Qualified Purchaser
A Qualified Purchaser is a category of investor defined under Section 2(a)(51) of the U.S. Investment Company Act of 1940, characterized by owning at least $5 million in investments (for individuals) or $25 million in investments (for institutions), granting access to private funds that rely on the Section 3(c)(7) exemption from registration as investment companies. The Qualified Purchaser standard is more stringent than the Accredited Investor threshold and is often regarded as the highest tier of investor sophistication under U.S. securities law.
Key takeaways
- Individuals must own at least $5 million in investments; certain family-owned companies must own at least $5 million; institutions must own and invest at least $25 million.
- Funds relying on the Section 3(c)(7) exemption from the Investment Company Act can accept up to 500 Qualified Purchasers without registering as investment companies.
- The Qualified Purchaser standard is distinct from and more demanding than the Accredited Investor standard used for securities offerings under Regulation D.
- Trusts not formed for the specific purpose of investing in the fund can qualify if each trustee or grantor is a Qualified Purchaser.
- Unlike the QEP designation (a CFTC concept), Qualified Purchaser status is an SEC concept applied specifically to fund access under the Investment Company Act.
Explanation
The Qualified Purchaser designation emerged from the National Securities Markets Improvement Act of 1996, which created the Section 3(c)(7) exemption as a complement to the older Section 3(c)(1) exemption. While 3(c)(1) funds are limited to 100 investors regardless of sophistication, 3(c)(7) funds may accommodate up to 500 investors, but only if each is a Qualified Purchaser. This framework allows large hedge funds, private equity vehicles, and other pooled investment vehicles to scale their investor base without the operational and disclosure burdens of registering as investment companies under the 1940 Act.
The investment threshold — $5 million for natural persons and $25 million for entities — is measured as net investments, not net worth. 'Investments' under the Act include securities, real estate held for investment, commodity interests, and financial contracts. A primary residence or operating business assets generally do not count. This distinction means an investor with substantial real estate used for personal purposes may not qualify, even if their overall net worth is high.
Family-owned companies face a hybrid test: the entity itself must own at least $5 million in investments, and it must not have been formed for the specific purpose of investing in the relevant fund. This prevents sophisticated individuals from using purpose-built holding companies to circumvent the personal threshold. For institutional investors, the $25 million test is measured against the entity's own investments rather than those held on behalf of clients, which ensures the entity itself has meaningful skin in the game.
In the global context, Qualified Purchaser status bears comparison to the 'Professional Client' and 'Eligible Counterparty' classifications under MiFID II, and to the sophisticated investor exemptions under UCITS and AIFMD in Europe. While the definitions differ significantly, the underlying policy rationale — tailoring disclosure and protection requirements to investor sophistication and resources — is consistent across jurisdictions.
Example
A hedge fund manager structures a new multi-strategy fund under Section 3(c)(7). The fund's minimum investment is $1 million, and it seeks up to 200 investors. Each prospective investor must certify Qualified Purchaser status before subscribing. An endowment with $80 million in marketable securities qualifies comfortably. A successful entrepreneur with $4 million in securities and a $3 million primary residence does not qualify, since the primary residence is excluded from the investment calculation. The fund's compliance officer must document QP status at the time of each investor's initial investment and re-verify if circumstances suggest material changes.
Related terms
Accredited Investor Chief Compliance Officer Core Principle Equity Hedge Fund Mifid Ii Multi Strategy Fund Private Equity Qualified Eligible Person Ucits