Accredited Investors vs. Qualified Purchasers: What You Need to Know

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• Accredited investors and qualified purchasers are both allowed to purchase securities not registered with the SEC. These are shares not sold on public markets. They’re often issued by privately held companies.
• Accredited investors can invest only in 3(c)(1) funds, whereas qualified purchasers can typically invest in both 3(c)(1) funds and 3(c)(7) funds.
• A 3(c)(1) fund allows only 100 accredited investors, or 250 accredited investors if the fund size is less than $10M.
• A 3(c)(7) fund can accept up to 2,000 qualified purchasers. 

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Startup investors fall within a range of regulatory categories that determine which investment opportunities (whether on AngelList or elsewhere) are available to them. This post will focus on two of the most common categories: accredited investors and qualified purchasers.

In this guide, we’ll walk you through the most pertinent distinctions between accredited investors and qualified purchasers as they apply to angel investors, including how you could qualify for these designations and how they impact your investment opportunities.

What is an Accredited Investor?

“Accredited investor” is a regulatory designation for individuals or entities that meet certain income, net worth, or licensure criteria. This designation allows them to access certain private market investment opportunities not available to many retail investors. 

To qualify as an accredited investor, an individual angel investor typically needs to meet one of the following requirements:

• Individual or joint net worth in excess of $1M (not including the value of a primary residence);
• Individual income in excess of $200k or joint income in excess of $300k for the two most recent years, with a reasonable expectation of reaching this level in the current year;
• Holding a Series 7, 62, or 65 license.
  

Alternatively, if the investor wishes to invest through a trust, the trust can qualify as an accredited investor if it meets all of the following requirements:

• Has total assets greater than $5M;
• Was not formed for the specific purpose of investing in a particular fund; and
• Is being directed by a “sophisticated person” (i.e., a person who has knowledge and experience in financial or business matters necessary to evaluate merits and risks of a particular investment).

What You Can Do as an Accredited Investor

With regard to venture capital funds in particular, accredited investors can invest in funds with relatively strict limits on the number of fund investors. These funds, known as 3(c)(1) funds, are generally limited to 100 accredited investors (or 250 accredited investors, if the fund size is less than $10M).

There are several requirements for a 3(c)(1) fund to meet the SEC’s definition of a “venture capital fund,” including a requirement that the fund invest primarily in private operating companies (read: startups). 

What is a Qualified Purchaser?

Qualified purchaser status differs from accredited investor status in that it generally depends on the value of a person’s investments, rather than their net worth, income, or credentials. Individuals generally must invest either $5M for themself or $25M for themself and other qualified purchasers to be considered a qualified purchaser.

For individuals seeking to invest through a trust, the trust can qualify as a qualified purchaser in two scenarios: 

1. It has at least $5M in investments, and two or more close family members (spouses, siblings, descendants, and/or their respective spouses) own the trust.
2. Alternatively, (1) it was not formed for the specific purpose of investing in a particular fund; and, (2) its trustees and persons granting assets to the trust are qualified purchasers.
   

What You Can Do as a Qualified Purchaser

Qualified purchasers typically have broader investment opportunities then accredited investors. After all, if an investor meets the $5M investment threshold for qualified purchaser status, they will also typically meet the $1M net worth threshold for accredited investor status—meaning they can invest in 3(c)(1) funds.

Qualified purchasers can also invest in another private fund type: 3(c)(7) funds. 3(c)(7) funds can accept up to 2,000 qualified purchasers, as compared to the 100/250 accredited investors allowed by 3(c)(1) funds. 

Why Does the SEC Restrict Certain Investments?

Unlike mutual funds and exchange-traded funds in a 401(k) plan or brokerage account, venture capital funds are not required to register with the SEC. Thus, they can invest most of their assets in early-stage, non-public companies with relatively illiquid stock (i.e., startups).

The illiquidity and lack of standardized reporting and disclosure in the private market makes these investment opportunities both riskier and, ideally, more rewarding. In an effort to protect investors, lawmakers and regulators attempted to limit access to these funds to those investors likely to have sufficient sophistication and financial means to understand and bear the risks of those investments—i.e., accredited investors and qualified purchasers.

Who Determines Accredited Investor / Qualified Purchaser Status?

It’s the responsibility of the issuer of unregistered securities to verify that an investor meets the standard for accredited investor or qualified purchaser. In the instance of investing in a startup through a venture fund, the issuer is considered the GP, since the LPs are buying ownership in the fund. 

Note that the actual steps required for verifying accredited investors and qualified purchasers vary based on the specifics of the sale of unregistered securities in question. Sometimes GPs farm out the responsibility of verification to a lawyer, accountant, or other third party. 

For GPs on AngelList, we handle confirming LP accreditation status. Some of the documents we review to determine accreditation include:

• Tax returns 
• W-2s
• Bank statements (for asset-based accreditation)
• Brokerage statements (for asset-base accreditation)
• Series 7, Series 65, or Series 82 license documentation

The Future of Accredited Investors & Qualified Purchasers

In recent years, startups have delayed making initial public offerings for longer periods—a boon for venture capital investors allowed to invest pre-IPO. Thus, lawmakers and regulators have increasingly heard calls to loosen or eliminate these standards so that more people can invest in venture, leaving the future of these two designations uncertain.

Accredited Investors vs. Qualified Purchasers: Know the Difference

The accredited investor vs. qualified purchaser distinction is important for all angel investors to understand. Know where you fall and use it to help guide your investment decisions.

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