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Understanding Accredited Investors vs. Qualified Purchasers
Most offerings on the Crowd Street Marketplace are targeted towards 'Accredited Investors.' This requirement is based on the Securities and Exchange Commission's (SEC) Regulation D, permitting the sale of unregistered offerings under specific circumstances. Other offerings on the Marketplace are restricted to 'Qualified Purchasers' (QPs). Why is this, what's the difference and how do you know if you are one, the other, or both?
Private placements such as those on the Crowd Street platform are governed by the SEC's Regulation D. These offerings are subject to reduced disclosure and reporting requirements as compared to registered, publicly traded securities. In exchange for these lower barriers to sale, private offerings are limited to accredited investors or qualified purchasers, who are assumed to be sophisticated investors with sufficient knowledge to understand the risks inherent in these types of investments.
What is a Qualified Purchaser?
Qualified purchaser status is based on the size of the overall investment portfolio under a person or entities' control; investors owning portfolios valued at over $5 million for individuals or $25 million for entities are deemed qualified purchasers. Qualifying investments include stocks, bonds and mutual funds, including those held in individual retirement accounts if controlled by the investor directly. Property used for business or as a primary residence does not count towards the net worth definition; investment properties do qualify. Something to note: investors self attest to their QP status and no third party verification is required prior to investing.
This is for informational purposes only and should not be taken as legal advice. All investors should consult with their legal expert to determine QP eligibility
What is an Accredited Investor?
Accredited investor status has lower net worth requirements as well as other ways to qualify. Individuals qualify as accredited investors provided they have a net worth of 1 million or more, an annual income of at least $200,000 (or joint income of $300,000) in each of the past two years, or if they meet specific financial professional qualifications. Entities such as trusts must have assets greater than $5 million and be directed by a 'sophisticated person' with sufficient financial and business knowledge to make prudent decisions. Accredited investors must document their qualifications to a broker/dealer, attorney or certified public accountant (CPA) for verification.
What can QPs do that accredited investors can't?
Qualified purchasers and accredited investors alike are eligible to invest in private offerings sold under Regulation D as well as funds sold under the Investment Company Act of 1940's Section 3(c). Similar to individual offerings, funds sold under Section 3(c)(1) are not required to be registered with the SEC; however, they are limited to 100 accredited investors (250 in the case of funds under $10 million) and must meet the definition of a qualified venture capital fund.
Funds issued under Section 3(c)(7) are open only to qualified purchasers. These funds can accommodate 1,999 investors before being required to register under the Investment Company Act. By allowing a larger number of investors, these funds have the potential to raise significant amounts of assets.1
Sources:
1 https://www.strictlybusinesslawblog.com/2017/09/21/3c1-funds-vs-3c7-funds/
