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How are “Qualified Purchaser” Investors Different From “Accredited Investors?”
Both the US and California governments regulate the offering and sale of securities under various statutes such as the federal Securities Act of 1933 and the California Securities Act of 1968. In addition to those two statutes, there are many other statutes that provide general regulations and many that are specific to certain investment vehicles. In general, to offer or sell securities, the offeror/seller must register the securities. However, certain exceptions apply for small offerings.
San Diego Corporate Law: Accredited Investors
For small offerings, there is a category of potential purchasers called “accredited investors.” Securities laws are intended to prevent fraud and combat deceptive sales practices directed at an unsuspecting and unsophisticated general public. Thus, certain practices are outlawed, such as falsely promising to “double your investment in 30 days.” The registration requirements are intended to provide the general public and investors will as much information as possible before decisions are made to invest.
This is where the idea of “accredited investors” enters the picture. Certain types of investors — wealthy and experienced in the market — do not need, in theory, the protections provided by the securities laws. Thus, the laws and regulations define a category of “accredited investors” as those who are rich enough to suffer potential losses, who can bear the economic risk of large losses, and who have enough sophistication, training and/or advice to limit their risks. In practical terms, an “accredited investor” includes:
- A person with a net worth in excess of $1 million (not including the value of the person’s house/residence) or
- A person with income of $200,000 in the last couple of years (or $300,000 joint spousal income)
Certain other persons meet the definition based on profession and/or industry and governmental job title and duties.
Accredited investors are eligible to participate in certain sales of securities that are exempt from the registration requirements of the securities laws.
San Diego Corporate Law: What is a “Qualified Purchaser Investor?”
There is another category of investor that is higher and more exacting that “accredited investor.” These are called “qualified purchaser investors” and they are eligible to participate in hedge funds that are exempt from registration. A “qualified purchaser investors” is defined as:
- A natural person who “… owns not less than $5,000,000 in investments”
- A family-owned entity (like a family trust or charity or foundation) that “… owns not less than $5,000,000 in investments”
- Any natural 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”
See subparagraph 51, 15 U.S.C.§ 80a-2. Note that these dollar amounts are NOT asset amounts, but rather amounts “in investments.” Likewise, there are no provisions for being designated as a “qualified purchaser” based on earned income.
As noted, “qualified purchasers investors” are eligible to participate in exempt hedge funds. Hedge funds are a subcategory of investment vehicles that are, generally speaking, organized as limited partnerships of investors making high risk investments. In general, like most investment vehicles, hedge funds must register and make lengthy, extensive, and ongoing disclosures. Hedge funds are governed by the Investment Company Act of 1940. However, a hedge fund can be exempt from the registration requirements if, under subsection 3(c)(1), the outstanding securities are owned by a hundred or fewer persons or if, under subsection 3(c)(7), all of the owners — regardless of the number — are “qualified purchaser investors.”
Contact San Diego Corporate Law
For further information on qualified purchasers, accredited investors, and private securities offerings/sales, contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience and dedication to provide all the legal services needed for private offerings, the sale/purchase of a business and for mergers and acquisitions. Contact Mr. Leonard via email or by calling (858) 483-9200.
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