Qualified Purchaser Definition vs Accredited Investor

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Key Takeaways

  • As a general rule, federal securities regulations require that issuers of securities register their offering to ensure that potential investors have the necessary protections afforded by government oversight.
  • However, there are certain exemptions – such as those defined in the Investment Company act of 1940 – that allow issuers to sell securities and/or participate in solicitation of them without registration as long as they only sell them to Qualified Purchasers or Accredited Investors.
  • A Qualified Purchaser designation is achieved when an individual or entity amasses a minimum of $5MM in assets.
  • An Accredited Investor is one who has a minimum amount of income or net worth.
  • The idea behind these Qualified and Accredited certifications is that it demonstrates a minimum amount of financial sophistication to understand the potential risks and returns available in a private investment.
  • If unsure about their own status, individuals should seek investment advice from a qualified investment manager to determine whether they meet the necessary requirements.

 

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While we believe that private equity commercial real estate belongs in a well diversified portfolio of risk assets, it is important to note Securities and Exchange Commission rules mean that this type of investment is only available to individuals who meet a certain set of requirements.

In this article, we are going to discuss two types of individuals who are eligible to invest in private securities – Qualified Purchasers and Accredited Investors. Often, they can be confused for each other so the goal of this article is to describe what each one is and what the key differences are. By the end, readers will be able to determine if they fit into one of these groups, which makes them eligible to invest in a private equity commercial real estate deal.

At First National Realty Partners, we specialize in the purchase and management of grocery store anchored retail centers. As a private equity firm, we are only able to offer our deals to Accredited Investors. If you are one, and would like to learn more about our current investment opportunities, click here.

First, Why Does It Matter?

When an individual invests in a private equity deal, they are actually purchasing shares of stock in a single asset entity that owns the property. From a legal perspective, these shares are considered to be “securities.”

As a general rule, any issuer or entity who sells securities to investors is required to register them with the Securities and Exchange Commission. But, private equity firms, hedge funds, private funds, or any other private issuer often rely on an “exemption” outlined in Regulation D that allows them to bypass the registration requirement as long as they only sell shares to individuals who are either Accredited Investors or Qualified Purchasers.

To illustrate this point, definitions are helpful.

Qualified Purchaser vs. Accredited Investor

Qualified Purchaser Definition

Under Federal Law, a Qualified Purchaser is a person or entity who meets one of the following four criteria:

  • Any natural person who owns not less than $5,000,000 in investments;
  • Any company that owns not less than $5,000,000 in investments and that is owned directly or indirectly by or for 2 or more natural persons who are related as siblings or spouse (including former spouses), or direct lineal descendants by birth or adoption, spouses of such persons, the estates of such persons, or foundations, charitable organizations, or trusts established by or for the benefit of such persons;
  • Any trust that is not covered by clause (ii) and that was not formed for the specific purpose of acquiring the securities offered, as to which the trustee or other person authorized to make decisions with respect to the trust, and each settlor or other person who has contributed assets to the trust, is a person described in clause (i), (ii), or (iv); or
  • Any person, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than $25,000,000 in investments.

Perhaps an easier way to state it is that a Qualified Purchaser is a person or entity with at least $5MM in investments.

Determining Qualified Purchaser Status

As the definition above implies, the key point that affords an individual or entity Qualified Purchaser Status is the level of assets – $5MM for an individual or company or $25MM for any person acting for their own account or the accounts of other Qualified Purchasers.

Benefits of Holding Qualified Purchaser Status

The major benefit of being a Qualified Purchaser is access to investments in certain private funds that are otherwise unavailable to typical retail investors.

From a fund perspective, the benefit of dealing with Qualified Purchasers is that it provides an exemption from certain registration requirements – meaning less paperwork and administrative burden.

Examples of Qualified Purchasers

Based on the definition above, potential examples of Qualified Purchasers include:

  • An individual with $2MM in retirement savings accounts (IRA, 401K) and $4MM in a taxable investment account.
  • An individual investor who runs their own company that has $10MM in investable assets
  • A wealth manager, who invests total assets of $30MM or more on behalf of their clients – where the clients may not be Qualified Purchasers individually.

Again, the key point here is the amount of assets that the individual or entity has is what affords Qualified Purchaser status.

What is An Accredited Investor?

An Accredited Investor is defined by the Securities and Exchange Commission as an individual who meets certain income and/or net worth requirements as described below:

  • Net worth over $1 million, excluding primary residence (individually or with spouse or partner)
  • Annual income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and the reasonable expectation of the same for the current year

The idea behind these requirements is that individuals who meet these requirements are better positioned to absorb any potential investment losses.

Verification Required for Accredited Investor Status

In some cases, individual investors may be able to self-certify their accreditation status. In other cases, the issuer of the securities may be required to take steps to verify an individual’s status based on a review of their tax returns or by requesting financial statements from their investment advisor.

Benefits of Holding Accredited Investor Status

For an individual, the benefit of being an Accredited Investor is that they also have a wider array of investment opportunities that includes both public and private securities. For example, an Accredited Investor could buy shares of Apple stock on a public exchange and participate in the types of private offerings common in real estate investing.

Qualified Purchaser vs. Accredited Investor

Based on their definitions, it may seem like Qualified Purchasers and Accredited Investors are very similar. They are, but there is one key difference.

The definition of a Qualified Purchaser is dependent upon the amount of assets that an individual or entity has.

The Accredited Investor definition is dependent upon the amount of income and/or net worth that an individual possesses.

The Importance of Understanding Investor Qualification

Clearly, alignment with either one of these categories has an important impact on the investment decisions made by an individual. As a general rule, achieving Accredited Investor or Qualified Purchaser status provides individuals with a wider number of options outside of traditional publicly traded securities. For example, they could invest in the unregistered securities associated with commercial real estate, private placements for startups, venture capital funds, or private equity funds. In some cases, these sorts of private investments may offer some benefit over their publicly traded counterparts.

For investment purposes, if an individual has any doubt about their Qualified or Accredited status, they could research the website of the appropriate regulatory authority or seek advice from their investment adviser.

Summary of Qualified Purchaser vs. Accredited Investors

As a general rule, federal securities regulations require that issuers of securities register their offering to ensure that potential investors have the necessary protections afforded by government oversight.

However, there are certain exemptions – such as those defined in the Investment Company act of 1940 – that allow issuers to sell securities and/or participate in the solicitation of them without registration as long as they only sell them to Qualified Purchasers or Accredited Investors.

A Qualified Purchaser designation is achieved when an individual or entity amasses a minimum of $5MM in assets.

An Accredited Investor is one who has a minimum amount of income or net worth.

The idea behind these Qualified and Accredited certifications is that they demonstrate a minimum amount of financial sophistication needed to understand the potential risks and returns available in a private investment.

If unsure about their own status, individuals should seek investment advice from a qualified investment manager to ensure they meet any necessary requirements.

Interested In Learning More?

First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.

If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.

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