Understanding the distinction between being an accredited investor versus being a qualified eligible person is important because it determines the types of investment opportunities available to each category of investor.
In this article you will learn:
- The definitions of and differences between accredited investors status and qualified eligible person status.
- What this means for investment opportunities and legal requirements.
What is an accredited investor?
An Accredited Investor is typically an individual or entity with a higher financial standing and expertise. Registered brokers, dealers, advisors, insurance or investment companies, along with banks, savings and loans, and family offices, all count as accredited investors.
Individual investors can be accredited too, but they must meet at least one of these conditions:
- Have a net worth of over $1 million, not counting their main home.
- Earn more than $200,000 a year, or more than $300,000 together with their spouse if married and filing taxes jointly, for the past two years. They should also expect to make the same amount this year.
- Hold a Series 7, 62, or 65 license, which are key financial securities licenses in the US, given out by the Financial Industry Regulatory Authority (FINRA).
What is a qualified eligible person?
A Qualified Eligible Person is anybody who has more than $5 million. Qualified Eligible Persons are deemed to have sufficient financial literacy and investment knowledge thanks to their high net worth, qualifying them for sophisticated and potentially higher-risk investment vehicles.
Qualified Persons, also known as Qualified Purchasers, have to meet higher financial requirements than accredited investors, who only need a net worth of $1 million. This means that if someone is a qualified purchaser, they are automatically an accredited investor too.
Qualified Purchasers have broader investment opportunities than accredited investors because they can invest in both 3(c)(1) and 3(c)(7) funds. Fundamentally, qualified purchasers are the top-tier investors as per the law, allowing them to take part in any investment open to them. Since they also meet the criteria for accredited investors, they can join in investments that are exclusively for accredited investors too.
The Securities Acts
The Securities Acts of 1933 and 1940 define these two key investor categories. These Acts, fundamental to U.S. securities law, set the criteria for who can participate in certain types of sophisticated investments.
Specifically, these laws permit certain investment offerings to bypass the typical public registration requirements, provided they are directed exclusively towards these defined investor types.
This exemption is crucial for facilitating private investments and includes restrictions on the kinds of investors who can participate, such as limiting the total number of investors.
By establishing clear definitions for accredited investors and Qualified Purchasers, these Acts ensure that only individuals or entities with sufficient financial acumen and resources are engaging in potentially higher-risk, higher-reward investment opportunities typically not available to the general public.
How do I become an accredited investor?
To become an accredited investor, there’s no official application or government certificate. Instead, it’s up to the company offering the investment to make sure its investors qualify as accredited before they can invest.
This means that before investing, and usually before even getting the investment details, investors need to confirm they are accredited.
The company might ask for proof like tax returns, bank statements, brokerage statements, or proof of securities licenses to verify this.
To recap what we have learned; accredited investors need to meet income, net worth, or securities licensing criteria, while qualified purchasers are only required to have more than $5 million. Qualified purchasers have broader investment opportunities than accredited investors because they can invest in both 3(c)(1) and 3(c)(7) funds.
Discover the essential differences between Accredited Investors and Qualified Eligible Persons in our comprehensive guide. Learn how these distinctions impact investment opportunities, legal requirements, and your financial strategy. Explore the criteria set by the Securities Acts of 1933 and 1940, and understand what it takes to qualify as an accredited investor or a qualified purchaser.