purchaser representations from transferees. Alternatively, funds may restrict transfers exclusively to persons meeting qualified purchaser requirements. This maintains compliance through structural limitations rather than case-by-case verification.

The qualified purchaser standard enables 3(c)(7) funds to accept unlimited numbers of investors. This is unlike the 100-investor limitation that constrains funds. This flexibility has proven crucial for institutional-focused hedge funds seeking to scale beyond traditional constraints while maintaining Investment Company Act exemption status.

However, practical considerations exist. may be triggered at 2,000 investors. There's also possible classification for tax purposes if transferability restrictions are inadequately maintained. These factors often influence fund structuring decisions despite the theoretical unlimited investor capacity.

Qualified purchasers represent the highest wealth threshold among federal . They substantially exceed both accredited investor requirements ($1 million net worth or specified income levels) and standards ($2.2 million net worth or $1.1 million assets under management). This elevated threshold reflects the regulatory premise that investors with substantial investment assets possess sufficient sophistication and risk tolerance to evaluate complex investment strategies without comprehensive regulatory protections.

The distinction becomes particularly relevant for investment advisers managing multiple fund structures. Different investor categories enable access to different regulatory exemptions and fee arrangements. Understanding these relationships ensures appropriate fund structuring and investor allocation across various regulatory frameworks.