Difference Between Accredited Investor and Qualified Purchaser

Key Difference – Accredited Investor vs Qualified Purchaser
 

Accredited investors and qualified purchasers are two types of investors who usually invest in above-average risk, higher return earning investments. Despite this similarity between them, the criteria that should be met to be an accredited investor or a qualified purchaser are largely different. The key difference between accredited investor and qualified purchaser is that a qualified purchaser must have a net worth of at least $1 million whereas an accredited investor must at least have a net worth of $5 million.

Contents

1. Overview and Key Difference
2. Who is an Accredited Investor
3. Who is a Qualified Purchaser
4. Side by Side Comparison – Accredited Investor vs Qualified Purchaser

Who is an Accredited Investor?

Following criteria should be met to be an accredited investor in accordance with the guidelines by Securities and Exchange Commission (SEC).

• Have an individual net worth, or combined with a spouse, in excess of $1 million.
• Had individual income, excluding any income attributable to the spouse, of more than $200,000 in the previous two years, and is reasonably expected to do the same this calendar year.
• Had earned a joint income with the spouse of more than $300,000 in the previous two years and is reasonably expected to do the same in this calendar year

Types of investments that accredited investors can invest in real estate funds, private companies or hedge funds.

Real Estate Funds

A type of mutual fund that invests in securities offered by public real estate companies

Private companies

These are generally small to medium-scale businesses. Investors can make the investment as business angels or venture capitalists. These investors often seek exit routes once the business is established.

Hedge funds

A type of investment fund that invests in a range of securities using pooled funds in expectation of higher returns. Usually, an investor has to be an accredited investor to invest in hedge funds since the initial investment requirement can be as high as $1 million.

Calculating the Net Worth of an Investor

Since the main requirement to be classified as an accredited investor is to have a net worth that exceeds $1 million, it is important for an investor to have the knowledge of what elements should be included in the calculation of the net worth. Net worth should be calculated as the difference between total assets and total liabilities. Important points to note are,

• The value of the investor’s primary residence cannot be included in the net worth calculation.
• Mortgage or other loan on the residence does not count as a liability up to the fair market value (the price at which both the buyer and the seller are interested in making the transaction and have all the relevant information relating to the transaction). If the mortgage value is above the fair market value, the loan amount above the fair market value should count as a liability.
• Any increase in the loan amount in the 60 days prior to your purchase of the securities should be counted as a liability.

Who is a Qualified Purchaser

The requirements to become a qualified purchaser are greater than becoming an accredited investor; he or she should meet the following criteria as specified under the Securities Act of 1933.

• An individual who own $5 million or more in investments, including investments held jointly with a spouse
• A family-held business that owns $5 million or more in investments
• A business that has discretion over $25 million or more in investments

Investments that can be traded by Qualified Purchasers

• Securities, including stocks, bonds
• Physical commodities such as gold and silver
• Financial contracts held for investment purposes such as swaps and options
• Cash and cash equivalents held for investment purposes

What is the difference between Accredited Investor and Qualified Purchaser?

References:

“US-SecuritiesAndExchangeCommission-Seal” By U.S. Government – Extracted from PDF version of the SEC 2008 Performance and Accountability Report (Public Domain) via Commons Wikimedia