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June 22, 2024
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What Can Qualified Purchasers Do?

Two of the most common regulatory classifications that dictate which investors can participate in certain types of opportunities are “qualified purchasers” and “accredited investors.” As established by the U.S. Securities and Exchange Commission (SEC), these investors are allowed to take advantage of certain offerings that are not registered with the federal agency. These include shares that aren’t available to the public issued by privately held entities.

The focus here will be on qualified purchasers, which, of the two classifications, has the highest entry threshold. 

So, what can such qualified purchasers do? 

Explain Qualified Purchaser

A qualified purchaser is an individual or family business with $5 million or more in investments. This can include stocks and bonds, commodity futures contracts, financial contracts, real estate holdings and more. However, such investments cannot include a main residence or a property regularly used for business.

Also, a person can be classified as a qualified purchaser if they operate on behalf of a group of people who are qualified purchasers and who are able to invest at least $25 million. Moreover, a trust can also attain such status if its portfolio is valued at $5 million or more and it is owned by at least two closely related family members, such as siblings. Care is needed here though; a trust may not be established for the singular purpose of achieving qualified purchaser status.

Qualified Purchasers and the Investment Company Act of 1940

President Franklin D. Roosevelt sought to protect investors with the Investment Company Act of 1940, which he signed into law. The measure regulates the organization of investment companies and their activities and sets industry standards.

The legislation is enforced and regulated by the SEC and establishes the requirements and responsibilities of investment companies. It also sets forth the requirements for publicly traded investment offerings, mutual funds included.

In addition, the Act specifies the above-discussed criteria for becoming a qualified purchaser, which can be found under Section 2(a)(51) of the Act.

What Are Some of the Advantages of Being a Qualified Purchaser?

A major advantage is that qualified purchasers have access to 3(c)(7) funds, which can accommodate up to 2,000 qualified purchasers. This is a big deal, because the SEC primarily aims to protect small investors.

Although achieving qualified purchaser status requires significantly more cash than required to become an accredited investor, it avails the investor of offerings such as hedge funds, which typically require buy-ins of at least $250,000.

So, qualified purchasers are really competing at a whole different level than accredited investors. In fact, while all qualified purchasers are technically accredited investors, since they over-qualify for that status, not all accredited investors are qualified purchasers. 

Now you have a good idea of what qualified purchasers do. Note, though, that in response to increased pressure, regulators have begun to relax their standards so that more people can invest in start-up ventures and other offerings. 

To that end, the alternative investment platform Yieldstreet already has multiple ways that people who are not institutional investors or among top earners can take advantage of opportunities that traverse several asset classes. Such opportunities, which are not tied to the stock market, can provide consistent secondary income with low buy-in totals.

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