Like the accredited investor designation, “Qualified Purchaser” is a legal designation that may apply either to an individual investor or an entity. By offering securities exclusively to Qualified Purchasers, an investment company may exempt itself from registration of an investment fund with the Securities and Exchange Commission (SEC).
The Investment Company Act of 1940 stipulated that a private fund with more than 100 investors must register as an investment company unless the following conditions are met: (1) the Fund or Fund Manager is not making or proposing to make a public offering, and (2) the company’s outstanding securities are owned exclusively by “qualified purchasers.”
As with qualifying as an accredited investor, “qualified purchasers” may meet the legal threshold either as an individual, as an entity, or as part of a collective. These are the typical means of satisfying the Qualified Purchaser definition:
- Owning $5M or more in investments (possessing $5 million or more in AUM – assets under management) either as in individual or as a family owned business. For a family owned business to qualify as a Qualified Purchaser for the purposes of investing in a given fund, it cannot be formed solely for the purpose of investing in the fund.
- The purchaser is an investment trust sponsored and managed by qualified purchasers, not formed for the sole purpose of investing in a given fund.
- The purchaser is an individual or other entity that invests at least $25 million, either for their own accounts or on others’ behalf. Again, such an entity may not have been formed for the sole purpose of investing in a given fund. This method of qualifying would most often apply to a professional investment manager.
- Any entity, if all owners separately and on their own meet the Qualified Purchaser definition.
An investment company making use of an SEC exemption may or may not require you to validate your status, per the definitions above, in order to qualify as a QP and thus be eligible for investing in their fund.
What “Investments” Means in the Qualified Purchaser Definition
Representatives of investment trusts and professional investors may be well aware of size and makeup of their assets under management are at any one time. Individual self-directed investors may wonder what constitutes an “investment” in the context of the Qualified Purchaser definition, and hence whether or not they meet this threshold*. For these purposes, the SEC typically takes a broad view and defines “investments” as any of the following:
- Securities, including stocks, bonds and notes, other than securities of an issuer that is under common control with the qualified purchaser.
- Real estate held for investment purposes.
- Commodity futures contracts, options or commodity futures and options on physical commodities traded on a contract market or board of trade, held for investment purposes.
- Physical commodities (e.g., gold and silver), with respect to which futures contracts are traded on a contract market or board of trade, held for investment purposes.
- Financial contracts (e.g., swaps and similar individually negotiated financial transactions), other than securities, held for investment purposes.
- For an investment company or a commodity pool, any binding capital commitments.
- Cash and cash equivalents held for investment purposes. Neither cash used by an individual to meet everyday expenses nor working capital used by a business is considered cash held for investment purposes.
While most of EquityMultiple’s investment offerings are available to all accredited investors, a select few may be available only to Qualified Purchasers.
*If you have questions as to whether or not you meet the Qualified Purchaser threshold, please consult with your accountant or investment advisor. More detail from the SEC can be found here.
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