An investor who has reached qualified purchaser status certainly belongs to an exclusive club. The relatively high threshold one must reach to attain such status does come with bragging rights, particularly in terms of where they can invest their money, such as in hedge funds or pre-IPO startups.
Investors are permitted to self-certify their status, although the project or fund in which a qualified purchaser is seeking to participate will undoubtedly check the claim’s veracity, using their own methods. But if such investors are found to be untruthful, there will be consequences they’ll want to avoid.
Here’s what you should know about self-certifying qualified purchaser status – and more.
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Just What is a Qualified Purchaser?
According to the SEC, only certain types of investors are eligible to take part in non-registered investment possibilities, such as shares that aren’t available to the general public and those companies that are privately held. Two of the most common classifications are accredited investor and qualified purchasers.
A qualified purchaser is a person or family company with at least $5 million in assets, such as stocks and bonds, real estate, cash, financial contracts, commodity futures contracts, and other assets. Note that the $5 million thresholds may not include the value of the main residence or any property that’s regularly used for business.
Another option to become a qualified purchaser is to work in the name of a group of qualified purchasers who have the financial means to invest at least $25 million. The same residential provision applies.
Furthermore, any trust with a $5 million or larger investment portfolio can qualify for qualified purchaser status if it is held by at least two close family members, such as spouses or siblings.
Are Qualified Purchasers and Accredited Investors Similar?
They are, to an extent. The main differences are that qualified purchaser status hinges on investment holdings as opposed to income or net worth and that the threshold for becoming a qualified purchaser is higher than that for accredited investor designation.
What does that mean for practical purposes? It means qualified purchasers have more investment opportunities, including access to 3(c)(7) funds, which can accept up to 2,000 such investors. The designation can also provide access to 3(c)(1) funds since these investors can easily meet the $1 million net worth requisite.
Qualified Purchasers Can Self-Certify?
That is correct. According to SEC rule 506(b), investors must merely provide “reasonable assurance” within 90 days of the initial investment that they’re qualified. Qualified purchasers have professionals who can vouch for their status – a registered investment advisor, certified public accountant, or attorney, for example.
Still, bad actors can and do slip through the cracks.
Why Is Self-Certification Allowed?
One of the main reasons is there are major regulatory repercussions for misrepresenting one’s status – up to legal prosecution — particularly if doing so causes liability for the investors who have pooled their capital for an investment opportunity. Indeed, if the group of investors is aware of the false status and takes no action, there could be liabilities for losses if the deal fails.
So, that’s what you should know about qualified purchaser status. Know that regulators have begun to ease up on some of the requisites to widen the pool of people or entities that are allowed to put money into the opportunities mentioned.
In the meantime, Yieldstreet, an alternative investing platform, has various investment possibilities available across multiple asset classes that were previously exclusively available to accredited investors and qualified consumers. These opportunities can generate secondary income and have relatively low buy-in costs.