Understanding the Distinction: Accredited Investor Versus Qualified Purchaser

Summary

While there are similarities between qualified purchasers and accredited investors, their criteria and benefits differ.

Understanding Accredited Investor Versus Qualified Purchaser

Most of the world’s investment opportunities are private. Privately held assets ($1,310 trillion) are more than 5x the size of the global public markets ($230 trillion).1 Why invest in private markets? Broader portfolio diversification and the potential for enhanced returns relative to publicly traded stocks and bonds. However, private markets carry greater risks, including sustained periods of illiquidity. Private market opportunities are mainly offered to accredited investors and qualified purchasers. While the two classifications share some similarities, they represent different regulatory purposes and have distinct criteria. Here we break down the difference between an accredited investor and a qualified purchaser and explain why the distinction matters when investing in private markets.

Accredited investor

The U.S. Securities and Exchange Commission (SEC) defines the criteria for becoming an accredited investor under Regulation D of the Securities Act of 1933. To qualify, an individual must satisfy one of the following:

  • A net worth of $1 million (excluding their residence).
  • Annual income of $200,000 or more.
  • For a trust corporation, or other business entity, either 1) assets must be at least $5 million or 2) all equity owners must be accredited investors.

The main benefit of being an accredited investor is that the designation opens the door to a range of investment opportunities that aren’t available to non-accredited investors. The premise is that investors with substantial assets typically have more financial sophistication and a greater capacity to absorb losses should they occur in higher-risk, less-regulated private markets. Here are some examples of investments available to accredited investors:

  • Private placements: Securities offerings that aren’t registered with the SEC.
  • Hedge funds: Investment funds using more advanced strategies to try and generate high returns.
  • Private equity: Investments in private companies that aren’t publicly traded.
  • Venture capital: Funding for early-stage startups, turnarounds, spin-offs and other projects with high growth potential.

Qualified purchaser

The SEC defines qualified purchaser under the Investment Company Act of 1940. Like the accredited investor designation, a qualified purchaser status allows an individual or entity to participate in many offerings in private markets that are off limits to non-qualified investors.

While an accredited investor must reach an income and net worth threshold, the requirements for qualified purchaser status are based on how much money is currently invested. Amounts can range from $5 million to $100+ million or more, depending on the investor type:

  • An individual investor with $5 million or more;
  • A family, trust, or estate planning entity with $5 million or more;
  • An institutional investor (banks, insurance companies, pension funds, and corporations) or a foundation with $25 million or more
  • A qualified institutional buyer (Rule 144A) with $100 million or more.

A qualified purchaser has access to more opportunities than an accredited investor. For example, some private funds, real estate projects, and hedge funds using advanced investment strategies only accept investments from qualified purchasers. This is due to the higher financial thresholds and illiquidity and presumed greater sophistication of qualified purchasers, allowing participation in more exclusive and potentially higher-risk-and-reward investment opportunities.

Why it matters

Qualified purchasers have access to a wider array of opportunities in private markets because they face fewer regulatory restrictions than accredited investors, and they are considered to have a greater level of financial sophistication and a higher tolerance for risk.

As a result, private funds and other issuers have less regulatory oversight when their investors are qualified purchasers rather than non-qualified ones. Less regulatory oversight means that private funds have fewer regulatory requirements and can pursue more advanced strategies that might be deemed too risky or complex for most investors, even accredited ones. For more information about qualified purchasers, read our article, Private Investments: What is a Qualified Purchaser?

Bottom line

Both accredited investors and qualified purchasers can access venture capital, hedge funds, and other exclusive investment opportunities typically unavailable to average investors. However, qualified purchasers benefit from the least stringent regulatory requirements, granting them access to an even broader range of investment options. If you think you qualify for either designation or you want to expand your investment options within private markets, please reach out to your advisor. If you are not a client of Mercer Advisors, let’s talk.

  Qualified Purchaser Accredited Investor
Current Investments $5 million or more (Individual) N/A
Can Trusts or Business Corporations Qualify? Yes, the following qualify:

A family, trust, or estate planning entity with $5 million or more

An institutional investor (banks, insurance companies, pension funds, and corporations) or a foundation with $25 million or more

A qualified institutional buyer (Rule 144A) with $100 million or more

For a trust corporation, or other business entity, either 1) assets must be at least $5 million or 2) all equity owners must be accredited investors.
Net worth N/A $1 million (excluding residence)
Annual Income N/A $200,000+
Investments Available (examples)    

 

1 McKinsey Global Institute, “The Rise and Rise of the Global Balance Sheet,” 2021.

2 Some private funds, real estate projects, and hedge funds using advanced investment strategies only accept investments from qualified purchasers. This is due to the higher financial thresholds and presumed greater sophistication of qualified purchasers, allowing participation in more exclusive and potentially higher-risk-and-reward investment opportunities.

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.

This information is provided for informational purposes only and is not intended as, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security. Any such offer can be made only via the relevant access fund’s formal offering documents. Investing in private funds is speculative and will entail substantial risks.

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